Firm efficiency and stock returns

In this paper, we investigate the role of firm efficiency in asset pricing using a sample of US publicly listed companies for the period 1988–2007. We employ non-parametric data envelopment analysis (DEA) on various input/output combinations, focusing on sales and market value as output measures in the construction of the frontier technologies. Using these performance measures, we examine whether efficient firms perform differently from inefficient firms following standard financial analysis procedures. First, we employ performance attribution regressions, by forming portfolios based on efficiency scores and tracking the performance of the various portfolios over time. Second, we perform cross-sectional/panel regressions to determine whether firm efficiency indeed has explanatory power for the cross-section of stock returns. Our results suggest that firm efficiency plays an important role in asset pricing and that efficient firms significantly outperform inefficient firms even after controlling for known risk factors.     

Misvaluation comovement,market efficiency and the cross-section of stock returns: Evidence from China

In this study, we examine the relation between stock misvaluation and expected returns in China's A-share market. We measure individual stocks’ misvaluation based on their pricing deviation from fundamental values, following Rhodes-Kropf et al. (2005. J. Finan. Econ. 77 (3), 561) and Chang et al. (2013. J. Bank. Finance, forthcoming), and find that the measure has strong and robust return predictive power in the Chinese market. We further form a misvaluation factor and find that misvaluation comovement and systematic misvaluation exist in the Chinese market. A comparison of our results with those of Chang et al. (2013. J. Bank. Finance, forthcoming) reveals that the misvaluation effect is much stronger in the Chinese market than in the U.S market. This evidence is consistent with the notion that the Chinese market is much less efficient than the U.S. market. Finally, we show that the return predictive power of misvaluation has weakened since China launched its split-share structure reform in 2005, which could result from the fact that the reform helps to promote market efficiency.     

Overnight stock returns,intraday returns,and firm-specific investor sentiment

In this study, we propose a new index for measuring firm-specific investor sentiment using overnight and intraday stock returns. We use actual equity data to construct the firm-level investor sentiment index and find that the new index has characteristics expected of a sentiment measure. In addition, we propose a novel sentiment-weighted trading strategy and apply it to momentum and short-term reversal strategies. We find that the sentiment-weighted trading strategy generates better performance in momentum and short-term reversal strategies. The sentiment-weighted trading strategy’s superior performance is evidence that our firm-level investor sentiment index possesses predictive powers with regard to future returns.     

Large changes in stock prices: Market,liquidity, and momentum effect

This article investigates the determinants of large changes in stock prices. Empirical evidences suggest that the asymmetry phenomenon in determinants of large changes in stock prices is found in three stock exchanges. In the New York Stock Exchange (NYSE), momentum effect accounts for most of the likelihood of big gains in stock prices, while liquidity characteristics account for sharp declines of stock prices. An interesting finding is that the opposite is true for stocks traded in Amex and NASDAQ. The possible explanations of the different results in different stock exchanges may attribute to the characteristics of firms listed in these stock exchanges are different.     

Individual stock sentiment beta and stock returns

Using the data in Chinese stock market, we measure the individual stock sentiment beta, which is defined as the sensitivity of individual stock returns to the individual stock sentiment changes. We demonstrate that stocks in the highest individual stock sentiment beta portfolio have significantly higher excess returns, CAPM alpha, Fama-French three-factor alpha and Fama-French five-factor alpha. Besides, we find that the high individual stock sentiment beta stocks are smaller, younger, more volatile stocks with higher price and higher market beta. After controlling for firm characteristic, the returns of High-Low individual stock sentiment beta portfolios are still significantly positive. Moreover, we show the effect of the individual stock sentiment beta on stock returns is positive and significant in different stock markets, in different sample periods, and in bull and bear market. Besides, the results of the Bayes-Stein individual stock sentiment beta are still stable.     

Liquidity,earnings management,and stock expected returns

This paper examines the relationships among liquidity, earnings management, and stock expected returns by using a sample of Chinese listed firms to investigate 22,022 firm–year observations from 1998 to 2018. Our study reveals that an increase in stock liquidity is associated with a decrease in the degree of earnings management. This result is robust to the use of alternative measures when endogeneity concerns are controlled for. Moreover, the findings indicate that the stock liquidity component of earnings management is positively associated with future stock returns in Chinese firms. Our results reveal that the stock liquidity component of short-termism in managerial decisions plays a critical role in determining future stock returns.     

Tornado activity,house prices,and stock returns

In this paper we investigate the effects of tornado activity on house prices and stock returns in the US. First, using geo-referenced and metropolitan statistical area (MSA)-level data, we find tornado activity to be responsible for a significant drop in house prices. Spillover tornado effects between adjacent MSAs are also detected. Furthermore, our granular analysis provides evidence of tornadoes having a negative impact on stock returns. However, only two sectors seem to contribute to such a negative effect (i.e., consumer discretionary and telecommunications). In a macro-analysis, which relies on aggregate data for the South, West, Midwest and Northeast US regions, we then show that tornado activity generates a significant drop in house prices only in the South and Midwest. In these regions, tornadoes are also responsible for a drop in income. Tornado activity is finally found to positively (negatively) affect stock returns in the Midwest (South). If different sectors are examined, a more heterogeneous picture emerges.     

