Media Coverage and the Cross‐Section of Stock Returns: The Chinese Evidence

Using hand‐collected news headlines for a large sample of listed firms in China over a period of 2000–2015, we investigate the cross‐sectional relation between media coverage and stock returns. Our results document that no‐media coverage stocks earn 55 basis points a month higher than stocks that are featured in the media. This result is robust after controlling for common risk factors and is not driven by short‐run return reversals. Further analysis provides evidence to support the investor recognition hypothesis, suggesting that mass media may play an incremental role in providing a supplement to traditional channels of information dissemination. Therefore, results in this paper are of interests to both investors and regulators on drivers of stock returns.     

Internet Search Intensity and Its Relation with Trading Activity and Stock Returns*

Using Google search volume as a proxy for investor attention, this paper provides evidence on the role attention plays in financial markets. We first show that abnormal Google search volume (ASVI) helps explain cross‐sectional variations in trading activity, even after controlling for its important determinants. Specifically, ASVI is positively related to trading volume, order imbalance and liquidity. When the relation between stock returns and ASVI is examined, we find a strong positive relation in the month after attention shocks and a reversal over a longer holding period. We further conjecture that the attention effect is more pronounced in stocks with higher limits to arbitrage. For this purpose, we construct a limits‐to‐arbitrage index and show that limits to arbitrage play an important role in explaining the attention effect.     

Density forecast comparisons for stock prices,obtained from high‐frequency returns and daily option prices

This paper presents the first comparison of the accuracy of density forecasts for stock prices. Six sets of forecasts are evaluated for DJIA stocks, across four forecast horizons. Two forecasts are risk‐neutral densities implied by the Black–Scholes and Heston models. The third set are historical lognormal densities with dispersion determined by forecasts of realized variances obtained from 5‐min returns. Three further sets are defined by transforming risk‐neutral and historical densities into real‐world densities. The most accurate method applies the risk transformation to the Black–Scholes densities. This method outperforms all others for 87% of the comparisons made using the likelihood criterion.     

Does Investor Sentiment Predict the Near‐Term Returns of the Chinese Stock Market?

Recent evidence on the relationship between investor sentiment and subsequent monthly market returns in China shows that investor sentiment is a reliable momentum predictor since an increase (decrease) in investor sentiment leads to higher (lower) future returns. However, we suggest that momentum predictability of investor sentiment originates from the boom and bust period of 2006–2008 (the bubble period hereafter). The bubble period is characterized by several months of sustained optimism followed by several months of sustained pessimism, with the market consequently earning high (low) returns following high (low) sentiment months. Therefore, we find a strong positive association between investor sentiment and subsequent market returns during the bubble period. However, investor sentiment has a negligible impact on subsequent monthly market returns once we exclude the bubble period.     

Do Top 10 Lists of Daily Stock Returns Attract Investor Attention? Evidence from a Natural Experiment

Using the upper price limit‐hitting events, in the Shanghai Stock Exchange in China, as the basis for comparison, we find that limit‐hitting stocks in the top 10 ranking list of daily returns attract more investors' attention, and bring about significant abnormal return in excess of those list‐excluded limit‐hitting stocks. The result is robust after controlling for firm characteristics and market states. Furthermore, the attention distinction caused by the ranking lists is unlikely to be distracted by simultaneous events. Overall, the previous empirical evidence about the ranking lists basically supports the investor attention hypothesis.     

SKEWNESS‐AWARE ASSET ALLOCATION: A NEW THEORETICAL FRAMEWORK AND EMPIRICAL EVIDENCE

This paper presents a new measure of skewness, skewness‐aware deviation, that can be linked to prospective satisficing risk measures and tail risk measures such as Value‐at‐Risk. We show that this measure of skewness arises naturally also when one thinks of maximizing the certainty equivalent for an investor with a negative exponential utility function, thus bringing together the mean‐risk, expected utility, and prospective satisficing measures frameworks for an important class of investor preferences. We generalize the idea of variance and covariance in the new skewness‐aware asset pricing and allocation framework. We show via computational experiments that the proposed approach results in improved and intuitively appealing asset allocation when returns follow real‐world or simulated skewed distributions. We also suggest a skewness‐aware equivalent of the classical Capital Asset Pricing Model beta, and study its consistency with the observed behavior of the stocks traded at the NYSE between 1963 and 2006.     

Saddled with Attention: Overreaction to Bankruptcy Filings

We analyze the effect of investor attention on stock prices around Chapter 11 bankruptcy filings. We measure investor attention as abnormal search volume from Google, and find that attention‐grabbing companies have more negative abnormal stock returns in the days before and during bankruptcy filings and more positive abnormal returns immediately thereafter. That is, for companies receiving high attention, investors overreact to a bankruptcy filing; for companies receiving low attention, they underreact. This pattern is more pronounced for companies with low institutional ownership and holds after controlling for standard predictors of stock performance during bankruptcy.     

