David A Hirshleifer: 03-17-09 Economist of the Day

We choose David A. Hirshleifer as our Economist of the Day. David is the Merage Chair in Business Growth and Professor of Finance at the University of California, Irvine.

David Hirschleifer

Contact Information

Tel: 949-824-9955
david.h@uci.edu

Assistant:
Martha Matlock, 949-824-5122

Short Biography

David Hirshleifer joined the Merage finance faculty in July 2006 after serving as the Kurtz Chair in Finance at Ohio State University’s Fisher College of Business, the Waterman Professor of Finance at the University of Michigan Business School, and as a tenured faculty member at the UCLA Anderson School of Management.

His expertise includes corporate finance, investments, and behavioral finance. Some of his recent research has been on psychology in firms and markets, and how emotions affect stock prices and managerial decision biases. He has also conducted research on risk management, determinants of futures prices, the effects of social interactions on markets, fads and fashions in economic decisions, and how psychological bias affects political and regulatory decisions.

Hirshleifer is co-author of Price Theory and Applications: Decisions, Markets, and Information, now in its seventh edition. He has published more than 40 papers, several of which have won research awards, including the Smith Breeden Award for outstanding paper in the Journal of Finance.

He has served as editor of the Review of Financial Studies, as associate editor of several other finance, economics, and strategy journals, and as director of the American Finance Association and the Western Finance Association.

Hirshleifer has presented papers and participated in discussions at many seminars and national and international conferences. His research has been profiled in U.S.and international newspapers, magazines, and broadcast media.

You may download a complete vita here.

		David A. Hirshleifer’s Scholarly Papers Click on the title of any column to sort the table by that column.
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			Total Downloads 39,963	Total Citations 1,464
		Papers (82)	Authors	Date	Downloads (Rank)	Citations
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1.		Can Individual Investors Beat the Market? | Show Abstract Hide Abstract | Download | Harvard NOM Working Paper No. 02-45, HBS Finance Working Paper No. 04-025 Working Paper Series	Joshua D. Coval Harvard Business School David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Tyler Shumway University of Michigan at Ann Arbor	Posted: 06 Jan 03 Last Revised: 13 Dec 08	5,685 (128)	34
		Abstract: We document strong persistence in the performance of trades of individual investors. The correlation of the risk-adjusted performance of an individual across sample periods is about 10 percent. Investors classified in the top performance decile in the first half of our sample subsequently outperform those in the bottom decile by about 8 percent per year. Strategies long in firms purchased by previously successful investors and short in firms purchased by previously unsuccessful investors earn abnormal returns of 5 basis points per day. These returns are not confined to small stocks nor to stocks in which the investors are likely to have inside information. Our results suggest that skillful individual investors exploit market inefficiencies to earn abnormal profits, above and beyond any profits available from well-known strategies based upon size, value, or momentum. Individual Investors, Market Efficiency, Performance Persistence
2.		Investor Psychology and Asset Pricing | View 2 Versions | Show Abstracts | Hide Abstracts| Journal of Finance, Vol. 56, No. 4, pp. 1533-1598, August 2001 AFA 2001 New Orleans Meetings Investor Psychology and Asset Pricing | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 28 Mar 01 Last Revised: 13 Dec 08	5,093	211
		Investor Psychology and Asset Pricing | Show Abstract Hide Abstract | Journal of Finance, Vol. 56, No. 4, pp. 1533-1598, August 2001 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.
		Investor Psychology and Asset Pricing | Show Abstract Hide Abstract | Download | AFA 2001 New Orleans Meetings Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 28 Mar 01 Last Revised: 13 Dec 08	5,093 (164)	212
		Abstract: The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.
3.		A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions | Show Abstract Hide Abstract | Download | Working Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area	Posted: 01 May 97 Last Revised: 24 Aug 01	3,979 (276)	51
		Abstract: We propose a theory based on investor overconfidence and biased self-attribution to explain several of the securities returns patterns that seem anomalous from the perspective of efficient markets with rational investors. The theory is based on two premises derived from evidence in psychological studies. The first is that individuals are overconfident about their ability to evaluate securities, in the sense that they overestimate the precision of their private information signals. The second is that investors’ confidence changes in a biased fashion as a function of their decision outcomes. The first premise implies overreaction to private information arrival and underreaction to public information arrival. This is consistent with (1) post-corporate event and post-earnings announcement stock price ‘drift’, (2) negative long-lag autocorrelations (long-run ‘overreaction’), and (3) excess volatility of asset prices. Adding the second premise leads to (4) positive short-lag autocorrelations (‘momentum’), and (5) short-run post-earnings announcement ‘drift,’ and negative correlation between future stock returns and long-term measures of past accounting performance. The model also offers several untested empirical implications and implications for corporate financial policy.
4.		Investor Psychology in Capital Markets: Evidence and Policy Implications | View 2 Versions | Show Abstracts | Hide Abstracts| THE PSYCHOLOGY OF WORLD EQUITY MARKETS, Werner De Bondt, ed., Edward Elgar Publishing Ltd., July 2005, Journal of Monetary Economics, Vol. 49, No. 1, 2002 Dice Center WP 2001-10 Investor Psychology in Capital Markets: Evidence and Policy Implications | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 14 Aug 01 Last Revised: 02 Jan 09	2,336	77
		Investor Psychology in Capital Markets: Evidence and Policy Implications | Show Abstract Hide Abstract | THE PSYCHOLOGY OF WORLD EQUITY MARKETS, Werner De Bondt, ed., Edward Elgar Publishing Ltd., July 2005, Journal of Monetary Economics, Vol. 49, No. 1, 2002 Accepted Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 02 Jan 09	0 (0)
		Abstract: We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules and procedures ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially, government should avoid actions that exacerbate investor biases.
		Investor Psychology in Capital Markets: Evidence and Policy Implications | Show Abstract Hide Abstract | Download | Dice Center WP 2001-10 Working Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 14 Aug 01 Last Revised: 18 Sep 01	2,336 (708)	77
		Abstract: We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option- setting policies. Especially, government should avoid actions that exacerbate investor biases.
5.		Herd Behavior and Cascading in Capital Markets: A Review and Synthesis | Show Abstract Hide Abstract | Download | Dice Center Working Paper No. 2001-20 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 10 Jan 02 Last Revised: 11 Feb 02	2,302 (726)	45
		Abstract: We review theory and evidence relating to herd behavior, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behavior of investors, firms, and analysts. We consider both incentives for parties to engage in herding or cascading, and the incentives for parties to protect against or take advantage of herding or cascading by others.
6.		Limited Attention, Information Disclosure, and Financial Reporting | View 2 Versions | Show Abstracts | Hide Abstracts| Journal of Accounting & Economics, Vol. 36, Nos. 1-3, pp. 337-386, December 2003 JAE Boston Conference October 2002 Limited Attention, Information Disclosure, and Financial Reporting | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 01 Dec 03 Last Revised: 19 Jan 05	2,001	86
		Limited Attention, Information Disclosure, and Financial Reporting | Show Abstract Hide Abstract | Journal of Accounting & Economics, Vol. 36, Nos. 1-3, pp. 337-386, December 2003 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 01 Dec 03 Last Revised: 19 Jan 05	0 (0)
		Abstract: This paper models firms’ choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions. limited attention, behavioral accounting, investor psychology, capital markets, accounting regulation, disclosure, market efficiency
		Limited Attention, Information Disclosure, and Financial Reporting | Show Abstract Hide Abstract | Download | JAE Boston Conference October 2002 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 06 Jan 04 Last Revised: 19 Jan 05	2,001 (958)	86
		Abstract: This paper models firms’ choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions. limited attention, behavioral accounting, investor psychology, capital markets, accounting regulation, disclosure, market efficiency
7.		Good Day Sunshine: Stock Returns and the Weather | View 2 Versions | Show Abstracts | Hide Abstracts| Journal of Finance, Vol. 58, pp. 1009-1032, June 2003 Dice Center Working Paper No. 2001-3 Good Day Sunshine: Stock Returns and the Weather | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Tyler Shumway University of Michigan at Ann Arbor	Posted: 17 Apr 01 Last Revised: 13 Dec 08	1,723	65
		Good Day Sunshine: Stock Returns and the Weather | Show Abstract Hide Abstract | Journal of Finance, Vol. 58, pp. 1009-1032, June 2003 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Tyler Shumway University of Michigan at Ann Arbor	Posted: 22 Jul 03 Last Revised: 13 Dec 08	0 (0)
		Abstract: Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relationship between morning sunshine in the city of a country’s leading stock exchange and daily market index returns across 26 countries from 1982 to 1997. Sunshine is strongly significantly correlated with stock returns. After controlling for sunshine, rain and snow are unrelated to returns. Substantial use of weather-based strategies was optimal for a trader with very low transactions costs. However, because these strategies involve frequent trades, fairly modest costs eliminate the gains. These findings are difficult to reconcile with fully rational price setting.
		Good Day Sunshine: Stock Returns and the Weather | Show Abstract Hide Abstract | Download | Dice Center Working Paper No. 2001-3 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Tyler Shumway University of Michigan at Ann Arbor	Posted: 17 Apr 01 Last Revised: 04 Oct 08	1,723 (1,271)	65
		Abstract: Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relation between morning sunshine at a country’s leading stock exchange and market index stock returns that day at 26 stock exchanges internationally from 1982-97. Sunshine is strongly positively correlated with daily stock returns. After controlling for sunshine, other weather conditions such as rain and snow are unrelated to returns. If transactions costs are assumed to be minor, it is possible to trade profitably on the weather. These results are difficult to reconcile with fully rational price-setting.
