Fascinating academic papers published recently
As an investor, I find financial academic research to be a valuable tool in sourcing new ideas and contextualizing current practices or received knowledge among practitioners. From now on, I will try to regularly provide links to recent academic papers worth reading. I have not settled on a title yet. Suggestions welcomed…
In its first iteration, I link to five research papers I came across lately which are worth one’s time. Let me know whether you like that format, find the information useful, and how you would like it improved.
This week’s edition spotlights three papers on ESG investing, one on the use of company meetings in generating alpha, and the last one on whether accounting for intangible assets improves the performance of the value factor. There is growing evidence that it does. This paper adds to the evidence.
Given all the interest around ESG investing, I thought a good place to start would be a working paper by Guillaume Coqueret surveying results and models on socially responsible investing. His splitting of the literature into six themes — data issues, investor preferences, link with financial performance, portfolio integration, climate change risk, and theoretical models — provides an excellent framework for practitioners to think about ESG investing. The review is comprehensive and balanced. I hope he will split it further into a series of deep dives as each theme merits, in my opinion, a whole discussion.
Coqueret, Guillaume, Recent perspectives in ESG equity investing (January 12, 2021). Available at SSRN: https://ssrn.com/abstract=3715753 or http://dx.doi.org/10.2139/ssrn.3715753
“The research on sustainable finance has intensified in the past decade. In this survey, we synthesize recent academic results and models on socially responsible investing (SRI) in equity markets. We split our review into six thematic parts: data issues, investor preferences, link with financial performance, portfolio integration, climate change risk, and theoretical models.”
Staying on the topic of ESG, I read a paper I found insightful at the intersection of climate change risk and portfolio construction.
Cheema-Fox, Alexander and LaPerla, Bridget Realmuto and Serafeim, George and Turkington, David and Wang, Hui, Decarbonizing Everything: Climate Data, Industry Returns, and Portfolio Construction (September 14, 2020). Available at SSRN: https://ssrn.com/abstract=3693941.
“Our results suggest that portfolios formed on carbon emissions perform better in industries that exhibit higher dispersion in carbon intensity across companies, consistent with the notion that greater dispersion in climate-related business strategies provides a useful proxy for the likelihood that climate change impacts the financials of companies in that industry. Investment strategies that weight each industry by the variation of carbon outcomes across firms exhibit superior performance compared to market capitalization-weighted industry portfolios”
The final ESG paper I want to highlight this week has a broader remit.
Giglio, Stefano, and Kelly, Bryan T., and Stroebel, Johannes, Climate Finance (2020). CESifo Working Paper №8772, Available at SSRN: https://ssrn.com/abstract=3751863
“We review the literature studying interactions between climate change and financial markets. We first discuss various approaches to incorporating climate risk in macro-finance models. We then review the empirical literature that explores the pricing of climate risks across a large number of asset classes including real estate, equities, and fixed income securities. In this context, we also discuss how investors can use these assets to construct portfolios that hedge against climate risk. We conclude by proposing several promising directions for future research in climate finance.”
I generally find company meetings a waste of time, except for trying to learn about a company or industry for the first time, assess a company’s communication, or understand what they are telling investors to frame what is priced in. The paper I link to below suggests otherwise, and might partly explain why the successful hedge fund platforms (Point72, Balyasny, Millenium…) insist on it.
So, Eric C. and Wang, Rongfei and Zhang, Ran, Meet Markets: Investor Meetings and Expected Returns (December 18, 2020). Available at SSRN: https://ssrn.com/abstract=3751468
“We show meetings of investors and firms convey information about expected returns. Investors frequently travel to meet in-person with firms before investing, and we show firms with abnormally frequent meetings predictably outperform firms with abnormally infrequent meetings by roughly 70-to-100 basis points per month.”
Finally, a paper that adds to the growing evidence that the value factor underperformance stems from an error of measurement of the value. A good reminder of how a simple shift in perspective can avoid large mistakes.
Eisfeldt, Andrea L. and Kim, Edward and Papanikolaou, Dimitris, Intangible Value (October 28, 2020). Available at SSRN: https://ssrn.com/abstract=3720983 or http://dx.doi.org/10.2139/ssrn.3720983
“Intangible assets are absent from traditional measures of value, despite their very large (and growing) importance in firms’ capital stocks. As a result, the fundamental anchor for value that uses book assets is mismeasured. We propose a simple improvement to the classic value factor (HML^FF) proposed by Fama and French (1992, 1993). Our intangible value factor, HML^INT, prices assets as well as or better than the traditional value factor but yields substantially higher returns. This outperformance holds over the entire sample, as well as in more recent decades in which value has underperformed. We show that this is likely due to the intangible value factor sorting more effectively on productivity, profitability, financial soundness, and on other valuation ratios such as price to earnings or price to sales.”
That’s all for this week.
Originally published at https://kinesisinvesting.com on January 13, 2021.
