Pub Date : 2026-01-01DOI: 10.1016/j.finmar.2025.101005
Olubunmi Faleye
I study the role of geographical proximity in hedge fund activism and find that activist hedge funds are more likely to target firms located closer to their headquarters. Despite this proximity preference, activism returns are lower for nearer targets. Alternative factors, including lower activism costs, target selection effects, and reduced employee wealth transfers at nearby firms do not explain lower returns to proximate targets. Instead, results are consistent with familiarity bias in hedge fund targeting decisions. Additional tests focusing on small targets, openly confrontational campaigns, and passive investments reinforce this behavioral explanation.
{"title":"Does familiarity breed activism? Geography and hedge fund activism","authors":"Olubunmi Faleye","doi":"10.1016/j.finmar.2025.101005","DOIUrl":"10.1016/j.finmar.2025.101005","url":null,"abstract":"<div><div>I study the role of geographical proximity in hedge fund activism and find that activist hedge funds are more likely to target firms located closer to their headquarters. Despite this proximity preference, activism returns are lower for nearer targets. Alternative factors, including lower activism costs, target selection effects, and reduced employee wealth transfers at nearby firms do not explain lower returns to proximate targets. Instead, results are consistent with familiarity bias in hedge fund targeting decisions. Additional tests focusing on small targets, openly confrontational campaigns, and passive investments reinforce this behavioral explanation.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"77 ","pages":"Article 101005"},"PeriodicalIF":2.1,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146071052","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.finmar.2025.101018
Yaqing Yang , Junqing Kang , Youcheng Lou
In an imperfectly competitive market, we find that an institutional investor with an information advantage consistently earns higher expected trading profits than sophisticated individual investors who internalize their price impact. However, when noise-trading volume and the noise-to-signal ratio are sufficiently high, the institutional investor underperforms naive individual investors who act as price-takers. The aggressive trading behavior of naive investors, driven by their failure to account for price impact, forces the institutional investor to reduce his trading aggressiveness. Our findings highlight that, under certain conditions, the irrationality of naive traders can erode the advantages of information-driven trading strategies.
{"title":"Can institutional investors always beat individual investors?","authors":"Yaqing Yang , Junqing Kang , Youcheng Lou","doi":"10.1016/j.finmar.2025.101018","DOIUrl":"10.1016/j.finmar.2025.101018","url":null,"abstract":"<div><div>In an imperfectly competitive market, we find that an institutional investor with an information advantage consistently earns higher expected trading profits than sophisticated individual investors who internalize their price impact. However, when noise-trading volume and the noise-to-signal ratio are sufficiently high, the institutional investor underperforms naive individual investors who act as price-takers. The aggressive trading behavior of naive investors, driven by their failure to account for price impact, forces the institutional investor to reduce his trading aggressiveness. Our findings highlight that, under certain conditions, the irrationality of naive traders can erode the advantages of information-driven trading strategies.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"77 ","pages":"Article 101018"},"PeriodicalIF":2.1,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146071055","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.finmar.2025.101011
Asad Kausar , Alok Kumar , Richard J. Taffler
We explain why the market underreacts to the certified extreme financial distress signal conveyed by the auditor's going-concern (GC) opinion. We conjecture that GC stocks attract retail investors with gambling proclivities. Splitting our GC sample into lottery-like and non-lottery-like firms, we find that the anomaly is concentrated in lottery-like firms, which underperform by −17 % to −32 % over the following year. A range of analyses confirm retail investors with greater propensity to gamble are more likely to trade lottery-like GC stocks. We conclude that retail investor gambling-motivated trading behavior is a key driver of the going-concern market paradox.
{"title":"Do investors gamble with going-concern firms?","authors":"Asad Kausar , Alok Kumar , Richard J. Taffler","doi":"10.1016/j.finmar.2025.101011","DOIUrl":"10.1016/j.finmar.2025.101011","url":null,"abstract":"<div><div>We explain why the market underreacts to the certified extreme financial distress signal conveyed by the auditor's going-concern (GC) opinion. We conjecture that GC stocks attract retail investors with gambling proclivities. Splitting our GC sample into lottery-like and non-lottery-like firms, we find that the anomaly is concentrated in lottery-like firms, which underperform by −17 % to −32 % over the following year. A range of analyses confirm retail investors with greater propensity to gamble are more likely to trade lottery-like GC stocks. We conclude that retail investor gambling-motivated trading behavior is a key driver of the going-concern market paradox.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"77 ","pages":"Article 101011"},"PeriodicalIF":2.1,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146071054","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.finmar.2025.101009
Yaosong Zhan , Wenwen Zhang , Zhenya Liu
Extreme fund performance creates divergent investor opinions about manager skill. We develop a model predicting that this disagreement follows a U-shaped pattern, increasing with both exceptionally good and poor performance. Using a flow-based divergence index and Chinese mutual fund data, we empirically confirm this relationship. We argue that this pattern is driven by retail investors, whose tendency to focus on extreme outcomes amplifies their disagreement. Higher divergence predicts weaker future performance persistence but also helps investors improve their realized returns by allowing them to exit funds before subsequent downturns.
