Learning about Discount Rates
(with Olivier Dessaint and Naveen Gondhi).
What information do firm managers extract from stock prices? Most of what they know about discount rates and very little about expected future cashflows.
Abstract
Abstract
Using data on firm managers’ beliefs about cashflow growth (g) and discount rates (k) in M&A transactions, we examine what they learn from target stock prices. Before correcting for endogeneity, both appear sensitive to prices---positively for g, negatively for k, and with equal magnitude---suggesting managers learn about both. However, using noise in prices as an instrument, only k reacts—with corrected estimates indicating that 89% of managers’ information about k comes from prices. Therefore, stock markets provide insights into risk and the compensation it requires, but not cashflows, which managers already understand well. Cross-sectional tests reinforce this conclusion.
(with Matthijs Breugem and Adrian Buss)
What information dooes the bond market reveal? The (riskless) interest rate reveals information about discount rates, which allows to extract more information about cashflows from stock price.
Abstract
Abstract
We provide novel insights into how investors use information contained in interest rates to learn about economic fundamentals and how this affects informational and allocative efficiency. Specifically, we develop a noisy rational expectations equilibrium model with an endogenous interest rate that investors use to update their beliefs. The model yields two key findings. First, the interest rate reveals primarily information about discount rates, allowing investors to extract more information about cashflows from stock prices. Second, the precision of the interest-rate signal and, hence, stock-price informativeness are positively correlated with the interest rate. We present evidence consistent with this prediction.
Anomalies Never Disappeared: The Case of Stubborn Retail Investors
(with Xi Dong and Cathy Yan)
Winner of 2025 China International Conference in Finance (CICF) Best Paper Award.
Anomalies have persisted over the past half-century, with alphas reaching 23% over a two-year horizon—driven largely by retail investor trading.
Abstract
Abstract
Contrary to conventional beliefs, anomalies have not disappeared over the past half-century; instead, their alphas materialize over long horizons, with value-weighted alphas accumulating to 23% over a two-year period. These returns are largely driven by anomalies against which retail investors trade. We propose a model that accounts for these findings and generates additional testable predictions. At the heart of the model is the persistence of retail trading behaviour.
Media Coverage and Investors’ Attention to Earnings Announcements
Permanent working paper
How media coverage affects the market's response to earnings: it generates a stronger price and trading volume reactions upon announcement and less subsequent drift.
Abstract
Abstract
I study whether investors’ inattention contributes to the post-earnings announcement drift using media coverage to measure attention. I compare announcements made by the same firm in the same year and generating the same earnings surprise, when one announcement is covered in the Wall Street Journal while the other is not. Announcements with media coverage generate stronger price and trading volume reactions upon announcement and less subsequent drift. This effect is less pronounced for more visible firms and on high-distraction days. These results are both economically and statistically strong. Thus, limited attention is an important source of friction in financial markets.