Working Paper: NBER ID: w15948
Authors: Robin Greenwood; Samuel Hanson
Abstract: We use differences between the attributes of stock issuers and repurchasers to forecast characteristic-related stock returns. For example, we show that large firms underperform following years when issuing firms are large relative to repurchasing firms. Our approach is useful for forecasting returns to portfolios based on book-to-market (HML), size (SMB), price, distress, payout policy, profitability, and industry. We consider interpretations of these results based on both time-varying risk premia and mispricing. Our results are primarily consistent with the view that firms issue and repurchase shares to exploit time-varying characteristic mispricing.
Keywords: stock returns; characteristic timing; equity issuance; repurchases
JEL Codes: G14; G3; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms that issue stock (G24) | low returns on average (G19) |
| firms repurchasing shares (G34) | abnormally high returns (G17) |
| differences between characteristics of recent issuers and repurchasers (G24) | forecast characteristic-level returns (G17) |
| high values of a characteristic in issuing firms (G32) | long-short portfolio associated with that characteristic performs poorly (G11) |
| characteristic timing (C41) | underperformance of recent issuers (G24) |
| firms act as arbitrageurs in the capital market (G12) | respond to predictable variations in characteristic returns (G11) |