{"title":"Extreme fund performance and investor divergence in beliefs about manager skill","authors":"Yaosong Zhan , Wenwen Zhang , Zhenya Liu","doi":"10.1016/j.finmar.2025.101009","DOIUrl":"10.1016/j.finmar.2025.101009","url":null,"abstract":"<div><div>Extreme fund performance creates divergent investor opinions about manager skill. We develop a model predicting that this disagreement follows a U-shaped pattern, increasing with both exceptionally good and poor performance. Using a flow-based divergence index and Chinese mutual fund data, we empirically confirm this relationship. We argue that this pattern is driven by retail investors, whose tendency to focus on extreme outcomes amplifies their disagreement. Higher divergence predicts weaker future performance persistence but also helps investors improve their realized returns by allowing them to exit funds before subsequent downturns.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"77 ","pages":"Article 101009"},"PeriodicalIF":2.1,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146071053","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.finmar.2025.101007
Crocker H. Liu , Charles Trzcinka , Ziwei Zhao
Chinese firms have the right to initiate trading halts with 42% of halts occurring after a price increase. We examine whether managers suspend trading to increase the signal-to-noise ratio of stock prices. We show that price non-synchronicity, institutional ownership, accounting, and microstructure variables predict a trading halt and explain the positive CARs after a halt. Halts following a price rise add more value relative to a price decline. We find that halts attract mutual funds. Trading suspensions are costly; we estimate that cost of capital rises by 117 bps.
{"title":"The Chinese trading halt puzzle","authors":"Crocker H. Liu , Charles Trzcinka , Ziwei Zhao","doi":"10.1016/j.finmar.2025.101007","DOIUrl":"10.1016/j.finmar.2025.101007","url":null,"abstract":"<div><div>Chinese firms have the right to initiate trading halts with 42% of halts occurring after a price <em>increase</em>. We examine whether managers suspend trading to increase the signal-to-noise ratio of stock prices. We show that price non-synchronicity, institutional ownership, accounting, and microstructure variables predict a trading halt and explain the positive CARs after a halt. Halts following a price rise add more value relative to a price decline. We find that halts attract mutual funds. Trading suspensions are costly; we estimate that cost of capital rises by 117 bps.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"77 ","pages":"Article 101007"},"PeriodicalIF":2.1,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146071051","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2026-01-01DOI: 10.1016/j.finmar.2025.101004
Alexander Singer
I examine the information acquisition and pricing of dealers in over-the-counter markets. I develop a theoretical model to show that heterogeneity in the dealers’ information accuracy about opaque market prices can arise endogenously and can explain heterogeneity in various dealer statistics, such as: the best-informed dealers quote the tightest bid–ask spreads, earn the highest margins, trade most frequently, and are least likely to suffer trading losses. Differently put, I show that the friction of opaque prices tends to direct the majority of trading activity/profits to a few core dealers.
{"title":"Dealer competition in over-the-counter markets","authors":"Alexander Singer","doi":"10.1016/j.finmar.2025.101004","DOIUrl":"10.1016/j.finmar.2025.101004","url":null,"abstract":"<div><div>I examine the information acquisition and pricing of dealers in over-the-counter markets. I develop a theoretical model to show that heterogeneity in the dealers’ information accuracy about opaque market prices can arise endogenously and can explain heterogeneity in various dealer statistics, such as: the best-informed dealers quote the tightest bid–ask spreads, earn the highest margins, trade most frequently, and are least likely to suffer trading losses. Differently put, I show that the friction of opaque prices tends to direct the majority of trading activity/profits to a few core dealers.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"77 ","pages":"Article 101004"},"PeriodicalIF":2.1,"publicationDate":"2026-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146071008","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
How does an idiosyncratic shock to stock liquidity affect liquidity and efficiency in the markets for related stocks? Utilizing the unique feature that the second stage of a two-step spinoff greatly increases the free float of a public firm, we document strong evidence that the enhanced liquidity of spun-off firms spills over to their industry peers, increasing their liquidity. The improved liquidity induces greater pricing efficiency and larger institutional holdings in these stocks. Liquidity spillovers also lead to positive valuation spillovers. Our results concerning liquidity externality and its consequences have important implications for policymakers, regulators, and firm managers.
