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Publications

“The Term Structure of Equity Risk Premia: Levered Noise and New Estimates”, with Oliver Boguth, Murray Carlson, and Adlai Fisher <pdf>
  • Review of Finance, Forthcoming
  • Presented at WFA 2012, EFA 2012, NFA 2012
Abstract: We show theoretically and empirically that no-arbitrage pricing magnifies the importance of noise when replication requires offsetting positions with similar fundamentals. This occurs because fundamentals are hedged, while any errors in the underlying asset prices are levered and amplified. Levered noise causes bias in estimated return moments including means, variances, and autocorrelations. We illustrate these effects in pairs trading strategies and in the highly levered portfolios required to replicate dividend strips. To improve estimates of the term structure of equity risk premia, we develop replication methods that reduce noise, focus on statistics that are more robust to noise, and provide time series that are longer than any prior study. The improved estimates provide no evidence of a downward sloping unconditional equity term structure. In the longest samples, dividend strip returns are lower than the market index.


“Dissecting Conglomerate Valuations”, with Oliver Boguth and Ran Duchin <pdf>
  • Journal of Finance (2022), Volume 77, 1097-1131
  • European Winter Finance Symposium 2016, Univeristy of Kentucky 2016 Finance Conference, SFS Cavalcade 2016, UBC 2016 Summer Conference, NFA 2016, City University of Hong Kong 2016 International Finance Conference, Edinburgh Corporate Finance 2017 Conference
Abstract: We develop a new methodology to value individual divisions of conglomerate firms by forming portfolios of conglomerates to mimic standalone firms. We find considerable variation in the average valuations of divisions relative to standalone firms within conglomerates, across industries, and over time, which cannot be captured by traditional estimates of conglomerate value. Within conglomerates, small non-core divisions are valued richer. Across industries, division valuation is higher in distressed industries and lower in innovative or competitive industries. Over time, valuation of divisions declines following industry deregulation. Overall, we provide the first evidence of within-conglomerate variation in value and identify key economic channels through which conglomeration creates or destroys value.


“Feedback Loops in Industry Trade Networks and the Term Structure of Momentum Profits”, with Ali Sharifkhani <pdf>
  • Journal of Financial Economics, Forthcoming
  • AFA 2017 poster session, CICF 2017, Trans-Atlantic Doctoral Conference 2017, EFA 2017 conference
Abstract: Industries are economically linked through customer-supplier trade flows. We show theoretically and empirically that industry shocks propagating along this inter-sectoral trade network can feed back to the originating industry, causing an "echo" -- intermediate-term autocorrelation in returns. Adopting techniques from graph theory, we find that the strength of the trade network feedback is a crucial determinant of the echo effect in industry returns. Returns of the echo strategy implemented within high-feedback strength industries exceed 1% monthly. Consistent with limited-information models, the relation between feedback strength and echo profits is strongest in industries with information diffusion frictions, such as low analyst coverage, along the feedback loop. Overall, our results identify inter-sectoral trade networks as important conduits of industry shocks and provide the first explanation for the echo effect.


“The Fragility of Organization Capital”, with Oliver Boguth and David Newton <pdf>
  • Journal of Financial and Quantitative Analysis (2022), Volume 57, 857-887
  • University of Alberta Frontiers in Finance 2016 conference, CFEA 2016 conference, EFA 2017 conference
Abstract: Firms with high levels of organization capital, a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that the fragility of organization capital -- its sensitivity to potential disruptions -- is an independently important determinant of risk. We validate our proxy for fragility, the size of the top management team, by showing that shocks to team composition from unexpected CEO deaths cause larger value losses in smaller teams. In the cross-section, firms with small teams outperform firms with big teams by 6% annually, and the return spread increases in the level of organization capital. A factor capturing organization capital fragility exhibits an exceptional risk-return trade-off and is priced in the cross-section of stocks.


