Fall 2023

The goal of this course is to help you begin developing this intuition. We will discuss a set of important seminal papers on the theory of information in capital markets. The emphasis will be on understanding the economic intuition underpinning the main results of the papers, not on the math or other technical minutiae. The idea is to help you develop an economic lens through which to view the world and isolate fundamental patterns lurking in complex data sets.  We will also look at theory-based empirical papers and consider how economic theory and storytelling can be useful as another tool in your identification toolkit.

Topics include:

• Mathematics of normal distributions; Bayes Theorem; The Hirshleifer Effect; Introduction to Rational Expectations

• Rational expectations equilibria; The aggregation of public & private information in stock prices; incentives of traders to invest in private information acquisition.

• Information, liquidity, and the cost of capital

• Short selling, market efficiency, disclosure incentives, reusing experiments.

• Insider trading & incentives to acquire private information.

• Price efficiency and feedback of stock prices on firm investment decisions

• Voluntary and mandatory disclosure

• Reusing natural experiments

Papers marked in green are available for student presentations. A typical presentation will run 30-40 minutes in total.  Assume the audience has read the paper. Your job is to get to the heart of the matter: (i) synthesize key elements of the theory, dataset and empirical specification; (ii) present the main results (iii) offer a critical perspective on identification and research design.

 Session Details

Session 1 Thursday 10/26 2:30pm to 5:30pm

Introduction to models of information in capital markets 

Background Papers

·        Hayek, F. 1945. The use of knowledge in society. American Economic Review 35, 519-530. (A classic article every student of markets should read).

Podcasts about Hayek: Econ Talk 1 Econ Talk 2

o   Daron Acemoglu, 2023. Would AI-Enabled Communism Work?  Project Syndicate.

·        Bushman, Robert M. and Smith, Abbie J., 2003. Transparency, Financial Accounting Information, and Corporate Governance. Economic Policy Review. (I will discuss the framework on 67).

·        Armstrong, Chris S. and Kepler, John and Samuels, Delphine and Taylor, Daniel, 2022. Causality Redux: The Evolution of Empirical Methods in Accounting Research and the Growth of Quasi-Experiments. Journal of Accounting & Economics. (Section 3.3 is the most directly pertinent for our discussion)

Papers for Class Discussion (Slides)

·        Robert E. Verrecchia, 1982. The Use of Mathematical Models in Financial Accounting: Journal of Accounting Research, 1982, Vol. 20. We are going to focus primarily on the models rather than the extensive historical discussion of the literature.  While these discussions trace the history of thought in accounting, I will not focus on this. The focus will be on the models:

o   Esther and Wesley pages 9-16

o   Esther and Wesley with Rational Expectations pp 21-26.

This stuff is hard.  I will remove some of the mystery in class meetings.

Related Literature

·        Jeremy Bertomeu, Anne Beyer and Daniel J. Taylor (2016), “From Casual to Causal Inference in Accounting Research: The Need for Theoretical Foundations”, Foundations and Trends in Accounting: Vol. 10, No. 2-4

·        All published papers from the Stanford Causality in the Social Sciences Conference in December 2014.  Look at Volume 10.

·        Ernest Nagel, 1963. Assumptions in Economic Theory. The American Economic Review, Vol. 53, No. 2.

·        Hirshleifer, J., 1971. The private and social value of information and the reward to inventive activity.  American Economic Review (61(4), 561-74.

Session 2 Thursday 11/2 2:30pm to 5:30pm

Rational expectations equilibria; information aggregation in price; public disclosure & private information acquisition

Papers for Class Discussion (Slides)

·        Verrecchia, Robert E., Essays on Disclosure, 2001. Journal of Accounting and Economics.  Only models 1, 2 & 3 (sections 2.1, 2.2 & 2.3)

·        Verrecchia, R., 1982.  "Information acquisition in a noisy rational expectations economy. Econometrica.

Related Literature

·        Grossman and Stiglitz 1980 "On the Impossibility of Informationally Efficient Markets", American Economic Review 70:393-408.

