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Abstract:
If investors have limited attention, then accounting outcomes that saliently highlight positive aspects of a firm's performance will promote high market valuations. When cumulative accounting value added (net operating income) over time outstrips cumulative cash value added (free cash flow), it becomes hard for the firm to sustain further earnings growth. When the balance sheet is 'bloated' in this fashion, we argue that investors with limited attention will overvalue the firm, because naïve earnings-based valuation disregards the firm's relative lack of success in generating cash flows in excess of investment needs. The level of net operating assets, the difference between cumulative earnings and cumulative free cash flow over time, is therefore a measure of the extent to which operating/reporting outcomes provoke excessive investor optimism. Therefore, if investor attention is limited, net operating assets will negatively predict subsequent stock returns. In our 1964-2002 sample, net operating assets scaled by beginning total assets is a strong negative predictor of long-run stock returns. Predictability is robust with respect to an extensive set of controls and testing methods.

limited attention, market efficiency, investor misvaluation

Abstract:
We document considerable return comovement associated with accruals after controlling for other common factors. An accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.15, higher than that of the market factor or the HML factor of Fama and French (1993). In time series regressions, a model that includes the Fama-French factors and the additional accrual factor captures the accrual anomaly in average returns. However, further time series and cross-sectional tests indicate that it is the accrual characteristic rather than the accrual factor loading that predicts returns. These findings favor a behavioral explanation for the accrual anomaly.

Capital markets, accruals, market efficiency, behavioral accounting, behavioral finance, limited attention

Abstract:
I argue that the slow diffusion of industry information is a leading cause of the lead-lag effect in stock returns. I find that the lead-lag effect between big firms and small firms is predominantly an intra-industry phenomenon. Moreover, this effect is driven by sluggish adjustment to negative information, and is robust to alternative determinants of the lead-lag effect. Small, less competitive and neglected industries experience a more pronounced lead-lag effect. The lead-lag effect is related to the post-announcement drift of small firms following the earnings releases of big firms within the industry.

G12, G14

Abstract:
This paper argues that slow diffusion of common information is a leading cause of the lead-lag effect in stock returns. I find that the lead-lag effect is predominantly an intra-industry phenomenon: returns on big firms lead returns on small firms within the same industry. Once this effect is accounted for, little evidence of predictability across industries can be found. Furthermore, this effect is largely driven by sluggish adjustment to negative information. Industry leaders lead industry followers; value firms lead growth firms (within the same industry); firms with low idiosyncratic volatility lead their highly volatile industry peers, controlling for firm size. Small, volatile, less competitive and neglected industries experience a more pronounced lead-lag effect. Finally, the intra-industry lead-lag effect drives the industry momentum anomaly.

Abstract:
Firms in more concentrated industries earn lower returns, even after controlling for size, book-to-market, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent, in-sample, cash flow shocks do not explain this finding. Drawing on work in industrial organization, we posit that either barriers to entry in highly concentrated industries insulate firms from undiversifiable distress risk, or that firms in highly concentrated industries are less risky because they engage in less innovation, thus commanding lower expected returns. Additional tests support these risk-based interpretations.

Abstract:
Past research has shown that the level of operating accruals is a negative cross-sectional predictor of stock returns. This paper examines whether the accrual anomaly extends to the aggregate stock market. In contrast with cross-sectional findings, there is no indication that aggregate operating accruals is a negative time series predictor of stock market returns; the relation is strongly positive for the market portfolio and also for several sector and industry portfolios. In addition, innovations in accruals are negatively contemporaneously associated with market returns, suggesting that changes in accruals contain information about changes in discount rates, or that firms manage earnings in response to market-wide undervaluation.

