with David Gempesaw and Joseph Henry
Global Finance Journal, Volume 54, November 2022, Article 100757
Abstract: We examine the introduction of fractional trading and its impact on retail security ownership. Fractional trading aims to increase investor access to securities with high prices. Over the initial months of Robinhood’s fractional trading program, the number of unique owners increases approximately 53 percentage points more for stocks priced above $100 versus those priced below $50. On an intraday basis, high-price stocks exhibit incremental ownership growth specifically during periods when fractional trading is permitted. Our results show that Robinhood investors make ample use of fractional trading to acquire previously inaccessible securities, indicating a substantial reduction in price-based investing frictions and carrying implications for retail portfolio management. In addition, we show that the potential market impacts of fractional trading activity appear negligible based on share volume data from multiple brokers with fractional trading programs.
An accompanying internet appendix includes important new details about the Robintrack dataset for researchers to consider in future applications.
with Michael Pagano and John Sedunov
Finance Research Letters, Volume 43, November 2021, Article 101946
Abstract: Using data on stocks held by individual investors at retail brokerage firm Robinhood, we document that these investors are actively engaged in both momentum and contrarian trading strategies. In response to the increased volatility and uncertainty in financial markets due to the COVID-19 pandemic in March 2020, we find that retail investors reduce momentum trading and increase contrarian trading activity during the initial phase of this crisis. We also find that the impact of Robinhood investors on several measures of market quality varied depending on market conditions, coinciding with better market quality during less-stressful periods and worse market quality during the early weeks of the pandemic in the U.S.
with Charles Cao and Matthew Gustafson
Management Science, Volume 65, Issue 9, September 2019, Pages 4156-4178
Abstract: Small public firms are subject to a bank hold-up problem whereby a bank’s information monopoly precludes competition from other financing sources, leading to an overreliance on bank lending and increased borrowing costs. Exploiting quasi-random variation in Russell 2000 index assignment, we find that index membership affects how small public firms obtain financing, in a manner consistent with index membership mitigating the bank hold-up problem. Russell 2000 firms initiate 34% fewer bank loans, conduct more seasoned equity offerings, and obtain 58 basis points lower bank loan spreads than similar firms outside the index. These effects are largest for recent Russell 2000 additions and do not reverse in the year following index deletion. Overall, our findings suggest that index membership creates an information environment that increases the feasibility of non-bank financing and persists for some time after index deletion.
with Tony Kwasnica and Jared Williams
Review of Finance, Volume 23, Issue 2, March 2019, Pages 325–361
Abstract: How do people update their beliefs upon observing others' forecasts? We conduct a series of forecasting experiments to determine whether people can recognize that others can see news that is qualitatively similar, but distinct, from the news that they observe. We document that subjects frequently fail to revise their forecasts even though they should always revise them in our setting. This tendency is most pronounced when subjects learn that another subject observed news that is qualitatively similar ("good" or "bad") to the news that they observed. Our findings reveal concrete situations where forecasts can be expected to be biased.
Finalist for 2018/2019 Pagano/Zechner award for best non-investments paper in the Review of Finance
with Charles Cao and Peter Iliev
Journal of Banking and Finance 78, May 2017, p. 42-57
Abstract: This paper documents that small-cap mutual funds allocate on average 27% of their portfolio to mid- and large-cap stocks. We find that larger and older small-cap funds are more likely to hold mid- and large-cap stocks, consistent with funds straying from their objective over time. Funds that invest heavily in mid- and large-cap stocks expose their investors to unanticipated risks but investors do not experience higher abnormal returns or performance persistence overall. These funds did outperform their peers by 3% annually in the most recent period between January 2003 and March 2010.
with Rabih Moussawi and Ke Shen
Revise & Resubmit, Review of Financial Studies
Abstract: The immense growth of ETFs is often attributed to their intraday liquidity and low expenses, which are favored by short-term investors. This paper argues that lesser known, yet economically significant, tax elimination and deferral features of ETFs’ security design are critical to their success in the last two decades. By relying on the in-kind redemption exemption, authorized participants help ETFs avoid distributing realized capital gains and reduce their tax overhang, partly by deploying “heartbeat” trades. We estimate that the tax efficiency of ETFs relative to mutual funds increases long-term investors’ after-tax returns by an average of 0.92% per year in recent years. Exploiting cross-sectional and time-series variations in investors’ tax burden, we document that tax efficiency is likely the driver of the capital migration by high-net-worth investors from active mutual funds into ETFs. Our results suggest an equilibrium where taxable mutual fund assets migrate or convert to ETFs.
Are Hedge Fund Capacity Constraints Binding? Evidence on Scale and Competition
with Charles Cao and Tim Simin
Abstract: An important question in hedge fund management is whether hedge funds experience decreasing returns to scale, as hedge fund managers often pursue arbitrage opportunities which are limited and short-lived. Extant literature has presented evidence of decreasing returns to scale at the hedge fund level based on OLS regressions. Employing a recently developed, unbiased estimation method based on recursive demeaning, we find no evidence of decreasing returns to scale at the hedge fund level. However, we do find evidence that hedge fund returns are decreasing in industry size. Further tests suggest that inter-hedge fund competition drives this result. Additionally, we examine the evolution of raw managerial skill of hedge funds over time and find that while fund performance deteriorates as funds grow older, controlling for this deterioration does not mitigate the detrimental effects on performance due to the industry becoming more competitive.
Female CEO Selection: Does the Glass Cliff Exist?
with Xiaoxiao Li, Olivia Moyer, Olivia Pfeiffer, and Pete Zaleski
Abstract: This paper revisits the glass cliff effect, which asserts that women predominantly advance into leadership roles in precarious times, when the chance of failure is highest. Compared to prior studies, we greatly expand the sample of female CEO appointments by extending our sample in time and breadth. Moreover, we address confounding effects, and explore heterogeneous and non-linear relationships. Using a variety of accounting- and market-based variables to proxy for precarious situations, our results do not provide clear evidence of a glass cliff effect in US corporations, implying that earlier findings may have been specific to the samples and methods used.
A few programs that I wrote for my own research or to replicate other researchers' papers can be found on my GitHub page, embedded below. Most of my code is written in SAS or Python, but I also like to use MatLab and Stata from time to time.
The following is a selection of websites and software products that I enjoy using:
Popular Python distribution for data science and machine learning
Tool that provides insights into FOIA requests
Network visualization tool
Form ADV information
High-level programming language for simulations and matrix oriented computations
Online LaTeX editor that allows for collaboration
Statistical software suite that is very fast on large datasets
Access company filings
Collaboration software that facilitates teamwork and logs conversations
Statistical software package that makes regressions easy to perform
Python source code editor with debugger
My research interests lie in the areas of empirical asset pricing, institutional investors, and alternative investments. I have worked on a variety of projects concerning mutual funds, hedge funds, indexing, and investor behavior. Recently, I have started exploring other areas such as crypto-currencies and machine learning as well.
Together with Paul Hanouna, I organize The Robert T. LeClair Finance Department Seminar Series. I am also a member of the VU Women in Tech committee and the Faculty Service Evaluation committee.