Behavioral Economics.

• Position: Program and Working Group Meeting

The NBER's Working Group on Behavioral Economics met in Cambridge on November 11. NBER Research Associates and Group Directors Robert J. Shiller of Yale University and Richard H. Thaler, University of Chicago, organized this program:

Am Tal Fishman and Harrison Hong, Princeton University, and Jeffrey D. Kubik, Syracuse University, "Do Arbitrageurs Amplify Economic Shocks?"

Discussant: Michael Rashes, Bracebridge Capital

John Y. Campbell, Harvard University and NBER, and Jens Hilscher and Jan Szilagyi, Harvard University, "In Search of Distress Risk" (NBER Working Paper No. 12362)

Discussant: Tyler Shumway, University of Michigan

Andrea Frazzini, University of Chicago, and Owen Lamont, Yale University and NBER, "The Earnings Announcement Premium and Trading Volume"

Discussant: Steven Heston, University of Maryland

David Hirshleifer and Slew Hong Teoh, University of California, Irvine, and Sonya Seongyeon Lim, DePaul University, "Driven to Distraction: Extraneous Events and Underreaction to Earnings News"

Discussant: Stefano Della Vigna, University of California, Berkeley and NBER

Robin Greenwood, Harvard University, and Stefan Nagel, Stanford University and NBER, "Inexperienced Investors and Speculative Bubbles"

Discussant: Jeremy C. Stein, Harvard University and NBER

Massimo Massa and Lei Zhang, INSEAD, "Cosmetic Mergers: The Effect of Style Investing on the Market for Corporate Control"

Discussant: Malcolm Baker, Harvard University and NBER

Fishman, Hong, and Kubik consider whether arbitrageurs amplify fundamental shocks in the context of short arbitrage in equity markets. The ability of arbitrageurs to hold on to short positions depends on asset values: shorts are often reduced following good news about a stock. As a result, the prices of highly shorted stocks are excessively sensitive to economic shocks. Using monthly short interest data and exploiting differences in short selling regulations across stock exchanges to instrument for the amount of shorting in a stock, the authors find: 1) The price of a highly shorted stock is more sensitive to earnings news than a stock with little short interest. 2) Short interest changes around announcements (proxied by share turnover) are more sensitive to earnings surprises for highly shorted stocks. 3) For highly shorted stocks, returns to shorting are higher following better earnings news. 4) These differential sensitivities are driven by very good earnings news as opposed to very bad earnings...