We show that the quality of information sharing networks linking firms’ institutional investors has stock return predictability implications. We find that firms with high shareholder coordination experience less local comovement and less post earnings announcement drift, consistent with the notion that information sharing networks facilitate information diffusion and improve stock price efficiency. In support of the view that coordination acts as an information diffusion channel, we document that the stock return performance of firms with high shareholder coordination leads that of firms with low shareholder coordination.
Relative to similar firms, targets of completed takeovers issue more debt and repurchase more equity around takeover announcement. We link these leverage adjustments to enhanced target bargaining power in negotiations with bidders over expected merger synergy gains, as debt issuance results in positive abnormal equity returns, with these gains coming at the expense of bidder shareholders. Valuation implications are strongest for debt issuances immediately surrounding takeover announcement. Target firm debt issuance after takeover announcement suggests that relatively low (high) ex ante target (bidder) bargaining power is subsequently adjusted upward (downward) with target debt issuances.
We examine how analysts’ changing incentives driven by changes in market uncertainty affect analyst output. Analysts issue more optimistically biased forecasts and buy recommendations under high market uncertainty (VIX). The lower reputational costs and larger benefits of optimistic output explain the increased optimistic output: Analysts are less likely to be penalized for inaccuracy and can stimulate more trading activity from optimistically biased output when market uncertainty is high. We find that the likelihood of analysts’ turnover decreases, while the trading volume associated with optimistic output increases, with VIX. No evidence suggests that analysts’ self-selection affects our findings on optimism and uncertainty.
Recent studies claim that mutual fund managers demonstrate strong MARKET liquidity timing skills. We extend their liquidity timing tests to the four-factor case and investigate liquidity timing skills with respect to the MARKET, SIZE, VALUE and MOMENTUM factors. Contrary to these claims, we find no evidence that fund managers adjust market exposure in anticipation of market liquidity changes. We find rather strong evidence that fund managers successfully overweight small stocks as market liquidity increases. Our study also demonstrates that it is easy to misidentify SIZE liquidity timing as MARKET liquidity timing in models that focus only on MARKET liquidity timing.
This article presents a dynamic stock-valuation model in an incomplete-information environment in which the unobservable mean earnings growth rate (MEGR), is learned and price is updated continuously. We calibrate our model to the S&P 500 Composite index to empirically evaluate its performance. Of the 8.84% total risk premium we estimate, we find that the earnings growth premium is 4.57%, the short rate risk contributes 3.38%, and the learning-induced risk premium on the unknown MEGR is 0.89% (a nontrivial 10% of the total risk premium). This result highlights the significant learning effect on valuation implying an additional risk premium in an incomplete information environment.
Firms receiving shareholder proposals are 16% more likely to become a target of acquisition. Such companies earn approximately 7.2% lower acquisition returns compared to gains for targets with no proposals. Higher acquisition likelihood and lower target returns are primarily associated with proposals drawing a larger proportion of favorable votes, larger voter turnout, as well as with proposals submitted shortly before takeover announcements, and motivated by the removal of antitakeover provisions. Our findings suggest that shareholder proposals can assist bidders in the identification of targets or signal the willingness of target shareholders to accept bids with lower premiums.
We examine factors that influence decisions by U.S. equity traders to execute a string of orders, in the same stock, in the same direction, around the same time. Order splitting is more likely to occur when traders submit larger-size orders and when market depth and trading activity are lower. Order splitters demand liquidity more and pay higher trading costs, but their overall performance is better. When controlling for execution time, split orders are more informative than single orders. Our results suggest that order splitting arises from a variety of factors, including informational differences, order and trader characteristics, and market conditions.
Lewellen and Nagel (2006) propose that, in conditional affine factor models, the estimated risk prices should satisfy certain unconditional constraints. We test this proposition on two different types of conditional factor models and results show that the proposition only applies to the conditional models with time-varying betas. Also, from the functional relationship between conditional and unconditional betas, we identify an unconditional constraint on unconditional betas for time-varying beta models and develop a testing procedure to incorporate this unconditional constraint. We show that imposing this unconditional constraint changes estimates of unconditional betas and risk prices significantly.
Using the informational sufficiency procedure from Forni and Gambetti (2014) along with data from McCracken and Ng (2014), we update the results of Lee (1992) and find that his Vector Autoregression (VAR) is informationally deficient. To correct this problem, we estimate a Factor Augmented VAR (FAVAR) and analyze the differences once informational deficiency is corrected with an emphasis on the relationship between real stock returns and inflation. In particular, we examine Modigliani and Cohn’s (1979) inflation illusion hypothesis, Fama’s (1983) proxy hypothesis, and the “anticipated policy hypothesis.”
One of the most distinct trends in capital markets over the past two decades has been the rise in the equity ownership of passive financial institutions. We propose that this rise has had a negative effect in price informativeness. By not trading around firm-specific news, passive investors reduce the firm-specific component of total volatility and increase stock correlations. Consistent with this hypothesis, we find that the growth in passive institutional ownership is robustly associated with the growth in market model R2s of individual stocks since the early 1990s. Additionally, we find a negative relation between passive ownership and earnings predictability, an informativeness proxy.