Sure things
Jarrad Harford & Adam Kolasinski
Management Science, forthcoming
Abstract:
We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties and from a focus on short-term profits at the expense of long-term value. Debt investors who finance buyouts, as well as buyers of private equity portfolio companies, represent the two potential sources of wealth transfers. However, we find that, on average, public companies benefit when they buy financial sponsors' portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run posttransaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress, suggesting that debt investors are not suffering systematic wealth losses either. However, we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism.
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Andrea Frazzini, David Kabiller & Lasse Pedersen
NBER Working Paper, November 2013
Abstract:
Berkshire Hathaway has realized a Sharpe ratio of 0.76, higher than any other stock or mutual fund with a history of more than 30 years, and Berkshire has a significant alpha to traditional risk factors. However, we find that the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management. These results have broad implications for market efficiency and the implementability of academic factors.
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The Price of Purity: Brokerage as Consecration in the Market for Modern Art
Fabien Accominotti
Columbia University Working Paper, November 2013
Abstract:
This article proposes a structural approach to consecration, and uses this approach to solve an empirical puzzle in the sociology of markets. Markets for novel and unique goods are often seen as privileged settings for the powerful influence of market intermediaries. Yet economic sociologists have repeatedly failed to observe any impact of art market brokers on the value of the artists they distribute. This puzzling finding, I argue, arises from a misconception of what brokerage does to economic products. While market intermediation is usually thought to act through two social processes of valuation – certification, or the signaling of underlying quality, and qualification, or the establishment of specific quality criteria – I suggest that it also influences value through consecration, or the conferral of relational purity. This approach fills a gap in economic sociology, which lacks a distinct definition of consecration. It also suggests a network-based strategy for capturing consecration empirically. I finally show that brokerage as consecration, not certification or qualification, is indeed how art market intermediaries shape the value of their artists. The empirical focus is on the market for modern art in early twentieth-century Paris – a setting chosen both for its historical significance and its ability to magnify how markets, as social environments, bear on the economic worth of things.
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Bid Takers or Market Makers? The Effect of Auctioneers on Auction Outcomes
Nicola Lacetera et al.
NBER Working Paper, December 2013
Abstract:
A large body of research has explored the importance of auction design and information structure for auction outcomes. Much less work has considered the importance of the auction process. For example, in many auctions, auctioneers are present and can impact the process of the auction by varying starting prices, level of price adjustments, the speed of the auction, the way they interact with auction participants, or their characteristic chant that is intended to excite buyers. We explore the importance of auction process by testing whether auctioneers can have a systematic difference on auction outcomes. We analyze more than 850,000 wholesale used car auctions and find large and significant differences in outcomes (probability of sale, price, and auction speed) across auctioneers. The performance heterogeneities are stable across time and correlate with subjective evaluations of auctioneers provided by the auction house. Although the available data here do not allow us to conclusively isolate mechanisms, a range of evidence suggests a role for tactics that generate excitement among bidders. Overall, these findings illustrate the complexities of auction environments and how outcomes can be impacted by subtle changes in process.
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Does Price Influence Assessment of Fundamental Value? Experimental Evidence
Sylvain Marsat & Benjamin Williams
Journal of Behavioral Finance, Fall 2013, Pages 268-275
Abstract:
Assessing the fundamental value of a firm is a difficult task. Theoretically, the market price is exogenous and should not be used in the estimation. We performed a simple experiment to pinpoint whether price is used in fundamental value calculation. Subjects were given similar information on a firm. In the first/control situation, no price was submitted. In the second situation, the actual price was submitted to them. In the third one, a manipulated, overvalued price was provided. We find that the price provided proves to have a clear impact on the subjects’ estimations. This is consistent with the anchoring-and-adjustment hypothesis of fundamental assessment and has implications for a better understanding of financial bubbles.
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To See is To Believe: Common Expectations in Experimental Asset Markets
Stephen Cheung, Morten Hedegaard & Stefan Palan
European Economic Review, February 2014, Pages 84–96
Abstract:
We experimentally manipulate agents' information regarding the rationality of others in a setting in which previous studies have found irrationality to be present, namely the asset market experiments introduced by Smith et al. (1988). Recent studies suggest that mispricing in such markets may be an artefact of confusion, which can be reduced by training subjects to understand the diminishing fundamental value. We reconsider this view, and propose that when it is made public knowledge that training has occurred, this may also reduce uncertainty over the behavior of others and facilitate the formation of common expectations. Our design disentangles the direct effect of training from the indirect effect of its public knowledge, and our results demonstrate a distinct and statistically significant effect of public knowledge over and above that of training alone.
