What Wall Street Doesn’t Understand About International Trade

Firms that correlate their international trading activity with the local ethnic community significantly outperform those that don't, according to new research by Lauren H. Cohen, Christopher J. Malloy, and Umit G. Gurun. Open for comment; 4 Comments posted.

Channels of Influence

Lauren Cohen, Umit G. Gurun, and Christopher J. Malloy

How do firms differentially navigate the global marketplace to buy and sell goods? The answer is critical to identifying which firms will ultimately succeed, and how investors should allocate capital amongst these firms. This paper analyzes the strategic entry choices of firms seeking to expand their businesses to overseas markets. Using customs and port authority data detailing the international shipments of all U.S. publicly-traded firms, the authors show that firms import and export significantly more with countries that have a strong resident population near the firm headquarters. In addition, by analyzing the formation of World War II Japanese internment camps in order to study external shocks to local ethnic populations, the authors also identify a causal link between local networks and firm trade. However, capital markets and sell-side analysts have difficulty deciphering even these observable channels, so make significant mistakes in assessing the positive impact of these links. Findings overall show a surprisingly large impact of immigrants' economic role as conduits of information for firms in their new countries. This research provides new evidence on the economic impact of immigration and ethnic diversity in the United States. Read More

Legislating Stock Prices

Lauren Cohen, Karl Diether, and Christopher Malloy

This paper examines the importance of firms' relationships with their legal and political environment, and the actors who form this environment. Governments pass laws that affect firms' competitive landscape, products, labor force, and capital, both directly and indirectly. And yet, it remains difficult to determine which firms any given piece of legislation will affect, and how it will affect them. By observing the actions of legislators whose constituents are the affected firms, the authors gather insights into the likely impact of government legislation on firms. Specifically, the authors demonstrate that legislation has a simple yet previously undetected impact on firm prices. Read More

Decoding Insider Information and Other Secrets of Old School Chums

Associate Professors Lauren H. Cohen and Christopher J. Malloy study how social connections affect important decisions and, ultimately, how those connections help shape the economy. Their research shows that it's possible to make better stock picks simply by knowing whether two industry players went to the same college or university. What's more, knowing whether two congressional members share an alma mater can help predict the outcome of pending legislation on the Senate floor. Open for comment; 1 Comment posted.

Friends in High Places

Lauren Cohen and Christopher Malloy

Research supports the old adage that says it's not what you know; it's whom you know--especially when it comes to the voting behavior of US politicians. In a National Bureau of Economic Research working paper, Harvard Business School professors Lauren Cohen and Christopher Malloy study the congressional voting record from 1989 to 2008. They show that personal connections among Congress members reliably affect how they will vote on pending legislation. Read More

Decoding Inside Information

Lauren Cohen, Christopher Malloy, and Lukasz Pomorski

Price setters and regulators face a difficult challenge in trying to understand the stock trading activity of corporate insiders, especially when it comes to figuring out whether the activity is a good indicator of the firm's financial future. This National Bureau of Economic Research paper discusses how to distinguish "routine" trades (which predict virtually no information about a firm's financial future) from "opportunistic" trades (which contain a great deal of predictive power). Research was conducted by Harvard Business School professors Lauren Cohen and Christopher Malloy and Lukasz Pomorski of the University of Toronto. Read More

Stimulus Surprise: Companies Retrench When Government Spends

Joshua Coval

New research from Harvard Business School suggests that federal spending in states appears to cause local businesses to cut back rather than grow. A conversation with Joshua Coval. Read More

Connecting School Ties and Stock Recommendations

Lauren H. Cohen

School connections are an important yet underexplored way in which private information is revealed in prices in financial markets. As HBS professor Lauren H. Cohen and colleagues discovered, school ties between equity analysts and top management of public companies led analysts to earn returns of up to 5.4 percent on their stock recommendations. Cohen explains more in our Q&A. Read More

Sell Side School Ties

Lauren H. Cohen, Andrea Frazzini, and Christopher J. Malloy

Certain agents play key roles in revealing information into securities markets. In the equities market, security analysts are among the most important. A large part of an analyst's job (perhaps the majority) is to research, produce, and disclose reports forecasting aspects of companies' future prospects, and to translate their forecasts into stock recommendations. Therefore, isolating how, or from whom, analysts obtain the information they use to produce their recommendations is important. Do analysts gain comparative information advantages through their social networks—specifically, their educational ties with senior officers and board members of firms that they cover? This paper investigates ties between sell-side analysts and management of public firms, and the subsequent performance of their stock recommendations. Read More

Long-Run Stockholder Consumption Risk and Asset Returns

Christopher J. Malloy, Tobias J. Moskowitz, and Annette Vissing-Jørgensen

The long-run consumption risk of households that hold financial assets is particularly relevant for asset pricing. The fact that stockholders are more sensitive to aggregate consumption movements helps explain why the consumption risk of stockholders delivers lower risk aversion estimates. Understanding further why consumption growth, particularly that of stockholders, responds slowly to news in asset returns will improve finance scholars' understanding of what drives these long-run relations. HBS professor Malloy and his coauthors examine more disaggregated measures of long-run consumption risks across stockholders and non-stockholders, and provide new evidence on the long-run properties of consumption growth and its importance for asset pricing. Read More

The Small World of Investing: Board Connections and Mutual Fund Returns

Lauren H. Cohen, Andrea Frazzini, and Christopher Malloy

How does information flow in security markets, and how do investors receive information? In the context of information flow, social networks allow a piece of information to flow along a network often in predictable paths. HBS professors Lauren Cohen and Christopher Malloy, along with University of Chicago colleague Andrea Frazzini, studied a type of dissemination through social networks tied to educational institutions, examining the information flow between mutual fund portfolio managers and senior officers of publicly traded companies. They then tested predictions on the portfolio allocations and returns earned by mutual fund managers on securities within and outside their networks. Read More