Christopher M. Hrdlicka

Precautionary Savings with Risky Assets: When Cash Is Not Cash

We show that U.S. industrial firms invest heavily in non-cash, risky financial assets such as corporate debt, equity, and mortgage-backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of risky financial investments. Consistent with the model’s predictions, risky assets are concentrated in financially unconstrained firms that hold large financial portfolios. Further, they are undertaken by poorly governed firms and discounted by 13-22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than

The Structure of Information Release and the Factor Structure of Returns

1.5 trillion, questioning the traditional boundaries of nonfinancial firms.

Understanding Network-Based Measures of Information Diffusion

We model how firms releasing information on different dates causes the CAPM to fail, requiring an additional factor based on the information structure to price assets. We exemplify this mechanism’s empirical relevance using quarterly earnings announcements, which cluster across months along size and book-to-market. Seventy percent of the alpha reduction from including SMB and HML occurs in the four main earnings announcement months. The information structure factor accounts for all of SMB and HML’s seasonal alpha reduction and one third of their overall alpha reduction. Controlling for size and book-tomarket, exposures to SMB and HML vary with firms’ earnings announcement month.

Finding the Disappearing Dividends: Stock Repurchaser Characteristics and Their Increasing Propensity to Pay

Previous studies document failures of market efficiency with price discovery requiring up to a year. These studies use network based measures of information diffusion: the long-short alpha of portfolios formed sorting on the preceding returns of firms economically linked to portfolio firms. Correlated alphas between linked firms bias these measures. Existing studies have monthly biases as large as a factor of two. This bias creates predictability even after price discovery completes. Subtracting the predicted return from the sorting firms’ returns removes this bias. Eliminating this bias reveals a more efficient market than previously documented: price discovery takes one month.

Daily Data is Bad for Beta: Opacity and Frequency-Dependent Betas

The total propensity to repay capital has risen not fallen as suggested by Fama and French 2001. What has fallen is the time series regularity, in respect to annual capital repayment as firms have shifted from dividend payments to stock repurchases. To understand capital repayment policy I focus my attention on the repayment participation decision of the marginal firm by classifying firms into discrete payment-types and weighting by firms not dollars. Weighting by dollars or using a continuous payment-type variable only answers the question: why do the largest most successful firms pay dividends? That is an interesting question but not the only one. I show that the first firms to employ stock repurchases in the 1980s look like an average of firms that did not repay capital and firms that paid dividends. Over time stock repurchasers have encroached on the territory of dividend payers, supporting the substitution hypothesis and explaining the disappearing dividends of Fama and French 2001. Stock repurchasers have also encroached on the territory of non-payers, helping to increase overall capital repayment rates at the bottom of the firm distribution. After showing the spread of stock repurchases, I document the time series behavior of stock repurchases shows regular patterns despite not occurring annually as dividend payments do. The lower frequency of stock repurchases causes the standard cross-sectional classification of firms that worked well when dividend payments dominated, to undercount stock repurchasers by as much as 50%. To correct this bias I propose an alternative measure: classify firms by their lifetime payment behavior rather than annual payment behavior.