Working papers

Performance Persistence of Individual Investors Abstract. Using unique data on month-end stock market portfolios of all individual investors over an eleven year period, we find that a substantial number of investors exhibit economically and statistically significant performance persistence. Furthermore, a portfolio that is long in stocks previously favored by top performing investors earns a substantial risk adjusted return. These finding are robust to how we measure past performance, how often investors trade, and to the size of investors' portfolios. Unlike the evidence from mutual and pension funds, the persistence in performance of individual investors is not concentrated in portfolios with poor prior performance., Working paper, February, 2009, with Limei Che and Richard Priestley.

Book chapters

Security Offerings Abstract.This essay surveys the extant literature and adds to the empirical evidence on issuance activity,flotation costs, and valuation effects of security offerings. We focus primarily on public offerings of equity for cash, although we also review and present new evidence on debt offerings and private placements. The essay has four major parts: (1) We review aggregate issue activity in exchange listed securities from 1980 through 2004. Following the IPO, only about one-half of the publicly traded firms undertake a public security offering of any type, and only about one-quarter undertake a SEO. Thus, SEOs are relatively rare, which is consistent with adverse selection costs being an important consideration when raising cash externally. (2) We review the evidence on direct issue costs across security types and flotation methods, including the more recent SEO underpricing phenomenon. A large number of studies provide evidence on the determinants of underwriter compensation, and confirm the importance of variables capturing information asymmetries and underwriter competition. (3) We survey and interpret the valuation effects of security issue announcements. In the period since the Eckbo and Masulis (1995) survey, many studies examining announcement-period stock returns have focused on the effects of flotation method choice and foreign offerings. The well-known negative average announcement effect observed for U.S. SEOs appears to be a somewhat U.S.-specific phenomenon. (4) We review and extend evidence on the performance of issuing firms in the five year post-issue period. The literature proposes either a risk based-explanation or a behavioral explanation for the phenomenon of low average realized returns following IPOs and SEOs. Standard factor model regressions fail to reject the null that the low average returns are commensurate with issuers' risk exposures. Recent theoretical developments suggest that lower risk levels following equity issues may be linked to issuers' investment activity, a promising direction for future research., HANDBOOK OF CORPORATE FINANCE: EMPIRICAL CORPORATE FINANCE, Vol. 1, B. E. Eckbo, ed., Chapter 6, pp. 233-373, Elsevier/North-Holland Handbook of Finance Series, 2007. with B. Espen Eckbo and Ronald W. Masulis.

Data

Published papers

Liquidity and Shareholder Activism Abstract. Blockholders' incentives to intervene in corporate governance are weakened by free-rider problems and high costs of activism. Theory suggests activists may recoup expenses through informed trading of target firms' stock when stocks are liquid. We show that stock liquidity increases the probability of activism, but less so for potentially overvalued firms where privately informed blockholders may have greater incentives to sell their stake than to intervene. We also document that activists accumulate more stocks in targets the more liquid is the stock. We conclude that liquidity helps overcome the free-rider problem and induces activism via pre-activism accumulation of target firms' shares., The Review of Financial Studies, vol. 28, Issue 2, February, 2015. With Charlotte Ostergaard and Ibolya Schindele.

Geographic Dispersion and Stock Returns Abstract.This paper shows that stocks of truly local firms have returns that exceed the return on stocks of geographically dispersed firms by 70 basis points per month. By extracting state name counts from annual reports filed with the Securities and Exchange Commission (SEC) on Form 10K, we distinguish firms with business operations in only a few states from firms with operations in multiple states. Our findings are consistent with the view that lower investor recognition for local firms results in higher stock returns to compensate investors for insufficient diversification., Journal of Financial Economics, vol. 106, Issue 3, December, 547--565, 2012. With Diego Garcia.

Crawling EDGAR Abstract.While our kids may think this paper is about spiders, it is, unfortunately, about firms in the United States reporting relevant business information to the Securities and Exchange Commission (SEC). The paper is meant to serve as a primer for economists in the computing details of searching for information in the Internet. One important goal of the paper is to show how simple open-source computer scripts can be generated to access financial data on firms that interact with regulators in the United States., The Spanish Review of Financial Economics, Vol. 10, Issue 1, January–June, 1--10, 2012. With Diego Garcia.

Sports sentiment and stock returns Abstract.This paper investigates the stock market reaction to sudden changes in investor mood. Motivated by psychological evidence of a strong link between soccer outcomes and mood, we use international soccer results as our primary mood variable. We find a significant market decline after soccer losses. For example, a loss in the World Cup elimination stage leads to a next-day abnormal stock return of -49 basis points. This loss effect is stronger in small stocks and in more important games, and is robust to methodological changes. We also document a loss effect after international cricket, rugby, and basketball games., Journal of Finance vol. 62, No. 4, 1967--1998, 2007, with Alex Edmans and Diego Garcia.

Canadian Business Trusts: A New Organizational Structure, Journal of Applied Corporate Finance, vol. 18, No. 3, 66--75, 2006, with Paul Halpern.

Liquidity risk, Leverage and Long-Run IPO Returns Abstract.We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as "longshots", as five-year buy-and-hold returns of 1,000 percent or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed "low minus high" (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here., Journal of Corporate Finance vol. 11, No.1--2, 1--39, 2005, with B.~Espen Eckbo.

Seasoned public offerings: Resolution of the `new issues puzzle' Abstract.The `new issues puzzle' is that stocks of seasoned common stock issuers subsequently underperform nonissuers matched on size and book-to-market ratio. With 7,000+ seasoned equity and debt issues, we document that issuer underperformance reflects lower systematic risk exposure for issuing firms relative to the matches. A consistent explanation is that, as equity issuers lower leverage, their exposures to unexpected inflation and default risks decrease, thus decreasing their stocks' expected returns relative to matched firms. Equity issues also significantly increase stock liquidity (turnover), again lowering expected returns relative to nonissuers. We conclude that the `new issue puzzle' is explained by a failure of the matched-firm technique to provide a proper control for risk. This conclusion is robust to issue characteristics and the choice of factor model framework., Journal of Financial Economics vol. 56, No. 2, 251--291, 2000, with B. Espen Eckbo and Ronald W. Masulis.

Determinants of Intercorporate Shareholdings Abstract.This paper examines why firms choose to spend resources on acquiring ownership rights in other firms. Based on a unique data base of every individual intercorporate shareholding on the Oslo Stock Exchange during the period 1980-1994, we find that such investments serve at least three functions. First, they play a role in corporate governance, as managers in firms with low insider holdings, diffuse ownership structure, and high free cash flow tend to mutually acquire equity stakes in each other, possibly in a collective attempt to protect their human capital in the market for corporate control. Second, interfirm equity holdings serve as financial slack for growing firms, reducing potential adverse selection costs by providing an internal funding source for new investments in long-term assets. Finally, our findings also suggest that intercorporate shareholdings are an integrated part of the investor's cash flow management system by being a liquidity buffer when cash inflows and cash outflows are non-synchronous.., European Finance Review, vol. 1, No. 2, 265--287, 1997, with Øyvind Bøhren.