Conference Agenda

Generative AI tools such as ChatGPT can fundamentally change the way investors process information. We probe the economic usefulness of these tools in summarizing complex corporate disclosures using the stock market as a laboratory. The unconstrained summaries are remarkably shorter compared to the originals, whereas their information content is amplified. When a document has a positive (negative) sentiment, its summary becomes more positive (negative). Importantly, the summaries are more effective at explaining stock market reactions to the disclosed information. Motivated by these findings, we propose a measure of information “bloat.” We show that bloated disclosure is associated with adverse capital market consequences, such as lower price efficiency and higher information asymmetry. Finally, we show that the model is effective at constructing targeted summaries that identify firms’ (non-)financial performance. Collectively, our results indicate that generative AI adds considerable value for investors with information processing constraints.

Traditional finance theory asserts that stock prices depend on expected future cash flows. We explore how the growing prominence of non-pecuniary preferences in the form of sustainable investing alters this core financial relationship. Using the setting of earnings announcements, we find that sustainable investing diminishes stock price sensitivity to earnings news by 45%-58%. This decline in announcement-day returns is mirrored by a comparable drop in trading volume. This effect persists beyond the immediate announcement period, implying a lasting alteration in price formation rather than a short-lived mispricing. Our findings suggest that sustainable investing reduces the significance of cash flows in shaping stock prices.

Off-exchange trades are often executed by referencing on-exchange prices. In equilibrium, such price referencing softens market makers' on-exchange competition and makes liquidity expensive for investors. Additionally, by equalizing on- and off-exchange prices, price referencing guarantees “best-execution” and makes investors indifferent where to trade. Market makers effectively obtain a license to fragment order flow off exchange, raising their profits but reinforcing market-wide illiquidity. This inefficiency remains tenacious even if more market makers enter and if they are forced to compete off exchange, as in the SEC's proposed order-by-order auction. The model yields important implications for regulating various forms of off-exchange trading.

We explore the potential for automated market makers (AMMs) to enhance traditional financial markets, drawing on their success in the crypto-assets space. The increasing tokenization of assets and regulatory changes, including the SEC’s initiatives to reshape retail order trading, underscore the relevance of considering AMMs in traditional markets. Our study establishes a practical framework to evaluate the viability of AMM liquidity provision in equities and assess if AMMs offer improvements over traditional markets. Analyzing U.S. equity trading data, we find that well-designed AMMs could save U.S. investors billions annually. These savings arise from the distinct characteristics of AMMs, especially the improved risk-sharing and the role of long-term asset holders as liquidity providers. Unlike traditional market makers, long-term asset holders in AMMs seek compensation only for incremental intraday risk relative to a buy-and-hold strategy. They utilize locked-up capital that would otherwise remain idle at brokerages. Small firms, in particular, can benefit by attracting more investors and capital through this approach.

Voluntary Environmental, Social, and Governance (ESG) disclosure by institutional investors enables clients to allocate responsible capital to institutions with better ESG practices. Institutional investors disclose their ESG practices as part of their commitment to the Principles for Responsible Investment (PRI), the world’s largest responsible investment network. After joining the PRI, investors annually file an ESG report, which is assessed and scored by the PRI. Clients allocate more assets toward institutions that receive higher scores on their disclosure, especially when the disclosure is corroborated by third-party ESG fund ratings. Importantly, the disclosure does not appear to be cheap talk since it correlates with more sustainable equity portfolios and more engagements on ESG issues. However, both higher flows and better ESG practices occur only in countries where responsible institutional asset owners have a stronger presence.

We show that after the introduction of leverage ratio constraints on bank-affiliated dealers, bond mutual funds have engaged in more liquidity provision in investment- grade corporate bonds and that the performance of funds with liquidity-supplying strategies has benefited. Not only have regulations transferred profits associated with liquidity provision in the corporate bond market to mutual funds, but the liquidity and returns of investment-grade corporate bonds have become more exposed to redemp- tions from the bond mutual fund industry, suggesting that the regulations may have made investment-grade corporate bonds more volatile. Accordingly, we observe that investment-grade corporate bonds more exposed to leverage ratio constraints experi- enced a more severe deterioration in liquidity and returns at the onset of the COVID-19 pandemic.

This paper studies the role of regulatory oversight in increasing market transparency and facilitating financial intermediation. I exploit an unanticipated reform that substantially expanded the regulatory oversight of private equity (PE) fund advisers, which reduces the information asymmetry faced by investors. Institutional investors that have more pre-existing relationships with regulated PE fund advisers are less likely to bypass external fund vehicles when investing in private companies. While disintermediation in PE markets allows investors to mitigate agency costs associated with intermediation, it could result in capital misallocation. There is little evidence of adverse selection in the deals available to investors, but they tend to finance more mature, larger, and less innovative companies when investing directly, as opposed to investing through PE funds. Overall, my findings highlight the limits of market governance in PE funds and the positive role of regulatory intervention in shaping the organizational structure of PE markets.

We examine the impact of the post-Dodd-Frank change in 2011 on hedge fund disclosure. We find that new disclosure questions added to Form ADV improve the ability to forecast future adverse operational events compared to the information disclosed pre-Dodd-Frank. A byproduct of the analysis is a uni-dimensional operational risk score based on information from the SEC website. The measure is effective in predicting liquidation events, changes in leverage, and other performance metrics. It is also predictive of net fund flows, suggesting that investors take into account operational risk when making investment decisions.