Working Papers

The Earnings Announcement Return Cycle

with Juhani Linnainmaa, August 2021


Stocks earn negative abnormal returns before earnings announcements and positive after them. Analysts' forecasts, recommendations, and target prices follow the same pattern: analysts start optimistic after earnings announcements but grow pessimistic as the next ones draw near. Analysts' optimism appears to drive the high returns early in the cycle and firms' disclosures of bad news cause both the low returns and analysts' pessimism late in the cycle. The tug of war between analysts and firms significantly affects anomaly profits: strategies that trade for or against contrarian anomalies depending on where the firms are relative to announcing their earnings earn as large alphas as the original anomalies---despite being unconditionally anomaly neutral.

The Efficient Horizon of Expectations and Stock Prices

October 2021 (Previously titled "Delayed Alpha")


Investors' expectations on firms' cash flow growth can be biased, yet we know little about how these biases and their asset pricing implications vary with forecast horizons. In this paper, I show that extreme expectations at all horizons beyond the current period inversely forecast abnormal stock returns, but some with a delay --- extreme expectations at long-horizons persist until they reach the imminent horizon, causing persistent mispricing. Consistent with managers' expectation management altering the efficient expectation horizon, the pattern is stronger after Regulation-FD. A model based on ``natural expectation'' by \cite{fuster2010natural} generates the short- and long-horizon forecast error dynamics that match the empirical patterns. Surprisingly, this extrapolative belief model also predicts underration.

Which Expectation? Toward a Unified Framework of Expectation-Based Asset Pricing

November 2021

[Available soon]

A model in which investors form sticky expectations on cash flow level and extrapolative beliefs on growth yields novel predictions on the shape and dynamics of the expectation error term structure, explains well-known stock market anomalies, and generates new implications for momentum and reversal. Empirical results support the model's predictions. Model simulations produce realistic joint dynamics of expectations and prices that reveal new insights for unifying under- and over-reaction to news in the cross-section. My results highlight stickiness and extrapolation as key ingredients for a unified framework of expectation-based asset pricing.

Economic Policy Transmission and Local Path Dependence

with Jiayin Hu, August 2021

[Available soon]

We examine the transmission efficiency of economic policies from central to local governments using hand-collected three-tier government reports from China. We find that local officials' political agendas are disproportionately shaped by the economic and political environment in the year when they take office. As a result, economic policies transmit better to and have a more lasting effect in cities with newly arrived governors. This political path dependence manifests into a cohort effect: local governors who assume office in the same year focus on a more similar set of policies going forward. Our paper provides fresh empirical evidence on the transmission mechanism of economic policies in a political hierarchy.



合作者:张峥,李尚宸; 2021年10月


合作者:胡佳胤,向昊天,黄北辰; 2021年8月







Chinese Working Papers