Abstract:
This study seeks to identify which factors are important for explaining the time-series and cross-sectional variation in global stock returns. We evaluate firm characteristics, such as size, earnings/price, cash flow/price, dividend/price, book-to-market equity, leverage, momentum, that have been suggested in the empirical asset pricing literature to be cross-sectionally correlated with average returns in the United States and in developed and emerging markets around the world. For monthly returns of 29,000 individual stocks from 49 countries over the 1981 to 2003 period, we perform cross-sectional regression tests of average returns at the individual firm level and we construct factor-mimicking portfolios based on these firm-level characteristics to assess their ability to explain time-series return variation in country, industry and characteristics-sorted portfolios. We find that the momentum and cash flow/price factor-mimicking portfolios, together with a global market factor, capture substantial common variation in global stock returns. In addition, the three factors explain the average returns of country and industry portfolios, and a wide variety of single- and double-sorted characteristics-based portfolios.

International finance; asset pricing models; common factors

Abstract:
We parsimoniously characterize the severity of market frictions affecting a stock using the delay with which its share price responds to information. The most severely delayed firms command a large return premium that captures the size effect and half the value premium. Moreover, idiosyncratic risk is priced only among the most delayed firms. These results are not explained by other sources of return premia, microstructure, or pure liquidity effects, but appear most consistent with investor recognition and firm neglect. The very small segment of neglected firms (less than 0.02% of the market) captures a sizeable amount of cross-sectional variation in average returns.

Abstract:
Motivated by the recent debate on return R2 as an information-efficiency measure, this paper proposes and examines a new hypothesis that R2 is related to investors' biases in processing information. We provide a model to show that R2 decreases with the degree of the marginal investor's overreaction to firm-specific information. This theoretical result motivates an empirical hypothesis that stocks with lower R2 should exhibit more pronounced overreaction-driven price momentum. Empirically, we confirm that such a negative relationship between R2 and price momentum exists, and find this relationship robust to controls for risk as well as several alternative mechanisms, such as slow information diffusion, information uncertainty, fundamental R2 and illiquidity. Furthermore, we also document stronger long-run price reversals for stocks with lower R2. Taken together, our results suggest that return R2 could be related to price inefficiency.

Abstract:
We examine the role of investor attention in explaining the profitability of price and earnings momentum strategies. Using trading volume and market state to measure cross-sectional and time-series variations of investor attention, we find that price momentum profits are higher among high volume stocks and in up markets, but that earnings momentum profits are higher among low volume stocks and in down markets. In the long run, price momentum profits reverse but earnings momentum profits do not. These results suggest that price underreaction to earnings news weakens with investor attention, but price continuation caused by investors' overreaction strengthens with attention.

Abstract:
Does takeover increase stockholder value? - Yes. We modify the calendar-time portfolio regressions (CTPRs) approach to measure the abnormal returns of a takeover portfolio composed exclusively of successful bidders and targets from 1963 to 1995. This technique balances the positive announcement-period stock price effects against the alleged post-announcement drift that is commonly thought to accompany takeovers. By regressing the takeover portfolio returns on asset-pricing factors with GARCH(1,1) error specification, our methodology overcomes a number of limitations that would otherwise confound this approach. Studying 3,467 successful takeover events, we find that value weighted portfolios earn a highly significant 72 basis points a month in abnormal returns. Equally weighted results are even more dramatic. We extend the analysis to study mergers within and across industry boundaries. Using method of payment as a proxy for pooling versus purchase accounting, we also examine the impact of accounting choice on performance.

Abstract:
This work explores the idea that governments use direct public ownership to make credible commitments to other agents in the economy. We argue that governments exercise indirect control rights over other agents' cash flows: direct ownership is a means of mitigating the holdup problems that arise when the government cannot commit to avoid abusing these rights. The empirical implication of this theory is that more credible governments take lower direct ownership of the economy, since they have fewer holdup problems to solve. With a unique panel comprising measures of ownership, credibility, and expenditure, for nearly 100 countries over a 10-year period, we find strong evidence in support of our propositions. To distinguish our story from alternatives we study the how the credibility-ownership relation varies with other measures. We find more pronounced results among industrial nations than developing ones. The tendency for high expenditure governments to own more diminishes as credibility increases. These results persist after instrumenting credibility with a country's origin of legal system and controlling for unobserved country-specific heterogeneity.