Showing papers on "Stock (geology) published in 1995"

Understanding Risk and Return

Abstract: This paper uses an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns. Priced factors include the return on a stock index, revisions in forecasts of future stock returns (to capture intertemporal hedging effects), and revisions in forecasts of future labor income growth (proxies for the return on human capital). Aggregate stock market risk is the main factor determining excess returns; but in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk.

Predictability of Stock Returns: Robustness and Economic Significance

Abstract: This article examines the robustness of the evidence on predictability of U.S. stock returns, and addresses the issue of whether this predictability could have been historically exploited by investors to earn profits in excess of a buy-and-hold strategy in the market index. We find that the predictive power of various economic factors over stock returns changes through time and tends to vary with the volatility of returns. The degree to which stock returns were predictable seemed quite low during the relatively calm markets in the 1960s, but increased to a level where, net of transaction costs, it could have been exploited by investors in the volatile markets of the 1970s. MANY RECENT STUDIES CONCLUDE that stock returns can be predicted by means of publicly available information, such as time series data on financial and macroeconomic variables with an important business cycle component.' This conclusion seems to hold across international stock markets as well as over different time horizons. Variables identified by these studies to have been statistically important for predicting stock returns include interest rates, monetary growth rates, changes in industrial production, inflation rates, earnings-price ratios, and dividend yields. However, the economic interpretation of these results is controversial and far from evident. First, it is possible that the predictable components in stock returns reflect time-varying expected returns, in which case predictability of stock returns is, in principle, consistent with an efficient stock market. A second interpretation takes expected returns as roughly constant and regards predictability of stock returns as evidence of stock market inefficiency. It is, however, clear that predictability of excess returns on its own does not imply stock market inefficiency, and can be

Good Timing: CEO Stock Option Awards and Company News Announcements

Abstract: This paper proposes and implements a new method for investigating whether CEOs influence the terms of their own compensation. I analyze the dates of 591 stock option awards to CEOs of Fortune 500 companies in 1992 and 1993, finding that the timing of awards coincides with favorable movements in companies stock prices even though the awards remain secret for many months. Patterns of corporate earnings and dividend announcements suggest strongly that CEOs receive stock option awards shortly before favorable corporate news and that awards are delayed until after the release of adverse news. Analysis of abnormal volume data does not support the possibility that insider trading based on knowledge of the option awards can explain the stock price gains. The findings imply that top mangers can affect their companies processes for awarding stock options and exploit this influence in order to increase compensation.

On the Predictability of Stock Returns: An Asset-Allocation Perspective

Abstract: Sample evidence about the predictability of monthly stock returns is considered from the perspective of an investor allocating funds between stocks and cash. A regression of stock returns on a set of predictive variables might seem weak when described by usual statistical measures, but such measures can fail to convey the economic significance of the sample evidence when it is used by a risk-averse Bayesian investor to update prior beliefs about the regression relation and to compute an optimal asset allocation. Even when those prior beliefs are weighted substantially against predictability, the current values of the predictive variables can exert a strong influence on the portfolio decision.

The Behavior of Stock Prices Around Institutional Trades

Abstract: All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence ("package") of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size, and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact. FINANCIAL ECONOMISTS HAVE LONG studied the equity trading process and its impact on stock prices. Much prior empirical research isolates individual trades and analyzes the behavior of the stock price around each trade. See, for example, Kraus and Stoll (1972a), Holthausen, Leftwich, and Mayers (1987, 1990), Keim and Madhavan (1991), Petersen and Umlauf (1991), Hausman, Lo, and MacKinlay (1992) and Chan and Lakonishok (1993). Evaluating the behavior of stock prices around trades provides a means of discriminating among various hypotheses as to the elasticity of the demand for stocks; yields an estimate of the cost of executing trades and a measure of the liquidity of a market; and permits tests of different models of the determination of quotes and transaction prices. For many institutional investors, however, even a moderately-sized position in a stock may represent a large fraction of the stock's trading volume. Accordingly, an investment manager's order is often broken up into several trades. It is often misleading, therefore, to consider an individual trade as the basic unit of analysis in the study of trading activity and its effects on prices. This paper uses the record of trades executed by 37 large investment manage

A Multivariate GARCH Model of International Transmissions of Stock Returns and Volatility: The Case of the United States and Canada

Abstract: This study examines the short-run dynamics of returns and volatility for stocks traded on the New York and Toronto stock exchanges. The main finding is that inferences about the magnitude and persistence of return innovations that originate in either market and that transmit to the other market depend importantly on how the cross-market dynamics in volatility are modeled. Moreover, much weaker cross-market dynamics in returns and volatility prevail during later subperiods and especially for Canadian stocks with shares dually listed in New York. Implications for international asset pricing, hedging strategies, and regulatory policy are discussed.

