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David Solomon

 

Assistant Professor of Finance and Business Economics

University of Southern California

Marshall School of Business

 

 

 

 

 

 

Contact:                          Office: Hoffman Hall 502

 

Phone: (213) 740 1057

 

Mailing Address:

3670 Trousdale Parkway, Suite 308

Bridge Hall 308, MC-0804

Los Angeles, CA, 90089-0804

 

Email: dhsolomo.at.marshall.usc.edu

 

Research   

Interests:                        Empirical Asset Pricing, The Role of the Media, Behavioral Finance, Prediction Markets and Mutual Funds.               

 

CV

 

Publications:              Selective Publicity and Stock Prices’, Journal of Finance (Forthcoming)

                                                Updated January 2011

Abstract: I examine how media coverage of good and bad corporate news affects stock prices, by studying the effect of investor relations (IR) firms.  I find that IR firms ‘spin’ their clients’ news, generating more media coverage of positive press releases than negative press releases. This spin increases announcement returns. Around earnings announcements, IR firms cannot spin the news, and their clients’ returns are significantly lower. This is consistent with positive media coverage increasing investor expectations, creating disappointment around hard information. Using reporter connections and geographical links to newspapers, I argue that IR firms causally affect both media coverage and returns.

                                                Internet Appendix

 

 

‘A Multinomial Approximation of American Option Prices in a Levy Process Model’, with Ross Maller and Alex Szimayer, Mathematical Finance, Vol. 16, No. 4, pp. 613-633, October 2006

Abstract. This paper gives a tree based method for pricing American options in models where the stock price follows a general exponential L´evy process. A multinomial model for approximating the stock price process, which can be viewed as generalising the binomial model of Cox, Ross and Rubinstein (1979) for geometric Brownian motion, is developed. Under mild conditions, it is proved that the stock price process and the prices of American-type options on the stock, calculated from the multinomial model, converge to the corresponding prices under the continuous time L´evy process model. Explicit illustrations are given for the variance gamma model and the normal inverse Gaussian process when the option is an American put, but the procedure is applicable to a much wider class of derivatives including some path-dependent options. Our approach overcomes some practical difficulties that have previously been encountered when the L´evy process has infinite activity.

                             

 

Working    

Papers:                            ‘What Are We Meeting For? The Consequences of Private Meetings with Investors’ (NEW!)

With Eugene Soltes

Updated: November 2011

Abstract: Executives of publicly-traded firms spend considerable time meeting privately with investors, despite regulation restricting their ability to convey material nonpublic information. Using a set of records of all one-on-one meetings between senior management and investors for a NYSE traded firm, we investigate which funds meet privately with management and the consequences of these interactions. We find that hedge funds, large block holders, geographically close investors, and investors with higher turnover meet more frequently with management. We also find that trades are more correlated among funds that meet with management and these trades better predict future performance. Overall, our results suggest that private meetings help some investors make more informed trading decisions.

 

‘The Dividend Month Premium’ (NEW!)

With Samuel Hartzmark

Updated: January 2012

Abstract: We document an asset-pricing anomaly whereby companies have positive abnormal returns in months when they are expected to issue a dividend. Abnormal returns in predicted dividend months are high relative to other companies (by 53 basis points per month), and relative to dividend-paying companies in months without a predicted dividend (by 37 basis points per month). The anomaly produces returns as large as the value premium, but with less volatility. We argue that the premium is consistent with price-pressure from dividend-seeking investors – returns are significantly positive on the announcement day, the ex-day, and the period in between, but are significantly negative in the forty days afterwards. Measures of liquidity and demand for dividends are associated with both larger price increases before the ex-day, and larger reversals afterwards.

 

‘Winners in the Spotlight: Media Coverage of Fund Holdings as a Driver of Flows’

With Eugene Soltes and Denis Sosyura

Updated: November 2011

Abstract: We show that media coverage of mutual fund holdings affects how investors allocate money across funds. Controlling for fund performance, fund holdings with high past returns attract extra flows only if these stocks were recently featured in the media. In contrast, holdings that were not covered in major newspapers do not affect flows. We present evidence that media coverage tends to amplify investors’ chasing of past returns rather than facilitate the processing of useful information in fund portfolios. Fund managers exploit this behavior by purchasing media-covered past winners at reporting dates, a strategy most prevalent among poorly performing funds. Our evidence suggests that media coverage can exacerbate investor biases and that it is the primary mechanism that makes window-dressing effective.

 

‘The Determinants of Coverage in the Business Press’

With Eugene Soltes

Updated: August 2011       

Abstract: The business press plays a significant role in distributing firm news to  investors. We investigate variables that influence a firm’s level of press coverage. In addition to firm and news characteristics, we examine choices of timing, press wire service, and ease of firm access. While we find that managers can increase coverage by issuing press releases during the day, the largest determinants of coverage are factors outside managerial control. We also find evidence of a newspaper bias towards covering negative news, which suggests the press differs from other intermediaries by choosing to focus on news for reasons other than its salience for making investment decisions.

 

 

‘Efficiency and the Disposition Effect in NFL Prediction Markets’

With Sam Hartzmark

Updated January 2012

Abstract: This paper examines $20.7 million of betting contracts on NFL games at Tradesports.com, an online prediction market. We find mispricing consistent with the disposition effect, where investors are more likely to close out profitable positions than losing positions. Prices are too low when teams are ahead and too high when teams are behind. Tradesports.com offers an ideal place to examine the impact and underlying cause of the disposition effect as market participants have a common stable reference price, the price before kick-off. These results do not appear driven by a lack of participation in the market, as games with more money gambled actually exhibit more mispricing. Further, team loyalty does not appear to impact trading behavior. Finding the disposition effect in a negative expected return gambling market calls into question the standard explanations for the disposition effect, a belief in mean reversion or prospect theory. It is consistent with cognitive dissonance, and models with time-inconsistent behavior. Implications for companies implementing prediction markets are discussed.

                             

 

How Effective are Individual Lifestyle Changes in Reducing Electricity Consumption? Measuring the Impact of Earth Hour’

Updated May 2008

Abstract: This paper examines a unique natural experiment where Sydney residents turned off lights and electrical appliances for one hour. While polls reported 57% of Sydney participated, statewide electricity use declined by 2.10%, statistically indistinguishable from zero. This indicates that discretionary household electricity use like lighting forms only a small component of total electricity consumption, and policies targeting such use may be of limited impact. Using poll data on participation and previous estimates of household electricity consumption, evidence indicates that respondents overstated their involvement by around 36%. This is consistent with consumers feeling pressure to overstate their preferences for environmental goods.

                             

 

 

 

Popular                           Op-Ed piece in The Australian Newspaper on Earth Hour, May 9, 2007

Writing:                         [html]

                                               

 

About Me:                    I enjoy surfing, squash, playing the acoustic guitar, and swimming at Cottesloe Beach