The Journal of Finance

Capital Budgeting versus Market Timing: An Evaluation Using Demographics

Published: 1/11/2013,  Volume: 68,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2012.01799.x  |  Cited by: 18

STEFANO DELLAVIGNA, JOSHUA M. POLLET

Using demand shifts induced by demographics, we evaluate capital budgeting and market timing. Capital budgeting implies that industries anticipating positive demand shifts in the near future should issue more equity to finance greater capacity. To the extent that demand shifts in the distant future are not incorporated into equity prices, market timing implies that industries anticipating positive shifts in the distant future should issue less equity due to undervaluation. The evidence supports both theories: new listings and equity issuance respond positively to demand shifts during the next 5 years and negatively to demand shifts further in the future.

Investor Inattention and Friday Earnings Announcements

Published: 3/13/2009,  Volume: 64,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2009.01447.x  |  Cited by: 1492

STEFANO DELLAVIGNA, JOSHUA M. POLLET

Does limited attention among investors affect stock returns? We compare the response to earnings announcements on Friday, when investor inattention is more likely, to the response on other weekdays. If inattention influences stock prices, we should observe less immediate response and more drift for Friday announcements. Indeed, Friday announcements have a 15% lower immediate response and a 70% higher delayed response. A portfolio investing in differential Friday drift earns substantial abnormal returns. In addition, trading volume is 8% lower around Friday announcements. These findings support explanations of post‐earnings announcement drift based on underreaction to information caused by limited attention.

Sovereign Default, Domestic Banks, and Financial Institutions

Published: 3/17/2014,  Volume: 69,  Issue: 2  |  DOI: 10.1111/jofi.12124  |  Cited by: 478

NICOLA GENNAIOLI, ALBERTO MARTIN, STEFANO ROSSI

We present a model of sovereign debt in which, contrary to conventional wisdom, government defaults are costly because they destroy the balance sheets of domestic banks. In our model, better financial institutions allow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults. Our predictions: government defaults should lead to declines in private credit, and these declines should be larger in countries where financial institutions are more developed and banks hold more government bonds. In these same countries, government defaults should be less likely. Using a large panel of countries, we find evidence consistent with these predictions.

Equity Term Structures without Dividend Strips Data

Published: 10/24/2024,  Volume: 79,  Issue: 6  |  DOI: 10.1111/jofi.13394  |  Cited by: 29

STEFANO GIGLIO, BRYAN KELLY, SERHIY KOZAK

We use a large cross section of equity returns to estimate a rich affine model of equity prices, dividends, returns, and their dynamics. Our model prices dividend strips of the market and equity portfolios without using strips data in the estimation. Yet model‐implied equity yields closely match yields on traded strips. Our model extends equity term‐structure data over time (to the 1970s) and across maturities, and generates term structures for various equity portfolios. The novel cross section of term structures from our model covers 45 years and includes several recessions, providing a novel set of empirical moments to discipline asset pricing models.

Taming the Factor Zoo: A Test of New Factors

Published: 2/27/2020,  Volume: 75,  Issue: 3  |  DOI: 10.1111/jofi.12883  |  Cited by: 674

GUANHAO FENG, STEFANO GIGLIO, DACHENG XIU

We propose a model selection method to systematically evaluate the contribution to asset pricing of any new factor, above and beyond what a high‐dimensional set of existing factors explains. Our methodology accounts for model selection mistakes that produce a bias due to omitted variables, unlike standard approaches that assume perfect variable selection. We apply our procedure to a set of factors recently discovered in the literature. While most of these new factors are shown to be redundant relative to the existing factors, a few have statistically significant explanatory power beyond the hundreds of factors proposed in the past.

Test Assets and Weak Factors

Published: 12/18/2024,  Volume: 80,  Issue: 1  |  DOI: 10.1111/jofi.13415  |  Cited by: 49

STEFANO GIGLIO, DACHENG XIU, DAKE ZHANG

We show that two important issues in empirical asset pricing—the presence of weak factors and the selection of test assets—are deeply connected. Since weak factors are those to which test assets have limited exposure, an appropriate selection of test assets can improve the strength of factors. Building on this insight, we introduce supervised principal component analysis (SPCA), a methodology that iterates supervised selection, principal‐component estimation, and factor projection. It enables risk premia estimation and factor model diagnosis even when weak factors are present and not all factors are observed. We establish SPCA's asymptotic properties and showcase its empirical applications.