Behavioral finance.

• Position: Bureau News - National Bureau of Economic Research meeting

The NBER's Working Group on Behavioral Finance, directed by Robert J. Shiller, NBER and Yale University, and Richard H. Thaler, NBER and University of Chicago, met in Cambridge on November 10. They discussed the following papers:

Andrei Shleifer, NBER and Harvard University, and Robert W. Vishny, NBER and University of Chicago, "Stock Market Driven Acquisitions."

Discussant: David S. Scharfstein, NBER and MIT

Amit Goyal and Pedro Santa-Clara, University of California, Los Angeles, "Idiosyncratic Risk Matters!"

Discussant: John Y. Campbell, NBER and Harvard University

Harrison Hong, Stanford University, and Jeffrey D. Kubik, Syracuse University, "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts"

Discussant: Kent Womack, Dartmouth College

Brad M. Barber, University of California, Davis, and Terrance Odean, University of California, Berkeley, "All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors"

Discussant: Sendhil Mullainathan, NBER and MIT

Charles M. Jones, NBER and Columbia University, and Owen A. Lamont, NBER and University of Chicago, "Short Sale Constraints and Stock Returns"

Discussant: Kent Daniel, NBER and Northwestern University

Artyom Durnev, University of Michigan, Randall Morck, NBER and University of Alberta, and Bernard Yeung, New York University, "Value Enhancing Capital Budgeting and Firm-Specific Stock Returns Variation"

Discussant: Jeremy C. Stein, NBER and Harvard University

Shleifer and Vishny present a model of mergers and acquisitions based on stock market misvaluations of the combining firms. The key ingredients of the model are the relative valuations of the merging firms, the horizons of their respective managers, and the market's perception of the synergies from the combination. The model explains who acquires whom, whether the medium of payment is cash or stock, what the valuation consequences of mergers are, and why there are merger waves. The model is consistent with available empirical findings about characteristics and returns of merging firms, and yields new predictions as well.

Goyal and Santa-Clara take a new look at the tradeoff between risk and return in the stock market. They find a significant positive relationship between average stock variance and the return on the market. Therefore, there is a tradeoff between risk and return in the stock market, but risk is measured as total risk, including idiosyncratic risk, not...