Net Stock Issues Research Articles

Oil price shocks, investor sentiment, and asset pricing anomalies in the oil and gas industry

This paper documents that stocks are not efficiently priced in the oil and gas industry. We find significant cross-sectional effects on stock returns from various firm characteristics in the oil and gas industry. Specifically, 13 out of 15 prominent capital market anomalies are robust in the oil and gas industry. Investor sentiment has significantly positive impact on 4 anomalies: composite equity issues, investment to assets, net stock issues, and value effect. Among the three oil shocks, we find that aggregate demand shocks have significantly impact on 6 anomalies: composite equity issues, financial distress, net stock issues, O-SCORE, return on assets, and idiosyncratic volatility. Our results are consistent with the view that high arbitrage costs and risks have significant deterring effects on arbitrage in the oil and gas industry. Our findings also have practical investment and policy implications for investors, firm managers, and policy makers alike.

Quality Investing Industry versus Academic Definitions

textabstractIn this study we provide an overview of common quality definitions that are currently used in the industry and those used in academic studies, and we outline the differences between these definitions. We show that there is a large dispersion in the definitions that are used for the quality factor with ‘industry’ definitions ranging from return-on-equity and profit margins to leverage and earnings variability, and ‘academic’ definitions such as operating accruals, net stock issues, and gross profitability. We document large performance differences between the different quality definitions. While ‘academic’ definitions for quality all seem to have significant predictive power for stock returns above and beyond common factors, we do not find significant predictive power for individual ‘industry’ definitions. Our results have important implications for the design of investment vehicles that provide investors exposure to the quality factor.

An Empirical Investigation of the Relationship between Net Stock Issues and Returns in India

In this article, we focus on net stock issues which is a relatively unexplored asset pricing anomaly. We examine the relationship between net stock issues and returns in the Indian context using data for BSE 500 stocks from 1995 to 2012. The relationship between size, value and momentum attributes and stock return is confirmed, which is consistent with prior literature. We specifically find a negative relationship between net stock issues and returns after controlling for other firm characteristics, thus implying that companies with larger public offerings provide lower post-event returns. The net stock issues attribute is empirically associated with size and value characteristics. Large firms and low price to book (P/B) or relatively distressed firms tend to make bigger public offerings. While the former may do it to finance business expansion plans, the latter rely more on external financing owing to weak earnings record. Our findings are pertinent for policymakers, market practitioners and academicians. The study contributes to equity market anomaly literature for emerging markets.

THE SHRINKING SPACE FOR ANOMALIES

AbstractThe existing literature documents a number of cross‐sectional stock return anomalies. This article examines how pervasive these anomalies are and whether factor models provide valid inferences on anomalous returns. First, by shrinking the stock space along the dimension of a predictive variable, we show that the book‐to‐market ratio (BM) and net stock issues effects are pervasive, whereas the size, momentum, and illiquidity effects are driven mainly by stocks on the long side, and the idiosyncratic volatility, accrual, capital expenditure, and sales growth effects mainly by stocks on the short side. Second, we provide evidence that commonly used factor models have limited explanatory power of stock returns. Restricting to stock samples where the four‐factor model adequately explains the size, BM, and momentum effects, we show that only the idiosyncratic volatility, accrual, and net stock issues effects remain significant.

Do Anomalies Exist Ex Ante?

The anomalies literature in capital markets research in finance and accounting is based (almost) exclusively on average realized returns. In contrast, we construct accounting- based expected returns for dollar-neutral long-short trading strategies formed on a wide array of anomaly variables, including book to market, size, composite issuance, net stock issues, abnormal investment, asset growth, investment to assets, accruals, earnings surprises, failure probability, return on assets, and short-term prior returns. Our findings are striking. Except for the value and the size premiums, the cost of equity estimates differ drastically from the average realized returns.

New return anomalies and new-Keynesian ICAPM

I propose a new multi-factor asset pricing model with new-Keynesian factors to explain stock return anomalies from 1972Q1 to 2009Q2. This new model explains the average returns across testing portfolios formed on financial distress, momentum, and standardized unexpected earnings with misspecification-robust statistics. Test portfolios formed on net stock issues and total accruals are also partly explained by new-Keynesian factors. Two monetary policy factors play an important role in explaining these new anomalies. The credit aspect of these new anomalies suggests an economic rationale for the model through capital market imperfections and the credit channel of monetary policy mechanism.

New Return Anomalies and New-Keynesian ICAPM

I propose a new multi-factor asset pricing model with new-Keynesian factors to explain stock return anomalies from 1972Q1 to 2009Q2. This new model explains the average returns across testing portfolios formed on financial distress, momentum, and standardized unexpected earnings with misspecification-robust statistics. Test portfolios formed on net stock issues and total accruals are also partly explained by new-Keynesian factors. Two monetary policy factors play an important role in explaining these new anomalies. The credit aspect of these new anomalies suggests an economic rational for the model through capital market imperfections and the credit channel of monetary policy mechanism.

