Eric C. So

The Option to Stock Volume Ratio and Future Returns

We examine the information content of option and equity volumes when trade direction is unobserved. In a multimarket symmetric information model, we show that equity short-sale costs result in a negative relation between relative option volume and future �?rm value. In our empirical tests, �?rms in the lowest decile of the option to stock volume ratio (O/S) outperform the highest decile by 1.47% per month on a risk-adjusted basis. Our model and empirics both indicate that O/S is a stronger signal when short-sale costs are high or option leverage is low. O/S also predicts future �?rm-speci�?c earnings news, consistent with O/S reflecting private information.

Boardroom Centrality and Firm Performance

Firms with central boards of directors earn superior risk-adjusted stock returns. A long (short) position in the most (least) central firms earns average annual returns of 4.68%. Firms with central boards also experience higher future return-on-assets growth and more positive analyst forecast errors. Return prediction, return-on-assets growth, and analyst errors are concentrated among high growth opportunity firms or firms confronting adverse circumstances, consistent with boardroom connections mattering most for firms standing to benefit most from information and resources exchanged through boardroom networks. Overall, our results suggest that director networks provide economic benefits that are not immediately reflected in stock prices.

Identifying Expectation Errors in Value/Glamour Strategies: A Fundamental Analysis Approach

It is well established that value stocks outperform glamour stocks, yet considerable debate exists about whether the return differential reflects compensation for risk or mispricing. Under mispricing explanations, prices of glamour (value) firms reflect systematically optimistic (pessimistic) expectations; thus, the value/glamour effect should be concentrated (absent) among firms with (without) ex ante identifiable expectation errors. Classifying firms based upon whether expectations implied by current pricing multiples are congruent with the strength of their fundamentals, we document that value/glamour returns and ex post revisions to market expectations are predictably concentrated (absent) among firms with ex ante biased (unbiased) market expectations. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Inside the Black Box of Doctoral Education: What Program Characteristics Influence Doctoral Students' Attrition and Graduation Probabilities?

The Andrew W. Mellon Foundation’s Graduate Education Initiative (GEI) provided funding to 54 departments in the humanities and related social sciences during the 1990s to improve their PhD programs. This article estimates the aspects of PhD programs the GEI influenced and how these aspects influenced attrition and graduation probabilities. It uses survey data on entrants to PhD programs at 44 of the “treatment” departments and 41 “control” departments during a 15-year period that spanned the start of the GEI. Factor analysis is used to group more than 100 program characteristics into a smaller number of factors, and the impact of the GEI on each and the impact of each on attrition and graduation probabilities are estimated. The article estimates the routes via which the GEI influenced attrition and graduation rates and indicates which aspects of PhD programs departments should concentrate on to improve their programs’ performance.

Non-Diversifiable Volatility Risk and Risk Premiums at Earnings Announcements

This study seeks to determine whether earnings announcements pose non-diversifiable volatility risk that commands a risk premium. We find that investors anticipate some earnings announcements to convey news that increases market return volatility and pay a premium to hedge this non-diversifiable risk. In particular, we find evidence of risk premiums embedded in prices of firms’ traded options that are significantly positively associated with the extent to which the firms’ earnings announcements pose non-diversifiable volatility risk. In addition, we find that volatility risk premiums are concentrated among bellwether firms and result in predictable variation in option straddle returns around earnings announcements. Taken together, our findings show that some earnings announcements pose non-diversifiable volatility risk that commands a risk premium.

