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
Decoding Expectation Formation from Realized Stock Prices: An Eye-Tracking Study
(with Huseyin Gulen)
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Revision requested, Management Science
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Presentation: WFA, INFORMS, NFA, Chinese University of Hong Kong, Hong Kong University of Science and Technology, National University of Singapore, Purdue University, San Diego State University, University at Buffalo, University of Hong Kong, Yonsei University
We conduct an eye-tracking study to investigate how investors allocate their attention across a price chart when predicting future stock prices. Eye-tracking data accurately predict the forecasts by participants, showing that attention reflects expectation formation. Investors gave more weight to recent and extreme returns, as well as price peaks and troughs. These attention patterns result in less accurate predictions. Our study not only supports behavioral models of expectation formation by providing an empirical microfoundation but also offers insights for improving these models.
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Presentation: ABFER, CICF, EFA, ENTFIN, MFA, SAIF, Joint Conference with Allied KFA, Erasmus University Rotterdam, Florida State University, Monash University, Rochester Institute of Technology, University at Buffalo
We investigate open-source innovation by public firms. Using an extensive dataset of public-firm activity on GitHub, we find that firms with open-source projects represent 68% of the U.S. stock market. We estimate the private value of all projects in our sample to be nearly $25 billion, with the average project generating $842,000. Firms facing higher competition tend to generate less private value from their projects. Open-source value significantly predicts firm growth in terms of sales, profits, employment, and patenting. These results contribute to our understanding of the private value generated by innovation in the absence of excludability.
The Gradual Reveal: Understanding Shareholder Meetings Through Options
(with Kateryna Holland, Irene Yi)
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Under Review
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Presentation: AFA AFFECT, EFA, FMA, Joint Conference of Allied KFA, Silicon Prairie Finance Conference, Southern Illinois University, University of Missouri, University of Oklahoma, University of Sydney
We investigate the options market's reactions to proposals at shareholder meetings. We observe a consistent decrease in option implied volatility from the record to the meeting date, indicating reduced uncertainty about future stock prices. Meetings with close votes and shareholder proposals exhibit a distinct peak before the record date, followed by a more significant yet gradual decline. This decline is pronounced for meetings with high voting premiums and stakeholder disagreements. Our findings highlight proposals' substantial impact on firm value, with investors processing most proposal-related information before the meeting, expanding our understanding beyond the literature's conventional focus around key event dates.
Extrapolative Expectations and Investment Decisions: Evidence from Scrip Dividends
(with Sergey Chernenko, 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.
Work in Progress
New Listings and Stock Return Distribution: Evidence from International Markets
(with Jaewon Choi and Yeejin Jang)