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AP 05: Equity and bond returns in the cross section
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ID: 241
The Asset Durability Premium 1Peking University HSBC Business School; 2Alliance Manchester Business School, University of Manchester Our paper examines the significant asset pricing implications of asset durability for understanding equity risk. We develop a quantitative model with aggregate uncertainty where firms optimize over asset durability driven by occasionally binding borrowing constraints. Our model highlights a novel risk premium channel emerging in general equilibrium, with durable capital harder to finance not only due to its greater down payment, but because of its larger price risk sensitivities to financial frictions. As holding less durable capital provides hedging against aggregate risk, our model helps rationalize the asset durability premium documented in the cross-section of stock returns.
ID: 1687
The Cross-Section of Corporate Bond Returns 1Erasmus University Rotterdam, Netherlands, The; 2Northern trust Asset Management – Quantitative Strategies; 3Robeco Quant Fixed Income; 4University of Melbourne We comprehensively examine the cross-section of U.S. corporate bond returns. By addressing challenges related to the infrequent trading of corporate bonds, selection bias, duration-matching, and transaction costs, we aim to establish a parsimonious factor model that most robustly prices the cross-section of U.S. corporate bonds. We find that a bond maturity factor, a valuation factor, an equity momentum factor, and an accruals factor provide robust, sizable, and unique credit return premia. A resulting factor model outperforms alternative models across multiple testing choices. Overall, we outline a framework for examining the cross-section of corporate bond returns.
ID: 931
Seeing is Believing: Annual Report Enhanced Visuals and Stock Returns 1University of New South Wales; 2George Mason University; 3Washington University in St. Louis Why do firms graphically enhance their annual reports that appear redundant to the 10-Ks? We develop a novel rational model to explain this. Using a large dataset, we report the first evidence that firms earn approximately 3.5% abnormal returns in the next 3 to 6 months after they initiate graphic annual reports, which is accompanied by an increase in institutional investors' abnormal attention and holdings, consistent with our theory that firms create visuals to overcome investor inattention and help communicate subtle information to fundamental investors. This is also consistent with the fact that such firms tend to increase their R&D investments afterwards.
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