Zhipeng Yan

Firm Maturity and the Pecking Order Theory

We identify firms according to two life cycle stages, namely growth and maturity, and test the pecking order theory of financing. We find a strong maturity effect, i.e., the pecking order theory describes the financing behavior of mature firms better than growth firms. Our findings show that firm maturity is an alternative proxy for debt capacity. In particular, mature firms are older, more stable, and highly profitable with good credit histories. Thus, they naturally have greater debt capacity. After controlling for firm maturity, the pecking order theory describes the financing behavior of firms fairly well.

Investor Inattention and Under-Reaction to Repurchase Announcements

This paper investigates investor inattention as a plausible explanation for market reaction to repurchase announcements. We use prior turnover as the proxy for investor attention to examine the difference in stock price performance between low-attention stocks and high-attention stocks. We find that low prior turnover firms experience greater underreaction to repurchase announcements than high prior turnover firms. Low prior turnover firms also experience larger positive long-run excess returns following announcements. Furthermore, a higher level of investors inattention leads to higher degree of underreactions, resulting in higher actual completion rates. JEL Classifications: G14, G15

New evidence on value investing in emerging equity markets

We design modified value investing strategies in emerging equity markets by comparing a countrys value weight with its market capitalization weight among a group of emerging countries. These strategies can be easily tested and implemented by using various country index funds. Our proposed strategy calculates the delta weight, the difference of a countrys weight based on value (Gross Domestic Product (GDP), Earning–Price (EP) ratio or Dividend Yield (DY)) and its capitalization weight, for each country. If the delta weight is positive, the countrys index fund is considered undervalued and the strategy is to buy delta shares of that countrys equity. Conversely, if delta weight is negative, the countrys index fund is deemed as overvalued and the strategy is to short delta shares of that countrys equity. These market neutral delta strategies can generate annualized returns of 14.25–16.89% even with the presence of over-weighting constraints which limit the over-investment in small financial markets.

Industry Herding and Momentum

Theoretical models on herd behavior predict that under different assumptions, herding can drive prices away from (or toward) fundamentals and reduce (or enhance) market efficiency. In this article, we study the joint effect of herding and momentum at the industry level. We find that the momentum effect is magnified when there is a low level of investor herding. Herd behavior in investors helps move asset prices toward fundamentals, enhances market efficiency, and reduces the momentum effect. A trading strategy taking a long position in winner industries and a short position in loser industries when the herding level is low can generate significant returns.

A New Methodology of Measuring Firm Life-Cycle Stages

Corporate life-cycle concept is widely used in a variety of disciplines, including management, economics and accounting, and also in the real-world investment. However, current commonly used methodologies of measuring life-cycle stages are either only suitable for small sample studies or only applicable in cross-sectional analysis of corporations over life-cycle stages. None of them can be employed in large-sample, time-series analysis. This paper develops a new methodology which makes the study of large-sample time-series properties within each stage a possibility, by comparing a corporations status at each point of its development with its own historical overall status. We use real-world financial accounting data to illustrate and validate our methodology.

Volatility Spread and the Stock Market Response to Earnings Announcements

Using a broad sample of earnings announcements, we find that option call and put implied volatilities become increasingly misaligned as the earnings announcement dates (EAD) get closer. The percentage deviation between call and put implied volatilities increases monotonically in the one-month period leading up to the EAD. In addition, the direction of these deviations is consistent with the announcement returns of such earnings releases. More importantly, by adapting the earnings response coefficient (ERC) framework, we find that pre-earnings option trading actually increases rather than decreases the stock market response to the earnings announcements. In a cross section of earnings announcements, we find stronger stock market reaction from earnings announcements with greater abnormal implied volatility spread immediately before the EAD. By relating option volume to investor attention, we find higher pre-announcement option volume is associated with increased stock market response. Overall, our findings suggest that pre-earnings option trading helps alleviate the stock market under-reaction to earnings announcements and make the stock market response more complete.