Growth opportunity bias (GOB), measured as the difference between market and fundamental values of a firm's growth opportunity, has an ability to predict future stock returns. In the portfolio sort, downward-biased GOB firms earn higher returns than upward-biased GOB firms, which is unexplained...

Employment growth (EG) is likely related to liquidity fundamentals of investment opportunities, firm health, and information environment. This, in turn, implies that liquidity risk may play a role in explaining the relation between employment growth and stock returns. We explain the link between...

In this paper, we make a liquidity adjustment to the consumption-based capital asset pricing model (CCAPM) and show that the liquidity-adjusted CCAPM is a generalized model of Acharya and Pedersen (2005). Using different proxies for transaction costs such as the effective trading costs measure...

In this paper, we propose a liquidity risk adjustment to the Epstein and Zin (1989, 1991) model and assess the adjusted model's performance against the traditional consumption pricing models. We show that liquidity is a significant risk factor and it adds considerable explanatory power to the...

As opposed to the “low beta low risk” convention, we show that low beta stocks are illiquid and exposed to high liquidity risk. After adjusting for liquidity risk, low beta stocks no longer outperform high beta stocks. Although investors who “bet against beta” earn a significant beta...

We conjecture that leverage has the potential to explain the positive relation between stock returns and gross profitability (Novy-Marx, 2013). At the firm level, we show that the profitability premium becomes insignificant for almost zero-leverage firms (Strebulaev and Yang, 2013). At the...

We examine the explanation of model misspecification for the cash-holding effect that stocks with the highest cash-to-asset ratios outperform stocks with the lowest ratios. We find that the Fama-French (1993, 2015) three- and five-factor models, and the q-factor model produce high Gibbons Ross...