In name only: Information spillovers among Chinese firms with similar stock names during earnings announcements

We examine whether investors' attention on salient firm characteristics affects information spillovers during corporate earnings announcements. For market participants in China, the stock name is a salient feature of listed companies. We find that the market reaction of non-announcing firms to earnings reports of announcing firms is greater across firms with similar stock names. The incremental information spillovers among similarly named stocks are stronger for larger announcing firms and on days with fewer earnings announcements. The incremental information spillovers between similarly named stocks do not fully reverse in the post-announcement period, consistent with persistent investor behavior predicted by the salience theory. There are also significant return comovements among similarly named stocks. Our findings suggest that investors with limited attention are likely to focus on salient stock names and overestimate the economic connections between similarly name stocks. Our study extends the behavioral finance literature by showing how investors' attention on salient firm features can bias their reaction to unrelated peer disclosures.     

The High-Volume Return Premium

The idea that extreme trading activity contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high (low) trading volume over a day or a week tend to appreciate (depreciate) over the course of the following month. We argue that this high-volume return premium is consistent with the idea that shocks in the trading activity of a stock affect its visibility, and in turn the subsequent demand and price for that stock. Return autocorrelations, firm announcements, market risk, and liquidity do not seem to explain our results.     

Earnings Announcements and Systematic Risk

Firms scheduled to report earnings earn an annualized abnormal return of 9.9%. We propose a risk‐based explanation for this phenomenon, whereby investors use announcements to revise their expectations for nonannouncing firms, but can only do so imperfectly. Consequently, the covariance between firm‐specific and market cash flow news spikes around announcements, making announcers especially risky. Consistent with our hypothesis, announcer returns forecast aggregate earnings. The announcement premium is persistent across stocks, and early (late) announcers earn higher (lower) returns. Nonannouncers' response to announcements is consistent with our model, both over time and across firms. Finally, exposure to announcement risk is priced.     

Contrarian flows,consumption and expected stock returns

We investigate the relation between contrarian flows, consumption growth, and market risk premium. We construct a contrarian flows measure by summing up the capital flows to stocks that go against the total flow of the aggregate market. We show that the contrarian flows are negatively influenced by the same-quarter consumption growth. During bad times, the majority of investors who are affected by the negative shock reduce their equity exposure, and these extra supplies of risky assets are absorbed by contrarian investors who are least affected by the consumption shock. Using quarterly stock market data, we find that the contrarian flows forecast market returns at short-to-intermediate horizons. The predictability stems from the component that is explained by the consumption growth, and therefore the consumption growth contains valuable information about the market risk premium. Moreover, the predictability is stronger for growth stocks than for value stocks, and hence it negatively predicts the value premium. This is because the contrarian flows measure the market risk premium and growth stocks bear more discount rate risk than value stocks. Out-of-sample tests show that the main results are robust to data-snooping bias.     

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.     

What determines the stock market's reaction to monetary policy statements?

We find that information communicated through monetary policy statements has important business cycle dependent implications for stock prices. For example, during periods of economic expansion, stocks tend to respond negatively to announcements of higher rates ahead. In recessions, however, we find a strong positive reaction of stocks to seemingly similar signals of future monetary tightening. We provide evidence that the state dependence in the stock market's response is explained by information about the expected equity premium and future corporate cash flows contained in monetary policy statements. We also show state dependence in the average stock returns on days of scheduled FOMC meetings and in the impact of monetary policy statements on stock and bond return volatility.     

Is there information content from insider trading activities preceding earnings and dividend announcements in Hong Kong?

This study examines whether insiders (directors) exploit information advantage of their firms by trading stocks before the simultaneous earnings and dividend announcements in Hong Kong. Our findings show that there are significant net-insider-buying activities before the announcements of good news ('Earnings-Dividend Increase') and significant net-insider-selling activities before bad news ('Earnings-Dividend Decrease' and 'Earnings Decrease-Dividend Zero'). In addition, our regression results provide some support for the hypothesis that there is a predictive relation between pre-event insider trading activity and the abnormal return of the announcements.     

