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Manager Uncertainty and Cross-Sectional Stock Returns

Tengfei Zhang ()

2020 Papers from Job Market Papers

Abstract: This paper evidences the explanatory power of managersâ uncertainty for cross-sectional stock returns. I introduce a novel measure of the degree of managersâ uncertain beliefs about future states: manager uncertainty (MU), defined as the count of the word âuncertaintyâ over the sum of the count of the word âuncertaintyâ and the count of the word âriskâ in filings and conference calls. I find that managerâs level of uncertainty reveals valuation information about real options and thereby has significantly negative explanatory power for cross-sectional stock returns. Beyond existing market-based uncertainty measures, the manager uncertainty measure has incremental pricing power by capturing information frictions between managersâ reported uncertainty and investorsâ perception of uncertainty. Moreover, a short-long portfolio sorted by manager uncertainty has a significantly positive premium and cannot be spanned by existing factor models. An application on COVID-19 uncertainty shows consistent results.

JEL-codes: G11 G12 G41 D81 (search for similar items in EconPapers)
Date: 2020-09-18
New Economics Papers: this item is included in nep-fmk, nep-ore and nep-rmg
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