Lagged order flows and returns: A longer-term perspective

In this paper, we consider the large-sample relation between returns and lagged order flows over horizons of up to 2 months. The analysis is motivated by work in market microstructure which suggests that the effects of inventory control on stock returns should be discernible over horizons longer than those considered in the literature. We begin our analysis by developing a simple model of inventory effects in the presence of public information. Using mid-quote return data, we then find some evidence of return predictability using order flows, even after controlling for lagged returns, which is consistent with our theoretical setting. The relation is present only for negative imbalances and is stronger in large firms rather than small ones. Overall, the analysis is consistent with the notion that inventory control effects span several weeks.     

Individual stock crowded trades,individual stock investor sentiment and excess returns

Recent behavioral asset pricing models and the popular press suggest that investors may follow similar strategies resulting in crowded equity positions to push prices further away from fundamentals. This paper develops a new approach to measure individual stock crowded trades, and further investigates the joint effects of individual stock crowded trades and individual stock investor sentiment on excess returns. Specifically, our results show that the combined effect of individual stock crowded trades and individual stock investor sentiment on excess returns is positive and significant, which reveals the importance of “anomaly factors” in asset pricing. Furthermore, our results suggest that increasing individual stock buyer-initiated crowded trades will increase excess returns simultaneously; however, increasing individual stock seller-initiated crowded trades will decrease excess returns simultaneously. Collectively, our results highlight the importance of individual stock crowded trades and individual stock investor sentiment on the formation of stock prices.     

Earnings and stock returns: evidence from Germany

Past research in the US indicates that stock prices and earnings per share are related. Evidence pertaining to this relationship in other countries is not as extensive. This paper extends two recent studies focusing on Germany, and provides additional information concerning the important informative role played by DVFA earnings. DVFA earnings are a metric jointly constructed by the Deutscher Vereinigung für Finanzanalyse und Anlageberatung and the Schmalenbach-Gesellschaftwith the purpose of providing investors and others interested in share value with a more meaningful measure of economic income than the traditional published earnings figure     

Dynamic relationships between industry returns and stock market returns

Different from prior studies which concentrate on the unidirectional impact of industry leading, this study examines the bi-directional dynamical causal relation between industry returns and stock market returns by considering multiple structural breaks for ten major eastern and southern Asia countries. Our results show that finance and consumer service industry returns have significant power in explaining the movements of market returns. Further, we apply logit regressions to explore the determinants of the leading hypotheses and find exchange rate and interest rate are important in explaining the industry–market nexus. In a developed market the industry and the market have feedback relations, but in a highly controlled economy the influence from the stock market dominates.     

Autocorrelation,return horizons,and momentum in stock returns

In this study we examine Lewellen’s (Rev Financ Stud 15:533–563 2002) claim that momentum in stock returns is not due to positive autocorrelation as behavioral models suggest. Using portfolio-specific data, we find the autocovariance component of the momentum profit to be negative, suggesting no return continuations. However, we also find that the autocorrelations calculated from short-term (e.g., monthly) returns are quite different from long-horizon (e.g., annual) autocorrelations. While the first-order autocorrelations of 6– and 12-month returns tend to be negative, the autocorrelations across twelve lags in monthly returns of the industry, size, and B/M portfolios are in general positive. Our results show that these portfolios exhibit return continuations when returns are measured on a monthly basis. Therefore, our finding appears to be consistent with the behavioral models, which suggest positive autocorrelation in stock returns.     

Market fundamentals versus rational bubbles in stock prices: a Bayesian perspective

Using Bayesian Markov chain Monte Carlo methods, we decompose the log price‐dividend ratio into a market fundamentals component and a bubble component. The market fundamentals component depends on expectations of future dividend growth and required returns, while the bubble component is assumed to follow a Markov switching model that allows for the possibility of exploding and collapsing regimes. If prior beliefs allow for the possibility of persistent shocks to dividend growth and/or required returns, the posterior distribution suggests the bubble component contributes virtually nothing to the stock price movements over our sample. On the other hand, if one's priors rule out the possibility of persistent shocks to dividend growth and required returns, the bubble component can have a much larger role to play in stock price movements. However, the regime switching behavior of the bubble bears little resemblance to infrequent switching from an exploding bubble regime to a collapsing or dormant bubble regime. Copyright © 2008 John Wiley & Sons, Ltd.     

Real estate illiquidity and returns: A time-varying regional perspective

This paper proposes two new measures of illiquidity for real estate markets, utilising concepts from asset pricing. Segregating real estate through a regional lens, we provide an in-depth analysis of real estate returns and illiquidity for the US and UK. Our results provide statistically significant and economically meaningful evidence that real estate illiquidity predicts real estate returns out-of-sample over and above a variety of control variables.     

