Samuel M. Hartzmark
Professor of Finance
Hillenbrand Family Faculty Fellow
We develop a new measure of impact elasticity, defined as a firm's change in environmental impact due to a change in its cost of financing. We show empirically that a reduction in financing costs for firms that are already green leads to small improvements in impact at best. In contrast, increasing financing costs for brown firms leads to large negative changes in firm impact. Thus, sustainable investing that directs capital away from brown firms and toward green firms may counterproductive, in that it makes brown firms more brown without making green firms more green. We further show that brown firms face very weak incentives to become more green. Due to a mistaken focus on percentage reductions in emissions, the sustainable investing movement primarily rewards green firms for economically trivial reductions in their already low levels of emissions.
with Kelly Shue
Jack Treynor Prize 2023
Charles Brandes Prize 2023
International Centre for Pension Management Runner-Up 2023
Driehaus Center for Behavioral Finance Research Prize 2nd Place 2023
We demonstrate that predictable uninformed cash flows forecast aggregate market stock returns. Buying pressure from dividend payments (announced weeks prior) predicts higher value-weighted market returns, with returns for the top quintile of payment days four times higher than the lowest. This holds internationally, and increases when reinvestment is high and market liquidity is low. We estimate a market-level price multiplier of 1.9. These results suggest price pressure is a widespread result of flows, not an anomaly.
Many researchers in finance and economics are interested in running online surveys or experiment, but do not know the particulars of how to implement them. Our goal is to provide the basic information to create a useful survey and post it online so you can collect data as quickly and easily as possible. We provide overviews and click-by-click instructions for popular survey platforms and participant recruitment platforms. Further, we highlight portions of the survey design literature that are likely to be most relevant to economists and outline a set of best practices to follow when creating your survey.
Textbook models assume that investors are trying to insure against bad states of the world associated with specific risk factors when investing. This is a testable assumption and we develop a survey framework for doing so. Our framework can be applied to any risk factor. We demonstrate the approach using consumption growth, making our results applicable to most modern asset-pricing models. Participants respond to changes in the mean and volatility of stock returns consistent with textbook models, but we find no evidence that they view an asset's correlation with consumption growth as relevant to investment decisions.
We examine how owning a good affects learning and beliefs about its quality. We show that people have more extreme reactions to information about a good that they own compared to the same information about a non-owned good: ownership causes more optimistic beliefs after receiving a positive signal and more pessimistic beliefs after receiving a negative signal. Comparing learning to normative benchmarks reveals that people over-extrapolate from signals about goods that they own, which leads to an overreaction to information; in contrast, learning is close to Bayesian for non-owned goods. We provide direct evidence that this effect is driven by ownership channeling greater attention towards associated information, which leads people to overweight recent signals when forming beliefs. The relationship between ownership and beliefs has testable implications for trade and market expectations. In line with these predictions, we show that the endowment effect doubles in response to positive information and disappears with negative information, and demonstrate a significant relationship between ownership and over-extrapolation in survey data about stock market expectations.
Investors' perception of performance is biased because the relevant measure, returns, is rarely displayed. Major indices ignore dividends, inducing mechanical underperformance on ex-dividend days. Newspapers are more pessimistic on these days, consistent with mistaking the index for a return. Market betas should track returns, but track prices more than dividends, creating predictable market returns. Mutual funds receive inflows for “beating the S&P 500,” comparing the price-only index with the fund's net asset value change (also not a return). Displaying returns by default would ameliorate these issues, which arise despite high attention and little ambiguity regarding the appropriate measure.
Examining a shock to the salience of the sustainability of the US mutual fund market, we present causal evidence that investors marketwide value sustainability. Being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high sustainability funds outperform low sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and non-pecuniary motives influencing investment decisions.
Many individual investors, mutual funds and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g. the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if they are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend-paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend-paying stocks.
(Lead Article) Journal of Finance, 2019, 74(5): 2153-2199.
Journal of Finance Dimensional Fund Advisors First Prize 2019
Charles Brandes Prize 2017
Finalist Hillcrest Behavioral Finance Award 2017
Roger F. Murray Prize 3rd Place 2017
Media Coverage: CNBC; reddit; The Financial Exchange; Investopedia; ETF.com; Chicago Booth Review (Video); Forbes; Alpha Architect; The Irish Times; Advisor Perspectives; Bloomberg; Forbes; Management Today; Wall Street Journal
We review the literature on recurring firm events and predictable returns. Many common firm events recur on a predictable basis, such as earnings and dividends, among others. These events tend to be associated with large positive returns in the period when those events are predicted to occur (without conditioning on the outcome or existence of the event itself). These returns occur mainly on the long side of the portfolio, are statistically and economically large when value weighted, and replicate internationally. It is difficult to explain the patterns with a unified risk theory. Some of the underlying causes seem to be related to idiosyncratic risk, predictable attention, probability mistakes and demand for corporate distributions.
