Asset Pricing and Ambiguity: A Cross-Sectional Approach

41 Pages Posted: 24 Dec 2019

See all articles by Jens Kvaerner

Jens Kvaerner

Tilburg University

Joakim Kvamvold

Folketrygdfondet

Maximilian Rohrer

NHH - Norwegian School of Economics

Date Written: March 13, 2019

Abstract

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

Kvaerner, Jens and Kvamvold, Joakim and Rohrer, Maximilian, Asset Pricing and Ambiguity: A Cross-Sectional Approach (March 13, 2019). Available at SSRN: https://ssrn.com/abstract=3497580 or http://dx.doi.org/10.2139/ssrn.3497580

Jens Kvaerner

Tilburg University ( email )

Warandelaan 2
Tilburg, Noord-Brabant 4818HK
Netherlands
+4740242704 (Phone)

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

Joakim Kvamvold (Contact Author)

Folketrygdfondet ( email )

Haakon VII’s gate 2
Postboks 1845 Vika
Oslo, 0123
Norway

Maximilian Rohrer

NHH - Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway

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