Stock Market Efficiency and Economic Efficiency: Is There a Connection?

Abstract: In a capitalist economy prices serve to equilibrate supply and demand for goods and services, continually changing to reallocate resources to their most efficient uses. Secondary stock market prices, however, often viewed as the most 'informationally efficient' prices in the economy, have no direct role in the allocation of equity capital since managers have discretion in determining the level of investment. What is the link between stock price informational efficiency and economic efficiency? We present a model of the stock market in which: (i) managers have discretion in making investments and must be given the right incentives; and (ii) stock market traders may have important information that managers do not have about the value of prospective investment opportunities. In equilibrium, information in stock prices will guide investment decisions because managers will be compensated based on informative stock prices in the future. The stock market indirectly guides investment by transferring two kinds of information: information about investment opportunities and information about managers' past decisions. The fact that stock prices only have an indirect role suggests that the stock market may not be a necessary institution for the efficient allocation of equity. We emphasize this by providing an example of a banking system that performs as well.

By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior

Abstract: We present a consumption-based model that explains the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. Our model has an i.i.d. consumption growth driving process, and adds a slow-moving external habit to the standard power utility function. The latter feature produces cyclical variation in risk aversion, and hence in the prices of risky assets. Our model also predicts many of the difficulties that beset the standard power utility model, including Euler equation rejections, no correlation between mean consumption growth and interest rates, very high estimates of risk aversion, and pricing errors that are larger than those of the static CAPM. Our model captures much of the history of stock prices, given only consumption data. Since our model captures the equity premium, it implies that fluctuations have important welfare costs. Unlike many habit-persistence models, our model does not necessarily produce cyclical variation in the risk free interest rate, nor does it produce an extremely skewed distribution or negative realizations of the marginal rate of substitution.

Differential Information and Dynamic Behavior of Stock Trading Volume

Abstract: This article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock. Investors trade competitively in the stock market based on their private information and the information revealed by the market-clearing prices, as well as other public news. We examine how trading volume is related to the information flow in the market and how investors' trading reveals their private information. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The profitability of technical trading rules in the Asian stock markets

Abstract: We assess whether some simple forms of technical analysis can predict stock price movement in Asian markets. We find the rules to be quite successful in the emerging markets of Malaysia, Thailand and Taiwan. The rules have less explanatory power in more developed markets such as Hong Kong and Japan. On average for our sample, mean percentage changes in stock indices on days that the rules emit buy signals exceed means on days that the rules emit sell signals by 0.095% per day, or about 26.8% on an annualized basis. We estimate “break-even” round-trip transactions costs (which would just eliminate gains from technical trading) to be 1.57% on average. We also find that technical signals emitted by U.S. markets have substantial forecast power for Asian stock returns beyond that of own-market signals. This is consistent with the reasoning that the technical rules identify periods when global equilibrium expected returns deviate substantially from their unconditional mean.

Economic Consequences of Accounting for Stock-Based Compensation: An Analysis of Investor Perceptions and Corporate Lobbing Behavior

Abstract: This study investigates the economic consequences of the FASB's 1993 Exposure Draft requiring the expensing of employee stock options. We examine (i) a sample of firms in industries that are intensive users of employee stock options; (ii) a sample of firms in an emerging 'high-tech' industry (biotechnology); and (iii) a sample of firms submitting comment letters to the FASB opposing the expensing of employee stock options. Our results indicate that investors do not share corporate America's concerns that expensing employee stock options would have negative economic consequences. Additional tests show that corporate America's opposition to expensing is concentrated in firms that use options extensively for top executives rather than in firms with high overall levels of option usage.

Industry and Country Effects in International Stock Returns

Abstract: that international returns are predominantly driven by industry factors. Managers who believe that domestic market factors are more important for returns than industry factors decide on a country allocation first, then in the second stage select the most promising stocks from each country. This article presents a simple model to measure country and industry effects in international stock returns, and provides a quantitative framework for analyzing these two approaches to portfolio selection.' We show that there are three reasons for portfolio managers to pay more attention to the geographical than to the industrial composition of an international portfolio. Each of these reasons is based on the finding that country effects in international stock returns are larger than industry effects. First, tilting an international portfolio geographically leads, on average, to larger and more variable tracking errors than tilting the industrial composition of the portfolio. Second, stocks from the same domestic market but in different industries are closer substitutes than stocks from the same industry but in different countries. Finally, the benefits of international I

Stock ownership patterns, stock market fluctuations, and consumption

Abstract: The market value of corporate stock in the United States increased by nearly one trillion dollars between December 1994 and July 1995. This paper explores the distribution of the stock ownership, and hence the gains from the stock price rise, and what the rise in stock prices implies for consumer spending.(This abstract was borrowed from another version of this item.)

