Forthcoming Articles

Sascha Füllbrunn, Christoph Huber, Catherine Eckel, and Utz Weitzel

Combining experimental data sets from seven individual studies, including 255 asset markets with 2,031 participants, and 36,326 short-term price forecasts, we analyze the role of heterogeneity of beliefs in the organization of trading behavior by reproducing and reconsidering earlier experimental findings. Our results confirm prior evidence that price expectations affect trading behavior. However, heterogeneity in beliefs does not seem to drive overpricing and asset market bubbles, as suggested by earlier studies, and we find no indication of short-term beliefs being better determinants of trading behavior than longer-term beliefs.

Turan Bali, Craig Nichols, and David Weinbaum

We introduce a new approach to estimating long-term aggregate discount rates using the crosssection of earnings and book values to explain current stock prices and extract expected market returns. The proposed discount rate measure is countercyclical. Shocks to it account for nearly half of historical market return variation; in contrast, shocks to other discount rate measures account for no more than two percent. It dominates other measures in explaining time-series variation in returns on duration-sorted portfolios and delivers out-of-sample predictability that exceeds that afforded by other expected return measures and predictive variables. It also performs well in international equity markets.

Nishad Kapadia, Matthew Linn, and Bradley Paye

We show that a common component governs volatility dynamics across a wide range of traded equity factors.  This `common factor volatility’ (CFV) exists even among orthogonal factors. CFV occurs in both cash-flow and discount-rate components of factor returns and derives from market responses to fundamental news rather than underlying commonality in news volatility. Incorporating CFV improves factor volatility forecasts relative to models that include only own-factor volatility. CFV allows us to characterize stochastic discount factor (SDF) volatility dynamics in a very general sense and we show that many popular models imply SDFs with time-varying volatility that correlates strongly with CFV.

T. Colin Campbell, Michael Gallmeyer, and Alex Petkevich

We examine the predictability of stock returns using implied volatility spreads (VS) from individual (non-index) options. Volatility spreads can occur under simple no-arbitrage conditions for American options when volatility is time-varying, suggesting that the VS-return predictability could be an artifact of firms’ sensitivities to aggregate volatility. Examining this empirically, we find that the predictability changes systematically with aggregate volatility and is positively related to the firms’ sensitivities to volatility risk. The alpha generated by VS hedge portfolios can be explained by aggregate volatility risk factors. Our results cannot be explained by firm-specific informed trading, transaction costs, or liquidity.

Teng Huang, Anil Kumar, Stefano Sacchetto and Carles Vergara-Alert

We develop a dynamic model of corporate investment and financing, in which shocks to the value of collateralizable assets generate variation in firms’ debt capacity. We show that the degree of similarity among firms’ financial flexibility forecasts cross-sectional return correlation. We test the implications of the model using an instrumental variable approach based on shocks to collateralizable corporate assets and the outbreak of the COVID-19 crisis as an event study. We find that firms in the same percentile of the cross-sectional distribution of financial flexibility have 62% higher correlation in stock return residuals than firms 50 percentiles apart.

Francois Derrien, Alexandre Garel, Arthur Petit-Romec, and Jean-Philippe Weisskopf

We explore the effects of online customer ratings on financial policy. Using a large sample of Parisian restaurants, we find a positive and economically significant relationship between customer ratings and restaurant debt. We use the locally exogenous variations in customer ratings resulting from the rounding of scores in regression discontinuity tests to establish causality. Favorable online ratings reduce cash flow risk and increase resilience to demand shocks. Consistent with the view that good online ratings increase the debt capacity of restaurants and their growth opportunities, restaurants with good ratings use their extra debt to invest in tangible assets.

Po-Hsuan Hsu, Yiqing Lu, Hong Wu, and Yuhai Xuan

In this paper, we show that firms can become conservative in innovation when their directors face job insecurity.  We find that after the staggered enactment of majority voting legislation that strengthens shareholders’ power in director elections, firms produce fewer patents, particularly exploratory patents, and fewer forward citations.  This effect is stronger for directors facing higher dismissal costs or threats and for firms with greater needs for board expertise and is mitigated by institutional investors’ expertise in innovation. Overall, our results suggest that heightened job insecurity induces director myopia, which leads to a reduction in investment in risky, long-term innovation projects.

Antonis Kartapanis and Christopher G Yust

This study introduces a new measure of ex ante litigation risk using scrutiny of SEC filings by the source of securities litigation—plaintiffs’ lawyers—to reduce measurement error, relative to existing measures. We show that plaintiff-lawyer views proxy for the largely unobservable factors that make firms more likely to face litigation risk. Lagged views precede the public bad news revelation that triggers litigation and predict future realized litigation risk (i.e., securities class actions filings and plaintiff-lawyer investigations) and stock market outcomes. Finally, we provide new insights into the plaintiff-lawyer case selection process that otherwise cannot be observed.