Momentum profits, factor pricing, and macroeconomic risk (with Lu Zhang, supersedes "Momentum profits and macroeconomic risk" and "Economic fundamentals, risk, and momentum profits"), 2008, Review of Financial Studies, 21 (6), 2417-2448.

 

    Data used in the paper:

 

· Chen, Roll and Ross 5 factors [Read Me File] (Updated Sept, 1, 2009)

 

· Momentum return (sort by past 6 months return, skip one month and hold for 6 month)

 

Recent winners have temporarily higher loadings than recent losers on the growth rate of industrial production. The loading spread derives mostly from the positive loadings of winners. The growth rate of industrial production is a priced risk factor in standard asset pricing tests. In many specifications, this macroeconomic risk factor explains more than half of momentum profits. We conclude that risk plays an important role in driving momentum profits.

 

Historical market-to-book in a partial-adjustment model of leverage (supersedes "Do firms have target leverage ratios? Evidence from historical market-to-book and past returns"), 2009, Journal of Corporate Finance, 602–612.

 

· CRA International Corporate Finance Award for the Best Corporate Finance Paper in the Western Finance Association Annual Meeting in 2005

 

· Best PhD paper award in Southwestern Finance Association Annual Meeting, 2005  

 

Historical market-to-book has been shown to explain current leverage. Prior studies attribute the evidence to market timing. This study shows that with the presence of time-varying targets and adjustment costs, historical market-to-book has a significant impact on leverage even when firms do not time the market. The historical values of alternative market timing proxies, such as insider sales and the market sentiment index, are shown to have no effects on leverage while the historical values of alternative growth options proxies do have effects. Overall, the evidence is largely consistent with a partial adjustment model of leverage.

 

Investment-based expected stock returns (with Toni Whited and Lu Zhang, supersedes "Regularities") 2009, forthcoming, Journal of Political Economy

[Internet Appendix]

 

We derive and test q-theory implications for cross-sectional stock returns. Under constant returns to scale, stock returns equal levered investment returns, which are tied directly to firm characteristics. When we use GMM to match average levered investment returns to average observed stock returns, the model captures the average stock returns of portfolios sorted by earnings surprises, book-to-market equity, and capital investment. When we try to match expected returns and return variances simultaneously, the variances predicted in the model are largely comparable to those observed in the data. However, the resulting expected return errors are large.

 

The role of the media in Initial Public Offerings (with Ann E. Sherman and Yong Zhang, supersedes “Media coverage and IPO underpricing”) presented at AFA

 

Is media attention related to short term demand from sentiment investors, or is it related to investor attention (as in Merton, 1987), thus having long term effects? We show that a simple, objective measure of media coverage is positively related not only to initial public offer (IPO) initial returns but also to long term value, analyst coverage and institutional investor ownership. The higher aftermarket stock price does not reverse over time, leading to greater long term underperformance, and media coverage is not related to underwriting fees, as predicted by sentiment investor explanations. Thus, our findings are most consistent with media being related to genuine (as opposed to temporary, sentiment-driven) investor demand, as in Merton’s attention model. Last, it should be noted that the relation between media and initial returns is economically as well as statistically significant. One extra piece of media coverage is associated with a 1.3% greater initial return.

 

Asset-Backed Securitization in Industrial Firms - An Empirical Investigation (with Mike Lemmon and Mike Qinghao Mao)

 

We investigate the determinants and consequences of the use of asset-backed securitizations (ABS) by industrial firms. ABS users are larger, more highly levered, have lower R&D intensity, and have more securitizable assets compared to other firms in the industry. Upon initiating an ABS program, firms experience an increase in asst return volatility, a decrease in bond rating, and increase in their total leverage (including the leverage associated with ABS). Firms with higher marginal tax rates borrow more using ABS. ABS users also experience an increase in their bond and loan spreads post ABS initiation, while the ABS spreads are much lower than bond spreads. Overall, our results are consistent with Leland’s (2007) model where firms use ABS financing to take advantage of financial synergies. Finally, we find that firms use less ABS when the securitization has to be consolidated and that ABS usage has declined following changes in the accounting treatment of these transactions that have made it more difficult to treat ABS as off-balance-sheet financing. This finding suggests that firms also care about accounting reporting in determining whether to use ABS.

 

Market-wide Private Information and Market Volatility-Volume Relation presented at SWFA

 

I investigate the different roles played by two components of trading volume, informed-trading and liquidity-trading, in the volatility-volume relation at the aggregate level. Using transaction data and an extended trading model of Easley, Kiefer, O'Hara and Paperman (1996), I estimate a marketwide private information arrival rate (PIAR) variable and use it to control for the informed trading component in trading volume. Contrary to the belief that aggregate trading volume mainly represents liquidity trading, my results show that the marketwide-private-information-trading component in aggregate trading volume is the underlying driving force for the positive volatility-volume relation.