The Long‐Run Negative Drift of Post‐Listing Stock Returns

Abstract: After firms move trading in their stock to the American or New York Stock Exchanges, stock returns are generally poor. Although many listing firms issue equity around the time of listing, post-listing performance is not entirely explained by the equity issuance puzzle. Similar to the conclusions regarding other long-run phenomena, poor post-listing performance appears related to managers timing their application for listing. Managers of smaller firms, where initial listing requirements may be more binding, tend to apply for listing before a decline in performance. Poor post-listing performance is not observed in larger firms. A COMMON OCCURRENCE ON the New York Stock Exchange (NYSE) and the American Stock Exchange (ASE) is the listing of stocks which formerly traded over-the-counter or on the National Association of Security Dealers Automated Quotation (Nasdaq) system. Between July 1962 and December 1990, an average of eight firms per month moved from one trading domicile to another. The stock returns of these firms prior to listing have typically been quite good. Furthermore, several studies find that the market response to the announcement of an exchange listing is positive. Yet, surprisingly, abnormal stock returns following listing on a new exchange are negative on average. Although several studies report poor return performance in the first few weeks following listing, the cause for this phenomenon has remained a mystery. In this paper, we pursue two objectives. First, we re-examine the nature of post-listing stock returns, controlling for biases which may affect post-listing performance. We find that not only are abnormal returns negative following listing, but also the drift is longer in duration than has been previously reported. Our second objective is to better understand why post-listing performance is on average negative. We find that this phenomenon is most characteristic of smaller firms that are not widely held by institutional investors.

On the Risk of Stocks in the Long Run

Abstract: A familiar proposition is that investing in common stocks is less risky the longer an investor plans to hold them. If this proposition were true, then the cost of insuring against earning less than the risk-free rate of interest should decline as the investment horizon lengthens. This paper shows that the opposite is true, even if stock returns are mean reverting in the long run. The case for young people investing more heavily than older people in stocks cannot, therefore, rest solely on the long-run properties of stock returns. For guarantors of money-fixed annuities, the proposition that stocks in their portfolios are a better hedge the longer the maturity of their obligations is unambiguously wrong.

Discount rate changes and security returns in the U.S., 1962–1991

Abstract: It is well-known that financial markets respond quickly to announcements of changes in the discount rate. We extend previous research and ask whether rate changes provide information about subsequent long-term market performance. Between 1962 and 1991, stock returns following discount rate decreases are higher and less volatile than returns following rate increases. The stock performance patterns are not due to changes in short or long-term bond rates.

All their eggs in one basket: Portfolio diversification of US households

Abstract: This paper uses data from the Survey of Consumer Finances to assess how well mean-variance efficiency describes the portfolio diversification of US households. It does not seem to work well. The median stockholder owns a single publicly traded stock, often in the company where he works. Looking at a sample of high income households who accounted for one third of all publicly traded stock, the median holding is only ten stocks. Indirect stock ownership through mutual funds, defined contribution pension plans, IRA's and trust funds is shown to have little power in explaining this poor diversification.

The effects of financial reporting costs on the use of employee stock options

Abstract: This study uses data on 123 firms over an 1 1 year period to examine whether the accounting for employee stock options permits them to be used as part of an income management strategy. Using a pooled cross-sectional, time-series analysis, the value of options granted is found to be negatively related to the extent the firm is below its target level of income and positively related to the firm's use of income-increasing accounting methods. I also find weak evidence of a positive relation between the firm's relative use of income-increasing accounting methods and the probability of issuing unattached stock options rather than incomedecreasing securities such as stock appreciation rights or tandem securities. However, the results from both tests are sensitive to the estimation method and are not consistent over time.

