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
Under Review
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
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 participants submit, showing that attention allocation reflects expectation formation based on historical prices. Investors gave more weight to recent and extreme returns, as well as price peaks and troughs, with an emphasis on past trends versus price levels varying by context. 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.
The Gradual Reveal: Understanding Shareholder Meetings Through Options
with Kateryna Holland and Irene Yi
Under Review
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.
The Private Value of Open-Source Innovation
We investigate open-source innovation by public firms and the private value it generates for these firms. Unlike patents, which grant inventors exclusive rights to their inventions, open-source innovations can be used by anyone. Nevertheless, using an extensive dataset of public-firm activity on GitHub, we find that open-source activity is widespread. Firms with open-source projects represent 68% of the U.S. stock market across 86% of industries. We estimate the value of all projects in our sample to be nearly $25 billion, with the average project generating $832,000. Firms facing less competition generate more value, suggesting they capture a larger portion of the total value of their innovation. Open-source value significantly predicts firm growth, but it also stimulates patenting by other firms and does not result in creative destruction. These results contribute to our understanding of how innovation generates private value in the absence of excludability.
Extrapolative Expectations and Investment Decisions: Evidence from Scrip Dividends
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.
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
School of Management, University at Buffalo
Mail: 160 Jacobs Management Center, Buffalo, NY 14260
Email: clim26@buffalo.edu
Phone: (765) 772-6701