https://w4.stern.nyu.edu/finance/docs/WP/2000/pdf/wpa00041.pdf

Illiquidity and stock returns: cross-section and time-series effects $

https://faculty.fuqua.duke.edu/~charvey/Research/Working_Papers/W73_The_economic_implications.pdf

The economic implications of corporate financial reporting

We examine the pricing of aggregate volatility risk in the cross-section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. In addition, we find that stocks with high idiosyncratic volatility relative to the Fama and French (1993) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility.

The Cross-Section of Volatility and Expected Returns

We examine the pricing of aggregate volatility risk in the cross-section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. Stocks with high idiosyncratic volatility relative to the Fama and French (1993, Journal of Financial Economics 25, 2349) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility. IT IS WELL KNOWN THAT THE VOLATILITY OF STOCK RETURNS varies over time. While considerable research has examined the time-series relation between the volatility of the market and the expected return on the market (see, among others, Campbell and Hentschel (1992) and Glosten, Jagannathan, and Runkle (1993)), the question of how aggregate volatility affects the cross-section of expected stock returns has received less attention. Time-varying market volatility induces changes in the investment opportunity set by changing the expectation of future market returns, or by changing the risk-return trade-off. If the volatility of the market return is a systematic risk factor, the arbitrage pricing theory or a factor model predicts that aggregate volatility should also be priced in the cross-section of stocks. Hence, stocks with different sensitivities to innovations in aggregate volatility should have different expected returns. The first goal of this paper is to provide a systematic investigation of how the stochastic volatility of the market is priced in the cross-section of expected stock returns. We want to both determine whether the volatility of the market

https://www0.gsb.columbia.edu/faculty/rhodrick/crosssection.pdf

A common approach to evaluating robustness to omitted variable bias is to observe coefficient movements after inclusion of controls. This is informative only if selection on observables is informative about selection on unobservables. Although this link is known in theory in existing literature, very few empirical articles approach this formally. I develop an extension of the theory that connects bias explicitly to coefficient stability. I show that it is necessary to take into account coefficient and R-squared movements. I develop a formal bounding argument. I show two validation exercises and discuss application to the economics literature. Supplementary materials for this article are available online.

/pdf/unobservable-selection-and-coefficient-stability-theory-and-1r9lpwnnl2.pdf

Unobservable Selection and Coefficient Stability: Theory and Evidence

We provide evidence that stocks with higher dispersion in analysts’ earnings forecasts earn lower future returns than otherwise similar stocks. This effect is most pronounced in small stocks and stocks that have performed poorly over the past year. Interpreting dispersion in analysts’ forecasts as a proxy for differences in opinion about a stock, we show that this evidence is consistent with the hypothesis that prices will ref lect the optimistic view whenever investors with the lowest valuations do not trade. By contrast, our evidence is inconsistent with a view that dispersion in analysts’ forecasts proxies for risk. IN THIS PAPER WE ANALYZE THE ROLE of dispersion in analysts’ earnings forecasts in predicting the cross section of future stock returns. We find that stocks with higher dispersion in analysts’ earnings forecasts earn significantly lower future returns than otherwise similar stocks. In particular, a portfolio of stocks in the highest quintile of dispersion underperforms a portfolio of stocks in the lowest quintile of dispersion by 9.48 percent per year. This effect is strongest in small stocks, and stocks that have performed poorly over the past year. Our results are robust to various risk-adjustment techniques, and are inconsistent with an interpretation of dispersion in analysts’ forecasts as a proxy for risk. We postulate that dispersion in analysts’ earnings forecasts can be viewed as a proxy for differences of opinion among investors. Differences of opinion are typically modeled via dogmatic beliefs or asymmetric information sets, and have been included in numerous models that relax the standard

/pdf/differences-of-opinion-and-the-cross-section-of-stock-3qq5mt7w9h.pdf

Differences of Opinion and the Cross Section of Stock Returns

This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on connected firms and perform significantly better on these holdings relative to their nonconnected holdings. A replicating portfolio of connected stocks outperforms nonconnected stocks by up to 7.8 percent per year. Returns are concentrated around corporate news announcements, consistent with portfolio managers gaining an informational advantage through the education networks. Our results suggest that social networks may be important mechanisms for information flow into asset prices.

/pdf/the-small-world-of-investing-board-connections-and-mutual-2973cdhizr.pdf

The Small World of Investing: Board Connections and Mutual Fund Returns

I provide evidence that geographically proximate analysts are more accurate than other analysts. Stock returns immediately surrounding forecast revisions suggest that local analysts impact prices more than other analysts. These effects are strongest for firms located in small cities and remote areas. Collectively these results suggest that geographically proximate analysts possess an information advantage over other analysts, and that this advantage translates into better performance. The well-documented underwriter affiliation bias in stock recommendations is concentrated among distant affiliated analysts; recommendations by local affiliated analysts are unbiased. This finding reveals a geographic component to the agency problems in the industry.

/pdf/the-geography-of-equity-analysis-377vqrw60s.pdf

The Geography of Equity Analysis

We study the impact of social networks on agents' ability to gather superior information about firms Exploiting novel data on the educational backgrounds of sell side equity analysts and senior officers of firms, we test the hypothesis that analysts' school ties to senior officers impart comparative information advantages in the production of analyst research We find evidence that analysts outperform on their stock recommendations when they have an educational link to the company A simple portfolio strategy of going long the buy recommendations with school ties and going short buy recommendations without ties earns returns of 540% per year We test whether Regulation FD, targeted at impeding selective disclosure, constrained the use of direct access to senior management We find a large effect: pre-Reg FD the return premium from school ties was 816% per year, while post-Reg FD the return premium is nearly zero and insignificant In contrast, in an environment that did not change selective disclosure regulation (the UK), the analyst school-tie premium has remained large and significant over the entire sample period

Sell Side School Ties

We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational background of sell-side analysts and senior corporate officers, we find that analysts outperform by up to 6.60% per year on their stock recommendations when they have an educational link to the company. Pre-Reg FD, this school-tie return premium is 9.36% per year, while postReg FD it is nearly zero. In contrast, in an environment that did not change selective disclosure regulation (the U.K.), the school-tie premium is large and significant over the entire sample period. CERTAIN AGENTS PLAY A KEY ROLE in revealing information to securities markets. In the equities market, security analysts are among the most important. A large part of an analyst’s job is to research, produce, and disclose reports forecasting companies’ future prospects, and to translate their forecasts into stock recommendations. Therefore, isolating how, or from whom, analysts obtain the information they use to produce their recommendations is critical. In this paper we investigate ties between sell-side analysts and management of public firms, and the subsequent performance of analysts’ stock recommendations. We exploit common past experiences, namely, attendance at the same educational institution, to identify firms where analysts are more likely to gain direct access to senior management. An advantageous aspect of our network ties is that they are formed long before the information likely being transferred across them, and thus the underlying tie (alumni link) is not directly related to the type of information likely being transmitted years later (company-related information).

/pdf/sell-side-school-ties-47h0dok6tj.pdf

Christopher J. Malloy

Papers

Differences of Opinion and the Cross Section of Stock Returns

The Small World of Investing: Board Connections and Mutual Fund Returns

The Geography of Equity Analysis

Sell Side School Ties

Sell-Side School Ties