8.		Do Investors Overvalue Firms With Bloated Balance Sheets? | Show Abstract Hide Abstract | Download | EFA 2004 Maastricht Meetings Paper No. 3233; Dice Center Working Paper No. 2004-18 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Kewei Hou Ohio State University – Department of Finance Siew Hong Teoh University of California – Paul Merage School of Business Yinglei Zhang Chinese University of Hong Kong (CUHK) – School of Accountancy	Posted: 03 Aug 04 Last Revised: 15 Mar 05	1,476 (1,662)	42
		Abstract: If investors have limited attention, then accounting outcomes that saliently highlight positive aspects of a firm’s performance will promote high market valuations. When cumulative accounting value added (net operating income) over time outstrips cumulative cash value added (free cash flow), it becomes hard for the firm to sustain further earnings growth. When the balance sheet is ‘bloated’ in this fashion, we argue that investors with limited attention will overvalue the firm, because naïve earnings-based valuation disregards the firm’s relative lack of success in generating cash flows in excess of investment needs. The level of net operating assets, the difference between cumulative earnings and cumulative free cash flow over time, is therefore a measure of the extent to which operating/reporting outcomes provoke excessive investor optimism. Therefore, if investor attention is limited, net operating assets will negatively predict subsequent stock returns. In our 1964-2002 sample, net operating assets scaled by beginning total assets is a strong negative predictor of long-run stock returns. Predictability is robust with respect to an extensive set of controls and testing methods. limited attention, market efficiency, investor misvaluation
9.		Do Individual Investors Cause Post-Earnings Announcement Drift? Direct Evidence from Personal Trades | Show Abstract Hide Abstract | Download | Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business James N. Myers University of Arkansas Linda A. Myers University of Arkansas Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 23 Nov 03 Last Revised: 17 Apr 08	1,367 (1,923)	16
		Abstract: This study tests whether naïve trading by individual investors, or some class of individual investors, causes post-earnings announcement drift (PEAD). Inconsistent with the individual trading hypothesis, individual investor trading fails to subsume any of the power of extreme earnings surprises to predict future abnormal returns. Moreover, individuals are significant net buyers after both negative and positive extreme earnings surprises, consistent with an attention effect, but not with their trades causing PEAD. Finally, we find no indication that trading by individuals explains the concentration of drift at subsequent earnings announcement dates. earnings anomalies, post-earnings announcement drift, market efficiency, trading activity, individual investors, investor sophistication
10.		An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness | Show Abstract Hide Abstract | Download | Dice Working Paper No. 2000-4; Yale Cowles Foundation Discussion Paper No. 1306; Yale ICF Working Paper No. 00-47 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Ivo Welch Brown University – Department of Economics	Posted: 17 May 01 Last Revised: 26 Nov 03	1,297 (2,119)	11
		Abstract: This paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with excess inertia, defined as a higher probability of following old policies than would occur under full recall. In a volatile environment, the player can exhibit excess impulsiveness (i.e., be more prone to follow new information signals). The model provides a memory-loss explanation for some documented psychological biases, implies that inertia and organizational routines should be more important instable environments than in volatile ones, and provides other empirical implications relating memory and environmental variables to the continuity of decisions. Memory, Inertia, Amnesia, Behavioral Economics
11.		Does Investor Misvaluation Drive the Takeover Market? | View 2 Versions | Show Abstracts | Hide Abstracts| Journal of Finance, Vol. 61, No. 2, pp. 725-762, April 2006 EFA 2003 Annual Conference Paper No. 652, Dice Center Working Paper No. 2003-7 Does Investor Misvaluation Drive the Takeover Market? | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	Ming Dong York University – Schulich School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Scott A. Richardson Barclays – Barclays Global Investors (BGI) Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 01 May 03 Last Revised: 13 Dec 08	1,223	84
		Does Investor Misvaluation Drive the Takeover Market? | Show Abstract Hide Abstract | Journal of Finance, Vol. 61, No. 2, pp. 725-762, April 2006 Accepted Paper Series	Ming Dong York University – Schulich School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Scott A. Richardson Barclays – Barclays Global Investors (BGI) Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 06 Oct 08 Last Revised: 19 Oct 08	0 (0)
		Abstract: This paper uses pre-offer market valuations to evaluate the misvaluation and Q theories of takeovers. Bidder and target valuations (price-to-book, or price-to-residual-income-model-value) are related to means of payment, mode of acquisition, premia, target hostility, offer success, and bidder and target announcement-period returns. The evidence is broadly consistent with both hypotheses. The evidence for the Q hypothesis is stronger in the pre-1990 period than in the 1990-2000 period, whereas the evidence for the misvaluation hypothesis is stronger in the 1990-2000 period than in the pre-1990 period. takeovers, misvaluation, market efficiency, behavioral finance
		Does Investor Misvaluation Drive the Takeover Market? | Show Abstract Hide Abstract | Download | EFA 2003 Annual Conference Paper No. 652, Dice Center Working Paper No. 2003-7 Working Paper Series	Ming Dong York University – Schulich School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Scott A. Richardson Barclays – Barclays Global Investors (BGI) Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 01 May 03 Last Revised: 13 Dec 08	1,223 (2,345)	85
		Abstract: This paper tests the hypothesis that irrational market misvaluation affects firms’ takeover behavior. We employ two contemporaneous proxies for market misvaluation, pre-takeover book/price ratios and pre-takeover ratios of residual income model value to price. Misvaluation of bidders and targets influences the means of payment chosen, the mode of acquisition, the premia paid, target hostility to the offer, the likelihood of offer success, and bidder and target announcement period stock returns. The evidence is broadly supportive of the misvaluation hypothesis. takeovers, misvaluation, market efficiency, behavioral finance
12.		The Accrual Anomaly: Risk or Mispricing? | Show Abstract Hide Abstract | Download | AFA 2007 Chicago Meetings Paper Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Kewei Hou Ohio State University – Department of Finance Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 30 Mar 06 Last Revised: 21 May 06	1,140 (2,647)	2
		Abstract: We document considerable return comovement associated with accruals after controlling for other common factors. An accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.15, higher than that of the market factor or the HML factor of Fama and French (1993). In time series regressions, a model that includes the Fama-French factors and the additional accrual factor captures the accrual anomaly in average returns. However, further time series and cross-sectional tests indicate that it is the accrual characteristic rather than the accrual factor loading that predicts returns. These findings favor a behavioral explanation for the accrual anomaly. Capital markets, accruals, market efficiency, behavioral accounting, behavioral finance, limited attention
13.		A Generalized Earnings-Based Stock Valuation Model | View 2 Versions | Show Abstracts | Hide Abstracts| Manchester School, Vol. 73, No. S1, pp. 1-31, September 2005 Working Paper A Generalized Earnings-Based Stock Valuation Model | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	Ming Dong York University – Schulich School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 22 Nov 04 Last Revised: 13 Dec 08	834
		A Generalized Earnings-Based Stock Valuation Model | Show Abstract Hide Abstract | Download | Manchester School, Vol. 73, No. S1, pp. 1-31, September 2005 Accepted Paper Series	Ming Dong York University – Schulich School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 28 Aug 05 Last Revised: 18 Sep 05	32 (109,313)
		Abstract: This paper provides a model for valuing stocks that takes into account the stochastic processes for earnings and interest rates. Our analysis differs from past research of this type in being applicable to stocks that have a positive probability of zero or negative earnings. By avoiding the singularity at the zero point, our earnings-based pricing model achieves improved pricing performance. The out-of-sample pricing performance of the generalized earnings valuation model (GEVM) and the Bakshi and Chen pricing model are compared on four stocks and two indices. The generalized model has smaller pricing errors and greater parameter stability. Furthermore, deviations between market and model prices tend to be mean-reverting using the GEVM model, suggesting that the model may be able to identify stock market misvaluation.
		A Generalized Earnings-Based Stock Valuation Model | Show Abstract Hide Abstract | Download | Working Paper Series	Ming Dong York University – Schulich School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 22 Nov 04 Last Revised: 13 Dec 08	802 (4,791)
		Abstract: This paper provides a model for valuing stocks that takes into account the stochastic processes for earnings and interest rates. Our analysis differs from past research of this type in being applicable to stocks that have a positive probability of zero or negative earnings. By avoiding the singularity at the zero point, our earnings-based pricing model achieves improved pricing performance. The out-of-sample pricing performance of Generalized Earnings Valuation Model (GEVM) and the Bakshi and Chen (2001) pricing model are compared on four stocks and two indices. The generalized model has smaller pricing errors, and greater parameter stability. Furthermore, deviations between market and model prices tend to be mean-reverting using the GEVM model, suggesting that the model may be able to identify stock market misvaluation. Stock valuation, negative earnings, asset pricing
14.		Disclosure to a Credulous Audience: The Role of Limited Attention | View 3 Versions | Show Abstracts | Hide Abstracts| 14th Annual Conference on Financial Economics and Accounting (FEA); Dice Center Working Paper No. 2002-3 14th Annual Conference on Financial Economics and Accounting (FEA); Dice Center Working Paper No. 2002-3 Dice Center Working Paper No. 2002-3 Disclosure to a Credulous Audience: The Role of Limited Attention | Show Abstracts | Hide Abstracts | Versions (3) | hide multiple versions | Export Bibliographic Info |	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Sonya S. Lim DePaul University – Kellstadt Graduate School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 13 Feb 02 Last Revised: 04 Feb 05	815	12
		Disclosure to a Credulous Audience: The Role of Limited Attention | Show Abstract Hide Abstract | Download | 14th Annual Conference on Financial Economics and Accounting (FEA); Dice Center Working Paper No. 2002-3 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Sonya S. Lim DePaul University – Kellstadt Graduate School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 04 Feb 05 Last Revised: 04 Feb 05	115 (52,403)	12
		Abstract: We model limited attention as incomplete usage of publicly available information. Informed players decide whether or not to disclose to observers who sometimes neglect either disclosed signals or the implications of non-disclosure. These observers may choose ex ante how to allocate their limited attention. In equilibrium observers are unrealistically optimistic, disclosure is incomplete, neglect of disclosed signals increases disclosure, and neglect of a failure to disclose reduces disclosure. Regulation requiring greater disclosure can reduce observers’ belief accuracies and welfare. Disclosure in one arena affects perceptions in fundamentally unrelated arenas, owing to cue competition, salience, and analytical interference. Disclosure in one arena can crowd out disclosure in another.
		Disclosure to a Credulous Audience: The Role of Limited Attention | Show Abstract Hide Abstract | Download | 14th Annual Conference on Financial Economics and Accounting (FEA); Dice Center Working Paper No. 2002-3 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Sonya S. Lim DePaul University – Kellstadt Graduate School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 19 Jan 04 Last Revised: 19 Jan 04	332 (17,037)	12
		Abstract: We model limited attention as incomplete usage of publicly available information. Informed players decide whether or not to disclose to observers who sometimes neglect either disclosed signals or the implications of non-disclosure. These observers may choose ex ante how to allocate their limited attention. In equilibrium observers are unrealistically optimistic, disclosure is incomplete, neglect of disclosed signals increases disclosure, and neglect of a failure to disclose reduces disclosure. Regulation requiring greater disclosure can reduce observers’ belief accuracies and welfare. Disclosure in one arena affects perceptions in fundamentally unrelated arenas, owing to cue competition, salience, and analytical interference. Disclosure in one arena can crowd out disclosure in another.