The Common Components of Idiosyncratic Volatility

We show that the pricing of idiosyncratic volatility (IV) is due to unaccounted systematic risk, which affects a large number of asset pricing anomalies. A single common IV component explains one third of variation in IV. Mispricing arises when sorting stocks by the part of IV predicted by exposure to the common IV component, but not when sorting by residual IV. We propose the return difference between stocks with high and low predicted IV, PIV, as a proxy for the missing risk factor. PIV is significantly related to the common components of the returns of several important anomaly-based trading strategies. Controlling for PIV helps explain the earnings surprise, net stock issues, profitability, as well as illiquidity anomalies, and completely explains the financial distress anomaly. Overall our results suggest that the IV puzzle reflects systematic risk related to the average stock volatility and credit risk.

The Shrinking Space for Anomalies

Existing literature has documented a number of cross-sectional stock return predictive patterns or the so-called anomalies. This paper examines two important issues: are the anomalies pervasive in different stock samples and do factor models provide valid inferences on anomalous returns? First, by shrinking the stock space along the dimension of predictive variable, we show that the BM and net stock issues effects are pervasive among different stock samples, whereas the size, momentum, and illiquidity effects are driven mainly by stocks on the long side, and the idiosyncratic olatility, accrual, capital expenditure, and sales growth effects mainly by stocks on the short side. Second, we provide evidence that commonly used factor models have limited explanatory power of stock returns and thus may offer invalid inference on abnormal returns. Restricting to the stock sample where the 4-factor model adequately explains the size, BM and momentum effects, we show that only the idiosyncratic volatility, accrual, and net stock issues effects have significant anomalous returns.

Characteristic-Based Covariances and Cross-Sectional Expected Returns

I suggest a characteristic-based covariance model that directly links the predetermined fi rm characteristics to time-varying covariance risk. Using a large cross section of individual stock-level data, I parsimoniously estimate both conditional expected returns and conditional covariances as functions of fi rm characteristics. I fi nd a strong and positive intertemporal risk-return relation on individual stocks. In comparison to the Fama-French three-factor model, the characteristic-based covariance model substantially reduces the pricing errors of characteristic-sorted portfolios on size, book-to-market, accruals, asset growth, investment-to-assets, return-on-assets, net stock issues, financial distress, and momentum. Portfolio tests similar to Daniel and Titman (1997) suggest that firm characteristics, mainly through the characteristic-based covariance structure of returns, appear to explain the cross section of average stock returns.

Do Anomalies Exist Ex Ante?

The anomalies literature in capital markets research in finance and accounting is based (almost) exclusively on average realized returns. In contrast, we construct accounting-based expected returns for dollar neutral long-short trading strategies formed on a wide array of anomaly variables, including book-to-market, size, composite issuance, net stock issues, abnormal investment, asset growth, investment-to-assets, accruals, earnings surprises, failure probability, return on assets, and short-term prior returns. Our findings are striking. Except for the value and the size premiums, the cost of equity estimates differ drastically from the average realized returns.

Does q-theory with investment frictions explain anomalies in the cross section of returns?

Q-theory predicts that investment frictions steepen the relation between expected returns and firm investment. Using financing constraints to proxy for investment frictions, we show only weak evidence that the investment-to-assets and asset growth effects in the cross section of returns are stronger in financially more constrained firms than in financially less constrained firms. There is no evidence that q-theory with investment frictions explains the investment growth, net stock issues, abnormal corporate investment, or net operating assets anomalies. Limits-to-arbitrage proxies dominate q-theory with investment frictions in explaining the magnitude of the investment-to-assets and asset growth anomalies in direct comparisons.

Dissecting Anomalies

ABSTRACTThe anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in cross‐section regressions, and they are also strong in sorts, at least in the extremes. The asset growth and profitability anomalies are less robust. There is an asset growth anomaly in average returns on microcaps and small stocks, but it is absent for big stocks. Among profitable firms, higher profitability tends to be associated with abnormally high returns, but there is little evidence that unprofitable firms have unusually low returns.

The implications of retained and distributed earnings for future profitability and stock returns

PurposeThe purpose of this paper is to examine the informational content of retained and distributed earnings for future profitability and stock returns.Design/methodology/approachThe paper utilizes firm‐level cross‐sectional persistent regressions, Mishkin's econometric framework and portfolio‐level analysis.FindingsThe paper shows that investors act as if the components of retained earnings (current operating accruals, non‐current operating accruals and retained cash flows) have similar implications for future profitability, leading to an overvaluation of their differential persistence. It also appears that while they cannot distinguish between the distinct properties of distributed earnings, they correctly anticipate the persistence of net cash distributions to debt holders (net debt repayment) but underestimate the persistence of net cash distributions to equity holders (dividends minus net stock issues). Overall, the findings of the paper suggest that the accrual anomaly documented in the accounting literature and the anomaly on net stock issues documented in the finance literature could be a subset of a larger anomaly on retained earnings.Originality/valueThe paper enhances one's understanding of the conflicting market's reaction to the accrual and cash flow component of earnings.