Research | elisapazaj.com

Limited Attention to Detail in Financial Markets: Evidence from Reduced-Form and Structural Estimation, with Henrik Cronqvist, Tomislav Ladika and Zacharias Sautner

(Journal of Financial Economics 4, 2024, 103811)

We show that firm valuations fell after a key expense became more visible in financial statements. FAS 123-R required firms to deduct option compensation costs from earnings, instead of disclosing them in footnotes. Firms that granted high option pay experienced earnings reductions, while fundamentals remained unchanged. These firms were more likely to miss earnings forecasts, and they experienced recommendation downgrades and valuation declines. Our findings suggest that market participants exhibited limited attention to option costs before FAS 123-R. As we reuse the FAS 123-R natural experiment, we show how one can address confounding channels by integrating reduced-form and structural estimation.

Price Momentum and the Value of Cash.

(Revise & Resubmit at the Review of Asset Pricing Studies)

Cash is valuable for momentum firms, more so for the winners than the losers. Momentum effects arise naturally within a dynamic liquidity management model that accounts for both permanent and transitory earnings shocks. In the model, the most cash constrained firms end up in the extreme past performance portfolios. Positive productivity shocks make winner firms more constrained and thus lead to higher expected returns, as optimal liquidity management requires setting aside more cash given the increase in productivity. Empirical proxies for the value of liquidity confirm model predictions.

Addressing Anticipation Effects in Finance, with Tomislav Ladika and Zacharias Sautner

A wide range of empirical techniques cannot accurately estimate causal effects of policy events due to anticipation bias-agents making decisions based on beliefs about future policy outcomes. We show how researchers can refine estimates to account for these beliefs, by integrating reduced-form and structural estimation around observed outcomes of a single policy change. We illustrate the importance and implementation of the approach by applying it to the Paris Agreement, which is frequently used to understand how agents respond to a policy event that increased climate regulatory risk. We document that anticipation can bias both the magnitude and sign of the Paris Agreement's average treatment effect on firm outcomes (estimated from a standard model such as a difference-in-differences regression). We offer concrete guidance on how to account for the divergence between causal and estimated effects.

Market-implied equity issuance costs, with Enrique Schroth

(Work in progress)

Existing literature measures the cost of issuing equity using low frequency accounting data from Compustat or specific databases with limited coverage. This paper proposes an alternative measure, motivated by Fama and French (2005), but based on the daily variation in outstanding equity from CRSP. The usefulness of this measure lies in its ability to capture each issuance and relate it to its associated price reaction. The Bolton, Chen and Wang (2013) model serves as the basic set up for the structural estimation. The project is currently at the final estimation stage.

A Unified Explanation of Value and Momentum Premia.

This paper shows that both value and momentum premia arise in a q-theoretic framework that considers optimal corporate policies under uncertain financing conditions. Higher expected growth and higher equity issuance costs make winners riskier than losers during times of overall easy financing conditions. The value premium captures differences in the degree of financial constraints that increase during tight financing markets. These dynamics imply a procyclical momentum premium, a countercyclical value premium and a negative correlation between the two premia. Empirical evidence on observed financing choices and relative measures of constraints in value and momentum portfolio sorts confirm model predictions.