		Disclosure to a Credulous Audience: The Role of Limited Attention | Show Abstract Hide Abstract | Download | Dice Center Working Paper No. 2002-3 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Sonya S. Lim DePaul University – Kellstadt Graduate School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 13 Feb 02 Last Revised: 25 Mar 02	368 (14,892)	12
		Abstract: We model limited attention as incomplete usage of publicly available information. Informed players decide whether or not to disclose to observers who sometimes neglect either disclosed signals or the implications of non-disclosure. In equilibrium observers are unrealistically optimistic, disclosure is incomplete, neglect of disclosed signals increases disclosure, and neglect of a failure to disclose reduces disclosure. Regulation requiring greater disclosure can reduce observers’ belief accuracies and welfare. Disclosure in one arena affects perceptions in fundamentally unrelated arenas, owing to cue competition, salience, and analytical interference. Disclosure in one arena can crowd out disclosure in another. A player may disclose in one arena to distract from bad news in the other (a “wag the dog” effect).
15.		Covariance Risk, Mispricing, and the Cross Section of Security Returns | View 2 Versions | Show Abstracts | Hide Abstracts| Ohio State University Working Paper No. 2000-6 NBER Working Paper No. W7615 Covariance Risk, Mispricing, and the Cross Section of Security Returns | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area	Posted: 16 May 00 Last Revised: 01 Apr 01	784	10
		Covariance Risk, Mispricing, and the Cross Section of Security Returns | Show Abstract Hide Abstract | Download | Ohio State University Working Paper No. 2000-6 Working Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area	Posted: 29 Dec 00 Last Revised: 29 Dec 00	744 (5,391)	10
		Abstract: This paper offers a model in which asset rices reflect both covariance risk and misperceptions of firms’ prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios). With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental/price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental/price ratios and market value to forecast returns, and the domination of beta by these variables in some studies.
		Covariance Risk, Mispricing, and the Cross Section of Security Returns | Show Abstract Hide Abstract | Download | NBER Working Paper No. W7615 Working Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area	Posted: 16 May 00 Last Revised: 01 Apr 01	40 (100,413)	10
		Abstract: This paper offers a multisecurity model in which prices reflect both covariance risk and misperceptions of firms’ prospects, and in which arbitrageurs trade to profit from mispricing. We derive a pricing relationship in which expected returns are linearly related to both risk and mispricing variables. The model thereby implies a multivariate relation between expected return, beta, and variables that proxy for mispricing of idiosyncratic components of value tends to be arbitraged away but systematic mispricing is not. The theory is consistent with several empirical findings regarding the cross-section of equity returns, including: the observed ability of fundamental/price ratios to forecast aggregate and cross-sectional returns, and of market value but not non-market size measures to forecast returns cross-sectionally; and the ability in some studies of fundamental/price ratios and market value to dominate traditional measures of security risk. The model also offers several untested empirical implications for the cross-section of expected returns and for the relation of volume to subsequent volatility.
16.		Accruals and Aggregate Stock Market Returns | Show Abstract Hide Abstract | Download | Journal of Financial Economics, Forthcoming Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Kewei Hou Ohio State University – Department of Finance Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 21 Nov 05 Last Revised: 19 Oct 08	674 (6,331)	6
		Abstract: Past research has shown that the level of operating accruals is a negative cross-sectional predictor of stock returns. This paper examines whether the accrual anomaly extends to the aggregate stock market. In contrast with cross-sectional findings, there is no indication that aggregate operating accruals is a negative time series predictor of stock market returns; the relation is strongly positive for the market portfolio and also for several sector and industry portfolios. In addition, innovations in accruals are negatively contemporaneously associated with market returns, suggesting that changes in accruals contain information about changes in discount rates, or that firms manage earnings in response to market-wide undervaluation.
17.		Feedback and the Success of Irrational Investors | Show Abstract Hide Abstract | Download | Journal of Financial Economics, Vol. 81, No. 2, pp. 311-338, August 2006, Dice Center Working Paper No. 2003-22 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area Sheridan Titman University of Texas at Austin – Department of Finance	Posted: 28 Jul 03 Last Revised: 13 Dec 08	662 (6,481)	12
		Abstract: We provide a model in which irrational investors trade based upon considerations that are not inherently related to fundamentals. However, because trading activity affects market prices, and because of feedback from security prices to cash flows, the irrational trades influence underlying cash flows. As a result, irrational investors can, in some situations, earn positive expected profits. These expected profits are not market compensation for bearing risk, and can exceed the expected profits of rational informed investors. The trades of irrational investors can distort real investment choices and lower ex ante firm values, even though stocks prices follow a random walk.
18.		Conversation, Observational Learning, and Informational Cascades | Show Abstract Hide Abstract | Download | Dice Center Working Paper No. 2001-5 Working Paper Series	H. Henry Cao University of North Carolina at Chapel Hill – Finance Area David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 09 May 01 Last Revised: 13 Dec 08	546 (8,624)	5
		Abstract: We offer a model to explain why groups of people sometimes converge upon poor decisions and are prone to fads, even though they can discuss the outcomes of their choices. Models of informational herding or cascades have examined how rational individuals learn by observing predecessors’ actions, and show that when individuals stop using their own private signals, improvements in decision quality cease. A literature on word-of-mouth learning shows how observation of outcomes as well as actions can cause convergence upon correct decisions. However, the assumptions of these models differ considerably from those of the cascades/herding literature. In a setting which adds ‘conversational’ learning about both the payoff outcomes of predecessors to a basic cascades model, we describe conditions under which (1) cascades/herding occurs with probability one; (2) once started there is a positive probability (generally less than one) that a cascade lasts forever; (3) cascades aggregate information inefficiently and are fragile; (4) the ability to observe past payoffs can reduce average decision accuracy and welfare; and (5) delay in observation of payoffs can improve average accuracy and welfare.
19.		Limited Investor Attention and Stock Market Misreactions to Accounting Information | Show Abstract Hide Abstract | Download | Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 18 Nov 05 Last Revised: 17 Mar 06	511 (9,509)	4
		Abstract: We provide a model in which a single psychological constraint, limited investor attention, explains both under- and over-reaction to different earnings components. Investor neglect of information in current-period earnings about future earnings induces post-earnings announcement drift (as documented by \citeN{bernard/thomas:89}), the strength of which is increasing with the persistence of earnings. Neglect of earnings components causes accruals and cash flows to predict abnormal returns (\citeN{sloan:96}). (Accruals are the adjustments made to cash flows to produce accounting earnings.) We derive new untested empirical implications relating the strength of the drift, accruals, and cash flow anomalies to the quality of earnings, to the number of distracting events, and to the volatilities of and correlation between accruals and cash flows. We model limited attention as causing some investors to condition only on subsets of publicly available information signals in valuing a stock. Owing to risk aversion, equilibrium stock prices reflect a weighted average of the beliefs of investors who attend to different signals. In equilibrium, prices underreact to earnings surprises because some investors form valuations that do not reflect the newly-arriving earnings news. Investors who do not distinguish between earnings components overvalue high accruals firms and undervalue high cash flow firms, because the level of accruals is a less favorable forecaster of future profitability than cash flow. Since misvaluation is eventually corrected, high accruals predict low subsequent abnormal returns, and high cash flows predict high subsequent abnormal returns. Thus, the analysis reconciles underreaction to earnings with overreaction to accruals. The model also offers a further set of empirical implications: (1) Greater earnings persistence implies stronger post-earnings announcement drift; (2) The greater the number of distracting events, the stronger is post-earnings announcement drift; (3) The more variable are accruals relative to cash flows, the stronger is the predictive power of cash flow relative to accruals in predicting future returns; (4) The ratio of the slope coefficient in the regression of returns on cash flow to the slope coefficient on accruals is greater in absolute value than the ratio of the accruals variance to the cash flow variance; and (5) The accruals/return relation becomes weaker when the correlation between cash flow and accruals increases. limited attention, behavioral finance, investor psychology, capital markets, accruals, market efficiency
20.		Investor Psychology and Tests of Factor Pricing Models | Show Abstract Hide Abstract | Download | Working Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area	Posted: 26 Nov 05 Last Revised: 26 Nov 05	504 (9,711)	5
		Abstract: We provide a model with overconfident risk neutral investors, and therefore no risk premia, in which a price-based portfolio such as HML earns positive expected returns and loads on fundamental macroeconomic variables. Furthermore, loadings on such portfolios are proxies for mispricing, and therefore forecast cross-sectional returns, even after controlling for characteristics such as book-to-market. Thus, an empirical finding that covariances incrementally predict returns does not distinguish rational factor pricing from a setting with no risk premia. The analysis reconciles the high risk (market betas) of low book-to-market firms with their low expected returns, and offers new empirical implications to distinguish alternative theories. factor models, overconfidence, Fama-French factors, covariance risk
21.		A Theory of Costly Sequential Bidding | Show Abstract Hide Abstract | Download | University of Michigan Business School Working Paper No. 98028 Working Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 17 Aug 99 Last Revised: 17 Aug 99	434 (11,991)	23
		Abstract: We propose a model of sequential bidding for a valuable object, such as a takeover target, when it is costly submit or revise a bid. An implication of the model is that bidding occurs in repeated jumps, a pattern that is consistent with certain types of natural auctions such as takeover contests. The jumps in bid communicate bidders’ information rapidly, leading to contests that are completed with a small number of bids. The model provides several new results concerning revenue and efficiency relationships between different auctions, and provides an information-based interpretation of delays in bidding.
