This dissertation investigates the impact of social interaction in the financial market. The focus of this defense is on understanding 1) how investment information is transmitted from one investor to another and 2) how social interaction between investors change their trading strategies. The first chapter of this dissertation finds that conversational norms shape the diffusion of investment information. The results in the second chapter show that investors are more likely to drastically adjust their investment strategies when other investor’s current buying (selling) strategies and past performance are consistent.

This dissertation contains three essays exploring the factors influencing investor behavior, worker productivity, and unintended consequences of government policies.

Chapter 1 examines the role of media in equity markets. We exploit exogenous attention shocks generated by the announcements of a financial analyst award --- award winners are featured on the front page of a high-profile financial magazine while analysts just missing the award are not. We find that the award announcement immediately causes higher market reaction to pre-existing stale recommendations from analysts barely winning the award than those by analysts barely missing it. However, the reaction fully reverses in six weeks. Evidence supports the notion that the overreaction is mainly driven by attention trading induced by media exposure of award winners rather than by ability signaling from winning the award. In terms of the longer-term consequences of the award, we find that brokerages assign more resources to awardees; the awardees issue more accurate and less biased earnings forecasts, but only for stocks unaffiliated with the brokerages.

Chapter 2 studies the effects of a non-pecuniary symbolic award on winners, losers, and their peers, using a regression discontinuity design. We identify newly recruited insurance salespeople who barely won a quarterly ``Best Rookie'' award and those who barely missed it in a large insurance company. Our main finding is that barely winners earn less life insurance commission than barely losers in the quarter following the award designation. Interestingly, the performance difference is mainly driven by winners earning less rather than losers' earning more. Several mechanisms, such as signaling, effort reallocation, licensing, and mean reversion are tested and ruled out. One mechanism, which we have empirical support for, is peer sabotage of winners triggered by the award designation. Finally, we examine spillover effects of the award and find no evidence that coworkers of winners and losers perform differently in any measurable aspects after the award.

Chapter 3 examines the effect of Recreational Marijuana Legalization (RML) in Colorado on the illegal marijuana possessions in its neighboring states. I use a difference-in-differences design with distance to Colorado border as treatment intensity. I find that RML in Colorado increases marijuana possession offenses among adult males in counties closer to Colorado border relative to those farther away. These findings add to the heated policy debate by pointing out externalities of RML to other states.

This dissertation comprises three papers examining several questions in finance and accounting. A common thread is investigating the strategic interactions between public firms and stock market investors. Chapter 1 studies how investors with short-term horizons can impact firms' behaviors. Chapters 2 and 3 examine the impact of corporate disclosure and the market pricing of information.

In Chapter 1, I use the unique features of the margin trading system in China to identify the causal impact of transient investors on managerial myopia. Specifically, I employ a regression discontinuity design that exploits the ranking procedure that determines a stock's margin trading eligibility. I find that margin traders are extremely short-term oriented and cause a sharp increase in stock share turnover. Moreover, marginable firms cater to these transient investors by manipulating current earnings and reducing long-term investments. Consistent with managerial myopia, these firms experience a short-term price increase but a long-term decline in operating performance.

Chapter 2 is joint work with John Hughes, Jun Liu, and Dan Yang. We reexamine the relation between disclosure indices and cost of equity capital employing an empirical specification similar to that of \citet{botosan97} for a substantially larger sample over an extended time frame made possible by textual analysis. Our results provide no support for a hypothesis of a negative relation between disclosure indices and implied cost of equity capital. Rather, consistent with a bias of implied cost of equity capital as a proxy for expected return depicted by \citet{Hughes2009}, we find strong evidence of a positive relation.

Chapter 3 is joint work with Yibin Liu. We exploit an earnings-based delisting policy and examine its adverse effect on investor trust in earnings news. Besides providing prominent visual evidence of large-scale earnings management at the required earnings threshold, we find that firms close to this threshold are trusted less by investors, regardless of whether they have manipulated earnings. Moreover, we provide causal evidence by studying firms that approach this threshold due to a plausibly exogenous profitability shock. Our results suggest that earnings-based regulations with harsh punishment may lead to a decline in investor trust.

This dissertation addresses several questions in corporate finance. A common thread is the study of stock market investors' processing of disclosure by public firms.

The first chapter studies the effect of public scrutiny on financial misreporting. I exploit the staggered implementation of the EDGAR system, which provides all investors with free and instant access to financial reports. Firms phased into EDGAR received higher public scrutiny and stronger stock market reaction to earnings announcements. A plausibly exogenous increase in public scrutiny incentivizes firms to substitute between different methods of earnings management. Moreover, the increase in public scrutiny impacts firms differently depending on the ex-ante level of scrutiny that firms already have, consistent with theoretical predictions.

The second chapter models investors' allocation of attention to financial disclosures and its impact on firms' voluntary disclosure. We jointly solve investors' optimal allocation of limited attention and managers' choice to disclose their privately observed signals (e.g., forecasts of future earnings). We predict an inverse-U-shaped relation between firms' likelihood of disclosure and investor attention, supported by our empirical tests. The third chapter also studies investors' reactions to financial reports. In particular, we examine whether earnings management by manipulating firms distorts investors' response to financial reports by (similar) non-manipulating firms. We exploit a unique setting in China's stock market that de-lists firms if they report consecutive negative annual earnings. We find that non-manipulating firms suffer from significant adverse capital market effects, resulting from investors' distrust.