Shorting costs and profitability of long–short strategies

We examine how the profitability of long–short arbitrage strategies based on anomalies is affected after adjustment for two shorting costs: implicit cost due to unavailability of stocks in the short-leg to sell short and loan fees actually paid to stock lenders. The combined shorting cost amounts to almost 40 percent of long–short gross returns over the sample period from January 2006 to December 2017. After adjustment for these shorting costs, long–short arbitrage profits are thus reduced by almost 40 percent. Even after adjustment for risk, the proportion of shorting costs is also substantial. If other trade-related transaction costs are considered, long–short arbitrage profits would be reduced further. Our results provide explicit evidence that casts doubt on the profitability of long-short arbitrage strategies based on anomalies.     

Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models

We develop a dynamic panel threshold model of capital structure to test the dynamic trade-off theory, allowing for asymmetries in firms' adjustments toward target leverage. Our novel estimation approach is able to consistently estimate heterogeneous speeds of adjustment in different regimes as well as to properly test for the threshold effect. We consider several proxies for adjustment costs that affect the asymmetries in capital structure adjustments and find evidence that firms with large financing imbalance (or a deficit), large investment or low earnings volatility adjust faster than those with the opposite characteristics. Firms not only adjust at different rates but also seem to adjust toward heterogeneous leverage targets. Moreover, we document a consistent pattern that firms undertaking quick adjustment are over-levered with a financing deficit and rely heavily on equity issues to make such adjustment.     

The Two Faces of Analyst Coverage

We find that positive excess (strong) analyst coverage is associated with overvaluation and low future returns. This finding is consistent with the view that excessive analyst coverage, driven by investment banking incentives and analyst self-interests, raises investor optimism causing share prices to trade above fundamental value. However, weak analyst coverage causes stocks to trade below fundamental values. This finding indicates that investors tend to believe that these firms are more likely to be plagued by information asymmetries and agency problems. The results remain robust after controlling for the possible endogenous nature of analyst coverage and analysts' self-selection bias.     

Intertemporal variation in the information content of aggregate earnings and its effect on the aggregate earnings-return relation

Review of Accounting Studies - We develop and test explanations for sources of intertemporal variation in the information content of aggregate earnings and how that variation explains variation in...     

The Resource Curse Hypothesis: Dynamic Heterogeneous Approach

Natural resources influence economic performance through many different mechanisms, both beneficial and harmful. Some of these mechanisms tend to set in fast while others are rather slow. This suggests that pooling the long- and short-run effect as typical in the resource empirical literature may lead to incorrect inferences. This article provides an evaluation of the income contribution of natural resources using a panel cointegration approach that allows for short-run dynamic heterogeneity while imposing the restriction of long-run homogeneity. It finds, in a sample of developing countries over the period 1990–2012, that natural resources are a curse in the long run. The evidence is robust to alternative dynamic specifications, different measures and types of natural resource wealth, and controlling for regional effects.     

Voluntary disclosure practices by foreign firms cross-listed in the United States

This is one of the first large-scale studies to examine the voluntary disclosure practices of foreign firms cross-listed in the United States. We proxy for voluntary disclosure using three attributes of firms’ management earnings guidance: (1) the likelihood of issuance; (2) the frequency of earnings guidance; and (3) a guidance quality measure. After first establishing that market participants view these firms’ disclosures as credible and economically important (i.e., the disclosures are negatively related to analyst forecast errors and the implied cost of equity capital), we compare cross-listed firms’ disclosure practices with comparable US firms and explore variations in disclosure practices among cross-listed firms. We find that cross-listed firms issue less frequent and lower quality management earnings guidance than comparable US firms. We further show that the gap between US and cross-listed firms widened after passage of Regulation FD, a regulation which induced greater public disclosure of firm-specific information. Focusing on the sample of cross-listing firms, we show that firms from common-law countries disclose more than firms from code-law countries. Finally, our results indicate that cross-listed firms that do not list on an organized US exchange provide more frequent and higher quality disclosure than those that do list on organized exchanges.