Market Imperfections and Asset Prices

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This dissertation studies two long-standing asset pricing anomalies: "Value and Growth Effects" and "Momentum Effects" via the channel of market imperfections. These market imperfections stem from basic information asymmetry problem, and take forms of contracting problems and less than perfectly competitive information intermediaries. The first essay (joint with Zhi Da) provides empirical evidence supporting the view that a sharp rise in a firm's default likelihood causes a change in its shareholder clientele. The market imperfection in this essay is institutional investors' investment policy (or investment mandate) constraints, by which they cannot hold stocks falling below certain market capitalization, price, analyst coverage trigger. As institutions decrease their holdings of the firm's share, trading volume and cost increase; the order imbalance measure indicates large selling pressure. The resulting liquidity shock leads to a further concession in the stock price, recovering though, in the subsequent month. Such price recovery explains the first-month abnormal high return earned by stocks with high default likelihood documented in Vassalou and Xing (2004). The abnormal high return is therefore mostly reward for providing liquidity when it is most needed rather than compensation for bearing a systematic default risk. The second essay studies the biased information intermediary (sell-side financial analysts) and the momentum effects. Sell-side equity analysts at times have a tendency to herd toward the consensus estimate when making their quarterly earnings forecasts. I argue that such tendency to herd leads to inefficient aggregation of private information and consequently price momentum in stocks. I demonstrate that the Jegadeesh and Titman (1993) price momentum phenomenon is present among stocks only during those time periods when analysts who follow those stocks herd together. I find that the herding tendency is stronger among smaller stocks, growth stocks, and stocks with higher share turnover ratio and more news media coverage. I provide diagnostics suggesting that my findings are distinct from the earnings momentum effects, information uncertainty effects and liquidity risk already documented in the literature

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  • 06/25/2018
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