Avanidhar Subrahmanyam

Bio: Avanidhar Subrahmanyam is an academic researcher from University of California, Los Angeles. The author has contributed to research in topics: Market liquidity & Liquidity crisis. The author has an hindex of 74, co-authored 273 publications receiving 35253 citations. Previous affiliations of Avanidhar Subrahmanyam include Nanjing University & University of California, Berkeley.

Investor Psychology and Security Market Under- and Overreactions

Abstract: We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors’ confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations ~“momentum”!, short-run earnings “drift,” but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. IN RECENT YEARS A BODY OF evidence on security returns has presented a sharp challenge to the traditional view that securities are rationally priced to ref lect all publicly available information. Some of the more pervasive anomalies can be classified as follows ~Appendix A cites the relevant literature!: 1. Event-based return predictability ~public-event-date average stock returns of the same sign as average subsequent long-run abnormal performance! 2. Short-term momentum ~positive short-term autocorrelation of stock returns, for individual stocks and the market as a whole!

Presentation Slides for 'Investor Psychology and Security Market Under and Overreactions'

Abstract: We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations (momentum), short-run earnings drift, but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. Prepublication version available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2017

Market Liquidity and Trading Activity

Abstract: Previous studies of liquidity span short time periods and focus on the individual security. In contrast, we study aggregate market spreads, depths, and trading activity for U.S. equities over an extended time sample. Daily changes in market averages of liquidity and trading activity are highly volatile and negatively serially dependent. Liquidity plummets significantly in down markets. Recent market volatility induces a decrease in trading activity and spreads. There are strong dayof-the-week effects; Fridays accompany a significant decrease in trading activity and liquidity, while Tuesdays display the opposite pattern. Long- and short-term interest rates inf luence liquidity. Depth and trading activity increase just prior to major macroeconomic announcements. LIQUIDITY AND TRADING ACTIVITY are important features of financial markets, yet little is known about their evolution over time or about their time-series determinants. Their fundamental importance is exemplified by the inf luence of trading costs on required returns ~Amihud and Mendelson ~1986!, and Jacoby, Fowler, and Gottesman ~2000!! which implies a direct link between liquidity and corporate costs of capital. More generally, exchange organization, regulation, and investment management could all be improved by knowledge of factors that inf luence liquidity and trading activity. A better understanding of these determinants should increase investor confidence in financial markets and thereby enhance the efficacy of corporate resource allocation. Notwithstanding the importance of research about liquidity, existing studies of trading costs have all been performed over short time spans of a year or less. In addition, these studies have usually focused on the liquidity of individual securities. This is probably due to the tedious task of handling voluminous intraday data and, until recently, the paucity of intraday data going back more than a few years. Thus, virtually nothing is known about

Illiquidity and Stock Returns: Cross-Section and Time-Series Effects

Abstract: New tests are presented on the effects of stock illiquidity on stock return. Over time, expected market illiquidity positively affects ex ante stock excess return (usually called â¬Srisk premiumâ¬?). This complements the positive cross-sectional return-illiquidity relationship. The illiquidity measure here is the average daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firms stocks, suggesting an explanation for the changes â¬Ssmall firm effectâ¬? over time. The impact of market illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.

Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*

Abstract: . This study investigates firms subject to accounting enforcement actions by the Securities and Exchange Commission for alleged violations of Generally Accepted Accounting Principles. We investigate: (i) the extent to which the alleged earnings manipulations can be explained by extant earnings management hypotheses; (ii) the relation between earnings manipulations and weaknesses in firms' internal governance structures; and (iii) the capital market consequences experienced by firms when the alleged earnings manipulations are made public. We find that an important motivation for earnings manipulation is the desire to attract external financing at low cost. We show that this motivation remains significant after controlling for contracting motives proposed in the academic literature. We also find that firms manipulating earnings are: (i) more likely to have boards of directors dominated by management; (ii) more likely to have a Chief Executive Officer who simultaneously serves as Chairman of the Board; (iii) more likely to have a Chief Executive Officer who is also the firm's founder, (iv) less likely to have an audit committee; and (v) less likely to have an outside blockholder. Finally, we document that firms manipulating earnings experience significant increases in their costs of capital when the manipulations are made public. Resume. Les auteurs analysent les entreprises assujetties aux mesures d'execution prises par la Securities and Exchange Commission dans les cas de presomption de transgression des principes comptables generalement reconnus. Ils s'interessent aux aspects suivants de la question: i) la mesure dans laquelle les presomptions de manipulations des benefices peuvent etre expliquees par les hypotheses existantes de gestion des benefices; ii) la relation entre les manipulations de benefices et les faiblesses des structures de regie interne des entreprises; et iii) la reaction du marche financier a l'endroit des entreprises au sujet desquelles les presomptions de manipulation des benefices sont rendues publiques. Les auteurs constatent qu'un incitatif majeur a la manipulation des benefices est le desir d'obtenir du financement externe a moindre cout. Ils demontrent que cet incitatif demeure important meme apres le controle des motifs contractuels que mettent de l'avant les travaux theoriques. Ils constatent egalement que les entreprises qui manipulent les benefices sont: i) davantage susceptibles d'avoir des conseils d'administration domines par la direction; ii) davantage susceptibles d'avoir un chef de la direction qui joue simultanement le role de president du conseil; iii) davantage susceptibles d'avoir un chef de la direction qui est egalement le fondateur de l'entreprise; iv) moins susceptibles d'avoir un comite de verification; et v) moins susceptibles d'avoir un bloc de titres detenus par un actionnaire exterieur. Enfin, les auteurs etablissent le fait que le cout du capital, pour les entreprises qui manipulent les benefices, enregistre des hausses appreciables lorsque ces manipulations sont rendues publiques.

Liquidity Risk and Expected Stock Returns

Abstract: This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. From 1966 through 1999, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5 percent annually, adjusted for exposures to the market return as well as size, value, and momentum factors. Furthermore, a liquidity risk factor accounts for half of the profits to a momentum strategy over the same 34-year period.