Crash
Bubbles for Fama
Robin Greenwood, Andrei Shleifer & Yang You
NBER Working Paper, February 2017
Abstract:
We evaluate Eugene Fama's claim that stock prices do not exhibit price bubbles. Based on US industry returns 1926-2014 and international sector returns 1985-2014, we present four findings: (1) Fama is correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward; (2) such sharp price increases predict a substantially heightened probability of a crash; (3) attributes of the price run-up, including volatility, turnover, issuance, and the price path of the run-up can all help forecast an eventual crash and future returns; and (4) some of these characteristics can help investors earn superior returns by timing the bubble. Results hold similarly in US and international samples.
Political Partisan Bias in Mutual Fund Portfolios
Babajide Wintoki & Yaoyi Xi
University of Kansas Working Paper, March 2017
Abstract:
We present evidence that mutual fund managers are more likely to allocate assets to firms managed by executives and directors with whom they share a similar political partisan affiliation. We find that this bias is not associated with improved fund performance, suggesting that it is not due to superior information. Funds with more partisan bias suffer from higher levels of idiosyncratic volatility than those with less bias. Partisan bias is more evident when the fund manager is less experienced, in firms with more opaque information environments, and when the President of the U.S. comes from the fund manager's own party.
Large shareholders and credit ratings
Simi Kedia, Shivaram Rajgopal & Xing Zhou
Journal of Financial Economics, forthcoming
Abstract:
This paper addresses regulatory concerns that large shareholders of credit rating agencies can influence the rating process. Unlike Standard & Poor's, which is a privately held division of McGraw-Hill, Moody's is a public company listed on the NYSE. From 2001 to 2010, Moody's has two shareholders, Berkshire Hathaway and Davis Selected Advisors, which collectively own about 23.5% of Moody's. Moody's ratings on bonds issued by important investee firms of these two stable large shareholders are more favorable relative to S&P, as well as Fitch, ratings. We exploit Moody's initial public offering in 2000 to address endogeneity and to mitigate concerns that the results are driven by issuer characteristics or by the greater informativeness of Moody's ratings. S&P's parent, McGraw-Hill, has a large shareholder for much less time, and some weak evidence exists that S&P ratings are relatively more favorable toward the owners of McGraw-Hill. These findings are consistent with regulatory concerns about the ownership and governance of rating agencies, especially those that are publicly listed.
The JOBS Act and the Costs of Going Public
Susan Chaplinsky, Kathleen Weiss Hanley & Katie Moon
Journal of Accounting Research, forthcoming
Abstract:
We examine the effects of Title I of the Jumpstart Our Business Startups Act for a sample of 312 emerging growth companies (EGCs) that filed for an initial public offering (IPO) from April 5, 2012 through April 30, 2015. We find no reduction in the direct costs of issuance, accounting, legal, or underwriting fees, for EGC IPOs. Underpricing, an indirect cost of issuance that increases an issuer's cost of capital, is significantly higher for EGCs compared to other IPOs. More importantly, greater underpricing is present only for larger firms that are newly eligible for scaled disclosure under the Act. Overall, we find little evidence that the Act in its first three years has reduced the measurable costs of going public. Although there are benefits of the Act that issuers appear to value, they should be balanced against the higher costs of capital that can occur after its enactment.
What can we Learn from Euro-Dollar Tweets?
Vahid Gholampour & Eric van Wincoop
NBER Working Paper, March 2017
Abstract:
We use 633 days of tweets about the Euro/dollar exchange rate to determine their information content and the profitability of trading based on Twitter Sentiment. We develop a detailed lexicon used by FX traders to translate verbal tweets into positive, negative and neutral opinions. The methodologically novel aspect of our approach is the use of a model with heterogeneous private information to interpret the data from FX tweets. After estimating model parameters, we compute the Sharpe ratio from a trading strategy based on Twitter Sentiment. The Sharpe ratio outperforms that based on the well-known carry trade and is precisely estimated.
The effects of removing barriers to equity issuance
Matthew Gustafson & Peter Iliev
Journal of Financial Economics, forthcoming
Abstract:
We study the consequences of a US deregulation allowing small firms to accelerate their public equity issuance. Post-deregulation, affected firms double their reliance on public equity and transition away from private investments in public equity compared to similar untreated firms. The net effect is a 5.7 percentage point or 49% increase in the annual probability of raising equity. This is accompanied by a reduction in equity issuance costs, an increase in investment, and a decrease in leverage. Our findings provide evidence that reducing equity issuance barriers benefits issuers even in highly developed markets.
Are all analysts created equal? Industry expertise and monitoring effectiveness of financial analysts
Daniel Bradley et al.
