Revealing Downturns

51 Pages Posted: 17 Nov 2012 Last revised: 16 Jan 2018

See all articles by Martin C. Schmalz

Martin C. Schmalz

University of Michigan, Stephen M. Ross School of Business; CEPR; CESifo; European Corporate Governance Institute (ECGI)

Sergey Zhuk

University of Vienna

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2018

Abstract

When Bayesian risk-averse investors are uncertain about their assets' cash flows' exposure to systematic risk, stock prices react more to news in downturns than in upturns, implying higher volatility in downturns and negatively skewed returns. The reason is that, in good times, less desirable assets with low average cash flows and high loading on market risk perform similar to more desirable assets with high average cash flows and low market risk, rendering them difficult to distinguish. However, their relative fundamental performance diverges in downturns, enabling better inference. Consistent with these predictions, stocks' reaction to earnings news is up to 70% stronger in downturns than in upturns.

Appendix is available at: https://ssrn.com/abstract=2996366

Keywords: Learning, Asymmetry, Business Cycle, Earnings Response

JEL Classification: G00, G10, G12, G14

Suggested Citation

Schmalz, Martin C. and Zhuk, Sergey, Revealing Downturns (January 15, 2018). Available at SSRN: https://ssrn.com/abstract=2176600 or http://dx.doi.org/10.2139/ssrn.2176600

Martin C. Schmalz (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States
7347630304 (Phone)

HOME PAGE: http://https://sites.google.com/site/martincschmalz/

CEPR ( email )

London
United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Sergey Zhuk

University of Vienna ( email )

Universitätsstrasse 7
Vienna, Vienna 1010
Austria

Register to save articles to
your library

Register

Paper statistics

Downloads
555
rank
40,761
Abstract Views
2,384
PlumX Metrics