Many price indices must be constructed without quantity data at the elementary level. We show that for some consumer goods in the United States and other countries, one can approximate expenditure shares using weights derived from the retail distribution of sellers. These weights are based on the share of outlets selling an item, or the share of outlets adjusted by the total number of items sold in each. Relative to using no weights, we find that using such imputed weights substantially reduces bias in the frequency of price changes, in annual inflation, and in price comparisons across countries. 

Stock returns convey information to investors about fundamental values. But do all investors perceive a specific stock return in the same way? Using a large dataset of individual investor stock selling decisions, we show that the same return is perceived differently by different investors, and that these differences are driven by the comparison of a given return to investors’ own personal and idiosyncratic experiences of returns in the small set of stocks that they own. The effect is large. When a given return is classed as extreme compared to an investor’s personal history of returns, the response of investors toward that return increases by a factor of 3.5. Whereas stock returns are commonly considered to be objective, our findings suggest that there is considerable subjectivity in their perception.

Are idiosyncratic shocks to one industry transmitted to other industries through common financial intermediaries? In this paper, we find that when banks are exposed to shocks due to their specialization in a certain sector, then they are more likely to increase lending to the treated sector due to a higher compensation. In addition, we find that banks cut their lending disproportionally in unrelated and non-affected sectors due to the bank’s funding capacity. At the aggregate-industry level, the effects are attenuated during good times as firms raise financing from other banks or from other markets or use internal funds. We do not find these shocks to have any effect on unrelated industries in good times or any associated real effects. However, during bad times, or when financing conditions are tight, these shocks translate into real effects for unrelated industries and thus highlight that idiosyncratic shocks to industries can be passed on to other unrelated industries through common lenders when times are bad and thus amplifying the initial shock. Critically, bank linkages between (unrelated) sectors serve as the transmission channel for the pass-through of industry externalities.

This study examines the effect of management earnings forecast imprecision (IMP) on future equity returns. We report that a wider management forecast range (high IMP) is associated with lower subsequent stock returns. This evidence is consistent with the notion that a wider management forecast range reflects increased uncertainty and Miller’s (1977) conjecture that increased divergence of opinion allows optimist investors to dominate leading to lower subsequent returns. In a market that exhibits dispersion of investor opinions regarding earnings estimates, high IMP discourages pessimistic investors who face short-selling constraints while optimists who believe in the high end of the range take long positions, leading to stock overpricing and subsequently to lower returns. Further, we find that high IMP also reflects genuine uncertainty regarding future earnings which may appeal to growth and lottery-type investors. The negative impact of IMP on subsequent returns is incremental to analyst forecast uncertainty, dispersion, and a host of previously documented predictors of future returns.

We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel”. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests.

We document the existence of exploitable directional predictability in equity returns. We find that that the conditional probability of observing positive returns after a sequence of k consecutive negative (positive) returns is increasing (decreasing) with k. We propose a number of strategies to profit from this finding and compare them with momentum. We show that the proposed strategies (i) generate positive alphas and higher Sharpe ratios relative to momentum; (ii) generate positively skewed returns and have very low probability of crashes; (iii) when combined with momentum, our strategies generate substantially higher returns and Sharpe ratios; and (iv) correlate with momentum during bull markets, but substantially outperform momentum strategies in bear markets thus reducing momentum crashes.

Using the staggered implementation of telehealth parity laws in the U.S. Healthcare industry, we find causal evidence that virtual competition affects U.S. hospitals’ cost of capital through a credit risk channel. Financial statements indicate that rural hospitals lose patients to urban hospitals in the same state after states require equivalent reimbursement of remote and in-person services. These effects increase rural hospital bankruptcy risk indicated by leverage and Z-Score. This increased financial stress translates into lower credit ratings and a higher cost of capital for rural hospitals. Controlling for bond characteristics, we find that affected rural hospitals’ new bond costs rise by 20 – 38 bps relative to urban hospital bonds issued in the same state and in the same year. Secondary market yields of outstanding rural bonds increase by a significant 8 – 17 bps. Overall, we conclude that virtual competition in healthcare provision exacerbates healthcare inequality between rural and urban areas.

: Drawing insights from the resource-based view and agency theory, we investigate the role of two distinct types of slack, available and recoverable, on the performance of acquirers after a takeover deal. Considering that the influence of slack on performance is conditional upon the level of slack resources, we introduce the concepts of slack deficit vs. slack surplus to identify departures from industry norms. Since at any point in time, the two types of slack may co-exist within the organization at differing levels, we depart from the traditional 'independence' assumption and theorize on the 'congruence/incongruence' role of slack on post-acquisition performance. We use a sample of 3,851 large U.S. acquisitions during 2000-2014 and calculate mean ROA to isolate the effects on the acquirer's performance three years after the deal. We find that post-acquisition performance is linked to the acquirer's pre-existing slack with available and recoverable slack exhibiting both independent and conditional effects on performance. In particular, while independently slack is detrimental to performance, acquirers with incongruent levels can outperform all others; combining a tight and efficient operation (recoverable slack deficit) with leeway in working capital (available slack surplus) maximizes post-acquisition performance. 

We utilize the exogenous intertemporal variation in employment protection across countries and study the impact of employment protection on international equity markets. We find robust evidence that firms located in countries with weak labor protection regulation exhibit a low level of one-year-ahead stock price crash risk relative to those in countries with strong labor protection regulation. It is consistent with the view that, when employees face material unemployment risk, they are more incentivized to engage in information search and analysis, thereby curtailing the effectiveness of managerial bad-news-hoarding activities (i.e., the protection heightening risk hypothesis). Our finding is robust to a battery of sensitivity tests. Further evidence shows that the impact of employment protection on crash risk is more pronounced for firms with a higher proclivity to suppress bad news and for firms in countries with stronger legal enforcement. Our findings have important implications for policymakers concerning equity extreme risk and labor protection around the globe.

This paper investigates stock returns for a large cross section of Eurozone corporations during 2000-2019 through various asset-pricing models. First, we compute Eurozone-specific factors to discuss the size, value, profitability, momentum, and investment effects of stock returns. Subsequently, the paper expands widely-used asset pricing models by introducing a foreign exchange risk factor to evaluate whether foreign currency risk is priced systematically in Eurozone stock returns. The results confirm the importance of various factors used previously by asset-pricing models. Moreover, we find strong evidence for the pricing of foreign currency risk in Eurozone stock returns. We employ panel regressions, factor spanning regressions, asset-pricing tests, and several evaluation metrics to derive and assess our findings.