2017 EFA, 2017 Yale Whitebox Advisors Conference, 2017 AFA Poster Session, 2016 NFA, 2016 LBS TADC
I investigate interactions between macro-announcements and the processing of earnings news. Existing theories suggest that macro-news should crowd out attention to firm-level news, implying less efficient pricing. However, I find the opposite: on macro-news days price reactions to earnings news are 17% stronger and the post-earnings announcement drift is 71% weaker. To explain these results, I show that institutional investor attention is higher on macro-news days. Hence, macro-news appears not to be a distraction from firm-level news, but instead serves to enhance overall attention to financial markets. I suggest extensions of existing theories that could be consistent with these findings.
2017 FIRS, 2016 ASU Sonoran Finance Conference, 2016 NFA, 2016 CICF, 2016 Econometric Society Asia
Media coverage: Canadian Investment Review
We construct indices of media attention to macroeconomic risks including employment, growth, inflation, monetary policy, and oil prices. Attention rises around macroeconomic announcements and following changes in fundamentals over quarterly, annual, and business cycle horizons. The effect is asymmetric, with bad news raising attention more than good news. Attention relates to the stock market in two ways. First, increases in aggregate trade volume and volatility coincide with rising attention, controlling for announcements. Second, changes in attention prior to the unemployment announcement predict both the announcement surprise and stock returns on the announcement day. We conclude that media attention to macroeconomic fundamentals provides useful information beyond the dates and contents of macroeconomic announcements.
2017 EFA, 2017 CICF, 2017 Finance Down Under Conference
The well-established negative relation between expense ratios and future net-of-fees performance of actively managed equity mutual funds guides portfolio decisions of institutional and retail investors. We show that this relation is an artifact of the failure to adjust performance for exposure to the profitability and investment factors. High-fee funds exhibit a strong preference for stocks with low operating profitability and high investment rates, characteristics recently found to associate with low expected returns. We show that after controlling for exposures to profitability and investment factors, high-fee funds significantly outperform low-fee funds before expenses, and perform equally well net of fees. Our results have important implications for asset allocation decisions and support the theoretical prediction that skilled managers extract rents by charging high fees.
Are Demographics Responsible for the Declining Interest Rates? Evidence from U.S. Metropolitan Areas, 2017
with Jack Favilukis
Interest rates have declined dramatically over the past 30 years. At the same time, the birth rate has declined, and life expectancy has increased. Demographic changes leading to an older population have been proposed as an explanation for the decline in rates. However, this conjecture is difficult to test because demographics change slowly over time, and are correlated with other country characteristics. We show that in a cross-section of U.S. MSAs, the relationship between interest rates and demographics is only partially consistent with traditional models, which predict a negative association between age and interest rates. This association is, indeed, negative for lending rates, but positive for deposit rates. We rationalize this pattern by solving an OLG model where the banking sector is not perfectly competitive, and there is heterogeneity in the intertemporal elasticity of substitution across households.
2015 AAA, 2015 CAAA, 2015 LBS TADC
Using a randomized experiment (Regulation SHO), in which the SEC exempted from short-selling price tests one-third of the Russell 3000 Index firms, we examine the impact of short selling on analyst forecast bias for these pilot firms. We find that short selling reduces analyst earnings forecast optimism. We also show that this effect increases with analyst forecast horizon and is concentrated among firms with greater institutional ownership and more earnings management. In addition, we show that the remaining two-thirds of the Russell 3000 firms also experience a reduction in analyst forecast optimism upon the permanent removal of price tests. Finally, we examine the underlying mechanisms and find that short sellers’ information intermediary role is a possible channel through which analyst forecast optimism is reduced. Our paper provides new evidence on the effect of investors on analyst behaviors.
The Real Effects of Government Intervention: Firm-level Evidence from TARP, 2016
2014 Econometric Society Summer Meeting, 2014 NFA, 2014 CEA
This paper investigates the real and financial effects of the largest government intervention in US history, the Troubled Asset Relief Program (TARP), on individual firms. Firms borrowing from banks that participate in TARP increase long-term debt and have more cash holdings and working capital after the Program compared to firms borrowing from banks that do not participate in TARP. But, there is no significant impact of TARP on corporate investment, employment, or R&D. We conclude that TARP exerts significant influence on firms’ liquidity and financial decisions, yet its impact on firms’ real activities is limited.