Dynamic relations between oil and stock market returns: A multi-country study

We study the relation between the BRENT and seventeen stock market indexes of important oil-dependent economies. We focus on connectedness between these markets and characterize the dynamics of transmission and reception. We use LASSO methods to shrink, select, and estimate the high dimensional network linking these markets between August, 1999 and March, 2018. This methodological innovation allows the inclusion of a significantly larger number of markets in the network, providing finer results regarding connectedness in the oil-stock market nexus. We show that transmission runs mainly from stock markets to the BRENT. Connectedness varies considerably over time, reaching peaks during times of financial distress. Dynamic predictive causality tests show evidence of time-varying bidirectional causality. Causality from stock markets to the BRENT is detected mostly for the last part of the sample period. This finding indicates that the impact of stock market developments on oil markets is growing over time.     

Market efficiency,asset returns,and the size of the risk premium in global equity markets

An important economic insight is that observed equity prices must equal the present value of the cash flows associated with the equity claim. An implication of this insight is that present values of cash flows must also quantitatively justify the observed volatility and cross-correlations of asset returns. In this paper, we show that parametric economic models for present values can indeed account for the observed high ex post return volatility and cross-correlation observed across five major equity markets—the U.S., the U.K., France, Germany, and Japan. We present evidence that cash flow growth rates contain a small predictable long-run component; this feature, in conjunction with time-varying systematic risk, can justify key empirical characteristics of observed equity prices. Our model also has direct implications for the level of equity prices and specific versions of the model can, in many cases, capture observed price levels. Our evidence suggests that the ex ante risk premium on the global market portfolio has dropped considerably—we show that this fall in the risk premium is related to a decline in the conditional variance of global real cash flow growth rates.     

Overnight stock returns and realized volatility

The information flow in modern financial markets is continuous, but major stock exchanges are open for trading for only a limited number of hours. No consensus has yet emerged on how to deal with overnight returns when calculating and forecasting realized volatility in markets where trading does not take place 24 hours a day. Based on a recently introduced formal testing procedure, we find that for the S&P 500 index, a realized volatility estimator that optimally incorporates overnight information is more accurate in-sample. In contrast, estimators that do not incorporate overnight information are more accurate for individual stocks. We also show that accounting for overnight returns may affect the conclusions drawn in an out-of-sample horserace of forecasting models. Finally, there is considerably less variation in the selection of the best out-of-sample forecasting model when only the most accurate in-sample RV estimators are considered.     

Order imbalance and stock returns: Evidence from China

We investigate the relation between daily order imbalance and return in the Chinese stock markets of Shenzhen and Shanghai. Prior studies have found that daily order imbalance is predictive of subsequent returns. On the two Chinese exchanges we find the autocorrelation in order imbalances is similar to that of the New York Stock Exchange as reported by Chordia and Subrahmanyam [Chordia, T., & Subrahmanyam, A. (2004). Order imbalance and individual stock returns: Theory and evidence. Journal of Financial Economics, 72, 485–518]. We also find a strong contemporaneous relation between daily order imbalances and returns. However, we do not find evidence that order imbalances predict subsequent returns. We attribute the difference in predicative power to differences in trading mechanisms on the two exchanges and to differences in the share turnover rates.     

Infectious diseases tracking and sectoral stock market returns: A quantile regression analysis

This paper investigates the relationship between changes in the newspaper-based infectious diseases tracking index (ITI) of Baker et al. (2020) and sectoral stock market returns in the US. Our results spanning the period 1985:01 to 2020:03 reveal the presence of a negative (positive) relationship between returns and ITI at lower (higher) return quantiles (representing different market conditions) in a majority of the sectors. For the health care sector, this relationship is negative at all quantiles. Interestingly, inclusion of the COVID-19 period in the sample data leads to the detection of a stronger relationship for smaller quantiles across all sectors. An asymmetric relationship between returns and the ITI is witnessed across different market conditions for the Consumer Staples, Healthcare, Industrial and Technology sectors. Results from a rolling regression uncover differences in the magnitudes of responses to various infectious diseases over time. Our results carry important implications regarding investment strategies for US sectoral returns in the presence of news relating to infectious diseases.     

Disclosure quality,price efficiency,and expected returns

Using a composite disclosure quality measure, we examine the effect of disclosure quality on price delay and the effect of price delay determined by disclosure quality on expected returns in the Taiwan stock market. We find that higher disclosure quality can reduce stock price delay through more investor attention and higher stock liquidity after we control for accounting quality variables and consider the endogeneity issue. Furthermore, we show that disclosure quality reduces expected stock returns through the price efficiency channel associated with both investor attention and stock liquidity. Our results indicate that increasing a firm’s standardized information rating by one standard deviation can reduce its expected stock return by 0.63% annually. Taken together, our evidence suggests that regulatory activities enforced to improve public firms’ disclosure quality in the Taiwan stock market can make the stock market more efficient and therefore lower investors’ required return for stocks.