Is volatility risk priced in the securities market? Evidence from S&P 500 index options

The authors examine whether volatility risk is a priced risk factor in securities returns. Zero‐beta at‐the‐money straddle returns of the S&P 500 index are used to measure volatility risk. It is demonstrated that volatility risk captures time variation in the stochastic discount factor. The results suggest that straddle returns are important conditioning variables in asset pricing, and investors use straddle returns when forming their expectations about securities returns. One interesting finding is that different classes of firms react differently to volatility risk. For example, small firms and value firms have negative and significant volatility coefficients, whereas big firms and growth firms have positive and significant volatility coefficients during high‐volatility periods, indicating that investors see these latter firms as hedges against volatile states of the economy. Overall, these findings have important implications for portfolio formation, risk management, and hedging strategies. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:617–642, 2007     

Earnings announcement timing,uncertainty, and volatility risk premiums

We examine the relationship between firms’ quarterly earnings report timing and uncertainty before quarterly earnings announcements. Prior research provides conflicting predictions on how investor uncertainty and report timing are related. Using implied volatilities from equity options and the realized returns to straddle positions, we find evidence that uncertainty and volatility risk premiums are higher for firms that report later in the quarter. Further tests show that the increase in option premiums is unexplained by risk factors suggesting a mispricing by investors. These results are not associated with static firm-level factors and our findings are concentrated in high growth firms.     

Environmental,Social, and Governance (ESG) Profiles,Stock Returns,and Financial Policy: Australian Evidence

This study investigates the independent effects of environmental (E), social (S), corporate governance (G), and the composite ESG ratings on stock returns and corporate financing decisions of the largest stocks in the Australian equity market. Firms with high composite ESG ratings tend to increase their leverage. For the individual ratings, we find different inferences: firms with low E and high G ratings tend to raise less debt. Firms with high G ratings hold less cash, while those with low G ratings have lower dividend payouts. S ratings have no impact on corporate financing decisions. There appears to be no significant difference in risk‐adjusted returns for portfolios based on ESG ratings, effectively indicating that there is no cost of ESG investment.     

The Calendar Structure of the Japanese Stock Market: The ‘Sell in May Effect’ versus the ‘Dekansho‐bushi Effect’

We report on a seasonal pattern that has persisted in the Japanese stock market for more than half a century: Mean stock returns are significantly positive for months during the first half of the calendar year and significantly negative for months during the second half. Dubbed the Dekansho‐bushi effect, this seasonality is independent of other known calendar anomalies, such as the so‐called January effect. The Dekansho‐bushi effect should be distinguished from the ‘sell in May effect,’ because Japanese stocks perform well in June and poorly in November and December. The Dekansho‐bushi effect varies in magnitude among firms and is particularly significant among small firms with high book‐to‐market ratios. Nonetheless, the effect exists, regardless of a company's size or book‐to‐market ratio.     

Good News and Bad News about Firm‐Level Stock Returns of Internationally Exposed Firms

We examine stock returns of firms with international exposure. Our empirical work relies on Campbell's variance decomposition framework. Not surprisingly, we find that the volatility of discount rate and cash flow news increase with the degree of international exposure. As firms globalize, the cash flow effect is good news, while the discount rate effect amounts to bad news. The surprising result is that the covariance between the news terms increases with international exposure. This finding provides indirect evidence for the proposition that foreign exchange (FX) risk is a priced factor in the cross‐section of risk‐adjusted expected returns. JEL Classifications: G12, G15; EFM Classification Code: 330     

Factor Exposures of Foreign Equity Capital in a Domestic Stock Market: Evidence from Korea

In this paper, we examine the factor exposures of foreign equity capital in a domestic stock market in order to understand its risk‐taking behavior and sources of returns in the market. Using data from Korea for the 1999–2013 period, we find that foreigners are strongly exposed to the idiosyncratic volatility (IVOL) factor, which is long on low‐IVOL stocks and short on high‐IVOL stocks. That is, foreign equity capital is typically allocated to low‐IVOL stocks and profits from the return differential between low‐IVOL and high‐IVOL stocks. We also find that foreign equity capital moves in a way that it is loaded more on the IVOL factor when the IVOL factor premium is larger. We discuss the comparative advantage of foreign equity capital in bearing the IVOL factor risk and the role of information asymmetry between locals and foreigners in this risk sharing. We also provide additional empirical results that support our interpretation.     

