scispace - formally typeset
Search or ask a question
Journal ArticleDOI

Do Demand Curves for Stocks Slope Down

01 Jul 1986-Journal of Finance (Blackwell Publishing Ltd)-Vol. 41, Iss: 3, pp 579-590
TL;DR: This article found that stocks newly included into the Standard and Poor's 500 Index have a significant positive abnormal return at the announcement of the inclusion, and this return does not disappear for at least ten days after the inclusion.
Abstract: Since September, 1976, stocks newly included into the Standard and Poor's 500 Index have earned a significant positive abnormal return at the announcement of the inclusion. This return does not disappear for at least ten days after the inclusion. The returns are positively related to measures of buying by index funds, consistent with the hypothesis that demand curves for stocks slope down. The returns are not related to S & P's bond ratings, which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock.
Citations
More filters
Journal ArticleDOI
TL;DR: This paper examined whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns and found that the fraction of negative words in firm-specific news stories predicts low firm earnings.
Abstract: We examine whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns. Our three main findings are: (1) the fraction of negative words in firm-specific news stories forecasts low firm earnings; (2) firms' stock prices briefly underreact to the information embedded in negative words; and (3) the earnings and return predictability from negative words is largest for the stories that focus on fundamentals. Together these findings suggest that linguistic media content captures otherwise hard-to-quantify aspects of firms' fundamentals, which investors quickly incorporate in stock prices.

1,605 citations


Cites background or methods from "Do Demand Curves for Stocks Slope D..."

  • ...To test this theory, we explore whether negative words predict firms’ future stock returns....

    [...]

  • ...We also exclude stories in the first week after a firm has been newly added to the index to prevent the well-known price increase associated with a firm’s inclusion in the S&P 500 index from affecting our analysis (Shleifer (1986))....

    [...]

Journal ArticleDOI
TL;DR: In this paper, the authors argue that some investors are not fully rational and their demand for risky assets is affected by their beliefs or sentiments that are not completely justified by fundamental news.
Abstract: This paper reviews an alternative to the efficient markets approach that we and others have recently pursued. Our approach rests on two assumptions. First, some investors are not fully rational and their demand for risky assets is affected by their beliefs or sentiments that are not fully justified by fundamental news. Second, arbitrage - defined as trading by fully rational investors not subject to such sentiment - is risky and therefore limited. The two assumption together imply that changes in investors sentiment are not fully countered by arbitrageurs and so affect security returns. We argue that this approach to financial markets is in many ways superior to the efficient markets paradigm. Our case for the noise trader approach is threefold. First, theoretical models with limited arbitrage are both tractable and more plausible than models with perfect arbitrage. The efficient markets hypithesis obtains only as an extreme case of perfect riskless arbitrage that unlikely to apply in practice. Second, the investors sentiment/ limited arbitrage approach yields a more accurate description of financial markets than the efficient markets paradigm. The approach not only explains the available anomalies, but also readly explains board features of financial markets such as trading volume and actual investment strategies. Third, and most importantly, this approach yields new and testable implications about asset prices, some of which have been proved to be consistent with the data. It is absolutely not true that introducing a degree of irrationality of some investors into models of financial markets "eliminates all discipline and can explain anything".

1,513 citations


Cites background from "Do Demand Curves for Stocks Slope D..."

  • ...For example, Harris and Gurel (1986) and Shleifer (1986) examine stock price reactions to inclusions of new stocks into the Standard & Poor 500 stock index....

    [...]

  • ...Both Harris and Gurel (1986) and Shleifer (1986) find that announcements of inclusions into the index are accompanied by share price increases of 2 to 3 percent....

    [...]

Journal ArticleDOI
TL;DR: The authors examined whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns and found that the fraction of negative words in firm-specific news stories predicts low firm earnings.
Abstract: We examine whether a simple quantitative measure of language can be used to predict individual firms’ accounting earnings and stock returns. Our three main findings are: (1) the fraction of negative words in firm-specific news stories forecasts low firm earnings; (2) firms’ stock prices briefly underreact to the information embedded in negative words; and (3) the earnings and return predictability from negative words is largest for the stories that focus on fundamentals. Together these findings suggest that linguistic media content captures otherwise hard-to-quantify aspects of firms’ fundamentals, which investors quickly incorporate into stock prices. Language is conceived in sin and science is its redemption

1,383 citations

Posted Content
TL;DR: This paper analyzed the relationship between employee satisfaction and long-run stock returns and found that employee satisfaction is positively correlated with shareholders' returns and need not represent managerial slack, even when independently verified by a highly public survey on large firms.
Abstract: This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the "100 Best Companies to Work For in America" earned an annual four-factor alpha of 3.5% from 1984-2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing ("SRI") screens may improve investment returns.

