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Essays on Asset Pricing Anomalies

Posted on:2015-02-27Degree:Ph.DType:Thesis
University:Emory UniversityCandidate:Wen, QuanFull Text:PDF
GTID:2479390017491613Subject:Economics
Abstract/Summary:
This dissertation investigates the pervasiveness of two asset pricing anomalies: asset growth and financial distress. In the first essay ("Asset growth and stock market returns: a time-series analysis"), I examine whether the firm-level asset growth effects extend to the aggregate stock market. I find that aggregate asset growth is a robust negative predictor of future stock market returns. The return predictability is short-term but economically large, and holds both in and out-of-sample. I find that high aggregate asset growth is also associated with more optimistic analyst forecasts and subsequent downward revisions, as well as greater earnings disappointments. These results are consistent with investor over-extrapolation hypothesis, but inconsistent with the rational explanation. The time-series framework sheds new light on the source of the anomaly. In the second essay ("A new measure of investor sentiment"), I investigate the implications of aggregate asset growth in a broad set of anomalies in cross-sectional stock returns. I find that asset growth has significant predictive power for the anomaly returns, consistent with asset growth capturing investor sentiment. Most importantly, unlike the commonly used sentiment index, the predictive power of asset growth for cross-sectional stock returns is not driven by economic fundamentals or business-cycle variables. In the third essay ("Financial distress innovations and the distress-return relation", joint work with Mark Rachwalski), we examine the puzzling evidence that financial distress risk is negatively related to subsequent returns. We find that this negative relation lasts only for a year but after that financial distress risk is positively related to returns. We find that the negative relation in the first year is driven by innovations in financial risk during the prior year and not by the level of risk. The evidence indicates that distress risk commands a positive risk premium although investors initially underreact to distress risk innovations. We also find that the positive distress risk premium explains the size effect.
Keywords/Search Tags:Asset, Distress, Essay
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