- Capital markets and valuation
- Regulation and entrepreneurship
Job Market Paper
I develop and test a new machine learning method for estimating cross-sectional firm-level expected returns. My approach adapts the loss function of a random forest algorithm to minimize the variance of measurement errors instead of trading off bias and variance. Out-of-sample tests show this approach yields reliably higher cross-sectional accuracy relative to: (a) commonly used implied cost of capital estimates, (b) factor-based estimates, and (c) estimates based on other state-of-the-art machine learning algorithms. In more detailed analyses, I find that while a small number of firm characteristics explain most of the returns predictability, the relative importance of these characteristics vary by holding horizon. I also use this new approach to revisit the reported association between earnings smoothness and expected returns. Contrary to prior studies, I show that firms whose earnings are smoother relative to their cash flows earn higher (not lower) expected returns, despite being safer on many dimensions.
Small businesses are a critical component of private sector activity, yet many face financial shortfalls that inhibit job creation, investment spending, and growth. We examine the economic benefits of extending financing to small businesses that are otherwise unfunded by traditional banks. Specifically, we study the economic effects of Equity Crowdfunding, which allows small businesses to raise capital from the public via online platforms. We predict and find that, despite uncertainty around the viability of these young companies, capital raised from the crowd is associated with increased likelihood of survival and subsequent venture capital fundraising. In addition to alleviating the financial constraints of successful issuers, crowdfunding campaigns are also associated with increased entrepreneurial activity in the local area, generating positive spillovers in the community. Our analysis contributes to the nascent literature on this growing sector of small firms and provides evidence about the regulation's effectiveness in stimulating local economic activity.