·        Blankespoor, Elizabeth and deHaan, Ed and Marinovic, Ivan, Disclosure Processing Costs, Investors’ Information Choice, and Equity Market Outcomes: A Review, 2020. Journal of Accounting & Economics, Volume 70, Issues 2–3.

·        Taylor, Daniel and Verrecchia, Robert E., Delegated Trade and the Pricing of Public and Private Information. Journal of Accounting & Economics (JAE).

·        Diamond, Douglas, "Optimal Release of Information by Firms,"  The Journal of Finance, Vol XL, NO. 4 September 1985.

·        Kim and Verrecchia, 1991. Trading Volume and Price Reactions to Public Announcements. Journal of Accounting Research.

·        Grossman, S. "An introduction to the theory of rational expectations under asymmetric information,"  Review of Economic Studies, 1981: 541-559. 

Session 3 Thursday 11/9 2:00pm to 5:00pm

Liquidity, Liquidity Risk and Disclosure

Papers for Class Discussion (Slides)

·        Acharya, Viral, and Lasse Pedersen, 2005, Asset Pricing with Liquidity Risk, Journal of Financial Economics, 77(2), 375-410.  We are not going to grind through any algebra.  Just try to get a sense for what their message is.

·        Kyle, Albert, "Continuous auctions and insider trading," Econometrica, Vol. 53, No. 6 September 1985. (Sections 1 & 2 only (single auction)

o   Verrecchia, Robert E., Essays on Disclosure, 2001. Journal of Accounting and Economics.  Only model 8 (section 2.8)

·        Bushman, Robert M. and Williams, Christopher D., 2015. Delayed Expected Loss Recognition and the Risk Profile of Banks. Journal of Accounting Research. Sections 1 - 2.4 & Section 3.2.

·        Lang, Mark H. and Maffett, Mark G., 2011. Transparency and Liquidity Uncertainty in Crisis Periods (July 1, 2011). Journal of Accounting & Economics (JAE).

·        Balakrishnan, K., Billings, M., Kelly, B., Ljungqvist, A., 2014. Shaping liquidity: on the causal effects of disclosure and liquidity. J. Finance. 69, 2237–2278.

Related Literature

·        Lee, Charles M.C. and So, Eric C. and Wang, Charles C. Y., Evaluating Firm-Level Expected-Return Proxies: Implications for Estimating Treatment Effects. The Review of Financial Studies.

·        Amihud, Y., H. Mendelson, and L. H. Pedersen, 2005, Liquidity and Asset Prices. Foundations and Trends in Finance 1 (4), 269–364. (Read at least the first 2 section of the paper)

·        Amihud, Y.,2002. Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets, 31–56.

·        Verrecchia, 1999. Disclosure and the cost of capital: A discussion. Journal of Accounting and Economics, Volume 26, Issues 1-3,

·        Glosten, L., Milgrom, P., 1985. Bid, ask, and transaction prices in a specialist market with heterogeneously informed traders. Journal of Financial Economics 14, 71-100.

·        Fang, V., Noe, T., Tice, S., 2009. Stock market liquidity and firm value. J. Financ. Econ. 94, 150-169.

·        Schoenfeld, Jordan, 2017. The Effect of Voluntary Disclosure on Stock Liquidity: New Evidence from Index Funds. JAE, 63(1), 51-74.

Session 4 Thursday 11/16 2:00pm to 5:00pm

Insider Trading and Information Markets

Papers for class discussion

·        Michael J. Fishman and Kathleen M. Hagerty, 1992. Insider Trading and the Efficiency of Stock Prices. The RAND Journal of Economics, Vol. 23, No. 1.

o   Bushman and Indjejikian, 1995. Voluntary Disclosures and the Trading Behavior of Corporate Insiders.  JAR

·        Bushman, Piotroski and Smith, 2005. Insider Trading Restrictions and Analysts' Incentives to Follow Firms. Journal of Finance Volume 60.

·        Bushee, Brian J. and Taylor, Daniel and Zhu, Christina, 2023. The Dark Side of Investor Conferences: Evidence of Managerial Opportunism. The Accounting Review, forthcoming.

