John R. Huck, PhD

Research

Published:

The Psychological Externalities of Investing: Evidence from Stock Returns and Crime, Review of Financial Studies, 2024

This paper investigates the psychological effects from stock market returns. Using a FBI database of over 55 million daily reported crime incidents across the United States, crime is proposed as a measure of psychological well-being. The evidence suggests that stock returns affect not only the well-being of investors but also non-investors. Specifically, a contemporaneous negative (positive) relationship between daily stock market returns and violent crime rates is found for investors (non-investors). A similar relationship is also found between local earnings surprises and violent crime. The contrasting relationships for investors and non-investors suggests that well-being may be influenced by relative wealth.

Working Papers:

Asset Pricing with Revealed Utility of Heterogeneous Consumers: Evidence from Crime (R&R RFS)

This paper proposes violent crime growth as a measure of revealed marginal utility growth of heterogeneous consumers in incomplete markets. Consumer heterogeneity is measured using the cross-sectional average and cross-sectional variance of crime growth exploiting a monthly panel of reported crime incidents from over 11,000 law enforcement agencies across the United States from 1960-2020. Consistent with heterogeneous consumer models, I find that the cross-sectional average and variance of violent crime growth can explain the cross-section of stock returns. Specifically, investors pay a premium for assets that have higher betas to the violent crime growth moments.

Updated evidence: Female CEOs perform no better than male CEOs in acquisitions, with Donglai Bao and Val Sibilkov (R&R CFR)

We revisit the relationship between executive gender and acquisition performance in Huang and Kisgen (2013) who indicate that acquirers with female CEOs or CFOs outperform their male counterparts from 1993 - 2005. Using their dataset, we find that their conclusion of outperformance is questionable, which motivates us to reexamine the relationship over the 2006 – 2023 period characterized by a significant increase in the proportion of female executives. In contrast to Huang and Kisgen's (2013) conclusion, we find that within the same firm, acquisitions led by female CEOs with longer tenure underperform those led by male CEOs. We find no underperformance for female CEOs early in their tenure or for female CFOs. We find similar levels of incentives between male CEOs and female CEOs with respect to acquisition performance. The underperformance of acquirers with female CEOs is inconsistent with overconfidence of male CEOs adversely affecting corporate decisions.

What is the Risk-Premium for the SDF? with BH Jeon and Johnathan Loudis

We develop a model that identifies a time-varying risk-premium for a latent stochastic discount factor (SDF) with minimal assumptions.  The SDF risk-premium can be identified in two ways: (1) as a function of the weighted average variance risk-premium (VRP) for individual stocks and the VRP for the market, and (2) as a function of the cross-sectional weighted variance of expected stock returns.  We construct empirical proxies for the SDF risk-premium, and show that they can price the cross-section of stock returns.  Specifically, investors pay a premium for assets that have higher betas to the SDF risk-premium factors.

M&A Announcement Timing, with Audra Boone

We document that takeover announcements are often bundled with earnings announcements and investigate potential reasons for this finding.  We show that acquirers that make M&A announcements are more likely to revise their earnings announcement dates relative to those that do not make an M&A announcement, suggesting that firms are actively manipulating the flow of information.  While acquirers appear to actively bundle, the market does not reward them for doing so.  As such, we investigate two channels why firms may still want to bundle.  First, we find evidence that bundling pressures targets to accept a lower acquisition price to meet an earnings announcement deadline.  Second, we find evidence using a difference-in-difference and triple difference framework, that acquirers bundle to reduce litigation risk.

Mutual Fund Performance Evaluation with Macroeconomic Risk, with Bob Dittmar and Chris Lundblad

We propose a holdings-based measure of mutual fund performance using a benchmark that captures a funds exposure to consumption risk. We find that before fees, funds are unable to outperform a benchmark that matches its exposure to consumption risk. While on average funds do not outperform, we find evidence that funds with short-term skill can be better identified by our measure and that fund flows based on perceived skill are more sensitive to our measure. This suggests that investors are more concerned about their exposure to consumption risk as suggested by economic theory, than the risk implied from other ad hoc factor or characteristic approaches that appear to be empirically related to average returns. We also show that funds cater to investors’ concerns by successfully timing their exposure to consumption risk.

Works in Progress:

OTC Markets and Liquidity: Evidence from PIPEs, with Yianni Floros and Vlad Ivanov

Does Reducing Misconduct Harm Future Performance, with Donglai Bao and Val Sibilkov

Financial Advisor Misconduct and Race, with Donglai Bao and Val Sibilkov

Consumption Risk in Decomposed Stock Returns

Permanent Working Papers:

Buyer Beware: Industry Links and Bankruptcy

This paper develops a model for forecasting bankruptcy at the industry level that accounts for bankruptcy contagion from customers and suppliers. Utilizing customer and supplier relationship networks, I find that both customer and supplier bankruptcies explain bankruptcies in the subject industry. However, when accounting for the endogeneity in the supply chain, I find that only bankruptcies in supplier industries cause bankruptcies in the subject industry. This contrasts with a previous study that only finds a relationship between customer bankruptcies and subject firms. Furthermore, the impact of supplier bankruptcies on subject industry bankruptcies is economically larger than other determinants of bankruptcy in the literature. To reinforce the notion of bankruptcy contagion, I find that close supplier bankruptcies have a larger influence on subject industry bankruptcies than far supplier bankruptcies. Finally, I find that high bankruptcies in central industries lead to high bankruptcies across the entire economy. These results provide a new explanation of why bankruptcies cluster in time. If an initial random bankruptcy shock in one industry propagates along industry links to a central hub industry or initiates from a central hub industry, a bankruptcy wave could branch out to many other industries in parallel from that central industry causing widespread bankruptcies across the economy.

Factor Momentum and Trade Links

This paper explores the cross-country auto-correlation of country risk factor performance (RM-RF, HML, SMB, or WML) along trading links. I show that past trading partner factors cross-predict future subject country factor performance. This association is both statistically and economically significant. For example, a 1% increase in trading partner factor performance in the previous month leads to a significant 13 to 15 bps increase in subject country factor performance in the following month. The predictive ability of trading partners also translates into a profitable trading strategy for RM-RF, HML, and WML that is long country factors with strong trading partner factor performance in the previous month, and short country factors with weak trading partner factor performance. The resulting RM-RF, HML, and WML trade momentum portfolios exhibit annualized long factor alphas of 3.4% to 12.3% and long-short factor alphas of 3.7% to 8.7%. The cross-predictability of trading partner factor returns are higher (though not significantly) in emerging markets and small markets by capitalization, consistent with gradual information diffusion. Predictability is also stronger with primary trading partners rather than fringe trading partners, and in countries that are reliant on trade. These results are consistent with gradual information diffusion resulting from limited attention and limited information-processing capabilities on the part of investors.