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Do option-like incentives induce overvaluation? Evidence from experimental asset markets
Martin Holmen, Michael Kirchler & Daniel Kleinlercher
Journal of Economic Dynamics and Control, forthcoming
Abstract:
One potential reason for bubbles evolving prior to the financial crisis was excessive risk taking stemming from option-like incentive schemes in financial institutions. By running laboratory asset markets, we investigate the impact of option-like incentives on price formation and trading behavior. The main results are that (i) we observe significantly higher market prices with option-like incentives than linear incentives. (ii) We further find that option-like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives. (iii) We finally show that trading at inflated prices is rational for subjects with option-like incentives since it increases their expected payout.
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Lynn Rees, Nathan Sharp & Paul Wong
Texas A&M University Working Paper, November 2013
Abstract:
We examine whether financial analysts strategically time the announcement of their recommendation revisions to maintain relations with management. We find that analysts are more likely to issue downgrades than upgrades on the weekend, and that downgrades are a higher proportion of weekend revisions than weekday revisions. When we examine analysts’ incentives further, we find that analysts with Institutional Investor Allstar status, analysts employed at large brokerage houses, and analysts whose employers provide underwriting services are all more likely to downgrade stocks on the weekends than their counterparts, suggesting analysts with strong incentives to maintain favor with management are more likely to exhibit strategic timing of their recommendations. Finally, we provide evidence that the market reaction is less negative to downgrades issued on weekends compared to downgrades issued on weekdays, and that analysts who downgrade stocks on the weekend are more likely to move up in II Allstar rankings in the period following their strategic behavior.
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Bidder Country Characteristics and Informed Trading in U.S. Targets
Jeff Madura & Marek Marciniak
Journal of International Financial Markets, Institutions and Money, forthcoming
Abstract:
Information leakages experienced by U.S. targets in the pre-bid period are especially pronounced when they involve foreign bidders whose countries have weak insider trading sanctions, are perceived to have prevalent insider trading activity, have a low level of local merger activity, and are not classified as common law countries. Among foreign countries, information leakages are less pronounced when the bidder's government has a cooperative agreement with the SEC. Enforcement cooperation agreements signed between the SEC and foreign regulators serve as an effective means of enforcing the stricter U.S. insider trading laws on a more global scale.
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Have Financial Markets Become More Informative?
Jennie Bai, Thomas Philippon & Alexi Savov
NBER Working Paper, December 2013
Abstract:
The finance industry has grown, financial markets have become more liquid, and information technology allows arbitrageurs to trade faster than ever. But have market prices then become more informative? We use stock and bond prices to forecast earnings and find that the information content of market prices has not improved since 1960. We use a model with information acquisition and investment to link financial development, price informativeness, and allocational efficiency. As information costs fall, the predictable component of future earnings should rise and hence improve capital allocation and welfare. We find that this component has remained stable over the past 50 years. When we decompose price informativeness into real price efficiency and forecasting price efficiency, we find that both have remained stable.
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Opaque Trading, Disclosure, and Asset Prices: Implications for Hedge Fund Regulation
David Easley, Maureen O'Hara & Liyan Yang
Review of Financial Studies, forthcoming
Abstract:
We investigate the effect of ambiguity about hedge fund investment strategies on asset prices and aggregate welfare. We model some traders (mutual funds) as facing ambiguity about the equilibrium trading strategies of other traders (hedge funds). This ambiguity limits the ability of mutual funds to infer information from prices and has negative effects on market outcomes. We use this analysis to investigate the implications of regulations that affect disclosure requirements of hedge funds or the cost of operating a hedge fund. Our analysis demonstrates how regulations affect asset prices and welfare through their influence on opaque trading.
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Private Interaction Between Firm Management and Sell-Side Analysts
Eugene Soltes
Journal of Accounting Research, forthcoming
Abstract:
Although sell-side analysts often privately interact with managers of publicly traded firms, the private nature of this contact has historically obscured direct examination. By examining a set of proprietary records compiled by a large-cap NYSE traded firm, I offer insights into which analysts privately meet with management, when analysts privately interact with management, and why these interactions occur. I also compare private interaction to public interaction between analysts and managers on conference calls. The evidence suggests that private interaction with management is an important communication channel for analysts for reasons other than firm-specific forecasting news.
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Competition, Endogeneity and the Winning Bid: An Empirical Analysis of eBay auctions
Ilke Onur & Malathi Velamuri
Information Economics and Policy, March 2014, Pages 68–74
Abstract:
Using a dataset of Texas Instruments (TI) calculator auctions on eBay, we estimate the impact of the number of bidders on the winning bid. We highlight the possible endogeneity associated with using the number of observed bidders. We tackle this problem by employing approaches involving instrumental variables. We introduce a novel instrumental variable, the closing interval between successive auctions. Estimates from the two-stage least squares (2SLS) regression are over 3 times those from an ordinary least squares (OLS) regression.
