Ricardo De la O
Welcome to my page!
I am an Assistant Professor of Finance and Business Economics at USC Marshall School of Business. I am interested in macroeconomics, asset pricing and corporate finance.
Subjective Cash Flow and Discount Rate Expectations [June 2021] [ Journal of Finance] (with Sean Myers) Data
Why do stock prices vary? Using survey forecasts, we find that cash flow growth expectations explain most movements in the S&P 500 price-dividend and price-earnings ratios, accounting for at least 93% and 63% of their variation. These expectations comove strongly with price ratios, even when price ratios do not predict future cash flow growth. In comparison, return expectations have low volatility and small comovement with price ratios. Short-term, rather than long-term, expectations account for most price ratio variation. We propose an asset pricing model with beliefs about earnings growth reversal that accurately replicates these cash flow growth expectations and dynamics.
Survey expectations of dividend growth (blue) vary substantially over time and strongly comove with the S&P 500 price-dividend ratio (red). Survey expectations of returns (green) are relatively flat over time and have low comovement with the price-dividend ratio.
Using survey forecasts, we find that systematic errors in expectations of long-term inflation and short-term nominal earnings growth are the main driver of prices and return puzzles for bonds and stocks. We demonstrate this by deriving and testing a single necessary and sufficient condition based on accounting identities. Errors in expectations of short-term inflation and long-term nominal earnings growth do not play a role in either asset market. Because of these systematic errors, real cash flow expectations closely match aggregate bond and stock prices, leaving little room for time-varying discount rates. These expectations also accurately match key return puzzles for bonds and stocks: the rejection of the expectations hypothesis and stock return predictability. These results are consistent with a simple model in which agents believe the persistences of inflation and nominal earnings growth are magnified versions of the objective persistences.
Survey expectations of long-term inflation are volatile, moving almost 1-1 with expectations of short-term inflation. In contrast, for survey expectations of S&P 500 nominal earning growth, almost of all of the movements occur in short-term expectations.
The Effect of Buybacks on Capital Allocation [July 2020]
This paper studies the macroeconomic effects of a 1982 SEC rule that made share buybacks a viable alternative to dividends for paying out funds to shareholders. I propose a quantitative model of heterogeneous firms with dividend adjustment costs and a manager-shareholder conflict, matched to micro data on US corporations' cash flow statements. The flexibility of buybacks improves welfare by reducing the misallocation of capital. This is not only because investors can more easily shift resources to more productive firms, but also because stock prices become more responsive to productivity and thus help align incentives of managers and shareholders. This "stock price effect" allows the model to not only account for a decline in investment and increase in productivity, but also the increase in corporate cash holdings over the last decades.
Employment Dynamics and Monetary Policy for Emerging Economies under Informality [October 2019] (with Stephen McKnight)
This paper investigates the role of labor informality in the propagation of transitory shocks and its implications for interest rate policy in preventing self-fulfilling inflation expectations. We develop a dynamic New Keynesian model where the size of the informal sector reacts to search and matching frictions in the formal sector, which can account for the observed behavior of formal and informal employment in Mexico. We show that informality reduces the volatility of aggregate consumption and employment, but investment volatility increases. While informality amplifies the propagation of demand shocks on inflation, it dampens the response of output, weakening the transmission mechanism of monetary policy to output. For interest-rate feedback rules that react to formal measures of inflation, we find that informality significantly restricts the ability of the Taylor principle to ensure determinacy. However, we show that determinacy can be restored when policy also responds to formal output.
Work in progress
Corporate Payouts and the Business Cycle