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UBC Theses and Dissertations

New directions in empirical asset pricing : information, innovation, and stock returns Vahl, Julian


This dissertation is a collection of three essays that explore new directions in empirical asset pricing. The first essay studies the role of textual information in analyst reports. I show that analysts use the report text to convey soft information that has not yet been incorporated into their numerical forecasts. A simple tone measure predicts forecast revisions and forecast errors several periods ahead. Market prices quickly and adequately absorb the soft earnings information in analyst tone after the report publication. I demonstrate that analyst tone can be used to measure the saliency of upside or downside risks. The second essay proposes a novel deep learning approach to identify predictors of announcement returns from text. The method reveals that stock returns on earnings announcement days are predictable using analyst reports published weeks before the announcements. The identified predictors perform well for several years out-of-sample but eventually vanish. The predictability arises from a persistent underreaction to firm-specific news. A portfolio strategy based on out-of-sample announcement predictions earns large significant alpha. The findings are consistent with biased expectations and not in line with common risk-based explanations. The third essay studies the pricing of technological innovators in the stock market. It shows that technological innovators are priced differently, earning high stock returns controlling for standard factors, with less punishment for high capital investment and weak profitability. We create the persistent new firm variable patent intensity (PI), patents received divided by market capitalization, available from 1926. Aged PI portfolios and standard factors show high alpha and low profitability lasting more than a decade past formation for firms with high patenting intensity. Adding an expected growth factor, alphas become insignificant at most horizons, and loadings show large but declining growth, aggressive and increasing investment, and weak but improving profitability. The essay discusses partly unifying interpretations of some important factor models and the essential role of expected growth.

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