“The origins and real effects of the gender gap: Evidence from CEOs' formative years ”, with Ran Duchin and Denis Sosyura <pdf>
  • Review of Financial Studies, Forthcoming
  • Best paper award, University of Colorado 2018 Front Range Finance Seminar
  • CEPR Third Annual Spring Symposium at Imperial College, Corporate Governance Conference at Drexel University, Northeastern Finance Conference, Front Range Finance conference, SFS Cavalcade, European Finance Association, Northern Finance Association, American Finance Association
Abstract: CEOs allocate more investment capital to male managers than to female managers in the same divisions. Using data from individual Census records, we find that this gender gap is driven by CEOs who grew up in male-dominated families—those where the father was the only income earner and had more education than the mother. The gender gap also increases for CEOs who attended all-male high schools and grew up in neighborhoods with greater gender inequality. The effect of gender on capital budgeting introduces frictions and erodes investment efficiency. Overall, the gender gap originates in CEO preferences developed during formative years and produces significant real effects.


“The best of both worlds: Accessing emerging economies via developed markets”, with Joon Bae and Redouane Elkamhi <pdf>
  • Journal of Finance, 74 (5), 2579-2617
  • CICF 2016, NFA 2016, SFS Cavalcade 2017
Abstract: A growing body of evidence suggests that the benefits of international diversification via developed markets have dramatically declined. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of economic activity of emerging countries. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries' overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.


“Leverage Constraints and Asset Prices: Insights from Mutual Fund Risk Taking”, with Oliver Boguth <pdf>
  • Journal of Financial Economics, 127 (2), 325-341
  • LCT data
  • Internet appendix
  • AQR Insight Award finalist
  • Frontiers in Financial Economics Research conference at IDC, French Finance Association, Oregon summer finance conference, AFA 2016, BlackRock Research conference
Abstract: Prior theory suggests that time variation in the degree to which leverage constraints bind affects the pricing kernel. We propose a demand-based measure for this leverage constraint tightness by inverting the argument that constrained investors tilt their portfolios to riskier assets. We show that the average market beta of actively managed mutual funds -- intermediaries facing leverage restrictions -- captures their borrowing demand and thus the tightness of leverage constraints. Consistent with theory, it strongly predicts returns of the betting-against-beta portfolio, and is a priced risk factor in the cross-section of mutual funds and stocks. Funds with low exposure to the factor outperform high-exposure funds by more than 5% annually, and for stocks this difference reaches 7%. Our results show that the tightness of leverage constraints has important implications for asset prices.


“A Labor Capital Asset Pricing Model”, with Lars-Alexander Kuehn and Jessie Wang <pdf>
  • Journal of Finance, 72 (5), 2131-2178
  • ASU Sonoran Winter Finance Conference 2013 Best Paper Award
  • WRDS award for an outstanding paper in asset pricing research (MFA 2013)
  • Presented at AFA 2014
  • Internet appendix
Abstract: We show that labor search frictions are an important determinant of the cross section of equity returns. In the data, sorting firms based on their loading on labor market tightness, the key statistic of search models, generates a spread in future returns of 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make optimal employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time variation in the labor force participation rate. Firms with low factor loadings are not hedged against adverse labor force shocks and thus require higher expected stock returns.


“On the demand for high-beta stocks: Evidence from mutual funds ”, with Susan Christoffersen <pdf>
  • Review of Financial Studies, 30 (8), 2596-2620
  • Presented at NFA 2012, LSE PWC 2014 conference, EFA 2014, AFA 2015, FIRS 2015
Abstract: Prior studies have documented that pension plan sponsors rigorously monitor a fund’s performance relative to a benchmark. We use a first-difference approach to causally show that in an effort to beat benchmarks, fund managers controlling large pension assets reduce fees and increase their exposure to high-beta stocks. Managers increase beta without affecting tracking error because they strategically substitute low-beta stocks for high-beta stocks with low idiosyncratic volatility. The findings support theoretical conjectures that benchmarking pressures increase demand for high-beta stocks and help to explain their low returns. Managerial risk-taking responses to benchmarking pressures complicate financial planning for investors.