1,256 citations

Journal ArticleDOI
TL;DR: In this paper, the authors explore a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-1996, and show that a "gravity" model explains international transactions in financial assets at least as well as goods trade transactions.

1,244 citations

References
More filters
Journal Article
TL;DR: In this article, the effect of financial structure on market valuations has been investigated and a theory of investment of the firm under conditions of uncertainty has been developed for the cost-of-capital problem.
Abstract: The potential advantages of the market-value approach have long been appreciated; yet analytical results have been meager. What appears to be keeping this line of development from achieving its promise is largely the lack of an adequate theory of the effect of financial structure on market valuations, and of how these effects can be inferred from objective market data. It is with the development of such a theory and of its implications for the cost-of-capital problem that we shall be concerned in this paper. Our procedure will be to develop in Section I the basic theory itself and to give some brief account of its empirical relevance. In Section II we show how the theory can be used to answer the cost-of-capital questions and how it permits us to develop a theory of investment of the firm under conditions of uncertainty. Throughout these sections the approach is essentially a partial-equilibrium one focusing on the firm and "industry". Accordingly, the "prices" of certain income streams will be treated as constant and given from outside the model, just as in the standard Marshallian analysis of the firm and industry the prices of all inputs and of all other products are taken as given. We have chosen to focus at this level rather than on the economy as a whole because it is at firm and the industry that the interests of the various specialists concerned with the cost-of-capital problem come most closely together. Although the emphasis has thus been placed on partial-equilibrium analysis, the results obtained also provide the essential building block for a general equilibrium model which shows how those prices which are here taken as given, are themselves determined. For reasons of space, however, and because the material is of interest in its own right, the presentation of the general equilibrium model which rounds out the analysis must be deferred to a subsequent paper.

15,342 citations


"Do Demand Curves for Stocks Slope D..." refers background in this paper

  • ...For example, the home leverage idea behind the Modigliani-Miller theorem [13] and simple cost of capital rules obtain under the maintained assumption of horizontal demand curves for the firm's equity....

    [...]

Journal ArticleDOI
TL;DR: In this paper, the authors examine the process by which common stock prices adjust to the information (if any) that is implicit in a stock split and show that the independence of successive price changes is consistent with a market that adjusts rapidly to new information.
Abstract: There is an impressive body of empirical evidence which indicates that successive price changes in individual common stocks are very nearly independent. Recent papers by Mandelbrot and Samuelson show rigorously that independence of successive price changes is consistent with an "efficient" market, i.e., a market that adjusts rapidly to new information. It is important to note, however, that in the empirical work to date the usual procedure has been to infer market efficiency from the observed independence of successive price changes. There has been very little actual testing of the speed of adjustment of prices to specijc kinds of new information. The prime concern of this paper is to examine the process by which common stock prices adjust to the information (if any) that is implicit in a stock split

4,470 citations

Journal ArticleDOI
TL;DR: A review of the scientific literature on the market for corporate control can be found in this paper, where the authors argue that corporate control is best viewed as an arena in which managerial teams compete for the rights to manage corporate resources.

3,821 citations

Journal ArticleDOI
TL;DR: In this paper, the authors explore the implications of a market with restricted short selling in which investors have differing estimates of the returns from investing in a risky security, and explain the very low returns on the stocks in the highest risk classes, the poor long run results on new issues of stocks, the presence of discounts from net value for closed end investment companies, and the lower than predicted rates of return for stocks with high systematic risk.
Abstract: THE THEORY OF investor behavior in a world of uncertainty has been set out by several writers including Sharpe (1964) and Lintner (Feb. 1965). A key assumption of the now standard capital asset model is what Sharpe calls homothetic expectations. All investors are assumed to have identical estimates of the expected return and probability distribution of return from all securities. However, it is implausible to assume that although the future is very uncertain, and forecasts are very difficult to make, that somehow everyone makes identical estimates of the return and risk from every security. In practice, the very concept of uncertainty implies that reasonable men may differ in their forecasts. This paper will explore some of the implications of a market with restricted short selling in which investors have differing estimates of the returns from investing in a risky security.' Explanations will be offered for the very low returns on the stocks in the highest risk classes, the poor long run results on new issues of stocks, the presence of discounts from net value for closed end investment companies, and the lower than predicted rates of return for stocks with high systematic risk.

3,436 citations


"Do Demand Curves for Stocks Slope D..." refers background in this paper

  • ...Miller [12] and Varian [21] explain how such disagreement yields downward sloping demand curves....

    [...]