22.		Thought and Behavior Contagion in Capital Markets | Show Abstract Hide Abstract | Download | HANDBOOK OF FINANCIAL MARKETS: DYNAMICS AND EVOLUTION, 2009 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 16 Jun 08 Last Revised: 13 Dec 08	420 (12,528)	1
		Abstract: Prevailing models of capital markets capture a limited form of social influence and information transmission, in which the beliefs and behavior of an investor affect others only through market price, information transmission and processing is simple (without thoughts and feelings), and there is no localization in the influence of an investor on others. In reality, individuals often process verbal arguments obtained in conversation or from media presentations, and observe the behavior of others. We review here evidence concerning how these activities cause beliefs and behaviors to spread, affect financial decisions, and affect market prices; and theoretical models of social influence and its effects on capital markets. Social influence is central to how information and investor sentiment are transmitted, so thought and behavior contagion should be incorporated into the theory of capital markets. capital markets, thought contagion, behavioral contagion, herd behavior, information cascades, social learning, investor psychology, accounting regulation, disclosure, behavioral finance, market efficiency, popular models, memes
23.		Investor Overconfidence and the Forward Discount Puzzle | Show Abstract Hide Abstract | Download | Working Paper Series	Bing Han University of Texas at Austin – McCombs School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Tracy Yue Wang University of Minnesota – Twin Cities – Carlson School of Management	Posted: 27 Mar 08 Last Revised: 04 Aug 08	418 (12,610)	5
		Abstract: This paper offers an explanation for the forward discount puzzle in foreign exchange markets based upon investor overconfidence. In our model, overconfident individuals overreact to their information about future inflation differential. The spot and the forward exchange rates differentially reflect such overreaction; as a result, the forward discount forecasts reversal in the spot rate. With plausible parameter values, the model explains the magnitude of the forward discount puzzle and stylized facts about how the forward discount bias varies with time horizon and time-series versus cross-sectional test method. Furthermore, the model generates new empirical predictions about the relation between the forward discount bias to foreign exchange trading volume, exchange rate volatility and predictability, as well as the degree of violation of the relative Purchasing Power Parity. investor overconfidence, forward discount puzzle, inflation differential, exchange rate overshooting, market efficiency, Purchasing Power Parity
24.		Do Tender Offers Create Value? New Methods and Evidence | Show Abstract Hide Abstract | Download | Dice Center Working Paper No. 2004-4 Working Paper Series	Sanjai Bhagat University of Colorado at Boulder – Department of Finance Ming Dong York University – Schulich School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Robert B. Noah Cambridge Finance Partners, LLC	Posted: 18 May 04 Last Revised: 10 Jun 04	412 (12,833)	17
		Abstract: We develop the Probability Scaling Method, which rescales short-window announcement period returns; and the Intervention Method, which uses returns associated with intervening events, to estimate value improvements from tender offers. These methods address biases in conventional techniques, which measure only a fraction of the total tender offer gain; and which include revelation about bidder stand-alone value. Perceived value improvements are much larger than traditional methods indicate, so that we cannot reject the hypothesis that bidders on average pay fair prices for targets. Furthermore, our new methods affect inferences about economic forces in the takeover market. We identify several effects (higher combined bidder-target stock returns for hostile offers, lower for equity offers, and lower for diversifying offers) that reflect differences in revelation about stand-alone value, not gains from combination. Tender offers, value improvements, truncation dilemma, revelation bias, agency
25.		Driven to Distraction: Extraneous Events and Underreaction to Earnings News | Show Abstract Hide Abstract | Download | Journal of Finance, Forthcoming, 3rd Prize, 2007 Chicago Quantitative Alliance Annual Academic Competition Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Sonya S. Lim DePaul University – Kellstadt Graduate School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 18 Apr 07 Last Revised: 19 Oct 08	384 (14,074)	9
		Abstract: Psychological evidence indicates that it is hard to process multiple stimuli and perform multiple tasks at the same time. This paper tests the investor distraction hypothesis, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm. Our test focuses on the competition for investor attention between a firm’s earnings announcements and the earnings announcements of other firms. We find that the immediate stock price and volume reaction to a firm’s earnings surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day. Distracting news has a stronger effect on firms that receive positive than negative earnings surprises. Industry-unrelated news has a stronger distracting effect than related news. A trading strategy that exploits post-earnings announcement drift is unprofitable for announcements made on days with little competing news. limited attention, behavioral finance, investor psychology, capital markets, post-earnings announcement drift, market efficiency
26.		Firm and Managerial Incentives to Manipulate the Timing of Project Resolution | Show Abstract Hide Abstract | Download | Dice Center Working Paper No. 2001-4 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Tarun Chordia Emory University – Department of Finance Sonya S. Lim DePaul University – Kellstadt Graduate School of Business	Posted: 25 Apr 01 Last Revised: 26 Apr 01	369 (14,892)	3
		Abstract: A manager who wants to be viewed favorably has an incentive to advance or delay the arrival of information about his firm’s profitability. In the model, a high ability manager tries to advance resolution of a likely-favorable outcome, while a low ability manager may defer resolution. Such manipulation of information arrival causes greater investment in execution projects (which tend to resolve early) than exploratory projects (which tend to resolve late), and affects investment in hastening or retarding project resolution. In contrast with previous literature, in some cases managers may secretly overinvest. The model offers empirical implications about innovative versus conventional investments, associated stock price reactions, and corporate control. The theory also implies a perverse sorting of high ability managers to conventional activities and low ability managers to visionary enterprises.
27.		Sidelined Investors, Trading-Generated News, and Security Returns | Show Abstract Hide Abstract | Download | Dice Working Paper No. 2000-2 Working Paper Series	H. Henry Cao University of North Carolina at Chapel Hill – Finance Area Joshua D. Coval Harvard Business School David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 10 Jul 01 Last Revised: 15 Jan 09	353 (15,695)	19
		Abstract: This paper studies information blockages and the asymmetric release of information in a security market with fixed setup costs of trading. In this setting, ’sidelined’ investors may delay trading until price movements validate their private signals. Trading thereby internally generates the arrival of further news to the market. This leads to 1) negative skewness following price runups and positive skewness following price rundowns (even though the model is ex ante symmetric), 2) a lack of correspondence between large price changes and the arrival of external information, and 3) increases in volatility following large price changes.
28.		Commonality in Misvaluation, Equity Financing, and the Cross Section of Stock Returns | Show Abstract Hide Abstract | Download | AFA 2008 New Orleans Meetings Paper Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Danling Jiang Florida State University – The College of Business	Posted: 20 Mar 07 Last Revised: 07 Aug 08	350 (15,870)
		Abstract: Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. This paper tests whether equity financing identifies comovement in returns and commonality in misvaluation. After new equity issues (repurchases), firms comove more with existing issuers (repurchasers). A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue stocks captures general comovement in returns incremental to the 4-factor model. The loadings of stocks or portfolios on UMO incrementally explain returns both in the time series and in the cross section. Further evidence suggests these loadings are proxies for the common component of a stock’s misvaluation. Comovement, equity financing, new issue, repurchase, systematic mispricing, return predictability
29.		Psychological Bias as a Driver of Financial Regulation | View 2 Versions | Show Abstracts | Hide Abstracts| European Financial Management, Vol. 14, No. 5, pp. 856-874, November 2008 European Financial Management Journal, Forthcoming Psychological Bias as a Driver of Financial Regulation | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 03 Oct 07 Last Revised: 13 Dec 08	325	1
		Psychological Bias as a Driver of Financial Regulation | Show Abstract Hide Abstract | Download | European Financial Management, Vol. 14, No. 5, pp. 856-874, November 2008 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 16 Oct 08 Last Revised: 16 Oct 08	0 (0)	1
		Abstract: I propose here the psychological attraction theory of financial regulation that regulation is the result of psychological biases on the part of political participants voters, politicians, bureaucrats, and media commentators; and of regulatory ideologies that exploit these biases. Some key elements of the psychological attraction approach are: salience and vividness, omission bias, scapegoating and xenophobia, fairness and reciprocity norms, overconfidence, and mood effects. This approach further emphasises emergent effects that arise from the interactions of individuals with psychological biases. For example, availability cascades and ideological replicators have powerful effects on regulatory outcomes.
		Psychological Bias as a Driver of Financial Regulation | Show Abstract Hide Abstract | Download | European Financial Management Journal, Forthcoming Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 03 Oct 07 Last Revised: 13 Dec 08	325 (17,535)	1
		Abstract: I propose here the psychological attraction theory of financial regulation – that regulation is the result of psychological biases on the part of political participants – voters, politicians, bureaucrats, and media commentators; and of regulatory ideologies that exploit these biases. Some key elements of the psychological attraction approach are: salience and vividness, omission bias, scapegoating and xenophobia, fairness and reciprocity norms, overconfidence, and mood effects. This approach further emphasizes emergent effects that arise from the interactions of individuals with psychological biases. For example, availability cascades and ideological replicators have powerful effects on regulatory outcomes. Investor psychology, regulation, salience, omission bias, scapegoating, xenophobia, fairness, reciprocity, norms, mood, availability cascades, overconfidence, evolutionary psychology, memes, ideology, replicators
30.		Disclosure to an Audience with Limited Attention | Show Abstract Hide Abstract | Download | Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Sonya S. Lim DePaul University – Kellstadt Graduate School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 15 Oct 04 Last Revised: 13 Dec 08	307 (18,744)	11
		Abstract: In our model, informed players decide whether or not to disclose, and observers allocate attention among disclosed signals, and toward reasoning through the implications of a failure to disclose. In equilibrium disclosure is incomplete, and observers are unrealistically optimistic. Nevertheless, regulation requiring greater disclosure can reduce observers’ belief accuracies and welfare. A stronger tendency to neglect disclosed signals increases disclosure, whereas a stronger tendency to neglect failures to disclose reduces disclosure. Observer beliefs are influenced by the salience of disclosed signals, and disclosure in one arena can crowd out disclosure in other fundamentally unrelated arenas. Disclosure policy, disclosure regulation, limited attention, behavioral economics, behavioral accounting, behavioral finance, market efficiency, psychology and economics
31.		Short Arbitrage, Return Asymmetry and the Accrual Anomaly | Show Abstract Hide Abstract | Download | Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business Jeff Jiewei Yu Massachusetts Institute of Technology (MIT) – Sloan School of Management	Posted: 20 Jun 07 Last Revised: 31 Jul 08	257 (23,190)
		Abstract: We find a positive association between short-selling and accruals during 1988-2003. Short arbitrage occurs primarily among firms in the top accrual decile, and firms with sufficiently high supply of loanable shares (proxied by institutional holdings). Consistent with limits to short arbitrage, there is an asymmetry between the up- and down- sides of the accrual anomaly. Asymmetry is only present on NASDAQ, and is significantly stronger among firms with low institutional holdings, low liquidity (turnover and size), and high residual volatility. Thus, there is short arbitrage of the accrual anomaly, but short sale constraints limit its effectiveness (especially among NASDAQ firms). Accruals, anomalies, arbitrage, short sales, market efficiency
