Ambrus Kecskes

How Much Does Investor Sentiment Really Matter for Equity Issuance Activity

We study the extent to which investor sentiment matters for aggregate equity issuance activity. We focus on firms that are susceptible to investor sentiment and for which accurate measures of economic fundamentals are available. While sentiment on its own matters for equity issuance, it matters relatively little once we control for accurately measured fundamentals. Collectively, proxies for sentiment explain roughly 10 percentage points of the time-series variation of equity issuance beyond the roughly 40% explained by fundamentals. We conclude that investor sentiment does not seem to matter very much for aggregate equity issuance activity.

Do Earnings Estimates Add Value to Sell-Side Analysts' Investment Recommendations?

Sell-side analysts change their stock recommendations when their valuations differ from the market’s. These valuation differences can arise from either differences in earnings estimates or the nonearnings components of valuation methodologies. We find that recommendation changes motivated by earnings estimate revisions have a greater initial price reaction than the same recommendation changes without earnings estimate revisions: about +1.3% (−2.8%) greater for upgrades (downgrades). Nevertheless, the postrecommendation drift is also greater, suggesting that investors underreact to earnings-based recommendation changes. Implemented as a trading strategy, earnings-based recommendation changes earn risk-adjusted returns of 3% per month, considerably more than non-earnings-based recommendation changes. Evidence from variation in firms’ information environment and analysts’ regulatory environment suggests that recommendation changes with earnings estimate revisions are less affected by analysts’ cognitive and ...

Investor Horizons and Corporate Cash Holdings

We study the effect of investor horizons on corporate cash holdings. We argue that investors with longer horizons monitor more because their net benefit of monitoring is higher. Consequently, the optimal amount of corporate cash holdings increases, so firms hold more cash. We find empirical support for our argument: (1) firms with longer investor horizons hold more cash; (2) when they have excess cash, they invest less and pay out more to shareholders; and (3) they are more likely to invest in projects with long-term payoffs, as evidenced by increased profitability in the long-term. We establish causality using long-term investors who index as an instrument. Our results are not explained by internal corporate governance mechanisms or ownership concentration (blockholders).

The Real Effects of Analyst Coverage

We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference-in-differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst. These results are significantly stronger for firms that are smaller, have less analyst coverage, have a bigger increase in information asymmetry, and are more financially constrained.

Are the Risk Attitudes of Professional Investors Affected by Personal Catastrophic Experiences

We adopt a novel empirical approach to show that the risk attitudes of professional investors are affected by their catastrophic experiences – even for catastrophes with no economic impact on these investors or their portfolio firms. We study the portfolio risk of U.S.-based mutual funds that invest outside the U.S. before and after fund managers personally experience severe natural disasters. Using differences-in-differences, we compare managers in disaster versus non-disaster counties matched on prior disaster probability and fund characteristics. We find that monthly fund return volatility decreases by roughly 60 bps in year 1 and the effect disappears by year 3. Systematic risk drives the results. Additional analyses rule out wealth effects (using disasters with no damages) and managerial agency, skill, and catering explanations.

Labor Force Demographics and Corporate Innovation

Firms in younger labor markets produce more innovation. We establish this using the local labor force projected based on historical births in each local labor market in the United States. Three successive levels of analysis – labor markets, firms, and inventors – allow us to separate out effects such as firm and inventor life cycles. We also find that corporate innovation activities reflect the innovative characteristics of younger labor forces, and firms in younger labor markets have higher valuations. Our results indicate that younger people as a group – inventors interacting with non-inventors – produce more innovation for firms through the labor supply channel rather than through a financing supply or consumer demand channel.

Do Technology Spillovers Affect the Corporate Information Environment

Technology spillovers across firms affect corporate innovation, productivity, and value, according to prior research, so information about technology spillovers should matter to investors. We argue that technology spillovers increase the complexity and uncertainty of value relevant information about the firm, which makes information processing more costly, discourages it, and thereby increases information asymmetry between insiders and outsiders. We find that not only does information asymmetry increase, but so does avoidance by sophisticated market participants, uncertainty, and insider trading. We also find that investors do not misestimate short-term earnings, but they underestimate long-term earnings, consistent with the higher future stock returns that we also find.

Technology Spillovers, Asset Redeployability, and Corporate Financial Policies

Prior research shows that technology spillovers across firms increase innovation, productivity, and value. We study how firms finance their own growth stimulated by technology spillovers from their technological peer firms. We find that greater technology spillovers lead to higher leverage. This is the result of technology spillovers increasing asset redeployability, as evidenced by more collateralized borrowing and asset transactions. Borrowing costs also decrease. Exogenous variation in the R&D tax credits of other firms allows us to identify the causal effect of technology spillovers on a given firm.