Abstract: We document an information channel for core inflation shocks in the relative pricing of cross-sectional stocks. We estimate stock-level core inflation exposures using an announcement-day approach, as, unlike the energy component, the release of the core component is concentrated on CPI announcement days. We find: 1) significant and persistent cross-sectional spread in core inflation exposure; 2) firms with positive inflation exposure later experience increased cash flow as inflation rises; and 3) the relative pricing of stocks with diverging core inflation exposures significantly predicts core inflation shocks and the economists’ forecasting errors. The predictability is especiallystrong under heightened inflation risk, including the surges in 2021 and 1973, and when the Fed is behind the curve. Our overall results indicate active price discovery in cross-sectional stocks for core inflation shocks through the cash flow channel.
Abstract: When do firms repurchase shares because they believe the stock is undervalued---and what valuation model guides that belief? We study opportunistic repurchases, defined as unusually large buybacks coinciding with insider purchases, and test which signals best predict them. Expected CAPM alphas consistently outperform multifactor models, but simple heuristics such as the earnings-to-price ratio can explain the opportunistic repurchase decisions better. The evidence suggests that while the CAPM best rationalizes the behavior of firm managers among the risk-based models, firm managers in reality may also rely on more intuitive valuation rules based on price multiples.
Discussant: Xing Huang, Washington University-St. Louis
