Christopher J. Malloy

Differences of Opinion and the Cross Section of Stock Returns

We provide evidence that stocks with higher dispersion in analysts’ earnings forecasts earn lower future returns than otherwise similar stocks. This effect is most pronounced in small stocks and stocks that have performed poorly over the past year. Interpreting dispersion in analysts’ forecasts as a proxy for differences in opinion about a stock, we show that this evidence is consistent with the hypothesis that prices will ref lect the optimistic view whenever investors with the lowest valuations do not trade. By contrast, our evidence is inconsistent with a view that dispersion in analysts’ forecasts proxies for risk. IN THIS PAPER WE ANALYZE THE ROLE of dispersion in analysts’ earnings forecasts in predicting the cross section of future stock returns. We find that stocks with higher dispersion in analysts’ earnings forecasts earn significantly lower future returns than otherwise similar stocks. In particular, a portfolio of stocks in the highest quintile of dispersion underperforms a portfolio of stocks in the lowest quintile of dispersion by 9.48 percent per year. This effect is strongest in small stocks, and stocks that have performed poorly over the past year. Our results are robust to various risk-adjustment techniques, and are inconsistent with an interpretation of dispersion in analysts’ forecasts as a proxy for risk. We postulate that dispersion in analysts’ earnings forecasts can be viewed as a proxy for differences of opinion among investors. Differences of opinion are typically modeled via dogmatic beliefs or asymmetric information sets, and have been included in numerous models that relax the standard

The Small World of Investing: Board Connections and Mutual Fund Returns

This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on connected firms and perform significantly better on these holdings relative to their nonconnected holdings. A replicating portfolio of connected stocks outperforms nonconnected stocks by up to 7.8 percent per year. Returns are concentrated around corporate news announcements, consistent with portfolio managers gaining an informational advantage through the education networks. Our results suggest that social networks may be important mechanisms for information flow into asset prices.

Long-Run Stockholder Consumption Risk and Asset Returns

We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by stockholders. Exploiting micro-level household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or non-stockholder consumption risk, and provides more plausible economic magnitudes. We find that risk aversion estimates around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French size and value portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks.

Resident Networks and Corporate Connections: Evidence from World War II Internment Camps

Using customs and port authority data, we show that firms are significantly more likely to trade with countries that have a large resident population near their firm headquarters, and that these connected trades are their most valuable international trades. Using the formation of World War II Japanese Internment Camps to isolate exogenous shocks to local ethnic populations, we identify a causal link between local networks and firm trade. Firms are also more likely to acquire target firms, and report increased segment sales, in connected countries. Our results point to a surprisingly large role of immigrants as economic conduits for firms.

IQ from IP: Simplifying Search in Portfolio Choice

Using a novel database that tracks web traffic on the SEC’s EDGAR server between 2004 and 2015, we show that institutional investors gather information on a very particular subset of firms and insiders, and their surveillance is very persistent over time. This tracking behavior has powerful implications for their portfolio choice, and its information content. An institution that downloaded an insider-trading filing by a given firm last quarter increases its likelihood of downloading an insider-trading filing on the same firm by more than 41.3% this quarter. Moreover, the average tracked stock that an institution buys generates annualized alphas of over 12% relative to the purchase of an average non-tracked stock. We find that institutional managers tend to track members of the top management teams of firms (CEOs, CFOs, Presidents, and Board Chairs), and tend to share educational and location-based commonalities with the specific insiders they choose to follow. Collectively, our results suggest that the information in tracked trades is important for fundamental firm value and is only revealed following the information-rich dual trading by insiders and linked institutions.

Reply: Do Powerful Politicians Really Cause Corporate Downsizing?

We first want to say that we believe the close examination of the methodology and robustness of published studies is absolutely necessary in our profession. We commend Snyder and Welch for their effort in following up with the data and code we posted on our sites and for investigating the questions explored in our paper in this Journal (Cohen, Coval, and Malloy 2011). We have had an engaging conversation with them for the past few years and we have enjoyed it. This having been said, we still donot agreewith the analysis, inferences, and conclusions of Snyder and Welch’s comment. Indeed, their concerns have prompted us to carry out a large amount of additional analysis—including a number of tests that address critiques that have since been dropped from the current version of their paper—that has only strengthened our confidence in our results. Themain tables of our origi-