Forthcoming Articles

The Predictive Power of the Dividend Risk Premium

Davide E. Avino, Andrei Stancu, and Chardin Wese Simen

We show that the dividend growth rate implied by the options market is informative about (i) the expected dividend growth rate and (ii) the expected dividend risk premium. We model the expected dividend risk premium and explore its implications for the predictability of dividend growth and stock market returns. Correcting for the expected dividend risk premium strengthens the evidence of dividend growth and stock market return predictability both in- and out-of-sample. Economically, a market timing investor who accounts for the time varying expected dividend risk premium realizes an additional utility gain of 2.02% per year.

Model Comparison with Sharpe Ratios

Francisco Barillas, Raymond Kan, Cesare Robotti, and Jay Shanken

We show how to conduct asymptotically valid tests of model comparison when the extent of model mispricing is gauged by the squared Sharpe ratio improvement measure. This is equivalent to ranking models on their maximum Sharpe ratios, effectively extending the GRS test to accommodate comparison of non-nested models. Mimicking portfolios can be substituted for any nontraded model factors and estimation error in the portfolio weights is taken into account in the statistical inference. A variant of the Fama and French (2018) 6-factor model, with a monthly-updated version of the usual value spread, emerges as the dominant model.

The Speed of Information and the Sell-Side Research Industry

Daniel Bradley, Jonathan Clarke, and Linghang Zeng

Between 2009 and 2013, (FLY) leaks 58% of recommendation revisions with a median delay of 27 minutes relative to the I/B/E/S announcement time. We show FLY improves price discovery, but leaked recommendations hamper the ability of brokers to offer price improvement on trades routed through them. Three major brokers sued FLY and using key court dates, we show significant wealth and real effects to the brokerage industry. Overall, the speed with which analyst recommendations are disseminated has led to more rapid price discovery at the expense of a decline in the scope of the sell-side research industry.

Liquidity and Information in Limit Order Markets

Ioanid Roşu

How does informed trading affect liquidity in limit order markets, where traders can choose between market orders (demanding liquidity) and limit orders (providing liquidity)? In a dynamic model, informed trading overall helps liquidity: a higher share of informed traders (i) improves liquidity as proxied by the bid–ask spread and market resiliency, and (ii) has no effect on the price impact of orders. The model generates other testable implications, and suggests new measures of informed trading.

Do Informal Contracts Matter for Corporate Innovation? Evidence from Social Capital

Atul Gupta, Kartik Raman, and Chenguang Shang

We examine the relevance of informal contracting mechanisms for corporate innovation. Using social capital to capture the social costs imposed on opportunistic behavior by management, we report evidence that firms headquartered in states with higher levels of social capital are associated with more innovation. This result is more pronounced when employees are more susceptible to holdup, e.g., firms with low labor union coverage, firms located in states with weak legal protections for employees, firms surrounded by few external employment opportunities, or when employees face higher levels of information asymmetry. Our study highlights the importance of informal contracts for innovation.

Do Underwriters Price-Up IPOs to Prevent Withdrawal?

Walid Y. Busaba, Zheng Liu, and Felipe Restrepo

We examine whether underwriters price-up weakly-demanded IPOs to prevent withdrawal. Our empirical strategy exploits a discontinuity in the distribution of IPO prices around the low boundary of the filing range. Offerings with a high ex-ante withdrawal probability that are priced at this boundary are likely priced-up to meet issuers’ reservation prices. We compare the aftermarket returns of these IPOs to the returns of other weakly-demanded offerings where issuers’ reservation prices were likely not binding, and identify a negative 8.4-percentage point differential attributable to the aggressive pricing inherent in setting the price at the low boundary when withdrawal risk is high.

CEO Turnover and Volatility under Long-Term Employment Contracts

Peter Cziraki and Moqi Groen-Xu

We study the role of the contractual time horizon of CEOs for CEO turnover and corporate policies. Using hand-collected data on 3,954 fixed-term CEO contracts, we show that remaining time under contract predicts CEO turnover. When contracts are close to expiration, turnover is more likely and is more sensitive to performance. We also show a positive within-CEO relation between remaining time under contract and firm risk. Our results are similar across short and long contracts and are driven neither by firm or CEO survival, nor technological cycles. They are consistent with incentives to take long-term projects with interim volatility.

Currency Regimes and the Carry Trade

Olivier Accominotti, Jason Cen, David Chambers, and Ian W. Marsh

This study exploits a new long-run data set of daily bid and offered exchange rates in spot and forward markets from 1919 to the present to analyze carry returns in fixed and floating currency regimes. We first find that outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. Second, we show that fixed-to-floating regime shifts are associated with negative returns to a carry strategy implemented only on floating currencies, robust to the inclusion of volatility risks. These shifts are typically characterized by global flight-to-safety events that represent bad times for carry traders.