“Horizon Effects in Average Returns: The Role of Slow Information Diffusion”, with Oliver Boguth, Murray Carlson, and Adlai Fisher <pdf>
  • Review of Financial Studies, 29 (8), 2241-2281
  • Presented at NFA 2011, Down Under Finance conference 2011, Red Rock Finance conference 2013, AFA 2015
Abstract: We characterize linkages between average returns calculated at different horizons. Theoretically, when stocks incorporate information slowly, average short-horizon returns are downward biased. Buy-and-hold strategies can amplify the effect. In contrast, existing theories analyze price noises that are independent of fundamentals, and buy-and-hold portfolio returns are unaffected. We document horizon effects as large as 10% annualized in daily and monthly style portfolios and international indices. Slow reaction to market information, identified by gradually declining lagged betas, is an important cause. These findings have natural consequences for performance evaluation.


“Managerial Activeness and Mutual Fund Performance”, with Hitesh Doshi and Redouane Elkamhi <pdf>
  • Review of Asset Pricing Studies, 5 (2), 156-184
  • SAS code to reproduce the key results of the paper <SAS>
  • Lead article (Editor's choice)
  • RAPS best paper award
Abstract: A closet indexer is more likely to meet a value-weighted investment benchmark by value-weighting the portfolio. Following this intuition, we introduce a simple measure of active management, the absolute difference between the value weights and the actual weights held by a fund, averaged across its holdings. This proxy captures managerial skill: Active funds outperform passive ones by 2.5% annually. Compared to known measures of skill, our proxy robustly predicts fund flows, asset growth, factor-adjusted performance, and value added. Its predictive ability is orthogonal to that of other measures and is robust to controlling for volatility timing, past performance, and style.


“Of Age, Sex, and Money: Insights from Corporate Officer Compensation on the Wage Inequality between Genders” with David Newton <pdf>
  • Management Science (2015), Volume 61 (10), 2355–2375
Abstract: This paper shows that the gender and age of the wage-setter are crucial determinants of the disparity in wages between sexes. We document our findings using a dataset on compensation of corporate officers that is uniquely suited for this analysis because officer wages are set by chief executive officers. We show that CEOs pay officers of the opposing gender less than officers of their own gender, even when controlling for job characteristics. Older and male CEOs exhibit the greatest propensity to differentiate on the basis of sex. Female officers receive smaller raises if the firm is headed by a man. Our results suggest that CEO gender and age are economically more important determinants of officer compensation than are firm stock performance, stock volatility or return on assets.


“Cash Holdings and Mutual Fund Performance” <pdf>
  • Review of Finance (2014), Volume 18 (4), 1425-1464
  • Presented at AFA 2011, EFA 2010
  • Online Appendix <pdf>
Abstract: Cash holdings of equity mutual funds impose a drag on fund performance but also allow managers to make quick investments in attractive stocks and satisfy outflows without costly fire sales. This paper shows that actively managed equity funds with high abnormal cash -- that is, with cash holdings in excess of the level predicted by fund attributes -- outperform their low abnormal cash peers by over 2% per year. Managers carrying high abnormal cash compensate for the low return on cash by making superior stock selection decisions, whereas less capable managers find abnormal cash costly and remain more fully invested in equities. Managers of high abnormal cash funds also proficiently satisfy fund outflows and control fund transaction costs, while low abnormal cash funds lack flexibility to cover outflows and can suffer from costly fire sales. The empirical evidence suggests that managers carrying abnormal cash benefit from the flexibility it provides despite the costs of holding cash.


