Asset Management

The US government has a massive footprint on any US company that goes way beyond just the impact of tariffs. How the government chooses to use that influence can make or break the company. Read the full article on Forbes.com

Earnings management involves actions by managers to influence reported financial results, often to present a more favorable view of company performance. In this chapter, we discuss the tools available to managers for earnings management. We first consider manipulation of net income through accruals and real earnings management. Then, we disaggregate earnings management along the income statement, comparing manipulation of revenue, expenses, and gains and losses.

We propose and test a simple model of the equity premium implied by stock index options, assuming frictionless and complete markets for the index and index options. The model’s forecasts are more accurate than forecasting benchmarks, especially when arbitrage costs are low. They closely match real market behavior, with an average equity premium of 7.9% and an implied Sharpe ratio of 0.36.

Insurance and macro models, increased capital risk results in higher risk free asset prices often attributed to precautionary saving. However at the demand level, even assuming the same preferences as in the equilibrium analysis, precautionary saving need not always hold. Assuming CES time and CRRA risk preferences, we derive conditions such that the consumer exhibits precautionary savng. Absent these conditions, a concrete example demonstrates that the consumer fails to exhibit precautionary saving.

The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no‐arbitrage restriction in the United States. Both cyclical and long‐run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.

ASC 842, which requires balance sheet recognition of right-of-use (ROU) lease assets, resulted in a large increase in reported assets since 2019, thus impairing the time-series consistency of metrics that use assets (e.g., asset turnover). This paper shows that ROU assets can be estimated quite precisely using lease disclosure. Adding the estimated ROU asset for pre-ASC 842 observations substantially improves the ability of operating assets to explain sales. It also increases the ability of growth in operating assets to predict sales growth and explain analysts’ revenue growth forecasts.

Private equity was a bright spot in institutional investors’ portfolios last year. The asset class held up much better than public stocks, which were whipsawed by rising rates. Read the full article at the Financial Times.

We develop a novel technique to extract credit-relevant information from the text of quarterly earnings calls. This information is not spanned by fundamental or market variables and forecasts future credit spread changes. One reason for such forecastability is that our text-based measure predicts future credit spread risk and firm profitability. More firm- and call-level complexity increase the forecasting power of our measure for spread changes. Out-of-sample portfolio tests show the information in our measure is valuable for investors.

We identify model-free mispricing factors and relate them to global stock prices and investor beliefs. The factors are model-free as they measure variation in the relative prices of assets with the same cash ows. We design three factors to re ect the beliefs and capital ows of important clientele: investors in United States (US), developed, and emerging stock markets; and individuals and institutions. Together the three factors capture most (52%) of the systematic variation in price premiums of individual securities.