When firms increase advertising spending, their stock prices climb in tandem

Managers opportunistically adjust advertising spending, in part to influence short-term stock prices, writes Dong Lo

Cross-market timing in security issuance

The conventional view of market timing suggests an unambiguous, negative relation between equity misvaluation and the equity share in new issues-that is, firms with overvalued equity issue more equity and, all else equal, less debt. We question this conventional view in the paper. Using price pressure resulting from mutual funds' flow-induced trading to identify equity misvaluation, we first show that equity and debt prices are affected by the same shocks, but to different degrees. Next, we document substantial cross-sectional variation in the sensitivity of issuance decisions to equity misvaluation. In particular, firms with sufficient internal resources increase equity issues and yet decrease debt issues in our measure of equity misvaluation; in contrast, firms that are heavily dependent on external finance increase both equity and debt issues, to take advantage of the misvaluation in both. In sum, this paper provides evidence that equity and debt can be jointly (mis)priced, and more important, examines the resulting impact on firms' issuance decisions

Comomentum: inferring arbitrage activity from return correlations

We propose a novel measure of arbitrage activity to examine whether arbitrageurs can have a destabilizing effect in the stock market. We apply our insight to stock price momentum, a classic example of an unanchored strategy that exhibits positive feedback as arbitrageurs buy stocks when prices rise and sell when prices fall. We define our measure, which we dub comomentum, as the high-frequency abnormal return correlation among stocks on which a typical momentum strategy would speculate on. We show that during periods of low comomentum, momentum strategies are profitable and stabilizing, reflecting an underreaction phenomenon that arbitrageurs correct. In contrast, during periods of high comomentum, these strategies tend to crash and revert, reflecting prior overreaction resulting from the momentum crowd pushing prices away from fundamentals. Theory suggests that we should not find destabilizing arbitrage activity in anchored strategies. Indeed, we find that a corresponding measure for the value strategy, covalue, indicates that arbitrage activity in that strategy is always stabilizing and, in fact, positively correlated with the value spread, a natural anchor for the value-minus-growth trade. Additional tests at the firm, fund, and international level confirm that our approach to measuring arbitrage capital in the momentum strategy is sensible

Inferring Social Status and Rich Club Effects in Enterprise Communication Networks

Social status, defined as the relative rank or position that an individual holds in a social hierarchy, is known to be among the most important motivating forces in social behaviors. In this paper, we consider the notion of status from the perspective of a position or title held by a person in an enterprise. We study the intersection of social status and social networks in an enterprise. We study whether enterprise communication logs can help reveal how social interactions and individual status manifest themselves in social networks. To that end, we use two enterprise datasets with three communication channels --- voice call, short message, and email --- to demonstrate the social-behavioral differences among individuals with different status. We have several interesting findings and based on these findings we also develop a model to predict social status. On the individual level, high-status individuals are more likely to be spanned as structural holes by linking to people in parts of the enterprise networks that are otherwise not well connected to one another. On the community level, the principle of homophily, social balance and clique theory generally indicate a "rich club" maintained by high-status individuals, in the sense that this community is much more connected, balanced and dense. Our model can predict social status of individuals with 93% accuracy.Comment: 13 pages, 4 figure

A tug of war: overnight versus intraday expected returns

We link investor heterogeneity to the persistence of the overnight and intraday components of returns. We document strong overnight and intraday firm-level return continuation along with an offsetting cross-period reversal effect, all of which lasts for years. We look for a similar tug of war in the returns of 14 trading strategies, finding in all cases that profits are either earned entirely overnight (for reversal and a variety of momentum strategies) or entirely intraday, typically with profits of opposite signs across these components. We argue that this tug of war should reduce the effectiveness of clienteles pursuing the strategy. Indeed, the smoothed spread between the overnight and intraday return components of a strategy generally forecasts time variation in that strategy's close-to-close performance in a manner consistent with that interpretation. Finally, we link cross-sectional and time-series variation in the decomposition of momentum profits to a specific institutional tug of war

Optimal geodesics for boundary points of the Gardiner-Masur compactification

The Gardiner-Masur compactification of Teichm\"uller space is homeomorphic to the horofunction compactification of the Teichm\"uller metric. Let $\xi$ and $\eta$ be a pair of boundary points in the Gardiner-Masur compactification that fill up the surface. We show that there is a unique Teichm\"uller geodesic which is optimal for the horofunctions corresponding to $\xi$ and $\eta$. In particular, when $\xi$ and $\eta$ are Busemann points that fill up the surface, the geodesic converges to $\xi$ in forward direction and to $\eta$ in backward direction. As an application, we show that if $\mathbf{G}_n$ is a sequence of Teichm\"uller geodesics passing through $X_n$ and $Y_n$ such that $X_n \to \xi$ and $Y_n \to \eta$, then $\mathbf{G}_n$ converges to a unique Teichm\"uller geodesic.Comment: 25 pages, 4 figures. We have expanded the introduction, added Section 6 and an appendi

Casting conference calls

We explore a subtle but important mechanism through which firms can control information flow to the markets. We find that firms that “cast” their conference calls by disproportionately calling on bullish analysts tend to underperform in the future. Firms that call on more favorable analysts experience more negative future earnings surprises and more future earnings restatements. A long–short portfolio that exploits this differential firm behavior earns abnormal returns of up to 149 basis points per month or almost 18% per year. We find similar evidence in an international sample of earnings call transcripts from the United Kingdom, Canada, France, and Japan. Firms with higher discretionary accruals, firms that barely meet/exceed earnings expectations, and firms (and their executives) that are about to issue equity, sell shares, and exercise options are all significantly more likely to cast their earnings calls