Samuel M. Hartzmark

Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns

We present evidence consistent with markets failing to properly price information in seasonal earnings patterns. Firms with historically larger earnings in one quarter of the year (“positive seasonality quarters”) have higher returns when those earnings are usually announced. Analysts have more positive forecast errors in positive seasonality quarters, consistent with the returns being driven by mistaken earnings estimates. We show that investors appear to overweight recent lower earnings following positive seasonality quarters, leading to pessimistic forecasts in the subsequent positive seasonality quarter. The returns are not explained by risk-based explanations, firm-specific information, increased volume, or idiosyncratic volatility.Received June 19, 2014; accepted April 25, 2016, by Editor David Hirshleifer.

Economic Uncertainty and Interest Rates

Asset-pricing models predict a strong connection between the real risk-free interest rate and the macroeconomy, but prior research finds little empirical support for the connection when examining expected growth. This paper documents a robust relation between the interest rate and macroeconomic uncertainty (i.e., conditional variance). Consistent with precautionary savings, high uncertainty is associated with a low interest rate using numerous data sources, time-periods, and measures. A relation between habit and the interest rate disappears after including uncertainty, and the relation is stronger using long-run uncertainty. The results imply that analyses of the interest rate without uncertainty are seriously incomplete.

Rolling Mental Accounts

When investors sell one asset and quickly buy another (“reinvestment days”), their trades suggest the original mental account is not closed, but is instead rolled into the new asset. Retail investors trading on their own accounts display a rolled disposition effect, selling the new position when its value exceeds the initial investment in the original position. On reinvestment days, these investors display no disposition effect (consistent with no disutility from realizing a loss) and make better selling decisions. Using a laboratory experiment, we show that reinvestment causally reduces the disposition effect and improves trading. Received April 10, 2016; editorial decision January 28, 2017 by Editor Andrew Karolyi.

The Dividend Disconnect

We show that investors trade as if they consider dividends and capital gains in separate mental accounts, without fully appreciating that dividends come at the expense of price decreases. Investors trade differently in response to each component - trading patterns such as the disposition effect are driven by price changes, with dividends being ignored or downweighted. Investors hold dividend-paying stocks longer, and are less sensitive to price changes, consistent with dividends being valued as a separate desirable attribute of stocks. The demand for dividend-paying stocks is higher when interest rates and recent market returns are lower, consistent with investors comparing dividends to other income streams and capital gains. Investors spend the proceeds of each component differently - mutual funds and institutions rarely reinvest dividends into the stocks from which they came, but instead purchase other stocks. This leads to predictable marketwide price increases on days of large aggregate dividend payouts, including stocks not paying dividends.

Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows

Examining a shock to the salience of the sustainability of the U.S. mutual fund market, we present causal evidence that investors marketwide value sustainability: being categorized as low sustainability resulted in net outflows of more than

Juicing the Dividend Yield: Mutual Funds and the Demand for Dividends

12 billion while being categorized as high sustainability led to net inflows of more than

The dividend month premium

24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high‐sustainability funds outperform low‐sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and nonpecuniary motives influencing investment decisions.