Seminars: BI Oslo, Louisiana State University, University of Arizona, University of British Columbia, University of Liechtenstein, University of Luxembourg, University of Surrey, and University of Cambridge.

Abstract: I develop a real options model to explain average returns and return volatilities of stock portfolios sorted on the book-to-market ratio. While average returns increase monotonically across portfolios, return volatilities are U-shaped. My model combines business cycle variations with countercyclical economic uncertainty. Operating leverage and procyclical growth options make both value stocks and growth stocks risky, generating U-shaped return volatilities. Growth stocks additionally load on the negative variance risk premium which reduces their expected return. Using structural estimation, my model jointly fits average returns and return volatilities, thereby solving a long-standing problem in investment-based asset pricing. Further reduced-form evidence supports the model channels.

Seminars: Binghamton University*, Emory University*, ESSEC Business School*, Florida International University*, FMA FEB-RN Seminar Series*, Louisiana State University*, Roma Tre University*, University of Amsterdam*, University of California (Irvine)*, University of California (Los Angeles)*, University of Houston*, University of Illinois Urbana-Champaign*, University of Lancaster*, University of Manchester*, University of Nottingham*, University of Surrey*, and University of Virginia*.

Abstract: Under a real options framework, we show that healthy firms become reluctant to invest and dis- invest in anticipation that uncertainty induces creditors to convert their defaulting industry rivals into zombies. We validate our theory using dynamic, industry-specific estimates of expected uncertainty-induced zombification together with loan contract-level data. Empirically, higher expected uncertainty-led rival zombification prompts healthy firms to reduce their costly-to-reverse capital investment and disinvestment, hiring, and establishment-level openings and closures (intensive and extensive margins are affected). Uncertainty-led rival zombification further depresses healthy firms' productivity and market valuations. Our results reveal nuanced effects on creative destruction: while healthy firms’ asset allocation slows down, their innovation activity accelerates. Our findings highlight a novel channel through which uncertainty shapes industry capital accumulation, distorting firms’ real policies and performance.

Seminar: University of Cardiff*.

Abstract: We develop a neoclassical theory of a firm exposed to seasonal output prices but able to store output in inventory. Our theory suggests that such a firm optimally builds up output inventories toward its high-price season, prepaying fixed production costs and deleveraging itself. In turn, the deleveraging creates inverse seasonality in its expected return. Importantly, higher inventory holding costs reduce optimal inventory building, making the expected-return seasonality disappear. Supporting our theory, our empirical work reveals that seasonal firms build up inventories toward their high-sales seasons. Also, seasonal inventory leverage relates positively to stock returns and helps explain several stock anomalies.

Seminar: BI Oslo*.

Abstract: We study aggregate return predictability in a production economy with external habit preferences and capital adjustment costs. In equilibrium, the household's consumption surplus predicts stock returns to the same extent as the firm's investment to capital ratio predicts investment returns. If investment returns equal stock returns, the investment to capital ratio predicts stock returns to the same extent as the consumption surplus. Using this testable insight, we find strong empirical support for the implications of the investment based model without the difficulties of calculating unobservable investment returns. Placebo tests further reinforce the equality of stock returns and investment returns.

Seminars: BI Oslo, University of Bristol, University of Cambridge, and University of Manchester.

Abstract: We test if the neoclassical q-theory of investment jointly explains the cross-section of average dividend yields and stock returns. Abstracting from financial market frictions, our structural estimations emphasize the overlooked role of investment policies, real frictions, and capital adjustment costs in explaining firm-level payout policies. Incorporating intangible capital as a second capital input factor and accounting for total distributions to shareholders in the form of share buybacks are critical to the success of the model. Overall, capital investments, stock prices, and corporate payouts are closely tied together.