Alok Kumar

• University of Miami

We use the Gabaix (2011) method to identify locally-dominant firms that are not among the largest 100 U.S. firms (i.e., nationally-dominant firms) but have a strong impact on their local macroeconomic environment. Idiosyncratic shocks to locally-dominant firms explain a significant portion of local business cycle as well as the aggregate U.S. macro...

We show that people's optimism towards financial markets and the macroeconomy is dynamically influenced by their political affiliation and the current political climate. Individuals become more optimistic and perceive markets to be less risky and more undervalued when their preferred party is in power. Accordingly, investors increase allocations to...

The ability to make predictions based on online searches in various contexts is gaining substantial interest in both research and practice. This study investigates a novel application of correlated online searches in predicting stock performance across supply chain partners. If two firms are economically dependent through a supply chain relationshi...

There is an increasing attention in information systems to be able to predict outcomes using search frequency on popular portals. This growing literature focuses on revealing demand patterns of individual assets (e.g., products, stocks, services). However, users typically search many different assets together (e.g., correlated searches) and leave a...

There is an increasing attention in IS to be able to predict outcomes using search frequency on popular portals. This growing literature focuses on revealing demand patterns of individual assets (e.g., products, stocks, services). However, users typically search many different assets together (e.g., correlated searches) and leave digital footprint,...

This study examines whether social discrimination affects the risk perceptions and, subsequently, the investment decisions of individual investors. We conjecture that minority groups such as gays/lesbians, African Americans, and women, who are more likely to experience discrimination, over-estimate their risk exposures (i.e., they experience social...

Motivated by the recent literature on geographical market segmentation and the theoretical literature on liquidity (Vayanos and Wang 2012), we posit that state-level economic conditions would affect the liquidity levels of local firms and subsequently their future returns. Consistent with this conjecture, we find that liquidity levels of local stoc...

Firms that file for Chapter 11 are actively traded. This paper investigates who trades these bankrupt firms and why. We also examine the potential pricing impact of this active trading. We find that the unique lottery-like characteristics of bankrupt firms make them attractive to a particular retail investor clientele who uses them to gamble in the...

This study shows that corporate bankruptcy events affect the investment and financing policies of geographically proximate firms. Following the bankruptcy of a local peer, non-filing local firms significantly reduce investment expenditures, reduce capital structure leverage, and hold more cash. The effects of local bankruptcy are more pronounced wh...

This study examines whether momentum in stock prices is induced by changes in the political environment. We find that momentum profits are concentrated among politically sensitive firms and industries. During the 1939 to 2011 period, a trading strategy with a long position in winners that are politically unfavored and a short position in losers tha...

Virtual communities continue to play a greater role in social, political, and economic interactions. However, how users value information from these communities and how that affects their behavior and future expectations is not fully understood. Stock message boards provide an excellent setting to analyze these issues given the large user base and...

This study examines the impact of changing political environment on asset prices. We find that as the political climate changes, there are systematic shifts in the portfolio compositions of investors, which generate predictable patterns in stock returns. This evidence of demand-based predictability is distinct from cash-flow based predictability id...

Using multiple U.S. and European data sources, we show that observed physical attributes are related to risk-taking behavior in financial markets. We conjecture that heterogeneity in observed physical attributes can be associated with personality differences that induce relatively taller individuals to take greater financial risks and relatively ov...

This paper investigates why the market fails to incorporate the adverse information conveyed by the going-concern (GC) opinion in a timely manner. Our main conjecture is that the lottery-like features of GC stocks attract a predominantly retail clientele who use those stocks to gamble in the market. Such trading behavior leads to the underreaction...

Although macroeconomic news has a major impact on corporate earnings, anecdotal evidence suggests that financial analyst research is inefficient with respect to such news. Examining analysts' earnings research, we find that they underreact to negative macroeconomic news. Analysts are not all equal, though, as analysts employed at the same firm as a...

We show that geographical variation in the level of investor sophistication influences local asset prices. Investors in less sophisticated regions exhibit stronger trading correlations, and correspondingly, the returns of firms headquartered in less sophisticated areas are more strongly correlated, especially when local economic conditions are unus...

Using a new geography-based measure of investment skill, we show that the superior intra-quarter trading performance of institutional investors reflects opportunistic access to short-term local information rather than innate trading skill. Institutions have high average local abnormal performance but this performance is not persistent over time. Fu...

