Brad Cannon

Working Papers

Return Extrapolation and Dividends (with John Lynch)

Online Appendix

Review of Finance, Accepted

We provide evidence that dividend-paying stocks are less exposed to return extrapolation than non-dividend-paying stocks. In particular, social media sentiment and analyst price targets of dividend-paying stocks are significantly less sensitive to past returns. Our findings indicate that this difference stems from price changes playing a larger role in extrapolation and dividends diverting attention away from price changes for dividend-paying stocks. Consistent with models of return extrapolation, dividend-paying stocks earn lower momentum and long-term reversal returns. The value premium, however, is similar among both groups. Collectively, our findings suggest that return extrapolation is an important source of some anomaly returns. 

Swimming Against the Current: Contrarian Retail Trading (with Hannes Mohrschladt)

Journal of Financial and Quantitative Analysis, Revise and Resubmit

Retail investors respond differently to a stock's most recent daily return depending on whether the position is trading at a gain or a loss. In line with behavioral theory, stocks are sold in a contrarian way for positions with unrealized capital gains, while loss positions are sold in a reverse-contrarian fashion. Consistent with increased liquidity due to contrarian retail trading, we find that short-term return reversals and stock return volatility are smaller among stocks with greater unrealized capital gains. Using stock splits as a natural experiment, our results lend support for a causal interpretation of our findings.

Friends with Benefits: Social Capital and Household Financial Behavior (with David Hirshleifer and Josh Thornton)

Using friendship data from Facebook, we study the effects of three aspects of social capital on household financial behavior. We find that the most important measure of social capital in explaining stock market and saving participation is Economic Connectedness, defined as the fraction of one’s social network with high socioeconomic status. One standard-deviation greater Economic Connectedness is associated with 2.9% greater stock market participation and 5.0% greater saving participation. Compared to Cohesiveness or Civic Engagement, Economic Connectedness explains more than 6 times the variation in stock market participation and more than 4 times the variation in saving participation. Using data on nonlocal friendships, we provide evidence supporting a causal link between household financial behavior and the income of one's friends. Furthermore, we provide evidence that greater opportunities for social interaction with wealthy individuals is associated with increased stock market and saving participation.

Diagnostic Expectations and Hedge Fund Flows (with Rui Gong and John Lynch)

We incorporate diagnostic expectations into a model of delegated asset management where some degree of recent return chasing is rational. In a structural estimation of the model, we find that hedge fund flows indicate an overreaction to recent returns. Furthermore, we document heterogeneity in the informativeness of recent returns across fund styles. Investors fail to account for this variation and, if anything, chase recent returns more aggressively in styles where it is least beneficial. Overall, we provide evidence of irrationality among institutional investors when allocating capital resulting in lower future returns. 

Does Banking Competition Really Increase Credit for All? 

The Effect of Bank Branching Deregulation on Small Business Credit (with John Lynch)

In this paper, we show that deregulating interstate bank branching in the U.S. resulted in decreased lending to small businesses. We provide evidence that this reduction was largely due to a decrease in the deposits of smaller local banks, which occurred as larger out-of-state banks entered deregulated markets. Small business lending declined by 5.4% following deregulation, with even larger decreases in areas with higher home prices and more deposits. Though small businesses were generally able to survive, we document a long-term decrease in their labor demand, indicating a tightening of credit constraints. Overall, our findings document potential costs of banking deregulation.

Do Lenders Learn from Peer Firm Valuations? (with John Lynch and Josh Thornton)

Online Appendix

A firm’s investment responds to the stock valuations of peer firms. For neighboring peers, this relation is stronger among financially constrained firms, robust to controlling for regional investment, and is driven by a more speculative component of valuations – the same is not true for industry peers. These geographical findings are difficult to reconcile with existing theories that link firm valuations to managerial learning. Instead, our findings suggest that lenders learn from peer firm valuations and allocate more credit to regions with higher stock valuations. Consistent with this explanation, financially constrained firms issue more debt and receive lower loan spreads when neighboring peer firms have higher valuations.

Perception Matters: How Executive Vocal Masculinity Influences CEO Selection and Compensation (with John Lynch and Amin Shams)

This study examines the relationship between vocal masculinity and CEO selection, utilizing a dataset of over 5,900 executive voices. Consistent with theory on how increased masculinity enhances the perception of females, we find that female executives are more likely to be selected as CEO if their voice is more masculine, while the opposite is true for males. This effect is amplified in firms with greater entrenchment provisions and varies based on the board's gender composition. Contingent on being hired, however, both male and female executives with higher vocal masculinity are better compensated. While upper echelon theory highlights the characteristics of successful managers, our paper shows that boards may rely on uninformative physical signals when making hiring and compensation decisions. 

Extreme Return Days and the Role of Purchase Prices (with Hannes Mohrschladt)

We provide evidence that purchase prices impact how investors behave towards extreme returns. Using a sample of individual investor trades and extreme return dates, we show that when a stock is trading farther from an investor's purchase price, the investor is more likely to trade in the direction of the stock's return. Consistent with relative overreaction, stocks trading farthest from their average purchase price experience the most extreme returns, which are then followed by greater subsequent reversals. A cross-sectional strategy motivated by these findings earns a monthly alpha of 1.02%.

Publications

The Asset Growth Premium and Anchoring on the 52-Week High (with Ben Blau)

Journal of Financial Research (2024)