The Earnings Announcement Return Cycle
with Juhani Linnainmaa, September 2022
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.
May 2023 (Previously titled "Delayed Alpha: The Term Structure of Earnings Expectations")
Theories of myopia predict that horizon-dependent belief dynamics drive asset prices. Using novel measures of ex ante horizon-specific forecast errors, I find strong empirical support for this prediction in the stock market. (1) Beliefs are forward-sticky as short-horizon forecast revisions predict underreactions in longer-horizon forecasts in the same direction. (2) Predictable forecast errors at distant horizons persist until they approach an imminent horizon (e.g., one quarter). (3) The location of this imminent horizon depends on the firm’s information environment. (4) Trading rules that exploit investors’ myopia produce large abnormal profits even after 2003. I propose and estimate a model of myopic-sticky belief to quantify the importance of myopia on belief underreaction at different horizons.
with Juhani Linnainmaa and Guofu Zhou, September 2022
We test a theory of two expectations in asset pricing: investors separately form subjective beliefs on the cash flow level} and cash flow growth when valuing assets. Biases in the two beliefs create distinct forms of mispricing. Using 123 anomalies and analysts' earnings forecast term structure data, we find strong evidence for the separability of the two beliefs and quantify their importance for the cross-section of anomalies.
Expectations, Intermediaries, and the Term Structure of Rental Supply
with Jiayin Hu, Shangchen Li and Zheng Zhang, September 2022
Housing decisions depend on the supply of long-term rental housing, yet few studies examine the determinants of this supply. Based on term structure theories of asset prices and extrapolative beliefs, we hypothesize that housing market conditions shape the term structure of rental supply. Using unique contract-level data between landlords, tenants, and a large rental agency in China, we show that growth in home prices, transaction volume, and rent significantly inhibit the supply of longer-term rental housing. Rental agencies increase this supply by financing renovation. Our findings uncover a cross-market spillover mechanism that affects housing stability, which can be generalized to understand the determinants of long-term capital supply.
Economic Policy Transmission and Local Path Dependence
with Jiayin Hu, March 2022
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.