Alexander Barinov

Turnover: Liquidity or Uncertainty?

I show that turnover is unrelated to several alternative measures of liquidity risk and in most cases negatively, not positively, related to liquidity. Consequently, neither liquidity nor liquidity risk explains why higher turnover predicts lower future returns. I find that the aggregate volatility risk factor explains why higher turnover predicts lower future returns. This paper shows that the negative relation between turnover and future returns is stronger for firms with option-like equity, and this regularity is also explained by the aggregate volatility risk factor. This paper was accepted by Wei Jiang, finance.

Aggregate volatility risk: Explaining the small growth anomaly and the new issues puzzle

The paper shows that new issues earn low expected returns because they are a hedge against increases in expected aggregate volatility. Consistent with that, the ICAPM with the aggregate volatility risk factor can explain the new issues puzzle, as well as the small growth anomaly and the cumulative issuance puzzle. The key mechanism is that, all else equal, growth options become less sensitive to the underlying asset value and more valuable as idiosyncratic volatility goes up. Idiosyncratic volatility usually increases together with aggregate volatility, that is, in recessions.

Firm Complexity and Post-Earnings-Announcement Drift

The paper shows that the post earnings announcement drift is stronger for conglomerates, despite conglomerates being larger, more liquid, and more actively researched by investors. We attribute this finding to slower information processing about complex firms and show that the post earnings announcement drift is positively related to measures of conglomerate complexity. We also find that the post earnings announcement drift is stronger for new conglomerates than it is for existing conglomerates and that investors are most confused about complicated firms that expand from within rather than firms that diversify into new business segments via mergers and acquisitions.

Why Does Higher Variability of Trading Activity Predict Lower Expected Returns

The paper shows that controlling for the aggregate volatility risk factor eliminates the puzzling negative relation between variability of trading activity and future abnormal returns. I find that variability of other measures of liquidity and liquidity risk is largely unrelated to expected returns. Lastly, I show that the low returns to firms with high variability of trading activity are not explained by liquidity risk or mispricing theories.

High Short Interest Effect and Aggregate Volatility Risk

We propose a risk-based firm-type explanation on why stocks of firms with high relative short interest (RSI) have lower future returns. We argue that these firms have negative alphas because they are a hedge against expected aggregate volatility risk. Consistent with this argument, we show that these firms have high firm-specific uncertainty and option-like equity, and the aggregate volatility risk factor can largely explain the high RSI effect. The key mechanism is that high RSI firms have abundant growth options and, all else equal, growth options become less sensitive to the underlying asset value and more valuable as idiosyncratic volatility goes up. Idiosyncratic volatility usually increases with aggregate volatility (i.e., in recessions).

Firm Liquidity and Issuing Activity

The paper shows that issuing activity does not result in additional liquidity. I find that even in the subsamples in which issuing is supposed to create more liquidity (severely underpriced IPOs, IPOs backed by venture capital, new issues with high-prestige underwriters) new issues are indeed more liquid, but so are their peers, and thus issuing does not create liquidity. The paper thus refutes the existing liquidity-based explanations of the new issues puzzle. The paper also shows that the low-minus-high turnover factor seems to explain the new issues puzzle and related anomalies only because it picks up volatility risk.

Profitability Anomaly and Aggregate Volatility Risk

The paper shows that firms with lower profitability have lower expected returns because such firms perform better than expected when market volatility increases. The better-than-expected performance comes from the fact that unprofitable firms are distressed and volatile, and thus their equity resembles a call option on the assets. Consistent with that, the profitability anomaly is stronger for distressed and volatile firms, and aggregate volatility risk can explain this regularity.

The Bright Side of Distress Risk

The paper shows that distressed firms have positive abnormal returns when aggregate volatility unexpectedly increases. This hedging property of distressed firms explains the puzzling negative relation between firm-specific distress risk and future alphas from benchmark asset-pricing models. Controlling for aggregate volatility risk exposure also explains why the negative relation is stronger for volatile firms and growth firms.