Journal of Accounting and Economics, April-May 2017, Pages 179-206
Abstract:
We examine whether analysts' prior industry experience influences their ability to serve as effective external firm monitors. Our analyses of firms' financial disclosure quality, executive compensation and CEO turnover decisions portray a consistent picture that related pre-analyst industry experience is of critical importance for analysts to play an effective monitoring role. Coverage by analysts with such experience is associated with reduced earnings management, lower probability of committing financial misrepresentation, less CEO excess compensation, and higher performance sensitivity of CEO turnover. We also provide evidence on several plausible mechanisms through which industry expert analysts exert monitoring efforts and limit managerial opportunism.
Foreshadowing as impression management: Illuminating the path for security analysts
John Busenbark, Donald Lange & Trevis Certo
Strategic Management Journal, forthcoming
Abstract:
Managers can disclose information to security analysts as a form of impression management, but doing so is problematic because competitors can use that same information at the expense of the firm. We identify an impression management technique we call foreshadowing, which refers to hinting about future potential strategic activity. Foreshadowing provides information of value to analysts that can influence their evaluations of a firm, but not so much information as to put the firm at a competitive disadvantage. We hypothesize and find that managers who foreshadow acquisition announcements receive fewer analyst downgrades following the announcements, especially when there is more analyst uncertainty about the firm. We also hypothesize and find that analysts' responses to foreshadowing positively influence the likelihood that managers eventually acquire other firms.
Skill and luck in private equity performance
Arthur Korteweg & Morten Sorensen
Journal of Financial Economics, forthcoming
Abstract:
Private equity (PE) performance is persistent, with PE firms consistently producing high (or low) net-of-fees returns. We use a new variance decomposition model to isolate three components of persistence. We find high long-term persistence: the spread in expected net-of-fee future returns between top and bottom quartile PE firms is 7 to 8 percentage points annually. This spread is estimated controlling for spurious persistence, which arises mechanically from the overlap of contemporaneous funds. Performance is noisy, however, making it difficult for investors to identify the PE funds with top quartile expected future performance and leaving little investable persistence.
Managing Performance Signals Through Delay: Evidence from Venture Capital
Indraneel Chakraborty & Michael Ewens
Management Science, forthcoming
Abstract:
This paper examines whether agency conflicts during venture capital (VC) fundraising impact investment behavior. Using novel investment-level decisions of VCs in the process of raising new funds, we find that venture capitalists take actions hidden from their investors - i.e., limited partners (LPs) - that delay revealing negative information about VC fund performance until after a new fund is raised. After fundraising is complete, write-offs double and reinvestments in relatively worse-off entrepreneurial firms increase. We find that these observations cannot be explained by strategic bundling of news or effort constraints due to the newly raised fund. Funds with both long and short fundraising track record exhibit this behavior and the delay is costly for fund investors (LPs). This strategic delay shows that fundraising incentives have real impacts on VC fund investment decisions, which are often difficult for LPs to observe.
Strategic Delays and Clustering in Hedge Fund Reported Returns
George Aragon & Vikram Nanda
Journal of Financial and Quantitative Analysis, February 2017, Pages 1-35
Abstract:
We use a novel database to study the timeliness of hedge fund monthly performance disclosures. Managers engage in strategic timing: poor monthly returns are reported with delay, sometimes clustered with stronger subsequent performance, suggestive of "performance smoothing." We posit that propensity to delay could reveal operational risk and/or poor managerial quality. Consistent with this, a portfolio strategy that buys (sells) funds with historically timely (untimely) reporting delivers 3% annual-style-adjusted returns. Investor flows are lower following reporting delays, although there are potential benefits to managers from delaying reporting when performance is sufficiently poor. We conclude that timely disclosure is an important consideration for hedge fund managers and investors.
Investment Banking Relationships and Analyst Affiliation Bias: The Impact of the Global Settlement on Sanctioned and Non-Sanctioned Banks
Shane Corwin, Stephannie Larocque & Mike Stegemoller
Journal of Financial Economics, forthcoming
Abstract:
We examine the impact of the Global Settlement on affiliation bias in analyst recommendations. Using a broad measure of investment bank-firm relationships, we find a substantial reduction in analyst affiliation bias following the settlement for sanctioned banks. In contrast, we find strong evidence of bias both before and after the settlement for affiliated analysts at non-sanctioned banks. Our results suggest that the settlement led to an increase in the expected costs of issuing biased coverage at sanctioned banks, while concurrent self-regulatory organization rule changes were largely ineffective at reducing the influence of investment banking on analyst research at large non-sanctioned banks.