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.

Job Market Paper

Biased Attention in Extrapolative Thinking: An Eye-Tracking Study

Eye movements reflect biases inherent in decisions. I conduct an eye-tracking experiment to measure how subjects allocate attention over a price chart while they predict future stock returns. I 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. 

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Working Papers

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. 

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Shareholder Meetings Matter: Evidence from the Options Market

with Kateryna Holland and Irene Yi

Extant literature documents a lack of stock market reaction around annual shareholder meetings, often interpreted as evidence that meetings, during which voting occurs on important proposals, have minimal value consequences. We re-examine this question by focusing on investors' expectations of stock price changes around meetings. We find that options implied volatility gradually declines between the record and meeting dates. This shows that the dispersion of investors' expectations of price changes narrows over that time. The decrease in implied volatility is consistent across meetings with different characteristics, such as meetings with and without shareholder proposals or close votes. We conclude that proposals are consequential, but the market continuously updates its views on meeting outcomes as information is released, which explains why studies fail to find significant market reactions around meetings despite their importance. 

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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

Krannert School of Management, Purdue University

Mail: Kran 444, 403 W. State Street, West Lafayette, IN 47907

Email: lim219@purdue.edu

Phone: (765) 772-6701

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