Using scaled wealth-performance sensitivity as our measure of CEO incentives, and utilizing cross-sectional variations in industry innovativeness, product market competition and firms’ degree of exposure to the market for corporate control for identification purposes, we find that higher long-term incentives that stem from CEO holdings of unvested options are associated with greater subsequent corporate innovation, exactly where incentivizing innovation is a matter of necessity. We address the endogeneity concern with systems of simultaneous equations estimated using 3SLS. A possible channel for the observed relation is that unvested-options-based incentives encourage managers to undertake riskier projects to achieve long-term economic benefits.
We produce convincing new evidence the turn of the year (TOY), turn of the month (TOM), and January effects are critically dependent on the sample period over which they are estimated. The TOY effect is significant in the value-weight portfolio from 1962 to 1997. It becomes insignificant in the medium-size portfolio after 1994 and in the equal-weight and low-size portfolios after 1997. The TOM effect becomes insignificant in the value-weight and high-size portfolios after 1978, in the equal-weight and medium-size portfolios after 1997, and in the low-size portfolio after 1998. January effects are significant in some sub-periods but not others.
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.”
Politics can interfere with capital markets. We show that political interference is a necessary condition for local bias in the stock market. We extend the framework of Hong, Kubik and Stein (2008) and find that the inverse relation between market‐to‐book ratios and the ratio of the aggregate book value of firms to the aggregate risk tolerance of investors in a state (RATIO) is only prevalent among firms located in areas where politics has substantial influence on local markets. Our results indicate that the impact of politically induced local bias is primarily demand driven and stronger among firms that are less visible.
Prior studies have shown that low beta and low volatility stocks earn higher average returns than high beta and high volatility stocks, contradicting the prediction of the capital asset pricing model and the fundamental relationship between risk and return. In this paper, we demonstrate that this phenomenon is driven by the seasonality of stock returns. We show that the risk-return tradeoff does hold in the nonsummer months, and that switching to a portfolio of low-risk stocks in summer outperforms—both in terms of absolute and in risk-adjusted returns—buy and hold strategies as well as the Sell in May strategy of switching to treasury bills in summer.
The financial press suggests that information is commonly leaked prior to analyst recommendations. We examine the impact that three regulatory actions (Regulation Fair Disclosure, Global Analysts Research Settlement, and the legal case against Galleon Group) have on information leakage prior to analyst recommendations. We find that all three regulatory actions have significantly reduced the leakage of information prior to analyst recommendations, even after controlling for several characteristics that explain the variation in information leakage. Our results are robust when applying an alternative method of measuring information leakage, and when forming various samples of analyst recommendations based on different criteria.