32.		Fear of the Unknown: Familiarity and Economic Decisions | Show Abstract Hide Abstract | Download | Working Paper Series	H. Henry Cao University of North Carolina at Chapel Hill – Finance Area Bing Han University of Texas at Austin – McCombs School of Business Harold H. Zhang University of Texas at Dallas – School of Management David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 10 May 07 Last Revised: 27 Jan 08	218 (28,000)	6
		Abstract: Evidence indicates that people fear change and the unknown. We offer a model of familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains the endowment effect, portfolio underdiversification, home and local biases. Equilibrium stock prices reflect an unfamiliarity premium. In an international setting, our model implies that the absolute pricing error of the standard CAPM is positively correlated with the amount of home bias. It also predicts that a modified CAPM holds wherein the market portfolio is replaced with a portfolio of the stock holdings of investors not subject to familiarity bias. familiarity, model uncertainty, status quo, home bias, diversification, inertia
33.		A Cross-Cultural Study of Reference Point Adaptation: Evidence from China, Korea, and the US | Show Abstract Hide Abstract | Download | Working Paper Series	Hal R. Arkes Ohio State University – Department of Psychology David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Danling Jiang Florida State University – The College of Business Sonya S. Lim DePaul University – Kellstadt Graduate School of Business	Posted: 12 Jul 07 Last Revised: 13 Dec 08	177 (35,068)
		Abstract: We examined reference point adaptation following gains or losses in security trading using participants from China, Korea, and the US. In both questionnaire studies and trading experiments with real money incentives, reference point adaptation was larger for Asians than for Americans. Subjects in all countries adapted their reference points more after a gain than after an equal-sized loss. When we introduced a forced sale intervention that highlighted a prior price change, Americans showed greater adaptation toward the new price, whereas Asians showed less adaptation. We offer possible explanations both for the cross-cultural similarities and the cross-cultural differences. Prospect theory, cross-cultural differences, reference point adaptation, mental accounting, security trading
34.		Promotion Tournaments and Capital Rationing | Show Abstract Hide Abstract | Download | Review of Financial Studies, Forthcoming , Dice Center Working Paper No. 2005-20 Working Paper Series	Bing Han University of Texas at Austin – McCombs School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business John C. Persons Ohio State University – Department of Finance	Posted: 16 Nov 05 Last Revised: 19 Oct 08	155 (39,783)
		Abstract: We analyze capital allocation in a conglomerate where divisional managers with uncertain abilities compete for promotion to CEO. A manager can sometimes gain by unobservably adding variance to divisional output. Capital rationing can limit this distortion, increase productive efficiency, and allow the owner to make more accurate promotion decisions. Firms in which the CEO has a greater span of control are more likely to use capital rationing. A rationed manager is more likely to be promoted even though all managers are identical ex ante. Overconfidence can increase a manager’s likelihood of promotion and can even benefit the (fully rational) owner. promotion, tournaments, capital rationing, conglomerate, career concerns, managerial overconfidence
35.		Reference Point Adaptation: Tests in the Domain of Security Trading | Show Abstract Hide Abstract | Download | Organizational Behavior and Human Decision Processes, Vol. 105, No. 1, pp. 67-81, January 2008 Accepted Paper Series	Hal R. Arkes Ohio State University – Department of Psychology David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Danling Jiang Florida State University – The College of Business Sonya S. Lim DePaul University – Kellstadt Graduate School of Business	Posted: 28 Jun 06 Last Revised: 19 Oct 08	132 (46,977)	5
		Abstract: According to prospect theory (Kahneman & Tversky, 1979), gains and losses are measured from a reference point. We attempted to ascertain to what extent the reference point shifts following gains or losses. In questionnaire studies we asked subjects what stock price today will generate the same utility as a previous change in a stock price. From participants’ responses we calculated the magnitude of reference point adaptation, which was significantly greater following a gain than following a loss of equivalent size. We also found the asymmetric adaptation of gains and losses persisted when a stock was included within a portfolio rather than being considered individually. In studies using financial incentives within the Becker, DeGroot, and Marschak (1964) procedure, we again noted faster adaptation of the reference point to gains than losses. We related our findings to several aspects of asset pricing and investor behavior. Prospect theory, Reference point, Asset pricing, Security trading
36.		Style as an Attention Technology | Show Abstract Hide Abstract | Download | Journal of Bioeconomics, 2009 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 20 Mar 06 Last Revised: 13 Dec 08	125 (48,754)
		Abstract: What is the point of style? According to Richard Lanham in his book, The Economics of Attention: Style and Substance in the Age of Information, style is the means by which attention is attracted and allocated. Lanham’s book describes the triumph of ‘fluff’ over ’stuff’ (information over objects) and the importance of intellectual property. Wealth effects and shifts in the distribution costs can help explain a shift over time from stuff to fluff. A deep economics of attention will require digging into the technology of attention allocation, and into the conflicts of interest between those who seek to attract the attention of others and those who seek to allocate their own scarce attention effectively. An understanding the role of style in therefore essential for building an economics of attention. attention, style, technology
37.		Taking the Road Less Traveled: Does Conversation Eradicate Pernicious Cascades? | Show Abstract Hide Abstract | Download | Dice Center Working Paper No. 2002-8 Working Paper Series	H. Henry Cao University of North Carolina at Chapel Hill – Finance Area David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 22 Aug 03 Last Revised: 22 Aug 03	83 (67,560)	2
		Abstract: We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite being able to communicate both past payoff outcomes and the private signals underlying past choices. This reflects direct and indirect action-based informational externalities; and conversational externalities – the failure of individuals to take into account the benefits their conversations confer upon later individuals. In contrast with previous cascades literature, cascades here are spontaneously dislodged and in general have a probability less than one of lasting forever. Furthermore, the ability of individuals to communicate can reduce average decision accuracy and welfare.
38.		The Blind Leading the Blind: Social Influence, Fads and Informational Cascades | Show Abstract Hide Abstract | Download | THE NEW ECONOMICS OF HUMAN BEHAVIOUR, Ierulli, K. and Tommasi, M., eds., Ch.12, pp. 188-215, Cambridge University Press, 1995, Anderson Graduate School of Management, UCLA, Working Paper No. 24-93 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 05 Oct 08 Last Revised: 19 Oct 08	31 (110,555)	1
		Abstract: An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to hollow the behavior of the preceding person without regard to his own information. Among the phenomena that can be explained by informational cascades are conformism at specific times and places, error-prone behavior, and fragility of behaviors.
39.		Informational Cascades and Social Conventions | Show Abstract Hide Abstract | Download | THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW, May 1988, University of Michigan Business School Working Paper No. 9705-10 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 05 Oct 08 Last Revised: 20 Oct 08	29 (114,800)	1
		Abstract: This entry reviews how the theory of informational cascades (in which an individual’s action is independent of his private information signal) explains the conformity, idiosyncrasy, and fragility of social behavior. It considers the effects on social outcomes of fashion leaders and of the public release of information. The entry further discusses the implications of informational cascades in various contexts, including fads, finance, medical practice, peer influence, politics, scientific theory, stigma, and zoology.
40.		Herd Behaviour and Cascading in Capital Markets: A Review and Synthesis | Show Abstract Hide Abstract | Download | European Financial Management, Vol. 9, pp. 25-66, 2003 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 18 Mar 03 Last Revised: 29 May 03	29 (113,305)	44
		Abstract: We review theory and evidence relating to herd behaviour, payoff and reputational interactions, social learning, and informational cascades in capital markets. We offer a simple taxonomy of effects, and evaluate how alternative theories may help explain evidence on the behaviour of investors, firms, and analysts. We consider both incentives for parties to engage in herding or cascading, and the incentives for parties to protect against or take advantage of herding or cascading by others. Herd Behaviour, Informational Cascades, Social Learning, Analyst Herding, Capital Markets, Financial Reporting, Behavioral Finance, Investor Psychology, Market Efficiency
41.		The Psychological Attraction Approach to Accounting and Disclosure Policy | Show Abstract Hide Abstract | Download | Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: Last Revised: 15 Mar 09	3 (0)
		Abstract: We offer here the psychological attraction approach to accounting and disclosure rules, regulation, and policy as a program for positive accounting research. We suggest that psychological forces have shaped and continue to shape rules and policies in two different ways. (1) Good Rules for Bad Users: rules and policies that provide information in a form that is useful for users who are subject to bias and cognitive processing constraints. (2) Bad Rules: superfluous or even pernicious rules and policies that result from psychological bias on the part of the ‘designers’ (managers, users, auditors, regulators, politicians, or voters). We offer some initial ideas about psychological sources of the use of historical costs, conservatism, aggregation, and a focus on downside outcomes in risk disclosures. We also suggest that psychological forces cause informal shifts in reporting and disclosure regulation and policy, which can exacerbate boom/bust patterns in financial markets.
42.		Promotion Tournaments and Capital Rationing | Show Abstract Hide Abstract | Download | The Review of Financial Studies, Vol. 22, Issue 1, pp. 219-255, 2009 Accepted Paper Series	Bing Han University of Texas at Austin – McCombs School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business John C. Persons Ohio State University – Department of Finance	Posted: 03 Jan 09 Last Revised: 20 Feb 09	0 (0)
		Abstract: We analyze capital allocation in a conglomerate where divisional managers with uncertain abilities compete for promotion to CEO. A manager can sometimes gain by unobservably adding variance to divisional performance. Capital rationing can limit this distortion, increase productive efficiency, and allow the owner to make more accurate promotion decisions. Firms for which CEO talent is more important for firm performance are more likely to ration capital. A rationed manager is more likely to be promoted even though all managers are identical ex ante. When the tournament payoff is relatively small, offering an incentive wage can be more efficient than rationing capital; however, when tournament incentives are paramount, rationing is more efficient. G30, G31, G39
43.		Residual Risk, Trading Costs and Commodity Futures Risk Premia | Show Abstract Hide Abstract | Review of Financial Studies, Vol. 2, pp. 173-193, Summer 1988 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 03 Dec 08 Last Revised: 03 Dec 08	0 (0)
		Abstract: Trading costs, in the form either of explicit charges or of the costs of becoming informed, limit the participation of some classes of traders in commodity futures markets. When speculators face a fixed cost of participating in a futures market that is used by commodity producers to hedge their stochastic revenues, the futures risk premium deviates from the perfect markets prediction. The deviation rises in absolute value with the square root of the trading cost and with the standard deviation of residual returns, and it is unrelated to the covariance of the futures price with producers’ nonmarketable wealths. The residual-risk premium depends not on the total magnitude of the risk that producers hedge (i.e., aggregate revenue variance), but on the variability of their revenue relative to its mean (i.e., the coefficient of variation). Hence, even a commodity that constitutes a minor fraction of aggregate consumption may have a large premium for residual risk if the revenue derived from it has a large coefficient of variation.
44.		Price Discrimination Through Offers to Match Price | Show Abstract Hide Abstract | Journal of Business, Vol. 60, No. 3, pp. 365-383, July 1987 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: In this paper, a firm discriminates between two classes of customer who have a different cost of information by coupling a list price with an offer to match the pr ice of any other shop. If the list price elsewhere is lower, the firm will be successful in discrimination. The list price of each firm is increasing in the number of sellers and the total sales are decreasing in the number of sellers. Furthermore, if sellers coordinate, they discriminate more efficaciously and increase their profits by increasing their total sales.
