Morad Zekhnini

Published Papers

Safe Minus Risky: Do Investors Pay a Premium for Stocks that Hedge Stock Market Downturns? (with Nishad Kapadia, Barbara Ostdiek,  and James Weston), 2019, JFQA Internet Appendix.   

Stocks that hedge against sustained market downturns — periods from peak to trough in S&P500 levels at the business cycle frequency — should have low expected returns, but they do not. We use ex-ante firm characteristics and covariances to construct a tradeable Safe Minus Risky (SMR) portfolio that hedges market downturns out-of-sample. Although downturns correspond to significant declines in GDP growth, SMR has significant positive average returns and four factor alphas (both about 0.75% per month). Risk-based models do not explain SMR’s returns, but mispricing does. Risky stocks are overpriced when sentiment is high, resulting in subsequent returns of -1% per month. 

Do Idiosyncratic Jumps Matter? (with Nishad Kapadia), 2019, JFE Internet Appendix.

The entire annual return of a typical stock accrues on the four days (on average) on which its stock price experiences jumps, or large idiosyncratic movements relative to its volatility, Stock prices drift down by about 2% before jumps. These patterns are likely due to a premium for idioysncratic jump risk. A trading strategy that buys stocks with high ex-ante jump probability earns high average returns and alphas. Returns for the strategy are higher when/where costs of arbitrage are high.

Financial Integration and Credit Democratization: Linking Banking Deregulation to Economic Growth  (with Elizabeth Berger, Alexander W. Butler, and Edwin Hu), 2021, JFI.

We document a positive effect of financial integration on economic growth. Using US state-by-state financial deregulations, we find that economic growth occurred in states where bank deregulation solved a capital immobility problem. We use a matching method that constructs synthetic counterfactual states to identify the channels that link bank deregulation to financial integration, and thereby to economic growth. Our results reveal a correlation between financial integration and subsequent banking sector changes including improved bank efficiency, better lending and borrowing rates, and an expansion in loan recipients. We show that financial integration democratizes lending and spurs economic growth. 

Industry Networks and the Geography of Firm Behavior (with William Grieser and James LeSage), 2022, MS.

Using a network approach that circumvents well-known challenges in estimating peer effects, we show that interactions with a firm’s geographic neighbors play a significant causal role in corporate investment behavior, and a modest role in financial policies and firm performance. Moreover, these geography network effects are almost entirely driven by propagation effects through product market and supply chain networks. We corroborate our findings in a quasi-experimental framework that allows for spillovers in treatment effects. Our findings help rationalize industrial clusters (e.g., Silicon Valley), as they illustrate that agglomeration economies are substantial and operate predominantly within industry boundaries. 

Network Effects in Corporate Financial Policies (with William Grieser, Charles Hadlock, and James LeSage), 2022, JFE.

We present a spatial econometrics framework for estimating peer effects in capital structure.  This approach exploits the heterogeneous and intransitive nature of peer networks to identify economically informative structural coefficients.  In models of leverage levels, we detect significant peer-effect leverage coefficients that are on the order of 0.20, indicating a moderate but substantive level of strategic complementarity in capital structure decisions.  We argue that prior estimates in the literature substantially overstate the magnitude of the underlying relation.  Our evidence is robust to a wide variety of model modifications and supports the hypothesis that leverage is an important strategic choice variable.

Intangible Capital in Factor Models (with Huseyin Gulen, Dongmei Li, and Ryan Peters), 2023, forthcoming, MS.

We incorporate intangible investment/capital into the empirical factor models of Fama and French (1993, 2015) and Hou, Xue, and Zhang (2015), and illustrate the distinctive effects of intangibles on expected stock returns via well-known return predictors such as book-to-market, investment, and profitability. Our frameworks highlight the importance of separating tangible from intangible investments and addressing the effects of intangible investment on profitability and other valuation measures. We show that incorporating intangibles significantly improves the Fama-French three- and five-factor models and the q-factor model, especially over recent decades. Additionally, we show that the adjusted value factor is no longer redundant. 

Working Papers

The Disappearing Earnings Announcement Premium  (with Amanda Heitz and Ganapathi Narayanamoorthy), 2023, Reject & Resubmit, MS. 

The earnings announcement premium, whereby a stock earns abnormal returns over its earnings announcement period, has been the subject of extensive research. We provide the first evidence that this premium has disappeared in the US in recent years. We theorize that the increased filings of material information (Form 8-K) due to a regulatory change is responsible for this disappearance. Information traditionally contained in earnings announcements is now preempted by 8-K filings, and the announcement premium has shifted to 8-K filing dates. These results are consistent with our information uncertainty resolution model and inconsistent with attention-based behavioral explanations. 

The Epidemiology of Financial Constraints (with William Grieser and Ioannis Spyridopoulos), 2021.

We use a network regression approach to study the propagation of financial constraints through production networks. We find that supply-chain partners' constraints i) are roughly 73% as important as a firm's own constraints for explaining investment levels, ii) propagate primarily upstream, and iii) play an important role in supply-chain network formation. To facilitate a causal interpretation, we exploit loan covenant violations in a novel Network Regression Discontinuity Design that allows for spillovers in treatment effects. Our study suggests that the aggregate effects of financial constraints on under-investment are considerably understated in firm-centric settings that ignore spillovers. 

Preference for Local Assets and Endogenous Location Decisions (with William Grieser, Zoran Ivković, and Jung Hoon Lee), 2023.

We examine local asset preferences in a framework that simultaneously considers endogenous location decisions of both investors and firms. We create fund-level counterfactuals that account for non-random investor and asset locations and compare actual fund-portfolio distances to these counterfactuals. On average, a local preference for assets does not exist. The relatively small set of funds that exhibit a statistically significant local preference relative to counterfactuals encompasses younger and smaller funds. These funds do not exhibit superior performance, but REITs with pronounced local holdings do.

Ubiquitous Comovement  (with William Grieser and Jung Hoon Lee), 2021. 

Rational and behavioral asset pricing theories offer conflicting interpretations of the covariance structure of asset returns. Return comovement beyond what prespecified empirical factor models can explain is often interpreted in favor of frictions or behavioral explanations. However, we show that randomly grouped assets exhibit "excess" comovement that is ubiquitous and indistinguishable from the comovement of economically motivated groupings advanced in the literature. Our finding is consistent with the presence of a latent factor that could be derived from multiple sources of systematic variation, including rational sources. We propose new statistical tests that account for latent factors when detecting excess comovement.

Sticky Wages, Profitability, and Momentum, 2016.

Wage stickiness and firm-specific human capital induce operating leverage that contributes to the risk exposure of the firm. This leverage produces momentum in returns as well as a positive relationship between profits and subsequent returns. I demonstrate these relationships in the context of a partial equilibrium production model. I empirically show that momentum and profitability returns are more pronounced in the presence of labor-induced operating leverage. A novel implication of the model is that recession-resistant stocks earn higher returns during subsequent expansions.  This prediction holds empirically and is distinct from other anomalies.