School Of Business Administration: Financial Review

I survey 457 published papers in top finance journals across two decades to assess whether these papers misuse tests of significance. More than 80% of published studies are diligent about distinguishing between statistical and economic significance and quantifying and interpreting the economic magnitudes of the statistical relationships they measure. Yet, only 10% of these acknowledge limits to the power of their tests and even fewer do anything about them. Recent demographic trends in publishing, such as larger co-author teams and increased participation by non-North American scholars, women, and those outside the top finance departments are not associated with these outcomes.

Keywords

econometric methodology; financial economics; educational and research institutions;

G0; C10; C58; I20

Post-Earnings Announcement Drift: Bounds on Profitability for the Marginal Investor

Robert H. Battalio and Richard R. Mendenhall

Abstract

The persistence of the post-earnings announcement drift (PEAD) leads many to believe that trading barriers prevent investors from eliminating it. We examine two factors that have not been adequately addressed by the literature: the exact timing of earnings announcements and liquidity costs. Under a wide range of timing and cost assumptions, our results leave little doubt that over our sample period the PEAD was highly profitable after trading costs. An additional incremental investor could have earned hedged-portfolio returns of at least 14% per year after trading costs. Over our sample period, investors did indeed leave money on the table.

Keywords

earnings; post-earnings announcement drift; anomalies; bid-ask spread; market microstructure;

G14

The Federal Reserve and the 2007–2009 Financial Crisis: Treating a Virus with Antibiotics? Evidence from the Commercial Paper Market

Mark D. Griffiths, Vladimir Kotomin and Drew B. Winters

Abstract

The two main explanations for the crisis in the commercial paper (CP) market are credit concerns and liquidity issues. The CP market is not homogeneous in terms of credit quality, maturities and types of issues. We find that lower credit-quality CP suffered more during the crisis. Additionally, we find little evidence that Federal Reserve (Fed) liquidity facilities reduced the impact of the crisis, but that when the Fed became a lender in the CP market, the crisis pressures were dramatically reduced. We conclude that the crisis in the money markets is related more to increases in credit risk. Liquidity is a secondary issue.

Keywords

commercial paper; financial crisis; credit risk; liquidity risk

G01;G12;G18

The Traditional Hedging Model Revisited with a Nonobservable Convenience Yield

Constantin Mellios and Pierre Six

Abstract

This article examines the hedging of constrained commodity positions with futures contracts. We extend the study of Adler and Detemple (1988a, 1988b) to include a partial information framework where the convenience yield is not observable. As a consequence, futures prices depend on investor's beliefs regarding the value of the convenience yield, and every component of the hedge is impacted by these beliefs. We achieve a decomposition of the demand that clarifies the impact on the optimal hedge of the beliefs, the spot price and the risk-free rate as well as the hedging horizon.

Keywords

partial information; hedging demand; convenience yield; commodity futures markets; market prices of risk; interest rates;

G11; G12; G13

Timing versus Buy and Hold: A Model for Determining Predictive Accuracy Required for Superior Performance

Jimmy E. Hilliard and Jitka Hilliard

Abstract

In this application, we develop a model to simulate the decisions of a trader whose subjective distribution of returns may be correlated with realized stock returns. Using empirically estimated parameters from stocks in the CRSP database, we obtain performance data on a number of measures, including mean returns, volatility, the Sharpe measure, and the probability of a correct trading decision. The model suggests that daily trading of a portfolio of 20 volatile stocks gives a Sharpe measure better than that of buying and holding the S&P 500 when timing accuracy is 53% or better.

Keywords

market timing; timer model; buy and hold;

G11; G14; G17

Board Independence and Mutual Fund Manager Turnover

Richard Fu and Lei Wedge

Abstract

This paper studies the relationship between board independence and manager turnover in the mutual fund industry. Using the Lipper 2003 mutual fund board data, we find that manager turnover is more likely to happen to funds with poor prior performance and more independent boards. Consistent with previous studies such as Tufano and Sevick (1997), our research provides new evidence in support of the Securities and Exchange Commission's approach of improving fund governance by promoting board independence.

Keywords

mutual funds; board of directors; manager turnover;

G23; G34

Determinants of the Method of Payment in Asset Sell-Off Transactions

Kien Cao and Jeff Madura

Abstract

Using a sample of asset sell-off transactions from January 1990 to April 2010, we find that the method of payment used in asset sell-off transactions is associated with several characteristics cited in the acquisitions research that reflect cash constraints of the bidder. Specifically, bidders facing more stringent cash constraints are more likely to use equity when purchasing assets, while sellers subjected to cash constraints prefer cash when selling assets. Second, we find that the variation in method of payment among asset sell-off transactions also is partially explained by variables representing asymmetric information. Third, we apply our model to an expanded sample that includes non-U.S. sellers of assets and find that an equity payment is more likely when sellers are based in countries that have relatively high country risk (more government restrictions), weak shareholder rights, and a weak legal system. Thus, it appears that bidders prefer that sellers share in the risk of the transaction under these conditions.

Keywords

asset selloffs; method of payment; country risk and corporate governance;

G32; G34; G38

On the Publicity of Two-Stage Spin-Offs and Equity Carve-Outs

Salim Chahine and Marc Goergen

Abstract

We investigate the effect of pre-offer publicity on ownership, pricing, and aftermarket performance for equity carve-outs (ECOs) and two-stage spin-offs (COSOs). Contrary to ECOs, for COSOs the parent firm's shareholders end up with free shares in the subsidiary. As the value of large share blocks is likely to be negatively affected by the emergence of new blocks after the divestiture, we hypothesize that parent firms undertaking COSOs may conduct more pre-offer publicity to attract more retail investors, keeping outside ownership diffuse and inflating aftermarket performance until the distribution of the free shares. We find empirical support for our hypotheses.

Keywords

two-stage spin-off; equity carve-out; publicity; underpricing; trading conditions

G24; G32; G34

Tax Calendar Effects in the Municipal Bond Market: Tax-Loss Selling and Cherry Picking by Investors and Market Timing by Fund Managers

Haiwei Chen, Jim Estes and Thanh Ngo

Abstract

Examining municipal bond returns, bond fund flows and buying activities by fund managers over the period 1990–2009, we find evidence of tax calendar-related rational opportunistic trading patterns by fund investors and fund managers. Specifically, fund shareholders conduct tax-loss selling in December and re-invest in January. In April, June, and September, fund investors rationally cherry pick to sell their shares of short-term bond funds instead of their shares of long-term bond funds to raise cash to pay estimated taxes. Unlike fund shareholders, fund managers adopt a contrarian strategy of buying in December and selling in January.

Keywords

municipal bond; fund flows; fund managers; contrarian; tax-loss selling

G11;G20

How Does Investor Sentiment Affect Stock Market Crises? Evidence from Panel Data

Mohamed Zouaoui, Geneviève Nouyrigat and Francisca Beer

Abstract

We test the impact of investor sentiment on a panel of international stock markets. Specifically, we examine the influence of investor sentiment on the probability of stock market crises. We find that investor sentiment increases the probability of occurrence of stock market crises within a one-year horizon. The impact of investor sentiment on stock markets is more pronounced in countries that are culturally more prone to herd-like behavior, overreaction and low institutional involvement.

Keywords

investor sentiment; noise trader; stock market crises

G12;G14;G15

The University of Mississippi: School of Business Administration