“Conditional Risk and Performance Evaluation: Volatility Timing, Overconditioning, and New Estimates of Momentum Alphas”, with Oliver Boguth, Murray Carlson, and Adlai Fisher <pdf>
  • Journal of Financial Economics (2011), Volume 102, p. 363-389
  • Presented at the NBER Asset Pricing Program 2007, NFA 2007, WFA 2009
Abstract: Unconditional alphas are biased when conditional beta covaries with the market risk premium (“market-timing”) or volatility (“volatility-timing”). We demonstrate an additional bias (“overconditioning”) that can occur any time an empiricist estimates risk using information, such as a realized beta, that is not available to investors ex ante. Calibrating to U.S. equity returns, volatility-timing and overconditioning can plausibly impact alphas more than market-timing, which has been the focus of prior literature. To correct market- and volatility-timing biases without overconditioning, we show that incorporating realized betas into instrumental variables estimators is effective. Empirically, instrumentation reduces momentum alphas by 20-40%. Overconditioned alphas overstate performance by up to 2.5 times. We explain the sources of both the volatility-timing and overconditioning biases in momentum portfolios.


“Excess Cash and Stock Returns” <pdf>
  • Financial Management (2010), Volume 39, Issue 3, p. 1197-1222
  • Presented at NFA 2009
Abstract: I document a positive relationship between corporate excess cash holdings and future stock returns. The difference in returns of portfolios of high and low excess cash firms amounts to 5% annually, or 6% after standard 3-factor risk adjustment. Firms with more excess cash have higher market betas and earn lower returns during market downturns. High excess cash companies invest considerably more in the future than do their low-cash peers, but do not experience stronger future profitability. On the whole, this evidence is consistent with the notion that excess cash holdings proxy for risky growth options.


Working Papers
“Cheaper Is Not Better: On the Superior Performance of High-Fee Mutual Funds ”, with Jinfei Sheng and Terry Zhang <pdf>
  • Finance Down Under 2017 conference, CICF 2017 conference, EFA 2017 conference
Abstract: The well-established negative relation between expense ratios and future net-of-fees performance of actively managed equity mutual funds guides portfolio decisions of institutional and retail investors. We show that this relation is an artifact of the failure to adjust performance for exposure to the profitability and investment factors. High-fee funds exhibit a strong preference for stocks with low operating profitability and high investment rates, characteristics recently found to associate with low expected returns. We show that after controlling for exposures to profitability and investment factors, high-fee funds significantly outperform low-fee funds before expenses, and perform equally well net of fees. Our results have important implications for asset allocation decisions and support the theoretical prediction that skilled managers extract rents by charging high fees.


“Standing Out in the Fund Family: Deviation from a Family Portfolio Predicts Mutual Fund Performance” <pdf>
  • Presented at NFA 2012
  • Online supplement with additional results <pdf>
Abstract: This paper studies how the family organization of the mutual fund industry affects managerial portfolio decisions and fund performance. Mutual fund managers who actively deviate from the "average" portfolio of other funds in the same fund family significantly outperform managers who passively mimic their family's portfolio. The superior performance of high-deviation managers is driven by their better stock-selection and timing abilities. Skilled managers deviate from the family portfolio because withholding their investment ideas from family peers enables such managers to achieve top rank in the family and benefit from the preferential treatment granted to best-performing family members. I show that deviation from a family portfolio is a new dimension of active management and argue that it captures superior managerial skill.


“IPO Offer Prices and Firm Performance” <pdf>

Abstract: This paper explores the determinants of IPO prices and studies the relationship between price choice of firms going public and post-issue stock performance and firm characteristics. I find that IPO prices positively relate to median industry prices, underwriter reputation, and book-to-market ratio of the firm going public. I further show that raw and risk-adjusted stock returns of IPOs monotonically increase with the ratio of offer price to average industry price. The difference in returns between IPOs with the highest and lowest relative offer prices averages 9% during one year following the issuance, and exceeds 60% over five years. The group of IPOs with high relative prices does not exhibit any underperformance relative to matches at any horizon. I also document a positive relation between underpricing and relative offer prices. I further show that firms with high relative prices generate better earnings after going public. These firms have larger market betas around the IPO, and spend considerably more on investment during five years following the offering.



Finance Division Rotman School UT