On the Accounting Valuation of Employee Stock Options

Abstract: In its Exposure Draft, "Accounting for Stock-based Compensation," FASB proposes that either the Black-Scholes or binomial option pricing model be used to expense employee stock options, and that the value of these options be measured on their grant date with typically modest ex-post adjustment. This brings the accounting profession squarely up against the Scylla of imposing too narrow a set rules that will force many firms to misstate considerably the value of their stock options and the Charybdis of granting considerable latitude which will increase non-comparability across financial statements of otherwise similar firms. This, of course, is a common tradeoff afflicting many rules for external financial accounting. It is not my intention to take a position on this issue, but merely to point out the inherent dangers in navigating between these twin perils. To examine this question, this paper develops a binomial valuation model which simultaneously takes into consideration the most significant differences between standard call options and employee stock options: longer maturity, delayed vesting, forfeiture, non-transferability, dilution, and taxes. The final model requires 16 input variables: stock price on grant date, stock volatility, stock payout rate, stock expected return, interest rate, option striking price, option years-toexpiration, option years-to-vesting, expected employee forfeiture rate, minimum and maximum forfeiture rate multipliers, employee's non-option wealth per owned option, employee's risk aversion, employee's tax rate, percentage dilution, and number of steps in the binomial tree. Many of these variables are difficult to estimate. Indeed, a firm seeking to overvalue its options might report values almost double those reported by an otherwise similar firm seeking to undervalue its options. The alternatives of expensing minimum (zero-volatility) option values, whether at grant or vesting date, can easily be gamed by slightly redefining employee stock option contracts, and therefore would not accomplish FASB's goals. As an alternative, FASB could give more careful consideration to exercise date accounting, under which an expense is recognized at the time of exercise equal to the exercise value of the option. This would achieve the long sought external accounting goal of realizing stock options as compensation, while at the same time minimizing the potential for the revised accounting rules to motivate gaming behavior or non-comparable statements. * Mark Rubinstein is a professor of finance at the University of California at Berkeley. This paper arose out of a consulting project for Intel Corporation. The author thanks Robert Sprouse for his accounting courses at Stanford, Jim Ohlson for instructive conversations on accounting over many years, and Stephen Penman for assistance with employee stock options.

Short Paper Public Capital Stock and State Productivity Growth: Further Evidence from an Error Components Model

Abstract: The contribution of different types of public infrastructure on private production is investigated using time-series of cross-section data for the 48 contiguous states over the period 1970-1986. A Cobb-Douglas production function is estimated with unobserved state-specific effects. Measurement errors in public capital stock and its components are detected and rectified.

Relative Importance of Economic Factors in the U.S. and Japanese Stock Markets

Abstract: This paper investigates various economic state variables as systematic influences on U.S. and Japanese stock market returns, and compares their influence on stock returns. For this purpose, we employed a VAR analysis. We found that economic news about risk premiums, term premiums, and the growth rate in industrial production is most significant in U.S. stock market returns. However, unlike in Hamao′s study, we found that international factors, such as changes in oil prices, are most significant in Japanese stock market returns. The difference between our findings and those of Hamao is primarily due to the difference in sample period and empirical methodology. We provide some evidence of changes in the economic environment for the Japanese stock market around 1985. J. Japan. Int. Econ., September 1995 9(3), pp. 290–307. Faculty of Business and Commerce, Keio University, 15-45, Mita 2-chome, Minato-ku, Tokyo 108, Japan. Department of Finance, Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455.

Public capital stock and state productivity growth: Further evidence from an error components model

Abstract: The contribution of different types of public infrastructure on private production is investigated using time-series of cross-section data for the 48 contiguous states over the period 1970–1986 A Cobb-Douglas production function is estimated with unobserved state-specific effects Measurement errors in public capital stock and its components are detected and rectified

The ex-dividend-day behavior of stock prices: the case of Japan

Abstract: We provide a comprehensive empirical analysis of stock price behavior around the ex-dividend day in Japan. We find that prices rise on the ex-day and that dividend-related tax effects appear to be secondary. Returns around ex-dividend days are dominated by the proximity of many ex-days to the fiscal year end. Excess returns of 1 percent, which are independent of any dividend-related considerations, are higher than round-trip transaction costs on medium-sized transactions. Prices seem to imply selling pressure before and buying pressure at the start of the new fiscal year. These trading patterns appear to be motivated by intercorporate manipulative trading around the end of the firms' fiscal year, which are unrelated to dividends. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The Response of Stock Prices to Permanent and Temporary Shocks to Dividends

Abstract: This paper investigates the response of stock prices to dividend shocks in a bivariate model of stock prices and price-dividend spreads. Dividend process is modeled as the sum of a permanent component and a temporary component. By using the stock price valuation (present value) model, the two components are related to stock prices. The stock market responds significantly not only to permanent shocks to dividends, but also to temporary shocks to dividends. Furthermore, initial responses of stock prices to the temporary shocks are as strong as those to the permanent shocks. As a result, substantial variation in stock prices is due to the temporary shocks. This finding provides empirical support for the imperfect information hypothesis that emphasizes the failure of investors to clearly dis? tinguish between the two components of dividends, and also suggests that the observed mean-reverting behavior of stock returns should be explained by incorporating a significant temporary component into stock prices. The price-dividend spreads are primarily accounted for by the temporary shocks to dividends, and respond strongly to them, suggesting that, in response to the temporary shocks to dividends, stock prices respond excessively relative to dividends.

