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Abstract:
This paper is the first to look at the long-run (30-year) behavior of underwriting spreads in the markets for corporate equity and debt. Specifically, we analyze the determinants of underwriting spreads on corporate bond issues, secondary equity offerings and initial public offerings over the period 1970-2000. We explain the time-varying cross-sectional behavior of these spreads by analyzing three sets of variables or factors: Macro (systematic) factors, investment banking market structure factors and issuer specific characteristics. We also analyze the relationship between the direct costs (underwriting spreads) and indirect costs (underpricing) of new issues. Among our many results we find an apparent decline in spreads over time, an increased clustering in spreads for both IPOs and SEOs, the dominance of issuer-specific characteristics in explaining spreads, and a relatively weak linkeage between the direct and indirect costs of issuance.

underwriting spreads, corporate bond issues, secondary equity offerings, initial public offerings, 1970-2000, clustering in spreads

Abstract:
This study examines whether and how earnings quality, measured as accruals quality (AQ), affects the cost of equity capital. Using two-stage cross-sectional regression tests, we find that the AQ risk factor is significantly priced, after controlling for low-priced stocks. This result is robust in tests using individual stocks, various portfolio formations, and different beta estimations. Furthermore, we show that AQ and its pricing effect systematically vary with business cycles and macroeconomic variables. In particular, this pricing effect is prominent in total AQ and innate AQ but not in discretionary AQ. The risk premium associated with AQ exists only in economic expansion but not in recession periods. Poorer AQ firms are more vulnerable to macroeconomic shocks. The risk premium and the dispersion of AQ are also related to future economic activity. Overall, our results suggest that AQ contributes to the cost of equity capital and that its pricing effect is associated with fundamental risk.

Accruals quality, Low-priced stocks, Risk factor models, Macroeconomic conditions, Business cycle

Abstract:
I provide a risk-based rational explanation for the seasonal regularity of January in stock returns by suggesting a common risk factor related to the information uncertainty caused by earnings volatility. When the two-factor model with the market risk factor and this common risk factor is used, there is a remarkable improvement in explaining the January effect. With the adjustment of raw returns for risk through this two-factor model, the systematic pattern in the residual returns across firm size disappears. This risk factor also dominates the other risk factors in explaining the cross-section of stock returns in January.

January effect, Earnings forecast errors, Empirical asset pricing models, Residual returns

Abstract:
This paper is the first to look at the long-run (30-year) behavior of underwriting spreads in the markets for corporate equity and debt. Specifically, we analyze the determinants of underwriting spreads on corporate bond issues, secondary equity offerings and initial public offerings over the period 1970-2000. We explain the time-varying cross-sectional behavior of these spreads by analyzing three sets of variables or factors: macro (systematic) factors, investment banking market structure factors and issuer specific characteristics. We also analyze the relationship between the direct costs (underwriting spreads) and indirect costs (underpricing) of new issues. Among our many results we find an apparent decline in spreads over time, an increased clustering in spreads for both IPOs and SEOs, the dominance of issuer- specific characteristics in explaining spreads, and a relatively weak linkage between the direct and indirect costs of issuance.

Abstract:
This paper is the first to look at the long-run (30-year) behavior of underwriting spreads in the markets for corporate equity and debt. Specifically, we analyze the determinants of underwriting spreads on corporate bond issues, secondary equity offerings and initial public offerings over the period 1970-2000. We explain the time-varying cross-sectional behavior of these spreads by analyzing three sets of variables or factors: macro (systematic) factors, investment banking market structure factors and issuer specific characteristics. We also analyze the relationship between the direct costs (underwriting spreads) and indirect costs (underpricing) of new issues. Among our many results we find an apparent decline in spreads over time, an increased clustering in spreads for both IPOs and SEOs, the dominance of issuer- specific characteristics in explaining spreads, and a relatively weak linkeage between the direct and indirect costs of issuance.

Abstract:
This paper is the first to look at the long-run (30-year) behavior of underwriting spreads in the markets for corporate equity and debt. Specifically, we analyze the determinants of underwriting spreads on corporate bond issues, secondary equity offerings and initial public offerings over the period 1970-2000. We explain the time-varying cross-sectional behavior of these spreads by analyzing three sets of variables or factors: macro (systematic) factors, investment banking market structure factors and issuer specific characteristics. We also analyze the relationship between the direct costs (underwriting spreads) and indirect costs (underpricing) of new issues. Among our many results we find an apparent decline in spreads over time, an increased clustering in spreads for both IPOs and SEOs, the dominance of issuer- specific characteristics in explaining spreads, and a relatively weak linkage between the direct and indirect costs of issuance.

