Author

Duo Zhang

Date of Graduation

2003

Document Type

Dissertation/Thesis

Abstract

My dissertation considers, in one theoretical essay and two empirical essays, the implications of an unequal distribution of wealth and of firms' intangible assets for the predictability of the returns on stocks. The first two essays are concerned with the effect of wealth distribution on the stock market. Essay I shows how to conceptualize the wealth distribution effect on stock returns. It starts with the assumption that some individuals are, and some are not, liquidity-constrained in their consumption; hence some save in the stock market and some do not. Then it is derived that stock returns depend on two factors: excess returns on the profit income asset and excess returns on the total income asset. The second essay carries out the empirical work that the first essay motivates. A Fama-MacBeth approach and a Generalized Method of Moments approach are used to test the hypothesis that the wealth distribution in fact matters for the stock market, and they provide predictive equations for stock returns. The results indicate rejection of the role of the wealth distribution. The third essay investigates the relationship between firms' stock returns and their intangibles. Hall argues that the value of intangible assets can be inferred from firms' stock market value, which suggests rational valuation in the market. However, I found that the inferred intangibles have predictive power for stock returns, which is consistent with market inefficiency. Thus Hall's intangible assets hypothesis does not hold and the discrepancy between market equity and book equity suggests market inefficiency. Also, the inferred intangibles outperform Fama and French's value factor, BE/ME, in predicting stock returns.

Share

COinS