·        Jackson, Jr., Robert J. and Lynch, Bradford and Taylor, Daniel, 2022. Holding Foreign Insiders Accountable NYU Law and Economics Paper No. 22-16, Jacobs Levy Equity Management Center for Quantitative Financial Research

Related Literature

·        Bhattacharya, Utpal and Daouk, Hazem, 2002. The World Price of Insider Trading. Journal of Finance.

·        Bhattacharya, Utpal, 2023. The Enforcement of Insider Trading Laws Around the World (1900-2022).

·        Nuno & Ferreira, 2008. Insider Trading Laws and Stock Price Informativeness. The Review of Financial Studies, Volume 22, Issue 5.

·        Lundblad, Christian T. and Yang, Zhishu and Zhang, Qi, 2022. Detecting Insider Trading in the Era of Big Data and Machine Learning.

·        Félez-Viñas, Ester and Johnson, Luke and Putnins, Talis J., 2023. Insider Trading in Cryptocurrency Markets.

·        Chabakauri, Georgy and Fos, Vyacheslav and Jiang, Wei, 2022. Trading Ahead of Barbarians' Arrival at the Gate: Insider Trading on Non-Inside Information. Columbia Business School Research Paper.

·        Guay, Wayne R. and Kim, Shawn and Tsui, David, 2023. Determinants of Insider Trading Windows.

Session 5 Thursday 11/30 2:00pm to 5:00pm

Price efficiency and feedback of stock prices on firm investment decisions

Papers for Class Discussion

·        Bai, Philippon and Savov, 2016. Have Financial Markets Become More Informative? Journal of Financial Economics, Vol. 122. (Check out “Where has all the big data gone?” below for an interesting application of this methodology)

·        Chen, Qi and Goldstein, Itay and Jiang, Wei, 2007. Price Informativeness and Investment Sensitivity to Stock Price. The Review of Financial Studies.

·        Jayaraman, Sudarshan and Wu, Joanna, 2019. Is Silence Golden? Real Effects of Mandatory Disclosure. Review of Financial Studies.

·        Edmans, Jayaraman, and Schneemeier, 2017, The Source of Information in Prices and Investment-Price Sensitivity. Journal of Financial Economics (JFE).

Background reading  

·        The Real Effects of Financial Markets, 2012. Bond, Edmans, and Goldstein. Annual Review of Financial Economics, vol. 4.

Other Literature

·        Information Disclosure in Financial Markets, 2017. Goldstein and Yang. Annual Review of Financial Economics, vol. 9, pp. 101-125.

·        Gao, Pingyang and Liang, Pierre Jinghong, 2013. Informational Feedback Effect, Adverse Selection, and the Optimal Disclosure Policy.  JAR Volume51, Issue5, 1133-1158.

·        Zuo, Luo. The Informational Feedback Effect of Stock Prices on Management Forecasts. Journal of Accounting and Economics. 61.2-3 (2016): 391-413.

·        Good Disclosure, Bad Disclosure Itay Goldstein and Liyan Yang, Journal of Financial Economics, vol. 131(1), pp. 118-138, January 2019.

·        Farboodi, Maryam and Matray, Adrien and Veldkamp, Laura, 2022. Where Has All the Big Data Gone? The Review of Financial Studies, 3101–3138.

Session 6 Thursday 12/7 2:00pm to 5:00pm

Short selling, market efficiency, disclosure incentives, reusing experiments.

Papers for Class Discussion

·        Diamond and Verrecchia, 1987. Constraints on Short-Selling and Asset Price Adjustment to Private Information. JFE. 

·       Bushman, Hyun Ahn and Pataoukas, 2023. Under the Hood of Activist Fraud Campaigns: Private Information Quality, Disclosure Incentives and Stock Lending Dynamics. 

 I will refer to these papers, but not formally present them

·        Ljungqvist, A., and Qian, W., 2016. How Constraining Are Limits to Arbitrage? The Review of Financial Studies, 29(8): 1975-2028.

·        Mitts, J., 2020. Short and Distort. Journal of Legal Studies 49 (2020): 287–334.

