Global,local, and contagious investor sentiment

We construct investor sentiment indices for six major stock markets and decompose them into one global and six local indices. In a validation test, we find that relative sentiment is correlated with the relative prices of dual-listed companies. Global sentiment is a contrarian predictor of country-level returns. Both global and local sentiment are contrarian predictors of the time-series of cross-sectional returns within markets: When sentiment is high, future returns are low on relatively difficult to arbitrage and difficult to value stocks. Private capital flows appear to be one mechanism by which sentiment spreads across markets and forms global sentiment.     

Diversification and heterogeneity of investor beliefs

In the paper, we find that diversification reduces the heterogeneity of investor beliefs on firm value. We obtain this finding by comparing not only between diversified and focused firms but also between diversifying and non-diversifying mergers. We also find that the reduced heterogeneity of investor beliefs on a diversified firm relative to its focused peers is negatively associated with its contemporaneous excess value and positively associated with its future excess value. Overall, our results contribute to the understanding about how corporate organization structure affects the heterogeneity of investor beliefs and further firm value.     

On the relationship between concentration of prospect theory/mental accounting investors,cointegration, and momentum

We examine the role of cointegration between stock prices and their estimated fundamental values in return momentum. We find that the positive relationship between capital gains overhang and future stock returns in Grinblatt and Han (2005) is significantly stronger among the “non-cointegrated” group of stocks as compared with the “cointegrated” group of stocks. Further, for the cointegrated stocks, the slower the speed of adjustment to the cointegrating equilibrium, the greater (smaller) is the future return of stocks with unrealized capital gains (losses). These findings are robust to various firm characteristics including firm size, book-to-market ratio, past returns, idiosyncratic volatility, dispersion in analysts’ earnings forecasts, turnover, individual investor ownership, and industry returns.     

Supply and Demand Shifts in the Shorting Market

Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.     

Dumb money: Mutual fund flows and the cross-section of stock returns

We use mutual fund flows as a measure of individual investor sentiment for different stocks, and find that high sentiment predicts low future returns. Fund flows are dumb money–by reallocating across different mutual funds, retail investors reduce their wealth in the long run. This dumb money effect is related to the value effect: high sentiment stocks tend to be growth stocks. High sentiment also is associated with high corporate issuance, interpretable as companies increasing the supply of shares in response to investor demand.     

The information content of stock split announcements: Do options matter?

We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.     

Death and jackpot: Why do individual investors hold overpriced stocks?

Campbell, Hilscher, and Szilagyi (2008) show that firms with a high probability of default have abnormally low average future returns. We show that firms with a high potential for default (death) also tend to have a relatively high probability of extremely large (jackpot) payoffs. Consistent with an investor preference for skewed, lottery-like payoffs, stocks with high predicted probabilities for jackpot returns earn abnormally low average returns. Stocks with high death or jackpot probabilities have relatively low institutional ownership and the jackpot effect we find is much stronger in stocks with high limits to arbitrage.     

The return impact of realized and expected idiosyncratic volatility

We show that the negative relation between realized idiosyncratic volatility, measured over the prior month, and returns is robust in non-January months. Controlling for realized idiosyncratic volatility, we show that the relation between returns and expected idiosyncratic volatility is positive and robust. Realized and expected idiosyncratic volatility are separate and important effects describing the cross-section of returns. We find the negative return on a zero-investment portfolio that is long high realized idiosyncratic volatility stocks and short low realized idiosyncratic volatility stocks is dependent on aggregate investor sentiment. In cross-sectional tests, we find the negative relation is weaker for stocks with a large analyst following and stronger for stocks with high dispersion of analyst forecasts. The positive relation between expected idiosyncratic volatility and returns is not due to mispricing.     