45.		Risk, Futures Pricing, and the Organization of Production in Commodity Markets | Show Abstract Hide Abstract | Journal of Political Economy, 96(6), December (1988):1206-1220. Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 01 Dec 08	0 (0)
		Abstract: This paper examines equilibrium in a spot and futures market with both primary producers (growers) and intermediate producers (processors). For a commodity that is subject to output shocks, processors tend to hedge long, in contrast with Hick’s theory of futures hedging. Nevertheless, if transaction costs are low, the two-stage production process brings about a downward futures price bias, consistent with Hick’s pricing prediction. But if costs of trading futures are high, growers tend to be differentially driven from the futures market, reversing the direction of the bias. Futures trading may also affect the organization of industry; when demand is inelastic, futures trading can serve as a substitute for vertical integration as a means of diversifying risk because the risk positions of growers are complementary with those of processors.
46.		Cooperation in a Repeated Prisoners’ Dilemma with Ostracism | Show Abstract Hide Abstract | Journal of Economic Behavior and Organization, Vol. 12, No. 1, pp. 87-106, August 1989 Accepted Paper Series	Eric Bennett Rasmusen Indiana University Bloomington – Department of Business Economics & Public Policy David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: The unique Nash equilibrium of the finitely repeated n-person Prisoners’ Dilemma calls for defection in all rounds. One way to enforce cooperation in groups is ostracism: players who defect are expelled. If the group’s members prefer not to diminish its size, ostracism hurts the legitimate members of the group as well as the outcast, putting the credibility of the threat in doubt. Nonetheless, we show that ostracism can be effective in promoting cooperation with either finite or infinite rounds of play. The model can be applied to games other than the Prisoners’ Dilemma, and ostracism can enforce inefficient as well as efficient outcomes.
47.		Futures Trading, Storage and the Division of Risk: A Multiperiod Analysis | Show Abstract Hide Abstract | Economic Journal, Vol. 99, No. 397, pp. 700-719, September 1989 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: This paper analyzes the interaction of storage and futures trading when producers make decisions covering many harvests. In this more general context, by examining how risks are distributed between storers and growers, results are obtained that differ dramatically from previous models in the literature. When storage is costly, storers may reduce risk by taking long hedging positions, rather than selling inventories short. Contrary to the conventional view (in a tradition beginning with J. M. Keynes and J. R. Hicks), costless storage does not imply downward bias of futures prices (” normal backwardation”). Hedging against the optimally varying planting costs promotes upward price bias (” contango”), while hedging against storage costs to be incurred promotes downward bias. When the risks faced by growers and storers are negatively correlated, futures trading can substitute for vertical integration as a means of reducing risk.
48.		Determinants of Hedging and Risk Premia in Commodity Futures Markets | Show Abstract Hide Abstract | Journal of Financial and Quantitative Analysis (JFQA), Vol. 24, No. 3, pp. 313-331, September 1989 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: This paper examines the determinants of commodity futures hedging and of risk premia arising from covariation of the futures price with stock market returns, and with the revenues of producers. Owing to supply shocks that stochastically redistribute real wealth (surplus) between producers and consumers, and to limited participation in the futures market, the total risk premium in the model is not proportional to the contract’s covariance with aggregate consumption. Stock market variability interacts with the incentive to hedge, causing the producer hedging component of the risk premium to increase (decrease) with income elasticity, for a normal (inferior) good. Production costs that depend on output raise the premium. We argue that output and demand shocks will typically be positively correlated, raising the premium. High supply elasticity reduces the absolute hedging premium by reducing the variability of spot price and revenue.
49.		Facilitation of Competing Bids and the Price of a Takeover Target | Show Abstract Hide Abstract | Review of Financial Studies, Vol. 2, No. 4, pp. 587-606, 1989 Accepted Paper Series	Ivan P.L. Png National University of Singapore David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: We present a model of corporate acquisitions in which initially uninformed bidders must incur costs to learn their (independent) valuations of a potential takeover target. The first bidder makes either a preemptive bid that will deter the second bidder from investigating or a lower bid that will induce the second bidder to investigate and possibly compete. We show that the expected price of the target may be higher when the first bidder makes a deterring bid than when there is competitive bidding. Hence, by weakening the first bidder’s incentive to choose a preemptive bid, regulatory and management policies to assist competing bidders may reduce both the expected takeover price and social welfare.
50.		Share Tendering Strategies and the Success of Hostile Takeover Bids | Show Abstract Hide Abstract | Journal of Political Economy, Vol. 98, No. 2, pp. 295-324, April 1990 Accepted Paper Series	Sheridan Titman University of Texas at Austin – Department of Finance David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: This paper presents a model of tender offers in which the bid perfectly reveals the bidder’s private information about the size of the value improvement that can be generated by a takeover. We argue that bidders with greater improvements will offer higher premia to ensure that sufficient shares are tendered to obtain control. The model relates announcement date returns and takeover success or failure to the amount bid, the initial shareholdings of the bidder, the number of shares the bidder attempts to purchase, the dilution of minority shareholders, and managerial opposition. We show that managerial defensive measures will sometimes increase the probability of the offer’s success, either by raising the incentive to bid high or by decreasing the asymmetry of information about the improvement.
51.		Hedging Pressure and Futures Price Movements in a General Equilibrium Model | Show Abstract Hide Abstract | Econometrica Vol. 58, No. 2, pp. 411-458, 1990, THE THEORY OF FUTURE MARKETS, P. Weller, ed., Blackwell Publishers, Oxford, UK and Cambridge MA, 1992 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: Optimal futures hedging and equilibrium futures price bias are examined in a model characterized by two consumption goods, one of which has stochastically varying output, and where information arrives sequentially. Positive (negative) complementarity in consumer preferences promotes downward (upward) bias in the futures price viewed as a predictor of the later spot price. I demonstrate that the conclusion derived from partial equilibrium analysis – that when speculators are risk averse, risk premia are a function of hedging pressure – fails in the general equilibrium analysis, so long as there are no transaction costs. A counterexample is analyzed in which, as consumers’ additive logarithmic preferences are varied, producers’ hedging positions change from long to short, while the futures risk premium remains unchanged. However, hedging pressure is reinstated as a force influencing risk premia in the sense that the futures price is downward biased when hedgers take short positions and is upward biased when hedgers take long positions, provided it can be assumed (as is usually valid) that fixed setup costs of trading deter consumers more than producers from participating in the futures market.
52.		Seasonal Patterns of Futures Hedging and the Resolution of Output Uncertainty | Show Abstract Hide Abstract | Journal of Economic Theory, Vol. 3, No. 2, pp. 304-327, April 1991 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: Optimal futures hedging is examined in a two-good model with stochastic output and sequential information arrival. A producer’s optimal hedge depends on demand elasticity, sensitivity of his output to weather, his correlation with aggregate output, and how rapidly his output uncertainty is resolved relative to other producers during different seasonal periods. Because regional output uncertainties are resolved at different times, the optimal futures position of a grower will commonly reverse in direction during the crop year. A producer with non-stochastic output who faces price risk arising from demand shocks may remain unhedged or even maintain a long position.
53.		A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades | Show Abstract Hide Abstract | Journal of Political Economy, Vol. 100, No. 5, pp. 992-1026, October 1992 Accepted Paper Series	Sushil Bikhchandani University of California, Los Angeles – Anderson School of Management Ivo Welch Brown University – Department of Economics David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.
54.		Managerial Conservatism, Project Choice and Debt | Show Abstract Hide Abstract | Review of Financial Studies, Vol. 5, No. 3, pp. 437-470, 1992 Accepted Paper Series	Anjan V. Thakor Washington University, St. Louis – John M. Olin School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: We show that the incentive for managers to build their reputations distorts firms’ investment policies in favor of relatively safe projects, thereby aligning managers’ interests with those of bond-holders, even though managers are hired and fired by shareholders. This effect opposes the familiar agency problem of risky debt that is imperfectly covenant-protected, wherein shareholders are tempted to favor excessively risky projects in order to expropriate bondholders. Consequently, when managerial concern for reputation results in conservatism, it can actually make shareholders better off ex ante by allowing the firm to issue more debt. We examine how the optimal choice of leverage from the shareholders’ standpoint is influenced by takeover activity, and how the adoption of anti-takeover measures affects a firm’s investment policy and leverage choice.
55.		Corporate Control and Majority Positions | Show Abstract Hide Abstract | Cuadernos Economicos de ICE, Vol. 50, No. 1, pp. 175-201, 1992 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: This essay addresses some salient issues associated with corporate control. First, what determines the distribution of insider and outsider share ownership in the firm, and how does this distribution affect corporate performance? Second, how effective are board dismissals, proxy fights and takeovers as alternative corporate control mechanisms? Third, how do these alternative mechanisms interact, and what are the resulting incentives for boards of directors, managers, and takeover bidders? Fourth, do takeovers change underlying value, or do they merely redistribute wealth between affected parties? Finally, what explains the changes in supervision by boards of directors and through takeovers that occur over time?
56.		Managerial Performance, Boards of Directors and Takeover Bidding | Show Abstract Hide Abstract | Journal of Corporate Finance, Vol. 1, No. 1, pp. 63-90, 1994 Accepted Paper Series	Anjan V. Thakor Washington University, St. Louis – John M. Olin School of Business David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: This paper models the maintenance of management quality through the simultaneous functioning of internal and external corporate control mechanisms – board dismissals and takeovers. We examine how the information sets of the board and the acquiror are noisily aggregated, and how this affects the behavior of the board and the acquiror. The board of directors, acting in shareholders’ interests, will sometimes oppose a takeover, and this opposition can be good news for the firm. An unsuccessful takeover attempt may be followed by a high rate of management turnover, because a takeover attempt conveys adverse information possessed by the bidder about the manager. If there is a probability that the board is ineffective, then a forced resignation of the manager can be either good or bad news for the firm. A positive effect is predicted to dominate when there is more adverse public information available about the manager’s performance and when there is a higher ex ante probability that the board is ineffective, for example, if the board is management-dominated rather than outsider-dominated.
57.		Risk, Managerial Effort and Project Choice | Show Abstract Hide Abstract | Journal of Financial Intermediation, Vol. 3, 1992, [1] Journal of Financial Intermediation, (3), (1992):308-45. [2] The Theory of Corporate Finance, Vol. 1, M.J. Brennan editor, Edward Elgar Publishers, Cheltenham, UK, 1996, pp. 419-58. Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Yoon Suh University of California, Los Angeles – Accounting Area	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: In our model risk-neutral shareholders need to motivate a manager to select among projects with different risks, and to work hard in implementing the chosen project. Curvature of the manager’s compensation contract as a function of profit affects his attitude toward project risk. The optimal curvature depends on the trade-off between controlling project risk and motivating effort. The analysis predicts greater option-based compensation when there are desirable risky growth opportunities (proxied by Tobin’s q or R&D expenditures) and less option compensation when there are effective monitoring institutions (such as outside directors and bank lenders).
