Working Paper: NBER ID: w22150
Authors: Ivo Welch
Abstract: Do financial markets properly reflect leverage? Unlike Gomes and Schmid (2010) who examine this question with a structural approach (using long-term monthly stock characteristics), my paper examines it with a quasi-experimental approach (using short-term a discrete event). After a firm has declared a dividend (i.e., after the news release), but in the few days that precede the payment date, an investor in the traded equity owns a claim to the dividend cash plus the remaining firm equity within the corporate shell. After the payment date, the shell contains only the dividend-sans-cash firm equity. The empirical evidence confirms rational increases in volatilities but shows unexpected decreases in average returns. The best explanation is behavioral.
Keywords: No keywords provided
JEL Codes: G12; G31; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased leverage (G32) | increased stock return volatility (G17) |
| increased leverage (G32) | decreased average rates of return (G19) |
| decreased average rates of return (G19) | increased stock return volatility (G17) |
| average return effect dissipates within two to four weeks (C41) | average rates of return (G12) |