Salient or Safe: Why Do Predicted Stock Issuers Earn Low Returns?

Predicted stock issuers (PSIs) are firms with expected “high-investment and low-profit” (HILP) profiles that earn unusually low returns. We carefully document important features of PSI firms to provide insights on the economic mechanism behind the HILP phenomenon. Top-PSI firms are cash-strapped, have lottery-like payoffs, high volatility, high Beta, and high shorting costs. Over the next two years, top-PSIs earn return-on-assets of -30% per …