Asymmetric risk premium in value and growth stocks

There are two competing explanations for the existence of a value premium, a rational market risk explanation, whereby value stocks are inherently more risky than growth stocks, and a market over-reaction hypothesis, where agents overstate future returns on growth stock. Using asymmetric GARCH-M models this paper tests the predictions of the two hypotheses. Specifically, examining whether returns exhibit a positive (negative) risk premium resulting from a negative (positive) shock and the relative size of any premium. The results of the paper suggest that following a shock, volatility and expected future volatility are heightened, leading to a rise in required rates of return which depresses current prices. Further, these effects are heightened for value stock over growth stock and for negative shocks over positive shocks. Thus, in support of the rational risk interpretation, with a volatility feedback explanation for predictive volatility asymmetry.     

Cross-sectional dispersion and expected returns

This study investigates whether the cross-sectional dispersion of stock returns, which reflects the aggregate level of idiosyncratic risk in the market, represents a priced state variable. We find that stocks with high sensitivities to dispersion offer low expected returns. Furthermore, a zero-cost spread portfolio that is long (short) in stocks with low (high) dispersion betas produces a statistically and economically significant return. Dispersion is associated with a significantly negative risk premium in the cross section (–1.32% per annum) which is distinct from premia commanded by alternative systematic factors. These results are robust to stock characteristics and market conditions.     

Time-varying state variable risk premia in the ICAPM

We find that the relation between state variables, such as the t-bill rate and term spread, and consumption growth is time-varying. In the cross-section of U.S. stocks, risk premia for exposure to state variables vary over time accordingly. When a state variable predicts consumption strongly relative to its own history, its annualized risk premium increases by 6% (0.4 in Sharpe ratio). This effect implies that risk premia can switch signs and are increasing in the conditional variance of the state variable. These common drivers of time-varying risk premia are consistent with the Intertemporal CAPM. Benchmark factors contain the same conditional expected return effects as state variable risk premia.     

Consumption growth predictability and asset prices

We derive and test a consumption-based intertemporal asset pricing model in which an asset earns a risk premium if it performs poorly when expected future consumption growth deteriorates. The predictability of consumption growth combined with the recursive preference delivers news about future consumption growth an additional risk factor, in addition to news about current consumption growth. We model the consumption growth dynamics using a vector autoregressive (VAR) structure with a set of instrumental variables commonly used for forecasting future economic growth. Our VAR estimation provides strong empirical support for future consumption growth predictability. The cross-sectional test shows that the model explains reasonably well the dispersion in average excess returns of 25 portfolios sorted on size and book-to-market, as well as 25 portfolios sorted on size and long-term return reversal. Growth stocks and long-term winners underperform value stocks and long-term losers, respectively, because growth stocks and long-term winners hedge adverse changes in the future consumption growth opportunities.     

Is information risk priced? Evidence from abnormal idiosyncratic volatility

We propose a new, price-based measure of information risk called abnormal idiosyncratic volatility (AIV) that captures information asymmetry faced by uninformed investors. AIV is the idiosyncratic volatility prior to information events in excess of normal levels. Using earnings announcements as information events, we show that AIV is positively associated with informed return run-ups, abnormal insider trading, short selling, and institutional trading during pre-earnings-announcement periods. We find that stocks with high AIV earn economically and statistically larger future returns than stocks with low AIV. Taken together, our findings support the notion that information risk is priced.     

Value versus growth stocks in Singapore

This study examines value and growth stocks in Singapore. Specifically, we examine the value premium up to 5 years after the value and growth portfolio formation. We also examine if growth (value) stocks really indicate higher (lower) company profits in the later years, whether analysts’ forecasts are overly optimistic/pessimistic, and if earnings and earnings growth exhibit mean reversion. Our findings are, first, there is a value premium for Singapore stocks, but the premium is concentrated in the first 2 years after the portfolio formation. Second, value (growth) stocks do indicate low (high) earnings growth rates and low (high) return on equity (ROE) in the following years. Third, earnings growth is significantly overestimated for growth stocks but it is not underestimated for value stocks, indicating a one-way over-reaction. Finally, there is some evidence of mean reversion for excess ROE but not for excess earnings growth rates.     

The Variation of Economic Risk Premiums in Real Estate Returns

We examine the predictable components of returns on stocks, bonds, and real estate investment trusts (REITs). We employ a multiple-beta asset pricing model and find that there are varying degrees of predictability among stocks, bonds, and REITs. Furthermore, we find that most of the predictability of returns is associated with the economic variables employed in the asset pricing model. The stock market risk premium is highly important in capturing the predictable variation in stock portfolios, and the bond market risk premiums (term and risk structure of interest rates) are important in capturing the predictable variation in bond portfolios. For REITs, however, both the stock and bond market risk premiums capture the predictable variation in returns. REITs have comparable return predictability to stock portfolios. We conclude that there is an important economic risk premium for REITs that are not captured by traditional multiple-beta asset pricing models.     

