Jordi Mondria

Investors in financial markets are often uncertain about the relationship intensity between firms and have to rely on firms' disclosure of such relationship intensity. We analytically study the asset pricing implications of this relationship intensity uncertainty and how such uncertainty affects firms' incentives to form and disclose their relationship intensities. We find that while such disclosure has a positive price impact by increasing the expected cash flow, it also has a negative impact by reducing the diversification benefit of investing in multiple firms that have more correlated cash flows. The price impact upon relationship intensity disclosure is therefore not monotone: it increases with the expected benefit of relationship and decreases with the risk of the underlying relationship. Our analysis implies that mandatory disclosure of firm relationship intensities may both destroy relationship development and reduce investor welfare.

We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, investors are boundedly rational and their interpretation of prices injects noise into the price, generating a source of endogenous noise trading. Our setup predicts price momentum and yields excessive return volatility and excessive trading volume. In an overall equilibrium, investors optimally choose sophistication levels by balancing the benefit of beating the market against the cost of acquiring sophistication. There can exist strategic complementarity in sophistication acquisition, leading to multiple equilibria.

This paper constructs a new measure of attention allocation by local investors relative to nonlocals using aggregate search volume from Google. We first present a conceptual framework in which local investors optimally choose to focus their attention on local stocks when they receive private news, leading to an asymmetric allocation of attention between local and nonlocal investors. Consistent with the main prediction of this framework, we find that firms attracting abnormally high asymmetric attention from local relative to nonlocal investors earn higher returns. A portfolio that goes long in stocks with high asymmetric attention and short in stocks with low asymmetric attention has an alpha of 32 basis points per month. The results are stronger for stocks with a greater degree of information frictions.

In this paper, we decompose attention allocation into two components - the familiar and the surprising - with opposite implications for US purchases of foreign stocks. Familiarity-induced attention leads to an increase in US holdings of foreign equities. Surprise-induced attention is associated with net selling of foreign stocks because US investors tend to pay more attention to negative than to positive economic surprises from foreign countries. Our findings suggest that information asymmetries between locals and non-locals are more pronounced when it comes to good news, with information regarding bad news being relatively symmetric.

Information frictions prevent importers from observing the price of a good in every market. We introduce rationally inattentive importers in a multi-country Ricardian trade model. The amount of information importers process is endogenous and reacts to changes in observable trade costs. Unlike traditional trade costs, changes in information processing costs have non-monotonic and asymmetric effects on bilateral trade flows. The model generates a novel prediction regarding the relationship between information processing costs and concentration of imports that finds support in the data.

Uncertainty about product quality is endemic in international trade. We develop a dynamic, two-country model where home producers differ in terms of product quality. Quality is not fully observed by foreign consumers initially but known once the product is consumed. We show that this lack of information generates an information cost of exporting, over and above the usual fixed costs used in standard heterogeneous firm models. We examine the role played by intermediaries in alleviating quality uncertainty and uncover a positive externality of using intermediaries.

This paper shows that imperfect financial integration and informational asymmetries are not competing theories but rather complementing ideas to a single explanation of the home bias puzzle. We develop a rational expectations model of asset prices with investors that face informational constraints and find that informational advantages arise endogenously as a response to small financial frictions. We also present empirical evidence that international financial frictions are correlated with observed patterns of US investors' attention, and that attention helps explain home bias toward those countries.

We propose a model of delegated asset management that can explain home bias, the lower proportion of mutual funds investing domestically, and the higher market value of mutual funds investing domestically. Fund managers choose whether to specialize in domestic or foreign assets. Individual investors are uncertain about managers' abilities and are more informed about domestic markets. This makes domestic investments less risky and generates home bias, which is magnified because higher ability managers specialize in domestic assets.

This paper explains financial contagion between two stock markets with uncorrelated fundamentals by fluctuations in international investors' attention allocation. Investors optimally allocate more attention to a region hit by a financial crisis, to the detriment of other markets. The resulting endogenous increase in uncertainty causes a reduction in international investors' capacity to bear risk and induces them to liquidate risky positions. Evidence from the East Asian crisis supports the attention reallocation channel.

This paper introduces and studies the role of managerial attention allocation constraints in incentive contracts. We extend the traditional moral-hazard benchmark model with multi-tasking and linear incentive contracts by letting the principal choose the amount of monitoring allocated across tasks. More attention allocated to a task improves contractibility and increases effort. Even under symmetry, increasing returns to scale in production or monitoring can lead the principal to offer an unbalanced incentive contract.

This paper models the attention allocation of portfolio investors. Investors choose the composition of their information subject to an information flow constraint. Given their expected investment strategy, investors choose to observe one linear combination of asset payoffs as a private signal. When investors use this signal to update information about two assets, changes in one asset affect both asset prices and may lead to asset price comovement.

This paper explores the joint determination of home bias and attention allocation. We use a new internet search query dataset to measure how much information investors decide to process. Employing an instrumental variables approach, we find empirical evidence of a two-way causality between home bias and attention. Our estimates suggest that if all countries received the same level of attention as the U.S., then average home bias by U.S. investors would fall substantially.

This paper explains the home equity bias and its puzzling evolution in a model where investors face an information constraint and have an initial local informational advantage. After financial liberalization, local investors have a magnified informational advantage because information processed under autarky remains useful. A gradual shift toward foreign assets occurs as the relevance of autarkic information declines, but home bias remains large due to the interaction between information and portfolio choices.

We build a theoretical framework to endogenize the editorial decisions of media and analyze their asset pricing implications. The media outlet optimally reports man-bites-dog signals by choosing to report about firms that generate more uncertainty for investors. The model has three implications. First, the editorial choice is state-dependent and has asset pricing implications for reported and non-reported firms. Second, it generates an asymmetric response of asset prices to positive and negative news. Finally, public information does not necessarily crowd out the acquisition of private information.

Social media attention before earnings announcements is overly optimistic, fails to predict fundamentals, and generates buying pressure, leading to a 58 bps stock return as intermediaries seek higher returns for providing liquidity. Such price pressure distorts price informativeness ahead of announcements. A return reversal occurs immediately following announcements as markets correct mispricing. When noise trading is systematically driven, liquidity provision becomes more costly and worsens price revelation.

The rate of capital gains of the market portfolio is vastly more volatile than the dividend yield. As a result, standard CAPM betas capture exposure only to market capital gains. We propose a two-factor CAPM that includes a separate market dividend yield factor and find that this factor carries a significant negative premium in the post-1978 period that coincides with the persistent decline in the number of US dividend-paying firms. We motivate this finding with a theoretical model in which the predictive information of the dividend yield can be high when investors have a behavioural bias against dividends.

We study the role of import tariffs when the quality of imported products is not observable. We consider a two-country model where foreign consumers do not observe the quality of home products. Home exporters use price to signal quality. We show that when the foreign country imposes an import tariff, its welfare can rise because the tariff reduces a signalling distortion. More surprisingly, a foreign import tariff can also raise welfare in the home country.