Market Excess Returns,Variance and the Third Cumulant

In this paper, we develop an equilibrium asset pricing model for market excess returns, variance and the third cumulant by using a jump‐diffusion process with stochastic variance and jump intensity in Cox et al. (1985) production economy. Empirical evidence with the S&P 500 index and options from January, 1996 to December, 2005 strongly supports our model prediction that the lower the third cumulant, the higher the market excess returns. Consistent with existing literature, the theoretical mean–variance relation is supported only by regressions on risk‐neutral variance. We further demonstrate empirically that the third cumulant explains significantly the variance risk premium.     

Are stocks dumped or neglected by analysts' inferior investments to covered stocks?

We compare the long-term stock price and operating performance of firms that are followed by analysts to those that are not over the period of 1994-2005. While analysts are skillful in identifying quality firms for coverage, the market is efficient in pricing both covered and neglected stocks such that risk-adjusted stock returns are compatible between the two groups. However, dumped stocks consistently outperform covered stocks with significant risk-adjusted returns across different market conditions and regulatory environments. Hence, investors might earn better returns by investing in dumped stocks, but the higher returns may represent compensation for greater search costs and information risk associated with investing in these stocks.     

Customer satisfaction as a buffer against sentimental stock-price corrections

Previous research has shown that customer satisfaction is a market-based asset that can contribute to a firm’s value by increasing its stock-market returns, while simultaneously reducing the riskiness of these returns. This study contributes to the growing literature on the marketing–finance interface by examining the relationship between customer satisfaction and a type of risk that has not been previously studied in the marketing literature: the vulnerability of a firm’s stock price to the stock-market corrections that typically follow periods of high investor sentiment. The results show that customer satisfaction can function as a buffer against the risk of such sentimental stock-price movements and reduces their negative impact on a firm’s market value. In particular, we find that firms with higher (lower) levels of customer satisfaction exhibit smaller (greater) price corrections and higher returns after periods of high investor sentiment.     

The cross-section of returns in frontier equity markets: Integrated or segmented pricing?

Is asset pricing segmented or integrated in frontier equity markets? To answer this question, we examine the returns on more than 4500 stocks from 22 frontier countries for the years 1997–2018. We evaluate the performance of a few major asset pricing models. We document strong value and momentum effects but find no consistent evidence regarding size, investment, and profitability premia. The recent six-factor model of Fama and French (2018) outperforms other models and best explains the cross-sectional and time-series variation in returns. Our results point to low integration of frontier equities, even after the global financial crisis. Local risk factors explain the behavior of prices much better than their global counterparts do. The low correlation of these risk factors allows augmenting the efficient frontier of an international investor.     

Investor Myopia and CEO Turnover

We find that Chief Executive Officer (CEO) turnover is significantly higher and considerably less sensitive to performance in firms with short investor horizons. Decisions to dismiss a CEO lead to worse operating performance, which is even poorer when investors have short horizons. Furthermore, new managers respond to investor short‐termism by increasing industry‐adjusted capital expenditures while maintaining R&D and patenting activity. In addition, in firms with short‐horizon investors, total risk increases around forced CEO turnovers, largely because of an increase in idiosyncratic risk. The evidence is consistent with short‐term investors distorting corporate policies of firms through their influence on top management turnover.     

The Effect of Timeliness and Credit Ratings on the Information Content of Earnings Announcements

This paper investigates the impact of timeliness and credit ratings on the information content of the earnings announcements of Greek listed firms from 2001 to 2008. Using the classical event study methodology and regression analysis, we find that firms tend to release good news on time and are inclined to delay the release of bad news. We also provide evidence that the level of corporate risk differentiates the information content of earnings according to the credit rating category. Specifically, firms displaying high creditworthiness enjoy positive excess returns on earnings announcement dates. In contrast, firms with low creditworthiness undergo significant share price erosions on earnings announcement days. We also observe a substitution effect between timeliness and credit ratings in relation to the information content of earnings announcements. Specifically, we find that as the credit category of earnings-announcing firms improves, the informational role of timeliness is mitigated.     

Government ownership and stock liquidity: Evidence from China

This paper documents that state ownership is associated with higher stock liquidity, a finding consistent with lower investor risk perception of firms that benefit from state ownership, like preferential financing and implicit government guarantees. The effect is found to be stronger when government ownership confers stronger benefits like firms with state controlling rather than non-controlling shareholders, and when the benefits of government ownership are important – for smaller firms, for financially constrained firms, and especially during the financial crisis period. These results suggest that investors perceive government ownership as value-enhancing, which increases their willingness to trade in such stocks.