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Session Overview
APE-11: Asset Price Predictability I
Thursday, 24/Aug/2017:
8:30am - 10:00am

Session Chair: Angelo Ranaldo, University of St. Gallen
Location: SN163

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Extracting Consumer Demand: Credit Card Spending and Post-Earnings Returns

Sumit Agarwal1, Wenlan Qian2, Xin Zou2

1Georgetown University; 2National University of Singapore

Discussant(s): Thiago de Oliveira Souza (University of Southern Denmark)

Using proprietary individual transaction-level data from a large financial institution, this paper examines the information content of consumer (credit card) spending in explaining stock returns. After controlling for the quarterly earnings and sales surprises, we find a positive relation between the spending surprise on a firm’s product during a fiscal quarter and the subsequent cumulative abnormal returns. One inter-quintile increase in the spending surprise leads to one percentage point increase in the 60-day post-earnings-announcement CAR. The predictive power is concentrated in firms with more sales from high-spending-capacity consumers, firms with a more diversified consumer base, and firms in consumer-oriented industries. Moreover, crecit card spending surprise predicts future earnings and sales surprises over the next four quarters. Further analysis suggests that our results are unlikely driven by information during the reporting lag period or other known factors that predict post-earnings returns. Our findings suggest that the disaggregated consumer spending provides a more accurate and persistent signal of consumer demand that is relevant to a firm’s growth potential and stock pricing.

EFA2017-574-APE-11-Agarwal-Extracting Consumer Demand.pdf

Fire Sale Risk and Expected Stock Returns

George O. Aragon1, Min S. Kim2

1Arizona State University; 2University of New South Wales

Discussant(s): Catherine Koch (Bank for International Settlements)

We measure a stock's exposure to fire sale risk through its ownership links to equity mutual funds with investor outflows that are highly sensitive to systematic industry outflows. We find that more exposed stocks earn higher average returns: a portfolio that buys (shorts) stocks with the highest (lowest) exposure outperforms by 3-7% per annum. Our findings cannot be explained by several known determinants of average returns, including market or funding liquidity risks, or downside or skewness risks. Our results are consistent with the ex-ante pricing of the risk of future fire sales and suggest that stocks' exposures to risks inherited from shareholders' constraints have important implications for stock prices.

EFA2017-1339-APE-11-Aragon-Fire Sale Risk and Expected Stock Returns.pdf

Margin Credit and Stock Return Predictability

Prachi Deuskar, Nitin Kumar, Jeramia Allan Poland

Indian School of Business

Discussant(s): Sven Klingler (BI Norwegian Business School)

Margin credit, defined as the excess debt capacity of investors buying securities on the margin, predicts lower aggregate stock returns, outperforming other forecasting variables proposed in the literature. Its out-of-sample R-squared of 7.5% at the monthly horizon is more than twice that of the next best predictor. Asset allocation based on margin credit generates a Sharpe ratio of 0.95 and 1.28 in expansions and recessions, respectively. Margin credit carries information about future discount rates and future cash flows. It anticipates lower future dividend, earnings, and GDP growth and higher future risk measured by higher VIX, average equity correlation, macro and financial uncertainty, and lower intermediary equity ratio.

EFA2017-1836-APE-11-Deuskar-Margin Credit and Stock Return Predictability.pdf

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