Sell on the news: Differences of opinion,short-sales constraints,and returns around earnings announcements

Miller [1977. Risk, uncertainty, and divergence of opinion. Journal of Finance 32, 1151–1168] hypothesizes that prices of stocks subject to high differences of opinion and short-sales constraints are biased upward. We expect earnings announcements to reduce differences of opinion among investors, and consequently, these announcements should reduce overvaluation. Using five distinct proxies for differences of opinion, we find that high differences of opinion stocks earn significantly lower returns around earnings announcements than low differences of opinion stocks. In addition, the returns on high differences of opinion stocks are more negative within the subsample of stocks that are most difficult for investors to sell short. These results are robust when we control for the size effect and the market-to-book effect and when we examine alternative explanations such as financial leverage, earnings announcement premium, post-earnings announcement drift, return momentum, and potential biases in analysts’ forecasts. Also consistent with Miller's theory, we find that stocks subject to high differences of opinion and more binding short-sales constraints have a price run-up just prior to earnings announcements that is followed by an even larger decline after the announcements.     

New evidence on the effect of belief heterogeneity on stock returns

We develop a new measure to examine the effect of the heterogeneity of beliefs among investors on stock returns. Our initial results do not support the information asymmetry hypothesis or the sidelined investor hypothesis (and thus are consistent with the unbiased prices hypothesis). However, since the first two hypotheses make opposite predictions regarding stock returns, they may both have merit but offset one another. Further analysis suggests that this is indeed the case. Overall, our results support both the information asymmetry and sidelined investor hypotheses and thus occupy middle ground in the debate on the effect of disagreement on stock returns.     

Order Flows and Stock Returns: Compensation for Market Makers with Inventory Concerns

We investigate whether market makers with inventory concerns are compensated with subsequent monthly returns in the cross‐section. We find a significant negative relation between order flows and monthly returns, “the order flow effect,” suggesting that market makers lower prices for stocks with sell order flows and demand a reward in the form of higher expected returns. Further, the order flow effect is stronger for high‐volatility or high‐volume stocks for which market makers have serious inventory concerns. Funding liquidity of market makers also affects the order flow effect. Finally, our finding is independent of existing regularities and robust to the decimalization.     

On the Stability of the Cross‐Section of Expected Stock Returns in the Cross‐Section: Understanding the Curious Role of Share Turnover

In this paper, we shed further light on cross‐sectional predictors of stock return performance. Specifically, we explore whether the cross‐section of expected stock returns is robust within stock groups sorted by past monthly return. We find that the book/market and momentum effects are remarkably robust to sorting on past returns. However, share turnover is negatively related to future returns for stocks with abnormally low stock price performance in the recent past, but postively related to returns for well‐performing stocks. This casts doubt on the use of turnover as a liquidity proxy, but is consistent with turnover being a proxy for momentum trading which pushes prices in the direction of past price movements. Our results are robust to both NYSE/AMEX and Nasdaq stocks, and also robust to stratifying the sample by time period.     

Bank Debt versus Bond Debt: Evidence from Secondary Market Prices

This paper uses a new data set of daily secondary market prices of loans to analyze the specialness of banks as monitors. Consistent with a monitoring advantage of loans over bonds, we find the secondary loan market to be informationally more efficient than the secondary bond market prior to a loan default. Specifically, we find that secondary market loan returns Granger cause secondary market bond returns prior to a loan default. In contrast, secondary market bond returns do not Granger cause secondary market loan returns prior to a loan default.     

Institutional stock trading on loan market information

One of the most important developments in the corporate loan market over the past decade has been the growing participation of institutional investors. As lenders, institutional investors routinely receive private information about borrowers. However, most of these investors also trade in public securities. This leads to a controversial question: Do institutional investors use private information acquired in the loan market to trade in public securities? This paper examines the stock trading of institutional investors whose portfolios also hold loans. Using the Securities and Exchange Commission filings of loan amendments, we identify institutional investors with access to private information disclosed during loan amendments. We then look at abnormal returns on subsequent stock trades. We find that institutional participants in loan renegotiations subsequently trade in the stock of the same company and outperform trades by other managers and trades in other stocks by approximately 5.4% in annualized terms.     

Does the difference in valuation between domestic and foreign investors help explain their distinct holdings of domestic stocks?

This paper proposes an investor heterogeneity approach to the different domestic stock holdings between domestic and foreign investors. Specifically, we hypothesize that domestic and foreign investors evaluate domestic stocks via different models and thus arrive at different valuations for them; consequently, the two investor groups are attracted to different sets of domestic stocks. Using panel data from Korea, we find strong support for our hypothesis. More precisely, we find that the foreign ownership of a stock increases with foreigners’ valuation for the stock in excess of that of domestic investors. As we control for various firm characteristics known to be correlated with foreign ownership, our results indicate that the valuation difference between domestic and foreign investors can help explain the allocation of domestic stocks between the two groups over and above the existing explanations.     

