Invested
Firms' Stock Prices, Stock Returns, and Remaining Lifetime Earnings
Sanjeev Bhojraj, Ashish Ochani & Shiva Rajgopal
Management Science, forthcoming
Abstract:
We document the disconnect between earnings expectations as captured in stock prices and the ultimate realization of earnings over long periods. To do so, we compare firms' stock prices on the first trading day and the beginning of each year to the realized earnings over their remaining lifetime (RLTEP ratio). We document that the RLTEP ratio, averaged over long periods and over 15,000 U.S. domestic public firms, approximates one, suggesting that expectations match actuals in the aggregate. However, most firms fail to deliver an RLTEP ratio greater than one. Acquisition prices are the largest contributors to the RLTEP ratio, with many surviving firms failing to generate enough earnings even after operating for between 15 and 45 years. The RLTEP ratio for survivors is positively associated with the future RLTEP ratio, future lifetime wealth creation, and future lifetime stock returns. Significant returns-based wealth creation by firms in the short term does not persist in the long term unless it is supported by fundamental wealth creation (high past RLTEP ratio).
Bubble Beliefs
Christian Stolborg & Robin Greenwood
Harvard Working Paper, November 2025
Abstract:
We study expert beliefs during boom-bust episodes in which highly valued individual US stocks experience a price run-up followed by a crash. As prices surge, analysts forecast exceptional earnings growth and high near-term returns. Short interest stays low. Media coverage rarely mentions the word "bubble", even as crashes unfold. Optimism portends crashes: the most bullish forecasts predict the highest crash risk. The results are consistent with accounts of bubbles driven by overly optimistic expectations about fundamentals and future prices, with only limited presence of skeptics who recognize the bubble, apart from a few cases where the share lending market offers signals.
Insider Trading and Position Limits
Andrew Verstein
University of California Working Paper, December 2025
Abstract:
Federal law has long prohibited insider trading in securities such as stocks and bonds. Yet many other financial assets-particularly derivatives and commodities-have historically fallen outside those rules. This Article asks why insider trading is penalized for some assets but not others. It argues that the goals of insider trading law are often pursued through alternative mechanisms. Markets lacking insider trading prohibitions are not unregulated; rather, they are governed by substitute regimes that achieve similar ends through different means. By examining the relationship between securities insider trading law and derivatives position limits, this Article clarifies the function of insider trading regulation and illuminates its boundaries. It shows that position-limit rules, though rarely analyzed in this way, can serve as functional substitutes for insider trading restrictions, offering a broader perspective on how law manages informed trading across markets.
Biased surveys
Luca Gemmi & Rosen Valchev
Journal of Monetary Economics, January 2026
Abstract:
We find empirical evidence that surveys of professional forecasters are biased by strategic incentives. First, we find that individual forecasts overreact to idiosyncratic information but underreact to common information. We show this is consistent with a model of strategic diversification incentives in forecast reporting where forecasters want to optimally "stand out" from the crowd, and thus report forecasts that exaggerate the agents' true beliefs. Second, we show that no such biases are present in forecasts data that is not subject to strategic incentives. We also test further comparative statics that also confirm the strategic incentive model. Overall, we conclude that strategic reporting biases the inference an econometrician can draw on the true underlying expectations formation process, and the precision and heterogeneity in agents' information sets, and lastly we show how to correct for this.
Tweeting for Money: Social Media and Mutual Fund Flows
Javier Gil-Bazo & Juan Imbet
Management Science, forthcoming
Abstract:
We unveil asset managers' social media communications as a distinct new channel for attracting flows of money to mutual funds. Combining a database of more than 1.6 million posts on X/Twitter by U.S. mutual fund families with textual analysis, we find that flows of money to mutual funds respond positively to both the number and tone of the posts. Whereas the link between social media communications and flows of money is not explained by conventional marketing efforts, our findings suggest that the social media channel is not independent from asset management companies' broader marketing strategies. A high-frequency analysis that exploits intraday ETF trade data allows us to isolate the effect of tweets on investor decisions from potential confounders. We then consider and test four different economic mechanisms. The results of these tests do not support the hypothesis that asset managers' social media communications reduce search costs for potential investors. The results do not support, either, that asset management companies' Twitter activity increases investor attention or alleviates information asymmetries by communicating performance-relevant information to investors. In contrast, our evidence suggests that asset managers use social media as an effective persuasion tool.