An Exposure-Based Analysis of Property-Liability Insurer Stock Values around Hurricane Andrew

Abstract: Introduction Investors hold a set of information that generates expectations concerning risk and earnings. In an efficient market, stock prices quickly reflect all of the relevant information involving a firm. Several studies have examined the type of information investors consider relevant for pricing decisions. Dividend and earnings announcements and stock splits have been extensively covered (Charest, 1978; Aharony and Swary, 1980; Asquith and Mullins, 1983). Other studies have addressed the impact of losses on firm value. Sprecher and Pertl (1983) and Davidson, Chandy, and Cross (1987) found a negative relationship between large losses and firm value. Reilly and Drzycimski (1973) found that stock prices adjust immediately following the announcement of major world events. Shelor, Anderson, and Cross (1990) examined the effect of the October 17, 1989, California earthquake on the stock value of firms in the real estate industry. They concluded that the earthquake conveyed important new information to the market that was reflected in significant negative stock returns among real estate firms operating around San Francisco (the area sustaining the most damage from the earthquake). Real estate-related firms operating in other areas of California were generally unaffected by the earthquake. The occurrence and timing of the earthquake could not be anticipated and, thus, instantaneously introduced new and relevant information to the marketplace. The large negative returns for the sample indicated that investors viewed the earthquake as a signal of unfavorable financial conditions for the real estate industry in the San Francisco bay area. The market response to the earthquake among other California firms was consistent with that observed for an event that has no impact on market valuation. These results provide evidence that the market may discriminate among firms in relation to their geographic risk exposure. Such behavior is expected in a rational and efficient market. In a related article, Shelor, Anderson, and Cross (1992) examined the market response of property-liability insurers around the earthquake. In contrast with the real estate-related firms, the property-liability industry demonstrated a significant positive response to the earthquake, indicating that investor expectations of higher demand for insurance (positive effect) may have more than offset the potential earthquake losses (negative effect). Aiuppa, Carney, and Krueger (1993) also explored the impact of the earthquake on property-liability stock values and found a similar positive response. These results suggest that the two industries were affected by the earthquake in different ways; that is, the California earthquake stimulated industry-specific responses. This conclusion, in part, provides the motivation for this study involving the examination of the effect of Hurricane Andrew on property-liability stock values. Research Question In August 1992, Hurricane Andrew struck South Florida and Louisiana with sustained winds of 138 miles per hour. The magnitude of this storm's devastation made it the costliest natural disaster in U.S. history. The property-liability insurance industry estimates that Andrew caused more than $20 billion in property damage.(1) This dwarfs the $7 billion in claims paid after Hurricane Hugo (the previous costliest natural disaster) struck North Carolina and South Carolina in September 1989. The effect of catastrophic property damage on the value of property-liability insurers is the subject of this study; specifically, does the market demonstrate an ability to discriminate by the degree of loss exposure of property-liability insurers around significant hurricanes (such as Andrew)? Although some insurers have heavy loss exposure in certain geographic areas of the country, other firms have little or no business in the affected areas. If the market is rational and efficient, then it would be surprising to find that unexposed or lightly-exposed firms experience a similar hurricane-induced market reaction to that of heavily-exposed firms. …

Making Sense of Beta, Size, and Book-to-Market

Abstract: We know from empirical studies that stocks of small companies with high book-to-market ratios have provided higher returns than stocks of large companies with low book-to-market ratios. But do senior executives, outside directors and financial analysts believe that? We show that senior executives, outside directors and financial analysts surveyed annually by Fortune magazine rank companies as if they believe that good companies are large companies with low book-to-market ratios. They rank stocks as if they believe the opposite of what empirical research has demonstrated; they rank stocks as if they believe that good stocks are stocks of good companies. We argue that a misperception of the relationship between the quality of a company and the expected rate of return of its stock underlies the superior performance of stocks of small, high book-to-market companies and the weak relationship betweenrealized returns and beta.