Sexy or Safe: Why do Predicted Stock Issuers Earn Low Returns?
Predicted stock issuers (PSIs) are firms with expected “high-investment and low-profit” (HILP) profiles that earn unusually low returns. We carefully document important features of PSI firms to provide new insights on the economic mechanism behind the HILP anomaly. Our results show top-PSI firms are cash-strapped and dependent on external financing, have lottery-like payoffs, high volatility, high Beta, and high shorting costs. Over the next two years, top-PSIs earn return-on-assets of -30% per year, report disappointing earnings, and experience strongly-negative analyst forecast revisions. They earn especially low returns in down markets and are nine times more likely to delist for performance reasons. We conclude that HILP firms earn low returns not because they are safer, but because they are more salient (i.e. sexier) to investors and are thus overpriced.
Co-Founder, Nipun Capital and Senior Fellow of ABFER
"Sexy or Safe: Why do Predicted Stock Issuers Earn Low Returns?"
Professor Bernard Yeung
Dean and Stephen Riady Distinguished Professor in Finance and Strategic Management, National University of Singapore and President of ABFER