Abstract:
This paper is the first to look at the long-run (30-year) behavior of underwriting spreads in the markets for corporate equity and debt. Specifically, we analyze the determinants of underwriting spreads on corporate bond issues, secondary equity offerings and initial public offerings over the period 1970-2000. We explain the time-varying cross-sectional behavior of these spreads by analyzing three sets of variables or factors: macro (systematic) factors, investment banking marketstructure factors and issuer specific characteristics. We also analyze the relationship between the direct costs (underwriting spreads) and indirect costs (underpricing) of new issues. Among our manyresults we find an apparent decline in spreads over time, an increased clustering in spreads for both IPOs and SEOs, the dominance of issuer- specific characteristics in explaining spreads, and a relatively weak linkeage between the direct and indirect costs of issuance.

Abstract:
This paper examines the equilibrium relation between future labor income growth and expected asset returns; it proposes revisions in the expectation of future labor income growth as a macroeconomic state variable and suggests a three-factor model, including a factor related to this variable, along with the consumption growth factor and the market factor. The proposed future labor income growth factor is positively associated with the Fama-French factors and subsumes their explanatory power in explaining the cross section of stock returns. These results provide a possible economic explanation for the roles of the Fama-French factors: They are compensation for higher exposure to the risk related to changes in the value of human capital. This paper also compares the performance of the proposed three-factor model with other competing models and finds that the proposed model specification better captures cross-sectional variation in average returns than any of the competing asset pricing models considered.

Future labor income growth, Fama-French factors, Economic tracking portfolio, Intertemporal CAPM

Abstract:
This article compares econometric model specifications that have been proposed to explain the commonly observed characteristics of the unconditional distribution of daily stock returns. The empirical results indicate that the most likely ranking is (1) intertemporal dependence models, (2) Student t, (3) generalized mixture of normal distributions, (4) Poisson jump, and (5) the stationary normal. Among the intertemporal dependence models for conditional heteroscedasticity, those with a leverage (or asymmetry) effect are superior. The Glosten, Jagannathan, and Runkie specification is the most descriptive for individual stocks, while Nelson's exponential model is the most likely for stock indexes.

Abstract:
Recent research has documented the failure of market beta to capture the cross-section of expected returns within the context of a two-pass estimation methodology. However, the two-pass methodology suffers from the errors-in-variables (EIV) problem that could attenuate the apparent significance of market beta. This paper provides a new correction for the EIV problem that is robust to conditional heteroskedasticity. After the correction, I find more support for the role of market beta and less support for the role of firm size in explaining the cross-section of expected returns. While the EIV correction leads to a diminished role of firm size, the size variable remains a significant force in explaining the cross-section of expected returns.

Abstract:
This paper reexamines the explanatory power of beta, firm size, book-to-market equity, and the earnings-price ratio for average stock returns, correcting two currently controversial biases: selection bias in COMPUSTAT and the errors-in-variables (EIV) bias. After filling in the missing data on COMPUSTAT with the Moody's sample, I do not find any significantly different results for book-to-market equity from using the COMPUSTAT sample only. After correcting for the EIV bias, I find stronger support for the beta pricing theory than previous studies. Regardless of the presence of firm size, book-to-market equity, and earnings-price ratios, betas have significant explanatory power for average stock returns. In particular, firm size is barely significant using monthly returns, but no longer significant using quarterly returns. However, book-to-market equity still has significant explanatory power for average stock returns, even though the EIV bias is corrected.

Abstract:
This paper reexamines the explanatory power of beta, firm size, book-to-market equity, and earnings-price ratio to average stock returns with correcting two currently controversial biases: the selection bias in COMPUSTAT and the errors-in-variables (EIV) problem. The selection bias is corrected by collecting most of the missing book equity data on COMPUSTAT from Moody's Manuals, and the EIV bias is corrected by using the consistent maximum likelihood estimation of risk premia. After filling in the missing data with the recovered Moody's sample, I do not find any significantly different results for book-to-market equity from using the COMPUSTAT sample only. With correcting for the EIV bias, I find stronger support for the beta pricing theory than previous studies. Regardless of the presence of firm size, book-to-market equity, and earnings-price ratio, betas have economically and statistically significant explanatory power to average stock returns. In particular, firm size is weakly statistically significant using monthly returns, but is no longer significant using quarterly returns. Earnings-price ratio is also not significant. Book- to-market equity has significant explanatory power to average stock returns, even though the EIV bias is corrected. However, a substantial portion of this significance of book-to-market equity is due to the embedded firm size. After disentangling the separate effects of book- to-market and firm size, I find that the significance of book-to-market equity is drastically decreased.

Abstract:
This paper examines the equilibrium relation between future labor income growth and expected asset returns; it proposes revisions in the expectation of future labor income growth as a macroeconomic state variable and suggests a three-factor model, including a factor related to this variable, along with the consumption growth factor and the market factor. The proposed future labor income growth factor is positively associated with the Fama-French factors and subsumes their explanatory power in explaining the cross section of stock returns. These results provide a possible economic explanation for the roles of the Fama-French factors: they are compensation for higher exposure to the risk related to changes in the value of human capital. This paper also compares the performance of the proposed three-factor model with other competing models and finds that the proposed model specification better captures cross-sectional variation in average returns than any of the competing asset pricing models considered.

Future labor income growth, Fama-French factors, Economic tracking portfolios, Intertemporal CAPM.