Our article comprehensively reexamines the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium. We find that by and large, these models have predicted poorly both in-sample (IS) and out-of-sample (OOS) for 30 years now; these models seem unstable, as diagnosed by their out-of-sample predictions and other statistics; and these models would not have helped an investor with access only to available information to profitably time the market.

/pdf/a-comprehensive-look-at-the-empirical-performance-of-equity-a8mudsid3i.pdf

A Comprehensive Look at the Empirical Performance of Equity Premium Prediction

We test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns. Attention-driven buying results from the difficulty that investors have searching the thousands of stocks they can potentially buy. Individual investors do not face the same search problem when selling because they tend to sell only stocks they already own. We hypothesize that many investors consider purchasing only stocks that have first caught their attention. Thus, preferences determine choices after attention has determined the choice set.

/pdf/all-that-glitters-the-effect-of-attention-and-news-on-the-3yq1i0rzh0.pdf

All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors

Disappearing dividends: changing firm characteristics or lower propensity to pay?

Goyal and Welch (2007) argue that the historical average excess stock return forecasts future excess stock returns better than regressions of excess returns on predictor variables. In this article, we show that many predictive regressions beat the historical average return, once weak restrictions are imposed on the signs of coefficients and return forecasts. The out-of-sample explanatory power is small, but nonetheless is economically meaningful for mean-variance investors. Even better results can be obtained by imposing the restrictions of steady-state valuation models, thereby removing the need to estimate the average from a short sample of volatile stock returns. (JEL G10, G11) Towards the end of the last century, academic finance economists came to take seriously the view that aggregate stock returns are predictable. During the 1980s, a number of papers studied valuation ratios, such as the dividend-price ratio, earnings-price ratio, or smoothed earnings-price ratio. Value-oriented investors in the tradition of Graham and Dodd (1934) had always asserted that high valuation ratios are an indication of an undervalued stock market and should predict high subsequent returns, but these ideas did not carry much weight in the academic literature until authors such as Rozeff (1984), Fama and French (1988), and Campbell and Shiller (1988a, 1988b) found that valuation ratios are positively correlated with subsequent returns and that the implied predictability of returns is substantial at longer horizons. Around the same time, several papers pointed out that yields on short- and long-term treasury and corporate bonds are correlated with subsequent stock returns (Fama and Schwert,1977;KeimandStambaugh,1986;Campbell,1987;FamaandFrench, 1989).

/pdf/predicting-excess-stock-returns-out-of-sample-can-anything-2mxrx7bxfk.pdf

Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?

When firms adjust their capital structures, they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt. In contrast to previous empirical work, out tests explicitly account for the fact that firms may face impediments to movements toward their target ratio, and that the target ratio may change over time as the firm's profitability and stock price change. A separate analysis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important role in the repurchase decision than in the issuance decision.

The debt-equity choice

Firms that increase (decrease) dividends experience a significant decline (increase) in their systematic risk. The dividend‐increasing firms do not increase their capital expenditure and experience a decline in profitability in the years after the dividend change. The positive market reaction to a dividend increase is significantly related to the subsequent decline in systematic risk. In the long run, the dividendincreasing firms with the largest decline in systematic risk also experience the largest increase in price over the next three years, suggesting that the market reaction to dividend changes may not incorporate the full extent of the decline in the cost of capital associated with dividend changes.

https://www.jstor.org/stable/10.1086/339889

Are Dividend Changes a Sign of Firm Maturity

We show that repurchases have not only became an important form of payout for U.S. corporations, but also that firms finance their share repurchases with funds that otherwise would have been used to increase dividends. We find that young firms have a higher propensity to pay cash through repurchases than they did in the past and that repurchases have become the preferred form of initiating a cash payout. Although large, established firms have generally not cut their dividends, they also show a higher propensity to pay out cash through repurchases. These findings indicate that firms have gradually substituted repurchases for dividends. Our results also suggest that before 1983, regulatory constraints inhibited firms from aggressively repurchasing shares.

https://www.jstor.org/stable/info/3094520

Dividends, Share Repurchases, and the Substitution Hypothesis

Contrary to the implications of many payout theories, we find that announcements of open-market share repurchase programs are not followed by an increase in operating performance. However, we find that the systematic risk and the cost of capital of these firms decline after these events. Further, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Taken together, our results suggest that the market reacts positively to share repurchase announcements because these events are associated with a reduction in the agency costs of free cash flows and with a reduction in the firm's cost of capital. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in systematic risk.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID206328_code000205214.pdf?abstractid=206328&rulid=181203&mirid=4

The Information Content of Share Repurchase Programs

We provide empirical evidence that a firm's overall visibility with investors, as measured by its product market advertising, has important consequences for the stock market. Specifically we show that firms with greater advertising expenditures, ceteris paribus, have a larger number of both individual and institutional investors, and better liquidity of their common stock. Our findings are robust to a variety of methodological approaches and to various measures of liquidity. These results sug

/pdf/advertising-breadth-of-ownership-and-liquidity-4g9sxostun.pdf

Advertising, Breadth of Ownership, and Liquidity

Contrary to the implications of many payout theories, we find that announcements of open-market share repurchase programs are not followed by an increase in operating performance. However, we find that repurchasing firms experience a significant reduction in systematic risk and cost of capital relative to non-repurchasing firms. Further, consistent with the free cash-flow hypothesis, we find that the market reaction to share repurchase announcements is more positive among those firms that are more likely to overinvest. Finally, we find evidence to indicate that investors underreact to repurchase announcements because they initially underestimate the decline in cost of capital. IN RECENT YEARS OPEN-MARKET share repurchase programs have become an important payout method for many U.S. firms. According to data from COMPUSTAT, between 1984 and 2000 corporations spent approximately 26 percent of their total annual earnings on repurchases. Over 90 percent of these repurchases were open-market repurchase programs. Also, in 1999 and 2000, for the first time in history, industrial corporations spent more money on share repurchases than they did on dividends. Our objective in this paper is to better understand the economic motivations behind the decision to repurchase shares. Two major reasons for repurchasing shares are analyzed in the theoretical literature. The first is that management uses open-market share repurchases to signal better prospects (Bhattacharya (1979), Miller and Rock (1985), and Vermaelen (1984)). 1 These papers suggest that repurchases can be used as a costly signal about future cash flows when markets are incomplete. As demonstrated by these papers, the repurchase decision can reveal information about

Gustavo Grullon

Papers

Are Dividend Changes a Sign of Firm Maturity

Dividends, Share Repurchases, and the Substitution Hypothesis

The Information Content of Share Repurchase Programs

Advertising, Breadth of Ownership, and Liquidity

The Information Content of Share Repurchase Programs