Ron Kaniel

Individual Investor Trading and Stock Returns

This paper investigates the dynamic relation between net individual investor trading and short-horizon returns for a large cross-section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk-averse individuals provide liquidity to meet institutional demand for immediacy.

Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

We present evidence that fund managers inf late quarter-end portfolio prices with last-minute purchases of stocks already held. The magnitude of price inf lation ranges from 0.5 percent per year for large-cap funds to well over 2 percent for small-cap funds. We find that the cross section of inf lation matches the cross section of incentives from the f low0performance relation, that a surge of trading in the quarter’s last minutes coincides with a surge in equity prices, and that the inf lation is greatest for the stocks held by funds with the most incentive to inf late, controlling for the stocks’ size and performance. QUARTER-END AND ESPECIALLY YEAR-END equity mutual fund prices are abnormally high. We present strong evidence that some mutual fund managers mark up their holdings at quarter end through aggressive trading of stocks they already hold. Funds with the greatest ability and most incentive to improve their performance exhibit the largest turn-of-quarter effect. Intradaily data show a surge of transactions and transaction prices in the quarter’s last few minutes, and fund-holdings data show a larger effect in the funds with the most incentive to mark up. Considering that open-end equity funds intermediate

Individual Investor Trading and Return Patterns Around Earnings Announcements

3.46 trillion ~year-end 1999!, 1 this turn-of-quarter inf lation of their prices is a significant opportunity for potential sellers, and a significant hazard for everybody else. In general, open-end domestic equity mutual funds calculate their net asset values per share ~NAVs! from the closing transaction prices of their holdings.

Advertising and Mutual Funds: From Families to Individual Funds

This paper documents evidence consistent with informed trading by individual investors around earnings announcements using a unique dataset of NYSE stocks. We show that intense aggregate individual investor buying (selling) predicts large positive (negative) abnormal returns on and after earnings announcement dates. We decompose the abnormal returns into a component that is attributed to risk-averse liquidity provision and a component that is attributed to private information or skill, and show that about half of the abnormal returns in the three months following the event can be attributed to private information. We also examine the behavior of individuals after the earnings announcement and find that they trade in the opposite direction to both pre-event returns (i.e., exhibit “contrarian�? behavior) and the earnings surprise (i.e., exhibit “news-contrarian�? behavior). The latter behavior, which could be consistent with profit-taking, has the potential to slow down the adjustment of prices to earnings news and contribute to the post-earnings announcement drift.

Headlines and Bottom Lines: Attention and Learning Effects from Media Coverage of Mutual Funds

We find that advertising appears to have significant effects on investor flows at the industry, family and individual fund level. At the industry level, flows are higher in months with more advertising dollars spent, even for non-advertising families. At the family level, flows have a convex relation with advertising expenditures, similar to that for performance, with a significant positive effect for high relative advertisers only. At the individual fund level, advertising stems redemptions rather than increasing purchases of fund shares. We further find that advertising can affect the fund’s flow-performance sensitivity, dampening it for poorly performing funds and increasing it for highly performing funds.

Efficient Computation of Hedging Parameters for Discretely Exercisable Options

To study attention and learning effects in financial markets, we investigate the role of media coverage in investment decisions of mutual fund investors and the consequent effects on fund flows. Employing a database of nearly 10,000 news articles and controlling for endogeneity in media coverage, we find that fund characteristics affect the probability of a news story and that the existence and stance of media coverage affects net investor flows into the fund in ways consistent with investor attention and learning.

Asset Return Predictability in a Heterogeneous Agent Equilibrium Model

We propose an algorithm to calculate confidence intervals for the values of hedging parameters of discretely exercisable options using Monte Carlo simulation. The algorithm is based on a combination of the duality formulation of the optimal stopping problem for pricing discretely exercisable options and Monte Carlo estimation of hedging parameters for European options. We show that the width of the confidence interval for a hedging parameter decreases, with an increase in the computer budget, asymptotically at the same rate as the width of the confidence interval for the price of the option. The method can handle arbitrary payoff functions, general diffusion processes, and a large number of random factors. We also present a fast, heuristic, alternative method and use our method to evaluate its accuracy.

Optimism and Economic Crisis

We use a general equilibrium model as a laboratory for generating predictable excess returns and for assessing the properties of the estimated consumption/portfolio rules, under both the empirical and the true dynamics of excess returns. The advantage of this approach, relative to the existing literature, is that the equilibrium model delineates the precise nature of the risk/return trade-off within an optimizing setting that endogenizes return predictability. In the experiments that we consider, the estimation issues are so severe that simple unconditional consumption and portfolio rules actually outperform (in a utility cost sense) both simple and bias-corrected empirical estimates of conditionally optimal policies.

The Real Side of the High-Volume Return Premium

How are expectations for the future affected by economic crisis? This is a question of interest to both economists and psychologists, especially as we increasingly consider the interplay between the two disciplines. Using a longitudinal design, we evaluate the impact of the financial crisis of 2008 on MBA students’ dispositional optimism, a widely used measure of generalized expectations for the future. Following three cohorts of students, graduating in 2007, 2008 and 2009, we find that dispositional optimism is a stable individual trait, robust to personal events such as class grades and recruiting success. However, we find that the economic crisis in the fall of 2008 corresponded with a reliable drop in dispositional optimism. Moreover, this drop was largely concentrated among US citizens, for whom the crisis has more global future consequences. This pattern sheds light on the nature of optimism and the role of personality traits in management.

Specification Error, Estimation Risk, and Conditional Portfolio Rules*

We investigate whether shocks to trading volume of a stock contain information about future corporate investment activity; an unexplored prediction of the link between the high-volume return premium and the Merton (1987) investor recognition hypothesis. Using a q-theory model of corporate investment as a framework, we document a positive relation between abnormal trading volume around earnings announcements and future investment expenditures. The relation persists across quarterly and annual horizons and, consistent with theory, is concentrated among firms with high financing constraints. We also find that shocks to trading volume serve as an important channel for facilitating the previously documented contemporaneous relation between investor recognition and corporate investments. Taken together, consistent with the idea that extreme trading activity of a stock is associated with an increase in firm visibility, our study suggests that shocks to trading volume play an important role in enhancing corporate investment activity.