Using a large sample of U.S. firms during 1964–2007, we find that conditional conservatism is associated with a lower likelihood of a firm's future stock price crashes. This finding holds for multiple measures of conditional conservatism and crash risk and is robust to controlling for other known determinants of crash risk and firm-fixed effects. Moreover, we find that the relation between conservatism and crash risk is more pronounced for firms with higher information asymmetry. Overall, our results are consistent with the notion that conditional conservatism limits managers’ incentive and ability to overstate performance and hide bad news from investors, which, in turn, reduces stock price crash risk.

https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=2735&context=soa_research

Accounting Conservatism and Stock Price Crash Risk: Firm‐level Evidence

This paper finds that the returns of the world's 14 major stock markets are not normally distributed, and that the correlation matrix of these stock markets was stable during the January 1988–December 1993 time period Polynomial goal programming, in which investor preferences for skewness can be incorporated, is utilized to determine the optimal portfolio consisting of the choices of 14 international stock indexes The empirical findings suggest that the incorporation of skewness into an investor's portfolio decision causes a major change in the construction of the optimal portfolio The evidence also indicate that investors trade expected return of the portfolio for skewness

Portfolio selection and skewness: Evidence from international stock markets

Recent empirical studies have found expost common stock returns to be consistently posi? tively skewed. The frequency of positive skewness in this study is found to be relatively stable over varying time periods from 1961 to 1980. However, the skewness of individual stocks and portfolios of stocks does not persist across different time periods. Positivelyskewed equity portfolios in one period are not likely to be positively skewed in the next time period. Past positively-skewed returns do not predict future positively-skewed re? turns.

Skewness Persistence in Common Stock Returns

Polynomial goal programming, in which investor preferences for skewness can be incorporated, is utilized to determine the optimal portfolio from Latin American, US and European capital markets The empirical findings suggest that the incorporation of skewness into an investor’s portfolio decision causes a major change in the resultant optimal portfolio The empirical evidence indicates that investors do trade expected return of the portfolio for skewness

Selecting a portfolio with skewness: Recent evidence from US, European, and Latin American equity markets

Publisher Summary This chapter explains the three-moment efficiency analysis by first studying the relationship of the first three moments of an asset's single-period return to the first three moments of its multiperiod returns. The notion of two-moment efficiency analysis and the subsequent derivation of security market equilibrium conditions in terms of the first two moments of return distributions has been introduced, extended, and discussed. While concentration on the first two moments permits the achievement of far reaching results, these results are obtained at the cost of restricting the analysis to quadratic utility or normal return distributions. If one believes that these assumptions regarding the utility function or rate of return distribution are unreasonable, the alternative is to work with an unrestricted utility function, which in turn implies that the decision process should consider higher distribution moments. While the economic importance of the first three moments is recognized—the role of skewness in purchasing a lottery ticket and in the pricing of stocks seems clear—there is no complete agreement about the importance of the role played by the higher moments, neither among statisticians nor among stock market investors.

Portfolio efficiency analysis in three moments: the multiperiod case

Certainly, the concept of skewness of returns and its role in the context of portfolio analysis has gained increasing attention in recent literature. Witness the studies by Alderfer and Bierman [1], Arditti [2, 3], Jean [4], and Simonson [5]. Each of these studies has treated skewness as the third moment of a series expansionâ€”accordingly, skewness has been measured and interpreted as a logical extension of the traditional two-dimensional return-versus-standard deviation analysis of security evaluation.

https://www.jstor.org/stable/pdfplus/2329875.pdf

A note on measurement of skewness

This study examines the historic security market performance of REIT shares during the six-year period 1968–1973. Performance measures suggested by Sharpe, Treynor, and Jensen were calculated for a sample of 30 larger and older REITs on both a pre- and post-tax basis. Principal conclusions are: 1) The average mortgage trust sampled had “outperformed” the S&P 500 while equity and hybrid trusts have fared poorer than the S&P 500. 2) The differences in performance levels are due principally to return levels and not risk differentials. 3) A substantial portion of the risk inherent in an REIT is diversifiable risk. This together with other evidence suggests that most REITs have not diversified risk exposure to the extent they indicated they would and were able to. 4) Performance rankings using before- and after-tax returns were identical, suggesting that certain espoused tax advantages unique to REITs have been virtually meaningless on a practical level.

Robert C. Radcliffe

Papers

A note on measurement of skewness

Abstract–The Risk-Return Performance of Real Estate Investment Trusts