A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements.
When investors sell one asset and quickly buy another (“reinvestment days”), their trades suggest the original mental account is not closed, but is instead rolled into the new asset. Investors display a rolled disposition effect, selling the new position when its value exceeds the investment in the original position. On reinvestment days, investors display no disposition effect (consistent with no disutility from realizing a loss) and make better selling decisions. Mutual funds exhibit a larger disposition effect when outflows prevent them from rolling accounts. Using a laboratory experiment, we show that reinvestment causally reduces the disposition effect and improves trading.
We present evidence consistent with markets failing to properly price information in seasonal earnings patterns. Firms with historically larger earnings in one quarter of the year (“positive seasonality quarters”) have higher returns when those earnings are usually announced. Analysts have more positive forecast errors in positive seasonality quarters, consistent with the returns being driven by mistaken earnings estimates. We show that investors appear to overweight recent lower earnings following positive seasonality quarters, leading to pessimistic forecasts in the subsequent positive seasonality quarter. The returns are not explained by risk-based explanations, firm-specific information, increased volume, or idiosyncratic volatility.
Review of Financial Studies, 2017, 30(1): 281-323.
Hillcrest Behavioral Finance Award 2015
Best paper California Corporate Finance Conference 2015
Asset-pricing models predict a strong connection between the real risk-free interest rate and the macroeconomy, but prior research finds little empirical support for the connection when examining expected growth. This paper documents a robust relation between the interest rate and macroeconomic uncertainty (i.e., conditional variance). Consistent with precautionary savings, high uncertainty is associated with a low interest rate using numerous data sources, time-periods, and measures. A relation between habit and the interest rate disappears after including uncertainty, and the relation is stronger using long-run uncertainty. The results imply that analyses of the interest rate without uncertainty are seriously incomplete.
Some mutual funds purchase stocks before dividend payments to artificially increase their dividends, which we call "juicing." Funds paid more than twice the dividends implied by their holdings in 7.4% of fund-years examined. Juicing is associated with larger inflows, and is more common among funds with unsophisticated investors. This behavior is consistent with an underlying investor demand for dividends, but is hard to explain by taxes or need for income, as funds can generate equivalent tax-free distributions by returning capital. Juicing is costly to investors through higher turnover and increased taxes of 0.57% to 1.52% of fund assets per year.
I document a new stylized fact about how investors trade assets: individuals are more likely to sell the extreme winning and extreme losing positions in their portfolio (“the rank effect”). This effect is not driven by firm-specific information, holding period or the level of returns itself, but is associated with the salience of extreme portfolio positions. The rank effect is exhibited by both retail traders and mutual fund managers. The effect indicates that trades in a given stock depend on how it compares to other positions in an investor’s portfolio.
Review of Financial Studies, 2015, 28(4): 1024-1059.
Cubist Systematic Strategies PhD Award for Outstanding Research, WFA 2014
Finalist AQR Insight Award 2014
UBS Global Asset Management Award, Financial Research Association 2013
Michael J. Barclay Award, Financial Research Association 2013
We document an asset-pricing anomaly whereby companies have positive abnormal returns in months when a dividend is predicted. Abnormal returns in predicted dividend months are high relative to other companies, and relative to dividend-paying companies in months without a predicted dividend, making risk-based explanations unlikely. The anomaly is as large as the value premium, but less volatile. The premium is consistent with price pressure from dividend-seeking investors. Measures of liquidity and demand for dividends are associated with larger price increases in the period before the ex-day (when there is no news about the dividend), and larger reversals afterwards.
Examining NFL betting contracts at Tradesports.com, we find mispricing consistent with the disposition effect, where investors are more likely to close out profitable positions than losing positions. Prices are too low when teams are ahead and too high when teams are behind. Returns following news events exhibit short-term reversals and longer-term momentum. These results do not appear driven by liquidity or non-financial reasons for trade. Finding the disposition effect in a negative expected return gambling market questions standard explanations for the effect (belief in mean reversion, prospect theory). It is consistent with cognitive dissonance, and models with time-inconsistent behaviour.