Analysts’ Forecasts and Asset Pricing: A Survey

This survey reviews the literature on sell-side analysts’ forecasts and their implications for asset pricing. We review the literature on the supply and demand forces shaping analysts’ forecasting decisions as well as on the implications of the information they produce for both the cash flow and the discount rate components of security returns. Analysts’ forecasts bring prices in line with the expectations they embody, consistent with the notion that they contain information about future cash flows. However, analysts’ forecasts exhibit predictable biases, and the market appears to underreact to the information in forecasts and to not fully filter the biases in forecasts. Analysts’ forecasts are also helpful in estimating expected returns on securities, but evidence on the relation between analysts’ forecasts and expected returns is still scarce. We conclude by identifying unanswered questions and offering suggestions for future research. 197 Click here to view this articles online features: • Download figures as PPT slides • Navigate linked references • Download citations • Explore related articles • Search keywords ANNUAL REVIEWS Further A nn u. R ev . F in an c. E co n. 2 01 6. 8: 19 721 9. D ow nl oa de d fr om w w w .a nn ua lr ev ie w s. or g A cc es s pr ov id ed b y M as sa ch us et ts I ns tit ut e of T ec hn ol og y (M IT ) on 1 2/ 15 /1 6. F or p er so na l u se o nl y. FE08CH09-Kothari ARI 30 September 2016 8:6

Evaluating Firm-Level Expected-Return Proxies

Characterizing a firm’s true (but unobservable) expected returns as the normative benchmark, we develop a two-dimensional framework for evaluating the relative performance of implied cost-of-capital (ICC) estimates. First, in time-series, variations in ICC estimates should reflect changes in true expected returns rather than changes in measurement errors. Second, cross-sectionally, ICC estimates should predict future realized returns. Using this framework, we compare seven alternative ICC measures and show that several perform quite well along both dimensions, and all do much better than Beta-based estimates. In addition, we provide evidence on the importance of appropriate matching between the earnings forecasting method (analyst vs. mechanical) and the valuation model. Overall, our evidence provides significant support for the broader adoption of ICCs as firm-level expected return proxies.

Uncovering Expected Returns: Information in Analyst Coverage Proxies

We show that analyst coverage proxies contain information about expected returns. We decompose analyst coverage into abnormal and expected components using a simple characteristic-based model and show that firms with abnormally high analyst coverage subsequently outperform firms with abnormally low coverage by approximately 80 basis points per month. We also show abnormal coverage rises following exogenous shocks to underpricing and predicts improvements in firms’ fundamental performance, suggesting that return predictability stems from analysts more heavily covering underpriced stocks. Our findings highlight the usefulness of analysts’ actions in expected return estimations, and a potential inference problem when coverage proxies are used to study information asymmetry and dissemination.

A Simple Multimarket Measure of Information Asymmetry

We develop and implement a new measure of information asymmetry among traders. Our measure is based on the intuition that informed traders are more likely than uninformed traders to generate abnormal volume in options or stock markets. We formalize this intuition theoretically and compute the resulting multimarket information asymmetry measure (MIA) for firm-days as a function of unsigned volume totals and without estimating a structural model. Empirically, MIA has many desirable properties: it is positively correlated with spreads, price impact, and absolute order imbalances; predicts future volatility; is an effective conditioning variable for trading strategies stemming from price pressure; and detects exogenous shocks to information asymmetry. This paper was accepted by Lauren Cohen, finance.

Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns

This study examines the link between earnings announcement premia (i.e., higher returns in announcement periods) and changes in liquidity prior to the announcements. Motivated by prior research, we model market makers as holding positive inventories and show they asymmetrically raise costs of providing liquidity to sellers, relative to buyers, to reduce inventory risks ahead of earnings news. This asymmetry gives rise to the announcement premium by increasing the relative cost of trading on negative news. Consistent with our friction-based hypothesis, we show that equity prices predictably rise in the week prior to announcements and gradually decline following announcements. Our model also yields implications of this friction for trading activity, price dynamics, and the information content of prices, all of which we validate in our empirical tests. JEL Classifications: G10, G11, G12, G14, M41 ∗We thank SP Kothari and seminar participants at Cornell University and MIT for helpful feedback and suggestions. Corresponding authors: Travis Johnson, travis.johnson@mccombs.utexas.edu, 2110 Speedway Stop B6600, Austin, TX 78712 and Eric So, ESo@mit.edu, E62-677 100 Main Street, Cambridge MA 02142. Earnings Announcement Premia: The Role of Asymmetric Liquidity Provision 1