Publications

2008
Working Paper

Inexperienced Investors and Bubbles

By: Robin Greenwood and Stefan Nagel

We use mutual fund manager data from the technology bubble to examine the hypothesis that inexperienced investors play a role in the formation of asset price bubbles. Using age as a proxy for managers' investment experience, we find that around the peak of the... View Details

Keywords: Investment; Stocks; Information Technology; Price Bubble; Asset Management; Experience and Expertise

SSRN

May 2008
Article

Excess Comovement of Stock Returns: Evidence from Cross-sectional Variation in Nikkei 225 Weights

By: Robin Greenwood

In the presence of limits to arbitrage, cross-sectional variation in periodic investor demand should be related to the degree of comovement of returns. I exploit the unusual weighting system of the Nikkei 225 index in Japan to identify cross-sectional variation in... View Details

Keywords: Stocks; Investment; Investment Return; Market Transactions; Weight; Performance Expectations; Behavior; Japan

Second Quarter 2008
Article

How Does Investor Sentiment Affect the Cross-Section of Returns

By: Malcolm Baker, Johnathan Wang and Jeffrey Wurgler

Broad waves of investor sentiment should have larger impacts on securities that are more difficult to value and to arbitrage. Consistent with this intuition, we find that when an index of investor sentiment takes low values, small, young, high volatility,... View Details

Keywords: Volatility; Behavioral Finance; Stocks; Investment; Investment Return; Attitudes

2007
Chapter

Behavioral Corporate Finance: A Survey

By: Malcolm Baker, Richard Ruback and Jeffrey Wurgler

Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach... View Details

Keywords: Decisions; Prejudice and Bias; Debt Securities; Financial Management; Price; Theory; Investment; Problems and Challenges; Behavioral Finance; Corporate Finance

2007
Working Paper

Investor Sentiment in the Stock Market

By: Malcolm Baker and Jeffrey Wurgler

Real investors and markets are too complicated to be neatly summarized by a few selected biases and trading frictions. The "top down" approach to behavioral finance focuses on the measurement of reduced form, aggregate sentiment and traces its effects to stock returns.... View Details

Keywords: Investment; Markets; Behavioral Finance; Stocks

May 2007
Article

Corporate Financing Decisions When Investors Take the Path of Least Resistance

By: Malcolm Baker, Joshua Coval and Jeremy Stein

We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to... View Details

Keywords: Behavior; Investment; Policy; Corporate Finance

Article

Investor Sentiment in the Stock Market

By: Malcolm Baker and Jeffrey Wurgler

We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by... View Details

Keywords: Financial Markets; Stocks; Investment Return; Valuation; Forecasting and Prediction; Volatility; Price; Risk and Uncertainty; Behavioral Finance

February 2007
Case

Behavioral Finance at JP Morgan

By: Malcolm P. Baker and Aldo Sesia

Following a successful model in Europe, JP Morgan has introduced a set of five U.S. retail mutual funds with an investment philosophy and marketing strategy grounded in behavioral finance. The asset management group believes that understanding investor biases like... View Details

Keywords: Banks and Banking; Investment Funds; Behavioral Finance; Competitive Advantage; Asset Management; Marketing Strategy; Product Marketing; Customer Focus and Relationships; Banking Industry; Financial Services Industry; United States; Europe

Educators

Purchase

August 2006
Article

Investor Sentiment and the Cross Section of Stock Returns

By: Malcolm Baker and Jeffrey Wurgler

We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by... View Details

Keywords: Behavioral Finance; Stocks; Investment Return; Forecasting and Prediction; Motivation and Incentives; Risk and Uncertainty; Volatility

June 2005
Article

Currency Returns, Intrinsic Value, and Institutional Investor Flows

By: K. A. Froot and T. Ramadorai

Keywords: Currencies; Exchange Rates; Purchasing Power Parity; Real Exchange Rate; Forecasting and Prediction; Behavioral Finance; Investment Return; Market Transactions; Performance Expectations; Personal Characteristics; Asset Pricing; Financial Services Industry

2005
Other Unpublished Work

Corporate Financing Decisions When Investors Take the Path of Least Resistance

By: Malcolm Baker, Joshua Coval and Jeremy Stein

We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to... View Details

Keywords: Decisions; Behavior; Stocks; Mergers and Acquisitions; Policy; Investment; Financial Institutions; Equity; Corporate Finance

2005
Working Paper

Investor Sentiment and the Cross-Section of Stock Returns

By: Malcolm Baker and Jeffrey Wurgler

We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying... View Details

Keywords: Investment Return; Behavioral Finance; Stocks; Theory; Forecasting and Prediction

February 2001
Article

The Portfolio Flows of International Investors

By: K. A. Froot, P. O'Connell and M. Seasholes

Keywords: Asset Pricing; Equity Investment; Forecasting and Prediction; Behavioral Finance; Stocks; Investment Return; Market Transactions; Performance Expectations; Personal Characteristics; Financial Services Industry

September 1995 (Revised May 1998)
Case

RogersCasey Alternative Investments: Innovative Response to the Distribution Challenge

By: Josh Lerner

RogersCasey Alternative Investments faces the challenge of managing distributions of stock by the private equity investors in which their clients have invested. These distributed shares appear to behave in complex ways, apparently at odds with market efficiency. A... View Details

Keywords: Private Equity; Stocks; Financial Strategy; Investment; Innovation Strategy; Management; Distribution; Performance; Behavior

Educators

Purchase

Research Summary

Innovating in Energy: Learning from High-Potential Ventures

By: Joseph B. Lassiter

My work at HBS has always focused on high-potential ventures. Most recently, these have been professionally financed start-ups and buyouts in newly emerging energy and cleantech businesses. These ventures tend to be based on innovative insights into technology and... View Details

Research Summary

Moving Beyond Direct-to-Consumer

By: Leonard A. Schlesinger

Changing consumer behaviors have redefined what it means to be direct to consumer ("DTC"). What once began online a decade ago as a distribution and disintermediation strategy has since evolved into a multifaceted approach for the modern-day brand.

The... View Details

Forthcoming
Article

Reflexivity in Credit Markets

By: Robin Greenwood, Samuel G. Hanson and Lawrence J. Jin

Reflexivity is the idea that investors' biased beliefs affect market outcomes and that market outcomes in turn affect investors’ future biases. We develop a dynamic behavioral model of the credit cycle featuring this two-way feedback loop. Investors form beliefs about... View Details

Keywords: Reflexivity; Attitudes; Financial Markets; Forecasting and Prediction; Investment; Credit