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Media-Driven High Frequency Trading: Evidence from News Analytics
Bastian Von Beschwitz, Donald Keim & Massimo Massa
INSEAD Working Paper, October 2013
Abstract:
We investigate whether providers of high frequency media analytics affect the stock market. This question is difficult to answer as the response to news analytics usually cannot be distinguished from the reaction to the news itself. We exploit a unique experiment based on differences in news event classifications between different product releases of a major provider of news analytics for algorithmic traders. Comparing the market reaction to similar news items depending on whether the news has been released to customers or not, we are able to determine the causal effect of news analytics on stock prices, irrespective of the informational content of the news. We show that coverage in news analytics speeds up the market reaction by both increasing the stock price update and the trading volume in the first few seconds after the news event. Such coverage also increases prices if the content of the news is positive. Placebo tests and econometric robustness checks, either based on difference-in-difference specifications or different samples, confirm the results. The fact that a provider of media analytics impacts the market in a separate and distinct way from the underlying information content of the news has important normative implications for the regulatory debate.
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Jieyan Fang, Alexander Kempf & Monika Trapp
Journal of Financial Economics, forthcoming
Abstract:
We show that fund families allocate their most skilled managers to market segments in which manager skill is rewarded best. In efficient markets, even skilled managers cannot generate excess returns. In less efficient markets, skilled managers can exploit inefficiencies and generate higher performance than unskilled managers. Fund families seem to be aware of the relation between skill, efficiency, and performance, and allocate more skilled managers to inefficient markets. They pursue this strategy when hiring new fund managers and when reassigning managers to funds within the family. Overall, we conclude that fund families allocate fund managers in an efficient way.
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Hassan Tehranian, Mengxing Zhao & Julie Zhu
Management Science, forthcoming
Abstract:
After the completion of a merger and acquisition (M&A) transaction, the target firm is delisted, but some analysts who covered it retain coverage of the merged firm. We hypothesize that this decision is based on two factors: the analyst's ability to cover the merged firm and his or her assessment of the M&A deal. Consistent with these hypotheses, we find that the remaining target analysts provide more accurate earnings forecasts and more optimistic stock recommendations and growth forecasts for the merged firms than do the remaining acquirer analysts. We also find that a higher percentage of target analysts choosing to cover the merged firm is associated with better operating and long-term stock performance of that firm, but we do not find this relation with acquirer analysts. Our results extend the literature by showing that target analysts' coverage decisions reveal valuable information about a merged firm's future performance.
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Is Sell-Side Research More Valuable in Bad Times?
Roger Loh & René Stulz
NBER Working Paper, January 2014
Abstract:
In bad times, uncertainty is high, so that investors find it more difficult to assess the prospects of the firms they invest in. Learning models suggest that in such times investors should, everything else equal, value informative signals such as analyst forecasts and recommendations more than in good times. However, the higher uncertainty in bad times and career concerns stemming from troubled employers may make the task of analysts harder, so that analyst output is noisier and hence less valuable in bad times. Consequently, whether analyst forecasts and recommendations are more valuable during bad times is an empirical matter. We examine a large sample of analyst output from 1983 to 2011. We find that analysts work harder in bad times, but their earnings forecasts accuracy is worse and that they disagree more. Despite more inaccurate earnings forecasts, revisions to earnings forecasts and stock recommendations have a more influential stock-price impact during bad times as predicted by a learning model.
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Expectations of Returns and Expected Returns
Robin Greenwood & Andrei Shleifer
Review of Financial Studies, forthcoming
Abstract:
We analyze time series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. The evidence is not consistent with rational expectations representative investor models of returns.
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Market Reaction to Corporate Press Releases
Andreas Neuhierl, Anna Scherbina & Bernd Schlusche
Journal of Financial and Quantitative Analysis, August 2013, Pages 1207-1240
Abstract:
We classify a unique and comprehensive dataset of corporate press releases into topics and study the market reaction to various types of news. While confirming prior findings regarding strong stock price responses to financial news, we also document significant reactions to news about corporate strategy, customers and partners, products and services, management changes, and legal developments. Consistent with regulators' expectations, the level of informational asymmetry in the market declines following most types of press releases. At the same time, return volatility frequently increases in the post-announcement period, which we show can be attributed to higher levels of valuation uncertainty.
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Jonathan Cohn, Lillian Mills & Erin Towery
Journal of Financial Economics, February 2014, Pages 469–494
Abstract:
This study uses corporate tax return data to examine the evolution of firms' financial structure and performance after leveraged buyouts (LBOs) for a comprehensive sample of 317 LBOs taking place between 1995 and 2007. We find little evidence of operating improvements subsequent to an LBO, although consistent with prior studies, we do observe operating improvements in the set of LBO firms that have public financial statements. We also find that firms do not reduce leverage after LBOs, even if they generate excess cash flow. Our results suggest that effecting a sustained change in capital structure is a conscious objective of the LBO structure.