Using data on scrip dividends, which give shareholders the option to receive additional shares instead of cash dividends, we investigate how investors form expectations on the future returns. We find that more shareholders choose to receive dividends in shares when recent past returns are higher, especially when returns are positive and volatile. In addition, extrapolative beliefs among shareholders are stronger in small firms, growth firms, and firms with low institutional ownership. Finally, take-up rates of scrip dividends negatively predict both short-run and long-run future returns. Our findings show that shareholders, like general investors, are affected by extrapolative beliefs when forming expectations of future returns on their holdings.
Working Papers
Biased Attention in Extrapolative Thinking: An Eye-Tracking Study
with Huseyin Gulen
Eye movements reflect biases inherent in decision-making. We conduct an eye-tracking experiment to measure how subjects allocate attention over a price chart while predicting future stock returns. We confirm that the attention allocation reflects how subjects form expectations from past price information. The measure of expectation based on eye-tracking quantitatively fits the actual forecasts submitted by subjects. Easily recognizable patterns in data receive disproportionately more attention: Subjects spend much more time reading recent as well as extreme trends and price levels. Such heuristics in information acquisition are heterogeneous across subjects and lead to inferior forecast precision. Overall, the results provide direct evidence for investor beliefs hypothesized by theories of return extrapolation.
Scrip Dividends and Extrapolative Beliefs
with Sergey Chernenko and Huseyin Gulen
Using data on scrip dividends, which give shareholders the option to receive additional shares instead of cash dividends, we investigate how investors form expectations on the future returns. We find that more shareholders choose to receive dividends in shares when recent past returns are higher, especially when returns are positive and volatile. In addition, extrapolative beliefs among shareholders are stronger in small firms, growth firms, and firms with low institutional ownership. Finally, take-up rates of scrip dividends negatively predict both short-run and long-run future returns. Our findings show that shareholders, like general investors, are affected by extrapolative beliefs when forming expectations of future returns on their holdings.
Shareholder Meetings Matter: Evidence from the Options Market
with Kateryna Holland and Irene Yi
This paper examines the value and timing of information released during shareholder meetings using options. In contrast to studies that report insignificant market reactions around these meetings, we provide evidence that shareholder meetings indeed matter. Our findings indicate that option prices peak around the record date and decline leading up to the meeting date, suggesting that information on meeting agendas and voting outcomes does not reach the market on specific event dates but is instead aggregated gradually throughout the meeting cycle. The decline in option prices is quantitatively substantial at 0.9\%, varies by proposal topic and contentiousness level, and persists after controlling for voting premiums and borrowing fees. Our results suggest that previous studies may have underestimated the value of shareholder meetings by relying solely on event returns.
Works in Progress
New Listings and Stock Return Distribution: Evidence from International Markets
with Jaewon Choi and Yeejin Jang
Equity Term Structure and Merger Activity
with Huseyin Gulen
Chan Lim
A.B. Freeman School of Business, Tulane University