Aerospace competition, investor attention, and stock return comovement

Fierce aerospace competition among global superpowers has resulted in strong public attention on satellite launch events in the U.S. Given limited attentional resources, U.S. investors pay more attention to market-level shocks than to firm-specific shocks, making stock returns comove more with the market on satellite launch days than on other days. We find that the effect is significantly stronger for military-related satellite launches, launches before the dissolution of the former Soviet Union, and international satellite launches by other competitors, highlighting a greater concern for national security. A trading strategy that exploits the potential satellite-induced mispricing yields an annualized abnormal risk-adjusted return of up to 17% within the three-day window around launch date. Our results are robust to a battery of robustness analyses that consider the different characteristics of satellite launches, the exclusion of aerospace firms, and stock return comovement with industries.</p

Asymmetric trading responses to credit rating announcements from issuer- versus investor-paid rating agencies

The credit rating industry has traditionally followed the “issuer-pays” principle. Issuer-paid credit rating agencies (CRAs) have faced criticism regarding their untimely release of negative rating adjustments, which is attributed to a conflict of interests in their business model. An alternative model based on the “investor-pays” principle is arguably less subject to the conflict of interest problem. We examine how investors respond to changes in credit ratings issued by these two types of CRAs. We find that investors react asymmetrically: They abnormally sell equity stakes around rating downgrades by investor-paid CRAs, while abnormally buying around rating upgrades by issuer-paid CRAs. Our study suggests that, through their trades, investors capitalize on value-relevant information provided by both types of CRAs, and a dynamic trading strategy taking advantage of this information generates significant abnormal returns

Political similarities in credit ratings

We investigate whether political similarities between credit rating agencies (CRAs) and bond issuers impact credit rating quality. We find that a higher degree of similarity of political affiliation leads to a decrease in timeliness and accuracy of downgrades prior to default events. Our finding supports the notion that CRAs tend to maintain/assign preferential ratings to politically similar firms via delaying negative signals as favourable rating activities. We further show that these politically similar firms tend to increase the proportion of donations to their favoured party following favourable credit ratings. Interestingly, this result is confined to Republican-leaning firms. The results indicate that CRAs successfully use biased credit ratings as an indirect channel of political party support. Our findings support the political similarities in credit ratings hypothesis

Portfolio's weighted political risk and mutual fund performance: A text-based approach

Using text-based measures of firm-level political risk, we find a negative impact of the portfolio's weighted political risk on U.S. mutual fund performance. This relationship is robust to a wide range of topic-specific political risks at the firm level. We, however, find that national geopolitical risk, the U.S. state-level economic policy uncertainty, and Brexit-induced risk do not affect mutual fund performance. Our results suggest that even though mutual funds are immune from political risk at the macro level, they are significantly exposed to idiosyncratic political risk. We also demonstrate that partisanship matters to mutual fund performance.</p

When Hollywood movies steal the show, stock returns dance more with the market!

Hollywood film releases attract U.S. investors' attention away from the financial markets. This is reflected in lower trading activity and abnormal Google search volume for firm names between film and non-film days. The resultant investor inattention leads to a significantly higher stock return comovement with the market on film release days. Interestingly, films with A-list star actors and blockbuster movies exhibit a more pronounced impact than their counterparts. Finally, we show that being aware of this Hollywood film-induced mispricing can yield an annualized abnormal risk-adjusted return of up to 13.5% within five days around the release events.</p