Asset Pricing and Ambiguity: A Cross-Sectional Approach
41 Pages Posted: 24 Dec 2019
Date Written: March 13, 2019
We use textual analysis to quantify how familiar investors are with any company’s business model. Our main result is that a portfolio that buys unfamiliar companies and sells familiar companies earns an annual premium of 5.3 %. Further, we find that unfamiliar companies have higher discount rates and lower listing prices in Initial Public Offerings (IPOs) than that of familiar companies. In particular, unfamiliar companies have about 50 % higher one-day returns after the IPO than firms with familiar business models. Overall, our results are consistent with previous empirical evidence on ambiguity premium. The data rejects investor recognition as an alternative explanation.
Keywords: familiarity, ambiguity, investor recognition, asset pricing
JEL Classification: D53, G11, G12
Suggested Citation: Suggested Citation