Forthcoming Articles

Earnings Growth and Acquisition Returns: Do Investors Gamble in the Takeover Market?

Tingting Liu and Danni Tu

We document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders’ earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, while the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that mergers and acquisition (M&A) deals initiated by poorly performing bidders will generate high synergies.

Zeroing in on the Expected Returns of Anomalies

Andrew Y. Chen and Mihail Velikov

We zero in on the expected returns of long-short portfolios based on 204 stock market anomalies by accounting for (1) effective bid-ask spreads, (2) post-publication effects, and (3) the modern era of trading technology that began in the early 2000s. Net of these effects, the average anomaly’s expected return is a measly 4 bps per month. The strongest anomalies net, at best, 10 bps after controlling for data-mining. Several methods for combining anomalies net around 20 bps. Expected returns are negligible despite cost mitigations that produce impressive net returns in-sample and the omission of additional trading costs, like price impact.

Market Return Around the Clock: A Puzzle

Oleg Bondarenko and Dmitriy Muravyev

We study how the market return depends on the time of the day using E-mini S&P 500 futures actively traded around the clock. Strikingly, four hours around European open account for the entire average market return. This period’s returns have a 1.6 Sharpe ratio and remain high after transaction costs. Average returns are a noisy zero during the remaining 20 hours. High returns are consistent with European investors processing information accumulated overnight and thus resolving uncertainty. Indeed, uncertainty reflected by VIX futures prices rises overnight and falls around European open. The results are stronger during the 2020 COVID crisis.

Do Cross-Sectional Predictors Contain Systematic Information?

Joseph Engelberg, R. David McLean, Jeffrey Pontiff, and Matthew C. Ringgenberg

Firm-level variables that predict cross-sectional stock returns, such as price-to-earnings and short interest, are often averaged and used to predict market returns. Using various samples of cross-sectional predictors and accounting for the number of predictors and their interdependence, we find only weak evidence that cross-sectional predictors make good time-series predictors, especially out-of-sample. The results suggest that cross-sectional predictors do not generally contain systematic information.

Does Industry Competition Influence Analyst Coverage Decisions and Career Outcomes?

Charles Hsu, Xi Li, Zhiming Ma, and Gordon M. Phillips

We analyze whether industry competition influences analyst coverage decisions and whether analysts benefit from covering product market competitors. We find that analysts are more likely to cover a firm when this firm competes with more firms already covered by the analyst. We also find that the intensity of competition among these competitors is additionally important to the coverage decision. Moreover, we find that analysts who cover product market competitors are more likely to obtain analyst star status. These results are consistent with the importance to analysts of industry competition and product market knowledge accumulated through covering product market competitors.

Technological Fit and the Market for Managerial Talent

Frederick Bereskin, Seong K. Byun, and Jong-Min Oh

We show that the similarity of a firm’s technological expertise with that of other firms affects managerial labor market outcomes. Using each firm’s patent portfolio to estimate its technological expertise, we find that its similarity in technological expertise with other firms is strongly related to the benchmark group used for CEO compensation and to job transitions. Furthermore, we show that a firm’s CEO pay is positively associated with the CEO compensation levels of technologically similar firms. Our results thus demonstrate the crucial role of technological similarity in determining the value of outside options and the boundaries of the managerial labor market.

Maturity Clienteles and Corporate Bond Maturities

Alexander W. Butler, Xiang Gao, and Cihan Uzmanoglu

The average maturity of newly issued corporate bonds has declined substantially over the past 40 years, and the traditional determinants of debt maturity fail to explain this decline fully.  We show that the changing composition of investors in the corporate bond market influences bond maturities. The results of a Granger causality test, an instrumental variable approach, and a natural experiment suggest that a decline in the insurance companies’ — which prefer long-term bonds — ownership share in the corporate bond market explains a significant part of the unexplained maturity decline. These findings illustrate how investor preferences can have real effects on corporations.

Does Finance Make Us Less Social?

Henrik Cronqvist, Mitch Warachka, and Fang (Frank) Yu

Informal risk sharing within social networks and formal financial contracts both enable households to manage risk. We find that financial contracting reduces participation in social networks. Specifically, increased crop insurance usage decreased local religious adherence and congregation membership in agricultural communities. Our identification utilizes the Federal Crop Insurance Reform Act of 1994 that doubled crop insurance usage nationally within a year, although changes in usage varied across counties. Difference-in-Difference and Spatial First Difference tests confirm that households substituted insurance for religiosity. This substitution was associated with reductions in crop diversification and crop yields, indicating an increase in moral hazard.