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 (Scheduled), INFORMS Annual Meeting, 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 explore how investors allocate their attention across a price chart while predicting future stock prices. We confirm that attention allocation reflects expectation formation based on historical prices, as measures based on eye-tracking predict the forecasts submitted by subjects. Subjects rely on their perceptions of past trends and price levels when making forecasts. Recent and extreme returns, as well as price peaks and troughs, receive greater weight. Such heuristics are heterogeneous across subjects and result in inferior forecast performance. Our results provide neural evidence on beliefs about historical prices hypothesized by behavioral expectation models.
Shareholder Meetings Matter: Evidence from the Options Market
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
with Logan Emery and Shiwei Ye
Presentation: Erasmus University Rotterdam
This study develops an extensive dataset of GitHub activity by public firms from 2011 to 2022 to investigate the impact of open-source innovation on corporate value. Firms that share their projects on GitHub represent 50% of the total market capitalization of the US stock market across 82% of industries. We estimate that the private value (i.e., the value to the firm) of the average project in our sample is $733,000. Notably, projects with permissive licenses that allow unrestricted use tend to be more valuable, suggesting that significant value is derived from allowing others to adopt the innovation. The evidence is also consistent with open-source engagement, providing value by complementing patenting activities, enhancing corporate reputation, and reducing financing costs. These results are supported by substantial growth in profitability and intangible assets following the release of valuable projects, ultimately leading to higher future stock returns.
Draft available upon request
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