{"title":"Liquidity spillovers: Evidence from two-step spinoffs","authors":"Yakov Amihud , Sahn-Wook Huh , Avanidhar Subrahmanyam","doi":"10.1016/j.finmar.2025.101000","DOIUrl":"10.1016/j.finmar.2025.101000","url":null,"abstract":"<div><div>How does an idiosyncratic shock to stock liquidity affect liquidity and efficiency in the markets for related stocks? Utilizing the unique feature that the second stage of a two-step spinoff greatly increases the free float of a public firm, we document strong evidence that the enhanced liquidity of spun-off firms spills over to their industry peers, increasing their liquidity. The improved liquidity induces greater pricing efficiency and larger institutional holdings in these stocks. Liquidity spillovers also lead to positive valuation spillovers. Our results concerning liquidity externality and its consequences have important implications for policymakers, regulators, and firm managers.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 101000"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594472","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.finmar.2025.100991
Danling Jiang , Baixiao Liu , Steven Chong Xiao
We examine how social norms measured by religiosity influence institutional investors’ willingness to lend stock and constrain short selling in the U.S. markets. We find that firms with blockholders located in higher religiosity areas are associated with lower supply and higher utilization of lendable shares, but are not related to the demand for stock borrowing. Short interest, utilization rates, and lending fees, when combined with high blockholder religiosity, are stronger negative predictors of future stock returns. Our findings suggest that the social norms of institutional investors serve as a source of limits to arbitrage, which hinders market efficiency through stock lending.
{"title":"Social norms and stock lending","authors":"Danling Jiang , Baixiao Liu , Steven Chong Xiao","doi":"10.1016/j.finmar.2025.100991","DOIUrl":"10.1016/j.finmar.2025.100991","url":null,"abstract":"<div><div>We examine how social norms measured by religiosity influence institutional investors’ willingness to lend stock and constrain short selling in the U.S. markets. We find that firms with blockholders located in higher religiosity areas are associated with lower supply and higher utilization of lendable shares, but are not related to the demand for stock borrowing. Short interest, utilization rates, and lending fees, when combined with high blockholder religiosity, are stronger negative predictors of future stock returns<span>. Our findings suggest that the social norms of institutional investors serve as a source of limits to arbitrage, which hinders market efficiency through stock lending.</span></div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 100991"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594627","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.finmar.2025.100988
Mario Bellia , Kim Christensen , Aleksey Kolokolov , Loriana Pelizzon , Roberto Renò
We study the trading activity of designated market makers (DMMs) in electronic markets using a unique dataset with audit-trail information on trader classification. DMMs may either adhere to their market-making agreements and offer immediacy during periods of heavy selling pressure, or they might lean-with-the-wind to profit from private information. We test these competing theories during extreme (downward) price movements, which we detect using a novel methodology. We show that DMMs provide liquidity when the selling pressure is concentrated on a single stock, but consume liquidity (leaving liquidity provision to slower traders) when several stocks are affected.
{"title":"Do designated market makers provide liquidity during downward extreme price movements?","authors":"Mario Bellia , Kim Christensen , Aleksey Kolokolov , Loriana Pelizzon , Roberto Renò","doi":"10.1016/j.finmar.2025.100988","DOIUrl":"10.1016/j.finmar.2025.100988","url":null,"abstract":"<div><div>We study the trading activity of designated market makers (DMMs) in electronic markets using a unique dataset with audit-trail information on trader classification. DMMs may either adhere to their market-making agreements and offer immediacy during periods of heavy selling pressure, or they might lean-with-the-wind to profit from private information. We test these competing theories during extreme (downward) price movements, which we detect using a novel methodology. We show that DMMs provide liquidity when the selling pressure is concentrated on a single stock, but consume liquidity (leaving liquidity provision to slower traders) when several stocks are affected.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 100988"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594470","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.finmar.2025.101003
Lai T. Hoang , Marvin Wee , Joey Wenling Yang , Jing Yu
We examine how and why institutional investors trade differently around firms' negative environmental, social, and governance (ESG) news. We find that they reduce net purchases primarily after the ESG incidents. However, those with higher ESG preferences begin reducing their net purchases before the news breaks, likely to safeguard their ESG reputation and mitigate portfolios' ESG risk. Additionally, institutions’ net purchases decline before negative ESG news in firms with high levels of information asymmetry, leading to abnormal returns, indicating that these institutions are informed and trade in advance for financial gains. In contrast, retail investors appear largely insensitive to ESG incidents.
{"title":"Institutional trading and ESG controversies","authors":"Lai T. Hoang , Marvin Wee , Joey Wenling Yang , Jing Yu","doi":"10.1016/j.finmar.2025.101003","DOIUrl":"10.1016/j.finmar.2025.101003","url":null,"abstract":"<div><div>We examine how and why institutional investors trade differently around firms' negative environmental, social, and governance (ESG) news. We find that they reduce net purchases primarily after the ESG incidents. However, those with higher ESG preferences begin reducing their net purchases before the news breaks, likely to safeguard their ESG reputation and mitigate portfolios' ESG risk. Additionally, institutions’ net purchases decline before negative ESG news in firms with high levels of information asymmetry, leading to abnormal returns, indicating that these institutions are informed and trade in advance for financial gains. In contrast, retail investors appear largely insensitive to ESG incidents.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 101003"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594626","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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