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Equity Issues and Return Volatility

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  • Borja Larrain
  • Felipe Varas

Abstract

We show that the repurchaser--issuer return spread is stronger among stocks with high return volatility. Rational and behavioral theories predict that this finding is the product of risk volatility and sentiment volatility, respectively. However, our results are inconsistent with these theories as they currently stand. Loadings on standard risk factors do not follow the dynamics that would explain the return predictability related to issuance decisions. If we sort on a stock's beta with respect to the aggregate sentiment index of Baker and Wurgler (2006, J. Finance, 61, 1645--1680), which proxies for sentiment volatility, the results are weaker--economically and statistically--than when sorting on return volatility. Copyright 2013, Oxford University Press.

Suggested Citation

  • Borja Larrain & Felipe Varas, 2013. "Equity Issues and Return Volatility," Review of Finance, European Finance Association, vol. 17(2), pages 767-808.
    • Handle: RePEc:oup:revfin:v:17:y:2013:i:2:p:767-808
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    File URL: http://hdl.handle.net/10.1093/rof/rfs012
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    Cited by:

    1. Walkshäusl, Christian, 2015. "Equity financing activities and European value-growth returns," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 27-40.
    2. Barroso, Pedro & Detzel, Andrew, 2021. "Do limits to arbitrage explain the benefits of volatility-managed portfolios?," Journal of Financial Economics, Elsevier, vol. 140(3), pages 744-767.
    3. Chen, Jian & Jiang, Fuwei & Li, Hongyi & Xu, Weidong, 2016. "Chinese stock market volatility and the role of U.S. economic variables," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 70-83.
    4. Robert F. Stambaugh & Yu Yuan, 2017. "Mispricing Factors," The Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1270-1315.
    5. Xu, Shaojun, 2023. "Behavioral asset pricing under expected feedback mode," International Review of Financial Analysis, Elsevier, vol. 86(C).

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