The relation between stock returns and short-term interest rates

This study examines the relation between the expected returns on common stocks and short-term interest rates. Using a two-factor model of stock returns, we show that the expected returns on common stocks are systematically related to the market risk and the interest-rate risk, which are estimated as the sensitivity of common-stock excess returns to the excess return on the equally weighted market index and to the federal fund premium, respectively. We find that the interest-rate risk for small firms is a significant source of investors' portfolio risk, but is not properly reflected in the single-factor market risk. We also find that the interest-rate risk for large firms is “negative” in the sense that the market risk estimated from the single-factor model overstates the true risk of large firms. An application of the Fama-MacBeth methodology indicates that the interest-rate risk premium as well as the market's risk premium are significant, implying that both the market risk and the interest-rate risk are priced. We show that the interest-rate risk premium explains a significant portion of the difference in expected returns between the top quintile and the bottom quintile of the NYSE and AMEX firms. We also show that the turn-of-the-year seasonal is observed for the interest-rate risk premium; however, the risk premium for the rest of the year is still significant, although small in mangitude.     

Investor attention,information acquisition,and value premium: A mispricing perspective

This paper investigates the impact of investor attention on the dynamics of the value premium. We find superior return differences to value-growth strategy conditioned as low degree of investor attention. In contrast, return differences to the value-growth strategy conditioned as high investor attention are indifferent from zero. We show that return differences to low degree of investor attention across value and growth firms are attributed to mispricing explanation using common risk factors, mispricing factors, sentiment analysis, multivariate analysis, and market expectation errors approach. The findings suggest that investor attention contributes to generating superior return differences to standard value-growth strategy. Our finding concludes that long-short investment strategy in value stocks and growth stocks conditioned as low investor attention generate superior value premium.     

Pricing assets with stochastic cash-flow growth

We model the time series behavior of dividend growth rates, as well as the profitability rate, with a variety of autoregressive moving-average processes, and use the capital asset pricing model (CAPM) to derive the appropriate discount rate. One of the most important implications of this research is that the rate of return beta changes with the time to maturity of the expected cash flow, and the degree of mean reversion displayed by the growth rate. We explore the consequences of this observation for three different strands of the literature. The first is for the value premium anomaly, the second for stock valuation and learning about long-run profitability, and the third is for the St. Petersburg paradox. One of the most surprising results is that the CAPM implies a higher rate of return beta for value stocks than growth stocks. Therefore, value stocks must have higher expected returns, and this is what is required theoretically in order to explain the well-known value premium anomaly.     

The earnings announcement premium around the globe

U.S. stocks have been shown to earn higher returns during earnings announcement months than during non-announcement months. We document that this earnings announcement premium exists across the globe. Moreover, it is not isolated to a few countries. Of the 20 countries with enough data to conduct a within-country analysis, nine exhibit a significantly positive premium. A cross-country analysis finds that the premium is strongest in countries with the greatest increase in idiosyncratic volatility around the time of their firms' earnings announcements, suggesting that uncertainty over the earnings information to be disclosed is a primary driver of the global announcement premium.     

Extreme downside risk and expected stock returns

We propose a measure for extreme downside risk (EDR) to investigate whether bearing such a risk is rewarded by higher expected stock returns. By constructing an EDR proxy with the left tail index in the classical generalized extreme value distribution, we document a significantly positive EDR premium in cross-section of stock returns even after controlling for market, size, value, momentum, and liquidity effects. The EDR premium is more prominent among glamor stocks and when high market returns are expected. High-EDR stocks are generally characterized by high idiosyncratic risk, large downside beta, lower coskewness and cokurtosis, and high bankruptcy risk. The EDR premium persists after these characteristics are controlled for. Although Value at Risk (VaR) plays a significant role in explaining the EDR premium, it cannot completely subsume the EDR effect.     

Informed Trading through the Accounts of Children

This study shows that the guardians behind underaged accounts are successful at picking stocks. Moreover, they tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these results, we argue that the proportion of total trading activity through underaged accounts (labeled BABYPIN) should serve as an effective proxy for the probability of information trading in a stock. Consistent with this claim, we show that investors demand a higher return for holding stocks with a greater likelihood of private information, proxied by BABYPIN.