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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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Disaggregated Sales and Stock Returns

Sumit Agarwal1, Wenlan Qian2, Xin Zou2

1Georgetown University; 2Hong Kong Baptist University

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

Using transaction-level credit card spending data from a large financial institution, this paper examines the return predictability implications of sales based on disaggregated spending information. After controlling for the quarterly earnings and sales surprises, one inter-quintile increase in the adjusted customer spending during a firm’s fiscal quarter leads to more than one percentage point increase in the 60-day post-earnings-announcement CAR, and 0.3 percentage point increase in the 3-day announcement CAR, respectively. The predictive power arises from the information in spending that captures sustainable customer demand: the effect is stronger in firms with more sales from high-spending-capacity consumers and with a more diversified consumer base; and the adjusted customer spending is able to predict future firm earnings and sales surprises. Overall, our findings suggest that firm disaggregated sales patterns provide accurate and persistent signals of customer demand relevant to a firm’s growth potential and stock pricing.

EFA2017-574-APE-11-Agarwal-Disaggregated Sales and Stock Returns.pdf

Fire Sale Risk and Expected Stock Returns

George O. Aragon1, Min S. Kim2

1Arizona State University; 2University of New South Wales

Discussant: 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: 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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