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My dissertation is composed of three chapters that are unified by their exploration of asset prices and macroeconomic news announcements. With respect to asset prices, my main focus is on the price discovery process: how do asset prices reveal information relevant for asset fundamentals? Through my research, I provide new answers to this question. My work gets at core issues in asset pricing: whether financial markets are informationally efficient; why some assets earn unconditionally high premia; and how the sensitivity of prices to information varies over time and across assets. Specifically, chapter one shows evidence that sophisticated traders with an informational advantage inefficiently impound their edge into the aggregate U.S. stock market and U.S. Treasury bonds. In chapter two, I explore a model in which investors are averse to ambiguity (Knightian uncertainty) to explain why the equity premium is concentrated around specific events. Finally, chapter three investigates how the Federal Reserve's zero lower bound affects the response of asset prices, in particular interest rates, to information. Each of the three chapters explores the price discovery process using the unique setting of U.S. macroeconomic news announcements, which are made by government agencies and private-sector organizations and cover macroeconomic data on inflation, output, and unemployment. Analyzing financial markets in this setting deepens our understanding of how asset prices reflect information about macroeconomic fundamentals. At the same time, the results have macroeconomic implications; for example, the assumptions of monetary policy models in theory and the effectiveness of unconventional monetary policy in practice., Business Economics

This dissertation addresses the central issue of understanding how frictions to information flow distort the ability for prices to incorporate new information. In chapter 1, “Forgotten Portfolios”, I illustrate how the ability of a stock’s price to impound information can rely on the portfolios of its owners. I show that, in the presence of limited attention, investors rationally allocate their attention towards processing information that has a greater impact on their wealth. Chapter 2, “The Social Elite” (based on joint work with Alexander Chernyakov), examines how casual social interactions impact asset prices. Social networks play a vital role in the diffusion of information. I focus on fund managers and corporate officers of publicly traded firms and present evidence of information transfer at exclusive social gatherings. I find that when executives attend social gatherings their stock prices' subsequent behavior directionally predicts upcoming earnings surprises. I show that fund managers who attend events that corporate officers from a particular firm also attend are more likely to purchase stock in that firm. I explore potential reasons for this tendency and find that fund managers demonstrably outperform when they decide to trade these socially-connected stocks. Further, socially-connected stocks that fund managers do not purchase subsequently underperform. In chapter 3, “Mean Reversion”, I propose a mechanism whereby learning from news jointly explains the patterns of short horizon momentum and long horizon reversals observed in equity prices. The model's key departure from rationality is its assumption that investors underestimate the relative precision of news. Under mild assumptions, investors will exhibit a rational but perverse tendency to increase their belief in other private signals, regardless of whether or not the private signal is true., Economics

In the first essay, I show that the transition to public equity markets have important implications to firms’ innovative process. To establish a causal effect of the IPO, I compare the long-run innovation of firms that completed their filing and went public with that of firms that withdrew their filing and remained private. I use NASDAQ fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this approach, I find that the quality of internal innovation declines by 50 percent relative to firms that remained private. The decline in innovation is driven by both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, going public allows firms to attract new human capital and purchase externally generated innovations through mergers and acquisitions. In the second essay, we explore the effects of private equity investments on the industries they invest at. This analysis looks across nations and industries to assess the impact of private equity on industry performance. Industries where PE funds have invested in the past five years have grown more quickly in terms of productivity and employment. It is hard to find support for claims that economic activity in industries with private equity backing is more exposed to aggregate shocks. The results using lagged private equity investments suggest that the results are not driven by reverse causality. Finally, in the third essay we model situations in which a principal offers a set of contracts to a group of agents to participate in a project. Agents’ benefits from participation depend on the identity of other participating agents. We show that when assuming multilateral externalities, the optimal contracts’ payoff relies on a ranking of the agents, which can be described as arising from a tournament among the agents. Rather than simply ranking agents according to a measure of popularity, the optimal contracting scheme makes use of a more refined two-way comparison between the agents. We derive results on the principal’s revenue extraction and the role of the level of externalities’ asymmetry., Economics