Should investors view stock returns around recurring firm events in aggregate as an exploitable anomaly? In their October 2017 paper entitled “Recurring Firm Events and Predictable Returns: The Within-Firm Time-Series”, Samuel Hartzmark and David Solomon review the body of research on relationships between recurring firm events and future stock returns. They classify events as predictable (1) releases of information or (2) corporate distributions, with some overlap. Information releases include earnings announcements, dividend announcements, earnings seasonality and predictable increases in dividends. Corporate distributions cover dividend ex-days, stock splits and stock dividends. They specify a general trading strategy to exploit these events that is long (short) stocks of applicable firms during months with (without) predictable events. They use market capitalization weighting but, since there are often more stocks in the short side, they scale short side weights downward so that overall long and short sides are equal in dollar value. Based on the body of research and updated analyses based on firm event data and associated stock prices from initial availabilities through December 2016, they conclude that:
- Abnormally high stock returns generally accompany recurring firm events as specified above. Trading strategies that exploit these abnormal returns include:
- Each month, buy (sell) stocks with (without) a predicted earnings announcement.
- Each month, among firms with predicted earnings announcements, buy (sell) stocks with historically larger (smaller) cyclical earnings that month.
- Each month, among firms paying dividends, buy (sell) stocks predicted to have (not to have) a dividend ex-date that month.
- Each month, buy (sell) stocks predicted to have a stock split ex-day or stock dividend ex-day that month (all other months).
- Each month, for firms predicted to pay dividends this month, buy (sell) firms that increased (did not increase) their dividend 12 months ago by at least 5%.
- Each month, buy (sell) the tenth of stocks with the highest (lowest) average returns during that month over the last five years.
- These strategies (with adjusted value weighting as described above) through 2016:
- Generate gross monthly alphas ranging from 0.27% to 1.12%.
- Produce most of their gross monthly alphas from the long side (ranging from 0.10% to 0.89%).
- Have similar alphas across a wide range of factor models of stock returns.
- Work even with stale data lagged five years.
- Results generally hold internationally.
- Underlying causes of predictable event returns appear related to idiosyncratic risk, predictable attention, probability mistakes and demand for corporate distributions.
In summary, evidence suggests that investors may be able to exploit a substantially independent equity return stream based on predictable firm events in aggregate.
Cautions regarding conclusions include:
- Reported results are gross, not net. The proposed strategies appear to have 100% monthly turnover and would therefore be costly to execute. The long-short versions involve shorting costs and constraints (lack of shares to borrow) that would further reduce performance.
- Data collection/processing and trade execution are beyond the reach of most investors, who would bear fees for delegating to a fund manager.
- The study does not address whether reported alphas are stable over time. It is plausible that alphas are shrinking due to accelerating information processing and lower trading frictions.
- Portfolios for some of the specified strategies may at times be very narrow (hold few stocks), with attendant limited capacity.