58.		Futures Versus Share Contracting as Alternatives for Diversifying Output Risk | Show Abstract Hide Abstract | Economic Journal, Vol. 103, pp. 620-639, May 1993 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: Two means by which commodity producers can reduce their exposure to quantity risk are share contracting and futures hedging. This paper explains the coexistence of these arrangements by showing that these will normally be complementary means of transferring risk. Share contracting by a purchaser with many producers can help diversify imperfectly correlated quantity risks. Futures contracts, on the other hand, hedge the systematic but not the idiosyncratic components of output risk. Thus, futures hedging helps to ameliorate the main disadvantage of multiple share contracting, an excessive loading of systematic risk on the purchaser.
59.		Managerial Reputation and Corporate Investment Decisions | Show Abstract Hide Abstract | Financial Management, Vol. 22, No. 2, pp. 145-160, Summer 1993 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: This review provides a conceptual framework for categorizing the effects of a managerial concern for short-term reputation on biases in corporate investment decisions. The incentives of managers to use investment choices as a tool for building their reputations or the reputations of their firms are examined. These incentives come in 3 main forms: 1. visibility bias, which encourages a manager to try to make short-term indicators of success look better, 2. resolution reference, which encourages managers to try to advance the arrival of good news and delay bad news, and 3. mimicry and avoidance, which encourages a manager to take the actions that the best managers are seen to do, and to avoid the actions the worst managers are seen to do. The sheer variety of possible ways of manipulating investment choices to influence reputation may seem bewildering. However, actions that are associated with rises in stock prices tend to enhance the firm’s reputation.
60.		Security Analysis and Trading Patterns When Some Investors Receive Information Before Others | Show Abstract Hide Abstract | Journal of Finance, Vol. 49, No. 5, pp. 1665-1698, December 1994 Accepted Paper Series	Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area Sheridan Titman University of Texas at Austin – Department of Finance David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: In existing models of information acquisition, all informed investors receive their information at the same time. This article analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others. The model implies that, under some conditions, investors will focus only on a subset of securities (“herding”), while neglecting other securities with identical exogenous characteristics. In addition, the model is consistent with empirical correlations that are suggestive of oft-cited trading strategies such as profit taking (short-term position reversal) and following the leader (mimicking earlier trades).
61.		Corporate Control Through Board Dismissals and Takeovers | Show Abstract Hide Abstract | Journal of Economics and Management Strategy, Vol. 7, No. 4, pp. 489-520, 1998 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Anjan V. Thakor Washington University, St. Louis – John M. Olin School of Business	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: This paper examines some policy issues related to the interaction between internal and external corporate control mechanisms – board dismissals and takeovers – by focusing on the information aggregation and other effects related to this interaction. We model the functioning of corporate control mechanisms as an example of a multilayered principal-agent relationship in which shareholders delegate the task of monitoring management quality to the board and rely on the external takeover market to provide additional disciplining of the manager as well as of the board. This gives rise to two effects: (1) a substitution effect, whereby the takeover market partially substitutes for board dismissal of the manager, leading to greater lenience toward the manager by a board acting in the shareholders’ best interest, and (2) a kick-in-the-pants effect, whereby the board is stricter with the manager because it may be dismissed by a successful acquirer who views it as lax. The interaction of these two effects leads to various implications about the behavior of boards and potential acquirers. In particular, a well-functioning internal control mechanism (the board) does not obviate the need for external control (takeovers). Moreover, somewhat counterintuitively, there may be a greater incidence of takeovers when the internal control mechanism is working well than when it is not.
62.		Overconfidence, Arbitrage, and Equilibrium Asset Pricing | Show Abstract Hide Abstract | Journal of Finance, Vol. 56, No. 3, pp. 921-965, June 2001 Accepted Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firmsapos prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios). With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental/price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental/price ratios and market value to forecast returns, and the domination of beta by these variables in some studies.
63.		Investor Psychology and Security Market Under- and Over-Reactions | Show Abstract Hide Abstract | Journal of Finance, Vol. 53, No. 6, pp. 1839-1885, December 1998, THE INTERNATIONAL LIBRARY OF CRITICAL WRITINGS IN FINANCIAL ECONOMICS, Hersh Shefrin, ed., Edward Elgar Publishers, 2002, ADVANCES IN BEHAVIORAL FINANCE II, Richard Thaler, ed., Princeton, 2002 Accepted Paper Series	Kent D. Daniel QS David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors’ confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations (“momentum”), short-run earnings “drift,” but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy.
64.		Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades | Show Abstract Hide Abstract | Journal of Economic Perspectives, Vol. 12, No. 3, pp. 151-70, Summer 1998 Accepted Paper Series	Sushil Bikhchandani University of California, Los Angeles – Anderson School of Management David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Ivo Welch Brown University – Department of Economics	Posted: 01 Dec 08 Last Revised: 04 Dec 08	0 (0)
		Abstract: Learning by observing the past decisions of others can help explain some otherwise puzzling phenomena about human behavior. For example, why do people tend to converge on similar behavior? Why is mass behavior prone to error and fads? The authors argue that the theory of observational learning, and particularly of informational cascades, has much to offer economics, business strategy, political science, and the study of criminal behavior.
65.		An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness | Show Abstract Hide Abstract | Journal of Economics and Management Strategy, Vol. 11, No. 3, pp. 379-421, Fall 2002 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Ivo Welch Brown University – Department of Economics	Posted: 01 Dec 08 Last Revised: 01 Dec 08	0 (0)
		Abstract: This paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with excess inertia, defined as a higher probability of following old policies than would occur under full recall. In a volatile environment, the player can exhibit excess impulsiveness (i.e., be more prone to follow new information signals). The model provides a memory-loss explanation for some documented psychological biases, implies that inertia and organizational routines should be more important in stable environments than in volatile ones, and provides other empirical implications relating memory and environmental variables to the continuity of decisions.
66.		Herding and Cascading in Capital Markets: A Review and Synthesis | Show Abstract Hide Abstract | European Financial Management, Vol. 9, No. 1, pp. 25-66, March 2003 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 01 Dec 08	0 (0)
		Abstract: We review theory and evidence relating to herd behavior, payoff and reputational interactions, social learning and informational cascades in capital markets. We offer a simple taxonomy of effects and evaluate how alternative theories may help explain evidence on the behavior of investors, firms and analysts. We consider both incentives for parties to engage in herding or cascading and the incentives for parties to protect against or take advantage of herding or cascading by others.
67.		Sidelined Investors, Trading-Generated News, and the Conditional Moments of Stock Returns | Show Abstract Hide Abstract | Review of Financial Studies, Vol. 15, No. 2, pp. 615-648, 2002 Accepted Paper Series	H. Henry Cao University of North Carolina at Chapel Hill – Finance Area Joshua D. Coval Harvard Business School David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 15 Jan 09	0 (0)
		Abstract: This paper studies information blockages and the asymmetric release of information in a security market with fixed setup costs of trading. In this setting, ’sidelined’ investors may delay trading until price movements validate their private signals. Trading thereby internally generates the arrival of further news to the market. This leads to 1) negative skewness following price runups and positive skewness following price rundowns (even though the model is ex ante symmetric), 2) a lack of correspondence between large price changes and the arrival of external information, and 3) increases in volatility following large price changes.
68.		Decisions Without Blinders | Show Abstract Hide Abstract | Harvard Business Review, Vol. 84, No. 4, April 2006 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 19 Oct 08 Last Revised: 19 Oct 08	0 (0)
		Abstract: Abstract not available.
69.		Price Theory and Applications: Decisions, Markets, and Information | Show Abstract Hide Abstract | Cambridge University Press, No. 7, 2005 Accepted Paper Series	Jack Hirshleifer affiliation not provided to SSRN Amihai Glazer University of California, Irvine – Department of Economics David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 14 Oct 08 Last Revised: 15 Oct 08	0 (0)
		Abstract: Abstract not available.
70.		Takeovers | Show Abstract Hide Abstract | THE NEW PALGRAVE DICTIONARY OF MONEY AND FINANCE, 1993 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 05 Oct 08 Last Revised: 20 Oct 08	0 (0)
		Abstract: This essay reviews a number of issues about takeovers, including the reasons for and the consequences of takeovers, the pitfalls in estimating takeover gains, the effects of different takeover mechanisms, that of managerial resistance and the means of payments, and the role of debt and managerial share ownership. It explains the average high stock returns of the targets and low returns of the bidders during the transaction period in the U.S. takeover market. It also analyzes the wealth distribution between different stakeholders and the effects of the regulation during the takeover process on the outcome of the takeover. (Abstract by Danling Jiang and David Hirshleifer)
71.		Mergers and Acquisitions: Strategic and Informational Issues | Show Abstract Hide Abstract | NORTH HOLLAND HANDBOOKS IN OPERATIONS RESEARCH AND MANAGEMENT SCIENCE: FINANCE, Vol. 9, pp. 839-887, 1995 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 05 Oct 08 Last Revised: 19 Oct 08	0 (0)
		Abstract: This essay describes the relationships between different models of the takeover process, and where possible provides analytical syntheses to integrate major trends in the literature. I focus mainly on three types of models: (1) models of tender offers, which examine the decisions of individual shareholders whether to tender (sell) their shares to a bidder, (2) models of competition among multiple bidders, and (3) models that examine the voting power of target managers who own shares.
72.		The Blurring of Boundaries between Financial Institutions and Markets | Show Abstract Hide Abstract | Journal of Financial Intermediation, Vol. 10, Nos. 3/4, pp.272-275, 2001 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 05 Oct 08 Last Revised: 20 Oct 08	0 (0)
		Abstract: Abstract not available.
73.		Information Cascades | Show Abstract Hide Abstract | THE NEW PALGRAVE DICTIONARY OF ECONOMICS, Second Edition, Steven N. Durlauf and Lawrence E. Blume, eds., Palgrave Macmillan/U.K., 2008 Accepted Paper Series	Sushil Bikhchandani University of California, Los Angeles – Anderson School of Management David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Ivo Welch Brown University – Department of Economics	Posted: 05 Oct 08 Last Revised: 19 Oct 08	0 (0)
		Abstract: An information cascade occurs when individuals, having observed the actions and possibly payoffs of those ahead of them, take the same action regardless of their own information signals. Informational cascades may realize only a fraction of the potential gains from aggregating the diverse information of many individuals, which helps explain some otherwise puzzling aspects of human and animal behaviour. For example, why do individuals tend to converge on similar behaviour? Why is mass behaviour prone to error and fads? The theory of observational learning, and particularly of information cascades, has much to offer economics and other social sciences.