·        Cohen, L.H., Diether, K.B., and Malloy, C.J., 2007. Supply and Demand Shifts in the Shorting Market. The Journal of Finance, 62(5): 2061-2096

Related Literature

·        Beneish, M.D., Lee, C.M., and Nichols, D.C., 2015. In Short Supply: Short Sellers and Stock Returns. Journal of Accounting and Economics, 60(2-3): 33-57.

·        Jank, S., Roling, C. and Smajlbegovic, E., 2021. Flying Under the Radar: The Effects of Short-Sale Disclosure Rules on Investor Behavior and Stock Prices. Journal of Financial Economics, 139(1): 209-233.

·        Karpoff, J.M. and Lou, X., 2010. Short Sellers and Financial Misconduct. The Journal of Finance, 65(5): 1879-1913.

·        Massa, Massimo, Bohui Zhang, and Hong Zhang, 2015. The invisible hand of short selling: Does short selling discipline earnings management? Review of Financial Studies 28: 1701-1736

·        Engelberg, J.E., Reed, A.V., and Ringgenberg, M.C., 2012. How Are Shorts Informed? Short sellers, News, and Information Processing. Journal of Financial Economics, 105(2): 260-278.

·        Lamont, O.A., 2012. Go Down Fighting: Short Sellers vs. Firms. Review of Asset Pricing Studies, 2(1): 1-30.

·        Kovbasyuk, S. and Pagano, M., 2020. Advertising Arbitrage. SSRN Working Paper: https://ssrn.com/abstract=2509735

·        Shleifer and Vishny 1997 “The Limits of Arbitrage.” The Journal of Finance, Vol LII, NO. 1.

·        Zhao, Wuyang, Activist Short-Selling and Corporate Opacity (May 24, 2020). Available at SSRN: https://ssrn.com/abstract=2852041

·        Brendel, J. and Ryans, J., 2021. Responding to Activist Short sellers: Allegations, Firm Disclosure Choices, and Outcomes. Journal of Accounting Research 59(2): 487-528.

Session 7 Thursday 12/14 2:00pm to 5:00pm 

Reusing experiments, disclosure & proprietary costs

Papers for Class Discussion.

·        Heath, Davidson and Ringgenberg, Matthew C. and Samadi, Mehrdad and Werner, Ingrid M., 2023. Reusing Natural Experiments. Journal of Finance.

·        Bushman, R.M. and Pinto, J., 2023. The Influence of Short Selling on Negative Press Coverage of Firms. Management Science

·        Verrecchia, Robert E., Essays on Disclosure, 2001. Journal of Accounting and Economics.  (Section 3 until the end of section 3.1 (Constant proprietary costs)).

·        Kim, Jinhwan and Valentine, Kristen, 2021. The Innovation Consequences of Mandatory Patent Disclosures. Journal of Accounting & Economics.

·        Chen, AJ and Hoberg, Gerard and Maksimovic, Vojislav, 2023. Life Cycles of Firm Disclosures. USC Marshall School of Business (Link to life cycle data)

Other Literature

·        Verrecchia. 1983. Discretionary disclosure. Journal of Accounting and Economics, Volume 5, Pages 179-194.

·        Jung and Kwon, 1988. Disclosure When the Market Is Unsure of Information Endowment of Managers. Journal of Accounting Research, Vol. 26, No. 1, pp. 146-153

·        Hoberg, Gerard and Maksimovic, Vojislav, 2022. Product Life Cycles in Corporate Finance. Review of Financial Studies (September 2022) 35 (9) 4249-4299.

·        Floros, Ioannis V. and Sivaramakrishnan, Shiva and Zufarov, Rustam, 2023. Proprietary Costs and the Equity Financing Choice. Review of Accounting Studies.

·        Heinle, Mirko Stanislav and Samuels, Delphine and Taylor, Daniel, 2022. Disclosure Substitution. Management Science. 

·        Boehmer, E., Jones, C. M., & Zhang, X. (2020a). Potential pilot problems: Treatment spillovers in financial regulatory experiments. Journal of Financial Economics, 135(1), 68-87.

·        Chu, Y., Hirshleifer, D., & Ma, L. (2020). The causal effect of limits to arbitrage on asset pricing anomalies. The Journal of Finance, 75(5), 2631-2672.