Essays on empirical asset pricing

• Main Author: CHEN, Zilin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Private subsidiaries; public parent firms; limited attention; limits to arbitrage; return predictability; Geographic peers; Material subsidiaries; Limited attention; Return predictability; Presidential puzzle; political cycle; presidential economic approval rating; presidential job approval rating; sentiment; Behavioral Economics; Economics
• Online Access: https://ink.library.smu.edu.sg/etd_coll/337; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1333&context=etd_coll
• Institution: Singapore Management University

The dissertation consists of three chapters on empirical asset pricing. The first chapter examines whether the cross-sectional variation in private subsidiaries’ information disclosure predicts the cross-sectional dispersion in future equity returns of public parent firms. Information disclosure on private subsidiaries is not mandatory for public firms in the U.S., and thus these subsidiaries could be a good choice for public firms to hide bad news. We construct a private subsidiaries’ information disclosure (PSID) measure and find that a value-weighted portfolio that longs stocks in the highest PSID quintile and shorts stocks in the lowest PSID quintile yields a Fama and French (2015) five-factor alpha of 0.60% per month. This return predictability is robust controlling for various firm-specific characteristics and is stronger for stocks that receive less investor attention and stocks that are costlier to arbitrage, consistent with the hypothesis that PSID information is slowly incorporated into stock prices. The second chapter investigates whether locations of firms’ economically-important public subsidiaries contain valuable information about parent firms’ stocks returns. Stock returns of firms in the same headquarter state tend to move together (Pirinsky and Wang (2006)). Parsons, Sabbatucci, and Titman (2020) find that the return comovement of firms headquartered in the same state extends to a predictable lead-lag effect because investors are not able to fully process information arising from firms’ peers located in the same place. We reexamine whether returns of geographic peers based on the locations of both headquarters and economically relevant subsidiaries are useful for predicting the stock returns of focal firms. We find that focal firms whose geographic peers experience higher (lower) returns in the current month will earn higher (lower) returns in the next month. A strategy exploiting this pattern is distinct from other wellknown cross-firm momentum strategies, and it is more pronounced among firms that receive less investor attention and firms that are more costly to arbitrage, consistent with slow information diffusion in the geographic network into stock prices. The third chapter focuses on the well-known presidential puzzle, which refers to the striking empirical fact that stock market returns are much higher under Democratic presidencies than Republican ones. Since first noted by Huang (1985) and Hensel and Ziemba (1995) and carefully documented by Santa-Clara and Valkanov (2003), the pattern remains robust. It is only recently that Pastor and Veronesi (2020) provide an ingenious solution to this puzzle. In this paper, we document a different presidential puzzle in the cross-section of individual stocks. We construct a monthly Presidential Economic Approval Rating (PEAR) index from 1981 to 2019, by averaging ratings on president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 0.9% per month in the future, on a risk adjusted basis. The low-PEAR-beta premium persists up to one year, and is present in various sub-samples (based on industries, presidential cycles, transitions, and tenures) and even in other G7 countries. It is also robust to different risk adjustment models and controls for other related return predictors. Since the PEAR index is negatively correlated with measures of aggregate risk aversion, a simple risk model would predict the low PEAR-beta stocks to earn lower (not higher) expected returns. Contrary to the sentimentinduced overpricing, the premium does not come primarily from the short leg following high sentiment periods. Instead, the premium could be driven by a novel sentiment towards presidential alignment.