Frothy Housing Markets and Local Stock-Price Movements

Prior empirical research finds habitat effects manifest in stock pricing among firms that share headquarters cities. We empirically investigate whether trends in residential real estate prices affect headquarters-city stock pricing phenomena for companies across U.S. metro areas for 1989?C2004. Specifically, we hypothesize that stocks of firms headquartered in ??hot?? residential real estate markets experience higher returns compared to stocks of firms from ??cold?? markets. We also hypothesize that stocks of firms headquartered in hot real estate markets display stronger return comovement with same-city stocks. We find support for these hypotheses during the 1999?C2004 sample period which coincides with the start of the housing bubble of the 2000?s; we find mixed results in earlier periods. Our findings indicate that city-specific home price patterns conditionally affect stock pricing of local firms, suggesting that investor behavior is influenced by localized shocks to household real estate wealth.     

Ownership concentration,foreign shareholding,audit quality,and stock price synchronicity: Evidence from China

This paper investigates the effects of largest-shareholder ownership concentration, foreign ownership, and audit quality on the amount of firm-specific information incorporated into share prices, as measured by stock price synchronicity, of Chinese-listed firms over the 1996–2003 period. We show that synchronicity is a concave function of ownership by the largest shareholder with its maximum at an approximate 50% level. Further, we find that synchronicity is higher when the largest shareholder is government related. We also find that foreign ownership and auditor quality are inversely associated with synchronicity. Finally, we show that the amount of earnings information reflected in stock returns is lower for firms with high synchronicity.     

Social media effect,investor recognition and the cross-section of stock returns

Investor recognition affects cross-sectional stock returns. In informationally incomplete markets, investors have limited recognition of all securities, and their holding of stocks with low recognition requires compensation for being imperfectly diversified. Using the number of posts on the Chinese social media platform Guba to measure investor recognition of stocks, this paper provides a direct test of Merton's investor recognition hypothesis. We find a significant social media premium in the Chinese stock market. We further find that including a social media factor based on this premium significantly improves the explanatory power of Fama-French factor models of cross-sectional stock returns, and these results are robust when we control for the mass media effect and liquidity effect. Finally, we find that investment strategies based on the social media factor earn sizable risk-adjusted returns, which signifies the importance of the social media premium in portfolio management.     

名义价格幻觉——基于证券分析师目标价格预测的经验证据

本文利用证券分析师发布的股票目标价格预测,为名义价格幻觉提供了能够直接反映心理预期的经验证据。研究发现,证券分析师对低价股未来收益的心理预期显著高于高价股,该行为偏误在规模小、上市时间短、股票波动性大、财务透明度低和无形资产占比高等估值难度更大的股票中表现得更加明显。我们还利用股票送转,对证券分析师是否受到名义价格幻觉的影响做进一步验证,发现由送转引起的与基本面无关的名义价格下降显著提升了证券分析师对股票未来回报的心理预期。进一步研究表明,上述发现并不是因为证券分析师准确预见了低价股和高价股未来有不同的投资机会,也不是为了最大化其供职证券公司的利益而有意迎合投资者。     

Are extreme returns priced in the stock market? European evidence

This paper revisits some recently found evidence in the literature on the cross-section of stock returns for a carefully constructed dataset of euro area stocks. First, we confirm recent results for US data and find evidence of a negative cross-sectional relation between extreme positive returns and average returns after controlling for characteristics such as momentum, book-to-market, size, liquidity and short term return reversal. We argue that this is the case because these stocks have lottery-like characteristics, which is attractive to certain investors. Also, these stocks tend to be very volatile so that arbitrageurs are discouraged from correcting potential mispricing. As a consequence, these stocks are often overpriced and hence face lower expected returns. Second, when we control for extreme returns, the recently found negative relationship between idiosyncratic risk and future returns is less robust. In our models, after adding maximum returns, the relationship is insignificant and sometimes even positive. We also find that idiosyncratic skewness and coskewness play an important role for asset pricing, as predicted by several theoretical models.