Aaron Burt

Publications in Refereed Journals

How Much Do Directors Influence Firm Value? (with Chris Hrdlicka and Jarrad Harford)    -   The Review of Financial Studies, 2020, 33(4), 1818-1847. 

The value a director provides to a firm is empirically hard to establish. We estimate that value by exploiting the commonality in idiosyncratic returns of firms linked by a director and show that a single director's influence causes variation in firm value of almost 1% per year. The return commonality is not due to industry or other observable economic links. Variation in the availability of information on shared directors and a placebo test exploiting the timing of shared directors provide further identification. The results also imply that the directorial labor market does not fully assess directors in real time.

Presentations:   2015 Western Finance Association Annual Meeting, Arizona State University

Where Does the Predictability from Sorting on Returns of Economically Linked Firms Come From? (with Chris Hrdlicka)    -    Journal of Financial and Quantitative Analysis, vol. 56, no. 8, 2021, 2634-2658. 

A large literature documents that a firm's returns predicts the returns of the firms to which it is economically linked and this predictability persists up to a year. The literature attributes this predictability to delays in information diffusion. We show two additional sources are important to this predictability: correlation among economically linked firms in their alphas and betas. Sorting on idiosyncratic returns better captures the predictability due to information diffusion. We show how to eliminate the attenuation in long-short alphas from estimation error in idiosyncratic returns that had previously prevented sorting on idiosyncratic returns.

Presentations:  2015 Western Finance Association Annual Meeting, 10th Conference on Advances in the Analysis of Hedge Fund Strategies, 2016 Northern Finance Association Annual Meeting

Working Papers

More factors matter and factors matter more than you might think: The role of time variation in factor premia (with Hendrik Bessembinder and Chris Hrdlicka) 

The literature has asserted that as few as four or five factor principal components (PCs) are sufficient to largely explain the cross-section of stock returns. Allowing for time variation in factor premia, we show that portfolios formed from factor PCs yield economically large out-of-sample Sharpe ratios that increase on average until about forty PCs are employed. That is, non-latent time-varying factors have strong predictive power for the cross-section of stock returns, and to a substantial extent are not redundant of each other. Time variation in the number of economically relevant factors is related to changes in economic conditions and the diversity of firm characteristics. These results imply that barriers to cross-factor arbitrage are large and indicate roles for economic complexity and investor learning in asset pricing. 

Presentations: 2023 American Finance Association Annual Meeting, 2023 Finance Down Under*, 2024 Midwest Finance Association Meetings*, University of Washington,  University of Oklahoma
*The Spencer Martin Best Paper Award (2023 Finance Down Under)

Does a VC's commitment lead to improved investment outcomes? Evidence from  climate startups (with Jarrad Harford, Jared Stanfield and Jason Zein) 

We assess whether a VC’s intrinsic commitment to a startup affects investment performance. We proxy for climate commitment using individual VCs’ contributions to the Democratic Party. Investments by Democrat VCs in climate startups have 8% higher round-to-exit returns and 29% higher round-to-exit multiples. Democrat VCs are more likely to sit on a climate startup’s board and these startups are more likely to obtain patents following a Democrat VC’s investment. Local climate-related natural disasters that exogenously increase a non-Democrat’s climate commitment results in higher exit returns. Our results are consistent with the importance of commitment in active (vs. passive) investing.  

Presentations:  2023 Eastern Finance Association, 2023 UNC/Duke Corporate Finance Conference*, 5th Annual Edinburgh Corporate Finance Conference, Sustainable Private Markets Conference 2023, ESADE-University Ramon Llull, EUROFIDAI-ESSEC Paris December Finance Meeting 2023, University of Oklahoma, University of Denver, Oklahoma State University
*Outstanding Paper in Empirical Corporate Finance (2023 Eastern Finance Association)

Factor Returns and Out-of-Sample Alphas: Factor Construction Matters (with Hendrik Bessembinder and Chris Hrdlicka) 

Portfolios formed on a time-varying basis from the principal components of the factors compiled by Chen and Zimmerman (CZ) and Jensen, Kelly, and Pedersen (JKP) display large and robust out-of-sample Sharpe ratios, implying that the factors strongly forecast the cross-section of stock returns. However, average Sharpe ratios obtained based on the CZ factors are notably larger than when using the JKP factors. We investigate this divergence, documenting the roles of the weighting methods used to construct factor returns, the number of quantile portfolios employed to construct factor returns, and divergences in the numbers and composition of the factors contained across databases. We also show that factor principal components beyond the first few contribute substantially to the factors’ ability to forecast the cross-section of returns. 

Untying the Knot: Disentagling Cash Flow and Voting Rights for Better Price Informativeness (with Ran Duchin and Chris Hrdlicka) 

We study the implications of equity’s combined cash flow and voting rights for price informativeness and corporate policies. Using hand-collected data on dual-class shares, we show that separating cash flow and voting rights improves the informativeness of share prices about future cash flows and mitigates arbitrage frictions. The effects are stronger for dual-class shares with no voting rights and when voting rights are more important, as measured by the occurrence of close votes. Consistent with the role of voting rights in short-selling constraints, dual-class shares respond less to negative earnings surprises, have larger average short positions, and do not exhibit a shorting premium anomaly. Overall, we put forth a new proposition, unexplored in the literature, that highlights price informativeness as a potential benefit of separating equity cash flow and voting rights.

Presentations:  2023 Australasian Finance and Banking Conference 

Information Networks and Market Segmentation

I examine how non-uniform information diffusion through distinct networks segments U.S. financial markets. Using changes in newspaper ownership networks, I document that a network link formation between different geographic areas leads to increased comovement of turnover and returns between stocks headquartered in the areas. Consistent with delayed content sharing within a network, the largest increase in comovement is observed using weekly data. I show that the network-driven comovement is not driven by fundamentals and is weaker for large firms with high institutional ownership. A network link also increases the similarity in stock prices of network-linked areas. My findings show that segmented information networks lead to segmented financial markets with implications for market efficiency, home bias, and the effects of changes in the U.S. media landscape on financial markets. 

Presentations:   Brigham Young University, Indiana University, University of Massachusetts - Amherst, University of Oklahoma, University of Hawaii, Australian National University

*  Future presentations