Salient or Safe: Why Do Predicted Stock Issuers Earn Low Returns?

61 Pages Posted: 18 Nov 2016 Last revised: 18 Jul 2019

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

Ken Li

McMaster University - Michael G. DeGroote School of Business

Date Written: July 12, 2019

Abstract

Predicted stock issuers (PSIs) are firms with expected “high-investment and low-profit” (HILP) profiles that earn unusually low returns. We carefully document important features of PSI firms to provide insights on the economic mechanism behind the HILP phenomenon. Top-PSI firms are cash-strapped, have lottery-like payoffs, high volatility, high Beta, and high shorting costs. Over the next two years, top-PSIs earn return-on-assets of -30% per year, report disappointing earnings, and experience strongly-negative analyst forecast revisions. They earn especially low returns in down markets and are nine times more likely to delist for performance reasons. We conclude that PSIs earn low returns not because they safe, but because they are more salient and are thus overpriced.

Keywords: asset pricing, risk factors, investment, profitability, saliency, market efficiency, fundamental analysis

JEL Classification: G12, G14, M40, M41

Suggested Citation

Lee, Charles M.C. and Li, Ken, Salient or Safe: Why Do Predicted Stock Issuers Earn Low Returns? (July 12, 2019). Available at SSRN: https://ssrn.com/abstract=2870728 or http://dx.doi.org/10.2139/ssrn.2870728

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Ken Li

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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