Working Papers
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Delayed Alpha: The Term Structure of Earnings Expectations and the Cross-Section of Stock Returns

October 2020

The term structure of analysts' earnings expectations and its dynamics predict the cross-section of stock returns. Stocks with the most positive expected change in earnings growth underperform those with the most negative expected change by over 8% per year. I decompose growth expectations by forecast horizon and find that the return predictability almost entirely stems from errors in two-quarter-ahead earnings forecasts, as opposed to one- or three-quarter-ahead forecasts. Strategies that trade against growth forecasts beyond two quarters experience "delayed alpha:" they do not earn alpha immediately but with a delay. Behavioral models with bounded rationality can explain both the return predictability and the delayed alpha through inattention to long-horizon earnings news. I estimate that while investors pay full attention to one-quarter-ahead earnings information, they are only 25% as attentive to earnings information beyond the one-quarter horizon.

 

 

 

The Earnings Announcement Return Cycle

with Juhani Linnainmaa, January 2021

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Stocks earn significantly negative abnormal returns before earnings announcements and positive after them. This “earnings announcement return cycle” (EARC) is unrelated to the earnings announcement premium, and it is a feature of stocks widely covered by analysts. Analysts’ forecasts follow the same pattern as returns: analysts’ forecasts become more optimistic after an earnings announcement and more pessimistic as the next one draws near. We attribute one-half of the earnings announcement return cycle to this optimism cycle. The EARC may stem from mispricing: both the return and optimism patterns are stronger among high-uncertainty and difficult-to-arbitrage stocks, and the EARC strategy is more profitable on days when it would accommodate larger amounts of arbitrage capital.

 

 

 

 

Publication Norm and Information Content: Evidence from Analysts' Industry Reports

​​​with Shangchen Li and Zheng Zhang, February 2021

Industry reports make up 42% of all analysts’ equity research reports in China. While a large body of academic work has been devoted to understanding analysts’ firm reports, researchers and investors seem to have largely overlooked the importance of analysts’ industry reports. We apply textual analysis to a new dataset of over 240 thousand industry reports in China between 2011 and 2018. We show that firms recommended in these reports subsequently outperform in terms of both stock returns and operating performances. These results persist even after controlling for firm characteristics and information in analysts’ firm reports such as earnings forecasts and recommendations. An industry-neutral long-short strategy that buys (sells) the most (least) recommended stocks by industry reports earns a value-weighted three-factor model alpha of over 12% per year. We trace such firm-level predictabilities to two “publication norms” of industry reports: (1) Analysts issue industry reports regularly (weekly or monthly), so these reports provide a constant flow of information that fills the gap between irregularly issued firm reports; (2) Industry reports recommend only a few stocks. Analysts, therefore, must select their top picks among the numerous “buy-rated” stocks to include in the industry reports. Our paper highlights the importance of industry reports as a channel through which analysts help improve market efficiency.

 

 

The Other Guy's Fault: CEO's Excessive Blaming and Stock Price Distortion

​​​with Hao Qu, October 2020

This paper shows evidence that top executives’ private incentives may lead to stock price distortion. We document an empirical pattern that firms with forced CEO turnovers significantly underperform during the following earnings announcements. New CEOs’ implicit blaming on their predecessors helps explain the negative returns. We find evidence that the blaming may be excessive and temporarily distort stock prices, as the negative announcement returns tend to revert in the subsequent quarter. Consistent with agency cost of free cash flow, the stock price reversal is concentrated among firms with low leverage ratios.