Working Papers
Wall Street Crosses Memory Lane: How Witnessed Returns Affect Professionals' Expected Returns
(with Benjamin Christoffersen, Arvid Hoffmann, and Zwetelina Iliewa)
Witnessing stock market history in the making leaves behind a vivid story, but does not provide valuable information. Nevertheless, well-versed finance professionals extrapolate from witnessed returns when forming beliefs about expected returns which we show by using a unique dataset regarding professionals' career start in the finance industry. This result is robust to controlling for all publicly available information and interpersonal differences. Additionally, we find that returns witnessed early on in a career are more formative than those witnessed recently. Among the potential channels through which witnessed returns might affect professionals' expectations, a judgmental bias appears the most plausible.
Media coverage: Neue Zürcher Zeitung, Euro Fondsxpress
Think Twice or Be Wise in Consumer Credit Choices
This paper analyzes why consumers use relatively expensive short-term credit. Consumers are heterogeneous in their susceptibility to short-term credit use. Specifically, I find that consumers with low financial literacy and consumers who do not think twice about their decisions use overdraft credit more frequently. The empirical evidence builds on rich household survey data from Germany, where 80% of the population has access to overdraft credit. I confirm the results when controlling for borrowing constraints, and for omitted variables through an IV approach. The evidence on borrower characteristics can help to inform evaluations of existing policies and targeting new policies.
Corporate Fraud Risk and Stock Market Performance
(with Alexandra Niessen-Ruenzi and Stefan Ruenzi)
We investigate the impact of fraud risk - measured by the probability for earnings overstatements - on a firm's future stock market performance. Based on an out-of-sample estimation of individual firms' fraud risk, we find that stocks with higher fraud risk earn significantly lower stock market returns. A long-short trading strategy delivers a statistically significant alpha of more than 10% per year. This result is robust to controlling for differences in firms' liquidity, downside risk, or investor preferences. Furthermore, abnormal returns are higher after periods of high sentiment, suggesting that the return patterns documented here constitute an anomaly.
Work in Progress
Cancer Risk and Portfolio Allocation (with Steffen Andersen and Kasper Meisner Nielsen)