This study shows that value-relevant information about firms is geographically distributed across U.S. states and the market is slow in aggregating this information. The earnings and cash flow of firms can be predicted using the past performance of firms in economically relevant geographical regions, but sell-side equity analysts and institutional...

We examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives. Standard economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases. Surprisingly, empirical studies fin...

Using one of the largest samples of litigation data available to date, we examine whether the political culture of a firm determines its propensity for corporate misconduct. We measure political culture using the political contributions of top managers, firm political action committees, and local residents. We show that firms with a Republican cult...

Using a large dataset of institutional trades, we analyze whether and how trading profitability varies with investment horizon and distance from firm locations. We document that institutional investors display a substantial local trading bias and earn significantly higher intraquarter trading profits on local stocks than non-local ones, even after...

This paper shows that gambling-motivated trading activities of retail and institutional investors (i.e., gambling-induced sentiment) generate comovement in stock returns. Using the religious composition (Catholic-Protestant ratio or CPRATIO) of a region as a proxy for investors' gambling propensity and other alternative measures, we show that inves...

This study shows that the geographical distribution of publicly-traded firms generates an economic network that links the economic environments of all U.S. states. Using a novel measure of economic linkages among publicly-traded firms, we build a geographical network of state-level economic connections and show that local economic shocks propagate...

We show that name-induced stereotypes affect the investment choices of U.S. mutual fund investors. Managers with foreign-sounding names have about 10% lower annual fund flows, and this effect is stronger among funds with investor clienteles more likely to be suspicious of foreigners. Foreign-named managers experience lower appreciation (greater dec...

This paper examines whether political activism increases people’s propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their information gathering costs are likely to be lower and the pro...

This paper shows that the geographical location of a firm affects its liquidity. Specifically, firm liquidity is higher when local macro-economic conditions improve and liquidity decreases when local economic conditions worsen. The impact of local economic conditions on local liquidity is more pronounced among larger firms and when local financing...

This study examines whether local stock returns vary with local business cycles in a predictable manner. Our key conjecture is that local stock prices would decline and the average future returns would rise during local recessions as local risk aversion increases and local risk sharing abilities decline. Consistent with this conjecture, we find tha...

We show that people's optimism towards financial markets and the macroeconomy is dynamically influenced by their political affiliation and the existing political climate. Individuals become more optimistic and perceive the markets to be less risky and more undervalued when their own party is in power. These shifts in perceptions of risk and reward...

This paper examines whether the trading activities of retail and institutional investors cause comovements in stock returns. Using stock splits and headquarters changes events and a variety of trading-based measures, we show directly that retail investors generate excess comovements in stock returns. Specifically, around stock splits, retail tradin...

Researchers often refer to investment habitats/categories to explain the patterns of comovement in asset returns that cannot be fully clarified by fundamentals. Many factors determine these habitats including investor preferences to size, industry, price-levels and risk-levels. This paper investigates a unique method to explore investment habitat b...

IntroductionCognitive Abilities and Broad Financial DecisionsDo Older Investors Make Better Investment Decisions?Cognitive Abilities, Portfolio Distortions, and PerformanceEvidence from FinlandOther Related WorkSummary and Conclusions Discussion QuestionsAbout the Authors

This paper examines the characteristics and pricing of stocks that are actively traded by speculative retail investors. We find that stocks with high "retail trading proportion" (RTP) have strong lottery features and they attract retail investors who are known to exhibit a strong propensity to gamble with stocks. High levels of RTP also reflect act...

This paper proposes and tests the conjecture that sophisticated individuals deviate from established personal and social norms only when the perceived benefits are sufficiently large. We apply this broad idea to the context of institutional investing and predict that norm-constrained investors deviate from norms when they have compelling informatio...

The recent behavioral literature has shown that individual investors hold concentrated portfolios, trade excessively, and exhibit a preference for local stocks. These results are puzzling because in all three instances portfolio distortions could reflect either an informational advantage or psychological biases. In this study, using a demographics-...

This paper examines whether people's mood and optimism affects economic activity. We consider two sets of exogenous proxies for optimism that are unrelated to the economic environment: (i) weather (average temperature and cloud cover) and (ii) sports and political optimism. We show that economic recessions are weaker, expansions are stronger, and t...

