Working Paper: NBER ID: w23115
Authors: Briana Chang; Harrison Hong
Abstract: Price efficiency plays an important role in financial markets. Firms influence it, particularly when they issue public equity. They can hire a reputable underwriter with a star analyst to generate public signals about profits, thereby reducing uncertainty and increasing valuations. We develop an assignment model of this labor market. The value of a match between firms, that differ in multiple dimensions, and agents, that differ in precision, is endogenously generated from a stock-market equilibrium. We characterize the multidimensional-to-one assignment and obtain predictions. Extensions allow firms to value efficiency for other reasons and apply to other labor markets like media-or-investor relations.
Keywords: No keywords provided
JEL Codes: G10; G12; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms that issue public equity and hire reputable analysts (G24) | improve stock price efficiency (G14) |
| hiring precise agents (L85) | reduces uncertainty (D80) |
| reduces uncertainty (D80) | increases valuations (G19) |
| firm characteristics (scale and transparency) (L25) | determines the quality of coverage (L15) |
| higher opacity in firms (L29) | greater need for precise coverage (G52) |
| greater need for precise coverage (G52) | positive assortative matching effect (C78) |
| sorting of agents in the labor market (J69) | affects expected returns of firms (G32) |
| higher opacity and scale (Y91) | lower risk premiums due to better coverage (G52) |
| assignment function and resulting coverage quality (G52) | determines the cross-section of expected returns (G11) |
| firm characteristics (L20) | non-monotonic relationship with expected returns (G19) |