My working papers are available online on SSRN.
How is Earnings News Transmitted to Stock Prices?
With Charles Martineau
We study price formation in the after-hours market following earnings announcements for S&P 1500 stocks from 2011 to 2015 using high-frequency, order-level data. Price discovery is generally complete before the opening auction, or by 10 a.m. for stocks with no after-hours trades. Initial price reactions following announcements are explained by earnings surprises, not by liquidity-taking order flow, consistent with the theoretical view that prices can incorporate news instantly. Moreover, sophisticated liquidity providers are active and profitable at that time. We find significant price drifts following big surprises in the after-hours market, which we relate to theoretical work on information processing.
Inverted Fee Venues and Market Quality
Revise and resubmit, Journal of Financial Economics
Stock exchanges compete for order flow through their fee models. A traditional model pays a rebate to the liquidity supplier, and an inverted model pays a rebate to liquidity demanders. We examine the impact of inverted fee models on market quality using an exogenous shock to inverted venue market share created by a regulatory intervention, the SEC Tick Size Pilot. We find that trading on inverted venues improves pricing efficiency and liquidity when the minimum tick size is binding. We show that by offering traders sub-tick price improvement, inverted fee venues enhance competition for liquidity provision and increase information impounded into prices through limit orders.
Shaping Expectations and Coordinating Attention: The Unintended Consequences of FOMC Press Conferences
Revise and resubmit, Journal of Financial and Quantitative Analysis
In an effort to increase transparency, the Chair of the Federal Reserve now holds a press conference following some, but not all, FOMC announcements. Evidence from financial markets shows that investors lower their expectations of important decisions on days without press conferences and that these announcements convey less price-relevant information. Using different proxies, we show that investors pay more attention to upcoming announcements with press conferences. This coordination of attention can reduce welfare in models of the social value of public information. Consistent with theories of investor attention, the market risk premium is larger on days with press conferences.
Double Bonus? Implicit Incentives for Money Managers with Explicit Incentives
With Juan Sotes-Paladino
Using a unique dataset of performance-fee mutual funds, we examine the interaction between direct and indirect incentives in the asset management industry. A comparison of the flow-performance relationships of performance-fee and non-performance-fee funds reveals that funds with direct incentives can face substantially steeper indirect incentives. Among performance-fee funds, the flow relationship depends on the performance fee level and tends to attenuate the asymmetry in total pay for good vs. poor performance. Altogether, our findings suggest that the market favors steep but symmetric ("linear") compensation schedules for asset managers. Our results shed new light on the contracting relation between delegating investors and their portfolio managers.
Indexers and Comovement
Revise and resubmit, Financial Management
I introduce a general equilibrium model with active investors and indexers. Indexing causes market segmentation, and the degree of segmentation is a function of the relative wealth of indexers in the economy. Shocks to this relative wealth induce correlated shocks to discount rates of index stocks. The wealthier indexers are, the greater the resulting comovement is. I confirm empirically that S&P 500 stocks comove more with other index stocks and less with non-index stocks, and that changes in passive holdings of S&P 500 stocks predict changes in comovement of index stocks.