Daniel Kahneman received the Nobel Prize in economics sciences in 2002, December 8, Stockholm, Sweden. This article is the edited version of his Nobel Prize lecture. The author comes back to the problems he has studied with the late Amos Tversky and to debates conducting for several decades already. The statement is based on worked out together with Shane Federik the quirkiness of human judgment. Language: ru

Maps of Bounded Rationality: Psychology for Behavioral Economics

/pdf/the-theory-of-industrial-organization-19bejph0ej.pdf

The Theory of Industrial Organization

We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1-N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1-N rule in terms of Sharpe ratio, certainty-equivalent return, or turnover, which indicates that, out of sample, the gain from optimal diversification is more than offset by estimation error. Based on parameters calibrated to the US equity market, our analytical results and simulations show that the estimation window needed for the sample-based mean-variance strategy and its extensions to outperform the 1-N benchmark is around 3000 months for a portfolio with 25 assets and about 6000 months for a portfolio with 50 assets. This suggests that there are still many "miles to go" before the gains promised by optimal portfolio choice can actually be realized out of sample. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

/pdf/optimal-versus-naive-diversification-how-inefficient-is-the-42sjq28l5w.pdf

Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?

Econometric policy evaluation: A critique

We identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate investment. Using a regression discontinuity design, we show that capital investment declines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management. Further, the reduction in investment is concentrated in situations where agency and information problems are relatively more severe, highlighting how the state contingent allocation of control rights can help mitigate investment distortions arising from financing frictions.

How Does Financing Impact Investment? The Role of Debt Covenants

Using a large hand-collected dataset from 2001 to 2006, we find that activist hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in two thirds of the cases. Hedge funds seldom seek control and in most cases are nonconfrontational. The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. Our analysis provides important new evidence on the mechanisms and effects of informed shareholder monitoring.

Hedge Fund Activism, Corporate Governance, and Firm Performance

The article shows that two measures of the amount of private information in stock price—price nonsynchronicity and probability of informed trading (PIN)—have a strong positive effect on the sensitivity of corporate investment to stock price. Moreover, the effect is robust to the inclusion of controls for managerial information and for other information-related variables. The results suggest that firm managers learn from the private information in stock price about their own firms’ fundamentals and incorporate this information in the corporate investment decisions. We relate our findings to an alternative explanation for the investment-to-price sensitivity, namely that it is generated by capital constraints, and show that both the learning channel and the alternative channel contribute to this sensitivity. (JEL G14, G31) Oneofthemainrolesoffinancialmarketsistheproductionandaggregation of information. This occurs via the trading process that transmits informationproducedbytradersfortheirownspeculativetradingintomarketprices [e.g.,Grossman and Stiglitz (1980), Glosten and Milgrom (1985), and Kyle (1985)]. The markets’ remarkable ability to produce information that generates precise predictions about real variables has been demonstrated empirically in several contexts. Roll (1984) showed that private information of citrus futures traders regarding weather conditions gets impounded into citrus futures’ prices, so that prices improve even public predictions of the weather. Relatedly, the literature on prediction markets has shown that

/pdf/price-informativeness-and-investment-sensitivity-to-stock-191tsieaox.pdf

Price Informativeness and Investment Sensitivity to Stock Price

Using a large hand-collected data set from 2001 to 2006, we find that activist hedge funds in the United States propose strategic, operational, and financial remedies and attain success or partial success in two-thirds of the cases. Hedge funds seldom seek control and in most cases are nonconfrontational. The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. Our analysis provides important new evidence on the mechanisms and effects of informed shareholder monitoring. ALTHOUGH HEDGE FUND ACTIVISM IS WIDELY discussed and fundamentally important, it remains poorly understood. Much of the commentary on hedge fund activism is based on supposition or anecdotal evidence. Critics and regulators question whether hedge fund activism benefits shareholders, while numerous commentators claim that hedge fund activists destroy value by distracting managers from long-term projects. However, there is a dearth of large-sample evidence about hedge fund activism, and existing samples are plagued by various biases. ∗ We thank the Acting Editor who handled our submission. Brav is with Duke University, Jiang

/pdf/hedge-fund-activism-corporate-governance-and-firm-uyxqypaqng.pdf

Stock prices and real investments are highly correlated. Previous literature has offered two main explanations for this high correlation. The first explanation relies on price being informative about investment opportunities, the second one is based on financing constraints. In this paper we empirically examine the effect of price informativeness on the sensitivity of investment to stock price. Using price non-synchronicity and PIN as measures of price informativeness, we find that the degree of informativeness is positively correlated with the sensitivity of investment to stock price. Since, according to previous literature, these measures reflect private information, the result suggests that prices perform an active role, i.e., that managers learn from stock price when making investment decisions. This result is robust to the inclusion of various control variables (such as controls for managerial information) and to changes in specification.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID451322_code238096.pdf?abstractid=451322

https://finance.wharton.upenn.edu/~itayg/Files/fundrun-published.pdf

Wei Jiang

Papers

Hedge Fund Activism, Corporate Governance, and Firm Performance

Price Informativeness and Investment Sensitivity to Stock Price

Hedge Fund Activism, Corporate Governance, and Firm Performance

Price Informativeness and Investment Sensitivity to Stock Price

Payoff complementarities and financial fragility: Evidence from mutual fund outflows $