We use religious background as a proxy for gambling propensity and investigate whether geographical variation in religion-induced gambling norms affects aggregate market outcomes. We examine four economic settings in which the recent literature has suggested a role for gambling and speculation. Our key conjecture is that gambling propensity would b...

Unethical decision making theory suggests that individual ethical norms keep one from engaging in fraudulent activities. We ask whether ethical norms estimated from political values of corporate executives influence the occurrence and nature of corporate fraud. We identify political values of managers using their contributions to the Republican ver...

Socially responsible (SR) investing based on religious beliefs is experiencing robust growth. While the prior literature has related investment behavior to investors’ religious backgrounds, whether a religious authority’s stock preferences affect equity markets is far less understood. In this paper we study the relevance of a well known religiously...

Our analysis exploits the exogenous shocks generated by Regulation Fair Disclosure (Reg FD) and Sarbanes-Oxley Act (SOX) to examine whether firms' information environments explain investors' preferences for local stocks. Our main conjecture is that as financial regulation makes the information environment more competitive, the local informational a...

This paper examines whether politically active individuals are more likely to participate in the stock market. Our key conjecture is that politically involved individuals follow political news more actively, which increases their chances of being exposed to financial news. Consequently, their information gathering costs decline and the propensity t...

The purpose of this paper is to relate mutual fund expenses and other costs to the characteristics of both fund managers and fund investors. Specifically, we test whether some types of fund managers are more likely to manipulate fees, and some types of fund investors are more susceptible to such exploitation. We use a variety of fund manager charac...

This paper investigates whether proximity to institutional shareholders influences corporate policies. We find that firms with high local institutional ownership are more profitable, less risky, and have better internal governance. Those firms are less likely to engage in undesirable corporate activities such as aggressive earnings management or op...

This study investigates whether retail and institutional investors concentrate their trading among certain stock categories (i.e., habitats) and whether their trading activities generate return comovements among stocks within those habitats. Our results indicate that both retail and institutional investors are more likely to trade stocks with simil...

This study shows that the propensity to gamble and investment decisions are correlated. At the aggregate level, individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery-type stocks increases during economic downturns. In the cross-section, socioeconomic factors that induce greater expenditure in lott...

This paper examines the investment decisions of older individual investors. We find that older and experienced investors are more likely to follow rules of thumb that reflect greater investment knowledge. However, older investors are less effective in applying their investment knowledge and exhibit worse investment skill, especially if they are les...

This paper investigates whether markets systematically under-estimate the abilities of female CEOs. We find that equity analysts, mutual fund managers, and individual investors have less favorable opinions about firms that are not headed by CEOs of their own "type". Examining analysts' earnings forecasts and stock recommendations, we find that male...

This paper shows that returns of U.S. state portfolios are predictable. In the presence of local bias and incomplete risk sharing, consumption smoothing motives of local investors generate predictable patterns in the returns of local stocks. Specifically, local investors require higher average future returns to hold risky local stocks when local ec...

We investigate whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. Focusing on the income risk-sharing role of financial markets, we find that risk sharing is higher (more than double) in U.S. states where investors are more sophisticated and exhibit weaker behavioral...

This paper shows that the diversification choices of individual investors influence stock returns. A zero-cost portfolio that takes a long (short) position in stocks with the least (most) diversified individual investor clientele generates an annual, risk-adjusted return of 5–9%. This spread reflects the combined effects of sentiment-induced mispri...

We study stock holdings and trading behavior of more than 60,000 households and find evidence consistent with dividend clienteles. Retail investor stock holdings indicate a preference for dividend yield that increases with age and decreases with income, consistent with age and tax clienteles, respectively. Trading patterns reinforce this evidence:...

This study analyzes the behavior and performance of 353 investment newsletters that make asset allocation recommendations during a period covering more than 21 years (June 1980 - November 2001). Newsletters change their asset mix between equity and cash using relatively simple rules that are strongly influenced by past market returns while macro-ec...

We analyze the impact of price trends on trading decisions of more than 40,000 households with accounts at a major discount brokerage house and find that buying and selling decisions of investors in our sample are influenced by short-term (less than 3 months) price trends. We examine investor heterogeneity in trading based on prior returns and clas...

This study investigates whether the adverse eects of investors'behavioral biases extend beyond the domain of …nancial markets to the broad macro-economy. We focus on the risk sharing (or income smoothing) role of …nancial markets and demonstrate that risk sharing levels are higher in U.S. states in which investors have higher cognitive abilities an...