Finance Seminar（2019-05)

Topic: Delayed Alpha: The Term Structure of Earnings Expectations and the Cross Section of Stock Returns

Speaker: Conson (Yingguang) Zhang, University of Southern California

Time: Thursday, 17 January, 10:00-11:30

Location: Room K01, Guanghua Building 2

Abstract:

The term structure of analysts' earnings expectations and its dynamics predict the cross section of stock returns. Stocks with the most positive expected change in earnings growth underper-form those with the most negative expected change by over 8% per year. I decompose growth expectations by forecast horizon and find that the return predictability almost entirely stems from errors in two-quarter-ahead earnings forecasts, as opposed to one- or three-quarter-ahead forecasts. Strategies that trade against growth forecasts beyond the two-quarter horizon experience “delayed alpha:" they do not earn alpha immediately but with a delay. Behavioral models with bounded rationality can explain both the return predictability and the delayed alpha through inattention to long-horizon earnings news. I estimate that while investors pay full attention to one-quarter-ahead earnings information, they are only 25% as attentive to earnings information beyond the one-quarter horizon.

Introduction:

Conson Zhang (张英广) is a Ph.D. candidate in Finance at the University of Southern California, Marshall School of Business. He holds a B.A. in Economics (honors) and Statistics (honors) from University of California, Berkeley. His main research areas include empirical asset pricing and behavioral finance. In his dissertation, Conson focuses on the relation between expectation dynamics and stock returns. He shows that investors’ expectations of firms’ earnings evolve in ways predicted by behavioral economic models. Such predictable dynamics drive stock returns in the cross section. His research highlights the importance of understanding investors’ subjective expectation formation when studying asset prices.

www.consonzhang.com

Your participation is warmly welcomed!