Learn More
We use a simple model to outline the conditions under which corporate investment is sensitive to nonfundamental movements in stock prices. The key prediction is that stock prices have a stronger impact on the investment of " equity-dependent " firms—firms that need external equity to finance marginal investments. Using an index of equity dependence based on(More)
We study asset prices in an economy where investors derive direct utility not only from consumption but also from fluctuations in the value of their financial wealth. They are loss averse over these fluctuations, and the degree of loss aversion depends on their prior investment performance. We find that our framework can help explain the high mean, excess(More)
We present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets. Such trades generate significant spikes in returns and volume, even in the absence of important news about fundamentals. We derive the optimal trading behavior of these investors, which(More)
We study asset prices in an economy where some investors categorize risky assets into different styles and move funds among these styles depending on their relative performance. In our economy, assets in the same style comove too much, assets in different styles comove too little, and reclassifying an asset into a new style raises its correlation with that(More)
  • Rafael La Porta, Florencio Lopez-de-Silanes, +4 authors Simon Johnson
  • 1999
Recent research on corporate governance has documented large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of financial markets, and in the access of firms to external finance. We suggest that there is a common element to the explanations of these differences, namely how well investors, both(More)
We study equilibrium firm-level stock returns in two economies: one in which investors are loss averse over the f luctuations of their stock portfolio, and another in which they are loss averse over the f luctuations of individual stocks that they own. Both approaches can shed light on empirical phenomena, but we find the second approach to be more(More)
One of the most striking portfolio puzzles is the " disposition effect " : the tendency of individuals to sell stocks in their portfolios that have risen in value since purchase, rather than fallen in value. Perhaps the most prominent explanation for this puzzle is based on prospect theory. Despite its prominence, this explanation has received little formal(More)