Catering to characteristics
By: Robin Greenwood and Samuel Hanson
Contributors: Hanson, Samuel (Samuel Gregory); Harvard Business School
Edition: Rev.
Series: Working paper / Harvard Business School -- 09-099; Working paper (Harvard Business School) -- 09-099.
Publisher: Harvard Business School
Published: 2009
Place of publication: [Boston]
Language: eng
Number of pages: 55
Description: When investors overvalue a particular firm characteristic, corporations endowed with that characteristic can absorb some of the demand by issuing equity. We use time-series variation in differences between the attributes of stock issuers and repurchasers to shed light on characteristic-related mispricing. During years when issuing firms are large relative to repurchasing firms, for example, we show that large firms subsequently underperform. This holds true even when we restrict attention to the returns of firms that do not issue at all, suggesting that issuance is partly an attempt to cater to broad time-varying patterns in characteristics mispricing. Our approach helps forecast returns to portfolios based on book-to-market (HML), size (SMB), price, distress, payout policy, profitability, and industry. Our results are consistent with the view that firms play an important role as arbitrageurs in the stock market.
Notes: "Revised: June 2009 (First draft: November 2008)"--added t.p.

"March 2009"--Publisher's website.

Originally published as: A corporate arbitrage approach to the cross-section of stock returns.

Includes bibliographical references.