Forthcoming Articles

Market Development, Information Diffusion and the Global Anomaly Puzzle

Charlie Xiaowu Cai, Kevin Keasey, Peng Li, and Qi Zhang

Previous literature finds anomalies are at least as prevalent in developed markets as in emerging markets, namely, the global anomaly puzzle. We show that while market development and information diffusion are linearly related, information diffusion has a nonlinear impact on anomalies. This is consistent with theoretical developments concerning the process of information diffusion. In extremely low efficiency regimes, without newswatchers sowing the seeds of price discovery and ensuring the long-run convergence of price to fundamentals, initial mispricing and subsequent correction will not occur. The concentration of emerging countries in low efficiency regimes provides an explanation to the puzzle.

Corporate R&D and Stock Returns: International Evidence

Kewei Hou, Po-Hsuan Hsu, Shiheng Wang, Akiko Watanabe, and Yan Xu

Firms with higher R&D intensity subsequently experience higher stock returns in international stock markets, highlighting the role of intangible investments in international asset pricing. The R&D effect is stronger in countries where growth option risk is more likely priced, but is unrelated to country characteristics representing market sentiments and limits-of-arbitrage. Moreover, we find that R&D intensity is associated with higher future operating performance, return volatility, and default likelihood. Our evidence suggests that the cross-sectional relation between R&D intensity and stock returns is more likely attributable to risk premium than to mispricing.

Do Large Gains Make Willing Sellers?

Dong Hong, Roger K. Loh, and Mitch Warachka

Using unique real estate data that allow for accurately-measured gains, we examine whether sell propensities depend on the magnitude of a seller’s gain. We find that sell propensities are flat over losses and increasing in gains. Consistent with their higher sell propensities, selling prices are lower for properties with larger gains. Large-sized stock investments also have sell propensities that are flat over losses and increasing in gains, although the sell propensities of typical stock investments are V-shaped (Ben-David and Hirshleifer (2012)). Our findings support the realization utility theories of Barberis and Xiong (2012) as well as Ingersoll and Jin (2013).

Managerial Trustworthiness and Buybacks

Sterling Huang, Kaisa Snellman, and Theo Vermaelen

CEO trustworthiness is positively related to long-term excess returns after buyback announcements. CEO trustworthiness is initially measured by the extent to which people in the county where the company headquarters is located trust each other. Further, the positive impact of trustworthiness on excess returns is higher when the CEO has been a long term resident of a high trust county, and correspondingly, trustworthy CEOs are less likely to be accused of financial misreporting. Our conclusions are confirmed when we use alternative measures of trustworthiness such as employee trust and CEO integrity.

Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending

Iftekhar Hasan, Qing He, and Haitian Lu

How does social capital affect trust? Evidence from a Chinese peer-to-peer lending platform shows regional social capital affects the trustee’s trustworthiness and the trustor’s trust propensity. Ceteris paribus, borrowers from higher social capital regions receive larger bid from individual lenders, have higher funding success, larger loan size, and lower default rates, especially for low-quality borrowers. Lenders from higher social capital regions take higher risks and have higher default rates, especially for inexperienced lenders. Cross-regional transactions are most (least) likely to be realized between parties from high (low) social capital regions.

Dividend Smoothing and Firm Valuation

Paul Brockman, Jan Hanousek, Jiri Tresl, and Emre Unlu

We examine the relationship between dividend smoothing and firm valuation across 21 countries using several empirical methods and smoothing measures. Our main results show that dividends are capitalized at significantly larger values for high-smoothing firms than for low-smoothing firms. We also find that dividend-smoothing premiums are higher in countries with weak shareholder protection, suggesting that smoothing serves as a substitute mechanism to reduce agency costs. Overall, our findings support the view that managers use dividend smoothing as a bonding mechanism to reduce agency costs (Leary and Michaely (2011)), and not as a rent extraction mechanism (Lambrecht and Myers (2012)).

Why Do Directors Join Poorly Performing Firms?

Ying Dou and Emma Jincheng Zhang

Prior research has suggested that sitting on the board of a poorly performing firm can be undesirable to directors. Yet, almost 60% of such firms are able to appoint new directors following director departures. Contrary to a quality matching explanation, we do not find that only poorly performing directors join these firms. Upon joining poorly performing firms, directors are more likely to fill leadership positions without necessarily receiving higher pay. These directors subsequently receive career benefits, especially those who are relatively junior in the pool. As such, the evidence is consistent with the leadership positions providing a certification effect.

Credit Ratings and Corporate Information Production: Evidence from Sovereign Downgrades

Sicong Wang and Wensi Xie

Exploiting exogenous variations in corporate ratings due to sovereign credit downgrades and sovereign ceiling policies, we assess how firms respond to a reduction in credit ratings. We find that firms bounded by the sovereign ceiling significantly increase information production in response to a sovereign downgrade. The effects are stronger for firms relying more heavily on external finance and operating in a more opaque environment. Enhanced information production, in turn, affects firms’ subsequent access to bond markets. These findings suggest that firms actively manage information environments to maintain access to public debt markets.