74.		Reputation, Incentives, and Managerial Decision | Show Abstract Hide Abstract | THE NEW PALGRAVE DICTIONARY OF MONEY AND FINANCE, Ch. 26, pp. 332-337, 1992 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 05 Oct 08 Last Revised: 19 Oct 08	0 (0)
		Abstract: This paper reviews the biases induced by managers’ incentives to build his reputation or that of his firm and the resulting distortions in investment and operating decisions. This essay argues that reputation incentives can influence the initiation and termination of projects, the degree of conservatism, the timing of resolution of uncertainty and of cash flows, and conformist versus deviant behavior.
75.		Deception and Self-Deception in Capital Markets | Show Abstract Hide Abstract | DECEPTION IN MARKETS, Caroline Gerschlager, ed., pp. 131-169, Palgrave Macmillan/U.K, 2005 Accepted Paper Series	Joshua D. Coval Harvard Business School David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 05 Oct 08 Last Revised: 15 Jan 09	0 (0)
		Abstract: We argue that self-deception underlies various aspects of the behavior of investors and of prices in capital markets. We examine the implications of self-deception for investor overconfidence, and how firms and financial institutions can exploit the overconfidence of investors in a predatory fashion. These ideas link self-deception to deception by others. We also examine how investor self-deception and overconfidence can affect financial reporting and disclosure policy.
76.		Do Individual Investors Cause Post-Earnings Announcement Drift? Direct Evidence from Personal Trades | Show Abstract Hide Abstract | Accounting Review, November 2008 Accepted Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business James N. Myers University of Arkansas Linda A. Myers University of Arkansas Siew Hong Teoh University of California – Paul Merage School of Business	Posted: 04 Jun 08 Last Revised: 19 Oct 08	0 (0)
		Abstract: This study tests whether na¿ve trading by individual investors, or some class of individual investors, causes post-earnings announcement drift (PEAD). Inconsistent with the individual trading hypothesis, individual investor trading fails to subsume any of the power of extreme earnings surprises to predict future abnormal returns. Moreover, individuals are significant net buyers after both negative and positive extreme earnings surprises, consistent with an attention effect, but not with their trades causing PEAD. Finally, we find no indication that trading by individuals explains the concentration of drift at subsequent earnings announcement dates. earnings anomalies, post-earnings announcement drift, market efficiency, trading activity, individual investors, investor sophistication
77.		Information Cascades; Entry Written for the New Palgrave Dictionary of Economics | Show Abstract Hide Abstract | Working Paper Series	Sushil Bikhchandani University of California, Los Angeles – Anderson School of Management David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Ivo Welch Brown University – Department of Economics	Posted: 14 Nov 05 Last Revised: 12 Jun 06	0 (0)
		Abstract: An information cascade occurs when it is optimal for an individual, having observed the actions and possibly payoffs of those ahead of him, to take the same action regardless of his own information. When there are informational cascades, society may reap only a modest fraction of the potential gains from aggregating the diverse information of many individuals. As a result, information cascades can help explain some otherwise puzzling aspects of human and animal behavior. For example, why do individuals tend to converge on similar behavior? Why is mass behavior prone to error and fads? We suggest that the theory of observational learning, and particularly of information cascades, has much to offer economics and other social sciences. Abstract describes an entry written for: S. N. Durlauf and L. E. Blume, The New Palgrave Dictionary of Economics, forthcoming, Palgrave Macmillan. This abstract has not been reviewed or edited. The definitive published version of the entry may be found in the complete New Palgrave Dictionary of Economics in print and online, forthcoming. information cascades, information aggregation, social learning, cultural evolution
78.		On the Survival of Overconfident Traders in a Competitive Securities Market | View 2 Versions | Show Abstracts | Hide Abstracts| Journal of Financial Markets, Vol. 4, No. 1, pp. 73-84, January 2001 Dice Working Paper No. WP 99-9 On the Survival of Overconfident Traders in a Competitive Securities Market | Show Abstracts | Hide Abstracts | Versions (2) | hide multiple versions | Export Bibliographic Info |	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Guo Ying Luo Rutgers, The State University of New Jersey – Management Science & Information Systems	Posted: 02 Mar 00 Last Revised: 08 Dec 08	0
		On the Survival of Overconfident Traders in a Competitive Securities Market | Show Abstract Hide Abstract | Journal of Financial Markets, Vol. 4, No. 1, pp. 73-84, January 2001 Accepted Paper Series	Guo Ying Luo Rutgers, The State University of New Jersey – Management Science & Information Systems David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 01 Dec 08 Last Revised: 08 Dec 08	0 (0)
		Abstract: Recent research has proposed several ways in which overconfident traders can persist in competition with rational traders. This paper offers an additional reason: overconfident traders do better than purely rational traders at exploiting mispricing caused by liquidity or noise traders. We examine both the static profitability of overconfident versus rational trading strategies, and the dynamic evolution of a population of overconfident, rational and noise traders. Replication of overconfident and rational types is assumed to be increasing in the recent profitability of their strategies. The main result is that the long-run steady-state equilibrium always involves overconfident traders as a substantial positive fraction of the population.
		On the Survival of Overconfident Traders in a Competitive Securities Market | Show Abstract Hide Abstract | Dice Working Paper No. WP 99-9 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Guo Ying Luo Rutgers, The State University of New Jersey – Management Science & Information Systems	Posted: 02 Mar 00 Last Revised: 02 Mar 00	0 (0)
		Abstract: Recent research has proposed several ways in which overconfident traders can persist in competition with rational traders. This paper offers an additional reason: overconfident traders do better than purely rational traders at exploiting mispricing caused by liquidity or noise traders. We examine both the static profitability of overconfident versus rational trading strategies, and the dynamic evolution of a population of overconfident, rational and noise traders. Replication of overconfident and rational types is assumed to be increasing in the recent profitability of their strategies. The main result is that the long-run steady-state equilibrium always involves overconfident traders as a substantial positive fraction of the population.
79.		Security Analysis and Trading Patterns When Some Investors Receive Information Before Others | Show Abstract Hide Abstract | Anderson Graduate School of Management Working Paper at UCLA Number 7-93 Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Avanidhar Subrahmanyam University of California, Los Angeles – Finance Area Sheridan Titman University of Texas at Austin – Department of Finance	Posted: 14 Sep 99 Last Revised: 14 Sep 99	0 (0)
		Abstract: In existing models of information acquisition, all informed investors receive their information at the same time. This paper analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others. The model implies that under some conditions, investors will focus only on a subset of securities (herding), while neglecting other securities withidentical exogenous characteristics. In addition, the model is consistent with empirical correlations that are suggestive of the oft-cited trading strategies such as profit-taking (short-term position reversal) and following- the-leader (mimicking earlier trades).
80.		Institutional Memory, Inertia, and Impulsiveness | Show Abstract Hide Abstract | Working Paper Series	David A. Hirshleifer University of California, Irvine – Paul Merage School of Business Ivo Welch Brown University – Department of Economics	Posted: 02 Sep 99 Last Revised: 02 Sep 99	0 (0)
		Abstract: This paper examines how imperfect institutional memory affects organizational decisions. In our model, new managers are aware of their firm’s previous actions but not the rationale for these actions. If the environment is stable, we find that a firm that has followed an old investment policy long enough and then changes management generally exhibits greater INERTIA, that is a greater tendency to follow old actions than a firm in which the old manager with full memory would have continued. On the other hand, if the environment is volatile or if the old manager has followed a policy only briefly, previous investment decisions are not very informative, and new managers can be excessively IMPULSIVE (prone to follow their latest information with less regard to history). The model implies relationships among various variables, such as the frequency of policy changes (e.g., reversal of project choices), managerial turnover, the quality of record-keeping, the history of the project, and the stability of the underlying environment.
81.		Do Takeovers Increase Value? An Intervention Approach | Show Abstract Hide Abstract | Working Paper Series	Sanjai Bhagat University of Colorado at Boulder – Department of Finance David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 11 Jul 97 Last Revised: 29 Jun 98	0 (0)
		Abstract: An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder’s abnormal return at the time of the bid gives a biased estimate of the market’s valuation of the bidder’s gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique , the intervention method, that extracts the market’s estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder’s success. Furthermore, this event does not occur at the discretion of the initial bidder. Hence, the arrival of a competing bid will reveal little or nothing about the non-takeover value of the initial bidder. We find four main results. First, takeover improvements from cash tender offers are perceived by investors to be large and positive – about 44.8 percent of target value. The conclusion that takeover improvements are positive is robust with respect to plausible variations in the parameters that have to be estimated and serve as input to computing the bidder’s gain from the takeover. Second, the average profits that successful bidders earn from initial shareholdings are modest. This suggests that high concentration of share ownership may be more important for internal monitoring than for motivating takeovers. Third, point estimates indicate that bidders are overpaying for targets, but most of the premium can be explained by value improvements. Fourth, value improvements are of similar magnitude for friendly and hostile transactions. This suggests that both discipline of bad managers and the realization of business complementarities may be motivating takeovers.
82.		Market-Based Estimates of Value Gains from Takeovers: An Intervention Approach | Show Abstract Hide Abstract | Working Paper Series	Sanjai Bhagat University of Colorado at Boulder – Department of Finance David A. Hirshleifer University of California, Irvine – Paul Merage School of Business	Posted: 24 Feb 97 Last Revised: 07 Jan 98	0 (0)
		Abstract: An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder’s abnormal return at the time of the bid gives a biased estimate of the market’s valuation of the bidder’s gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique, the intervention method, that extracts the market’s estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder’s success. Furthermore, this event does not occur at the discretion of the initial bidder. Hence, the arrival of a competing bid will reveal little or nothing about the non-takeover value of the initial bidder. We find four main results. First, takeover improvements from cash tender offers are perceived by investors to be large and positive – about 44.8 percent of target value. The conclusion that takeover improvements are positive is robust with respect to plausible variations in the parameters that have to be estimated and serve as input to computing the bidder’s gain from the takeover. Second, the average profits that successful bidders earn from initial shareholdings are modest. This suggests that high concentration of share ownership may be more important for internal monitoring than for motivating takeovers. Third, point estimates indicate that bidders are overpaying for targets, but most of the premium can be explained by value improvements. Fourth, value improvements are of similar magnitude for friendly and hostile transactions. This suggests that both discipline of bad managers and the realization of business complementarities may be motivating takeovers.