Showing papers on "Stock (geology) published in 2004"

The Cross-Section of Volatility and Expected Returns

Abstract: We examine the pricing of aggregate volatility risk in the cross-section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. In addition, we find that stocks with high idiosyncratic volatility relative to the Fama and French (1993) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility.

Investor Sentiment and the Cross-Section of Stock Returns

Abstract: We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with predictions and appear unlikely to reflect an alternative explanation based on compensation for systematic risk.

The Role of Social Capital in Financial Development

Abstract: To identify the effect of social capital on financial development, we exploit social capital differences within Italy. In high-social-capital areas, households are more likely to use checks, invest less in cash and more in stock, have higher access to institutional credit, and make less use of informal credit. The effect of social capital is stronger where legal enforcement is weaker and among less educated people. These results are not driven by omitted environmental variables, since we show that the behavior of movers is still affected by the level of social capital of the province where they were born.

Is All That Talk Just Noise? The Information Content of Internet Stock Message Boards

Abstract: Financial press reports claim that Internet stock message boards can move markets We study the effect of more than 15 million messages posted on Yahoo! Finance and Raging Bull about the 45 companies in the Dow Jones Industrial Average and the Dow Jones Internet Index Bullishness is measured using computational linguistics methods Wall Street Journal news stories are used as controls We find that stock messages help predict market volatility Their effect on stock returns is statistically significant but economically small Consistent with Harris and Raviv (1993), disagreement among the posted messages is associated with increased trading volume MANY PEOPLE ARE DEVOTING a considerable amount of time and effort creating and reading the messages posted on Internet stock message boards News stories report that the message boards are having a significant impact on financial markets The Securities and Exchange Commission has prosecuted people for Internet messages All this attention to Internet stock messages caused us to wonder whether these messages actually contain financially relevant information 1 We consider three specific issues Does the number of messages posted or the bullishness of these messages help to predict returns? Is disagreement among the messages associated with more trades? Does the level of message posting or the bullishness of the messages help to predict volatility? The first issue is, does the level of message activity or the bullishness of the messages successfully predict subsequent stock returns? This is the natural starting place because a very high proportion of the messages contain explicit assertions that the particular stock is either a good buy or a bad buy Of course, there are a great many previous empirical studies showing how hard it is to predict stock returns by enough to cover transactions costs We find that there is evidence of a small degree of negative predictability even after controlling for bid‐ask bounce When many messages are posted on a given day, there ∗ Both authors are at the Sauder School of Business, University of British Columbia We would

Information Uncertainty and Stock Returns

Abstract: There is substantial evidence of short-term stock price continuation, which prior literature often attributes to investor behavioral biases such as underreaction to new information. This paper investigates the role of information uncertainty in short-term CAPM anomalies and cross-sectional variations in stock returns. If short-term price continuation is due to investor behavioral biases, we should observe greater price drift when there is greater information uncertainty. As a result, greater information uncertainty produces relatively higher expected returns following good news and relatively lower expected returns following bad news. The evidence presented in this paper supports this hypothesis.

Stock markets, banks and growth: Panel evidence

Abstract: This paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976-98 and applying recent GMM techniques developed for dynamic panels. On balance, we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity, omitted variables or unobserved country-specific effects.

Capital Structure and Stock Returns

Abstract: U.S. corporations do not issue and repurchase debt and equity to counteract the mechanistic effects of stock returns on their debt‐equity ratios. Thus over one‐ to five‐year horizons, stock returns can explain about 40 percent of debt ratio dynamics. Although corporate net issuing activity is lively and although it can explain 60 percent of debt ratio dynamics (long‐term debt issuing activity being most capital structure–relevant), corporate issuing motives remain largely a mystery. When stock returns are accounted for, many other proxies used in the literature play a much lesser role in explaining capital structure.

Bad Beta, Good Beta

Abstract: This paper explains the size and value "anomalies" in stock returns using an economically motivated two-beta model. We break the beta of a stock with the market portfolio into two components, one reflecting news about the market's future cash flows and one reflecting news about the market's discount rates. Intertemporal asset pricing theory suggests that the former should have a higher price of risk; thus beta, like cholesterol, comes in "bad" and "good" varieties. Empirically, we find that value stocks and small stocks have considerably higher cash-flow betas than growth stocks and large stocks, and this can explain their higher average returns. The poor performance of the capital asset pricing model (CAPM) since 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices.

The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm‐Specific Information into Stock Prices

Abstract: We investigate the extent to which the trading and trade‐generating activities of three informed market participants—financial analysts, institutional investors, and insiders—influence the relative amount of firm‐specific, industry‐level, and market‐level information impounded into stock prices, as measured by stock return synchronicity. We find that stock return synchronicity is positively associated with analyst forecasting activities, consistent with analysts increasing the amount of industry‐level information in prices through intra‐industry information transfers. In contrast, stock return synchronicity is inversely related to insider trades, consistent with these transactions conveying firm‐specific information. Supplemental tests show that insider and institutional trading accelerate the incorporation of the firm‐specific component of future earnings news into prices alone, while analyst forecasting activity accelerates both the industry and firm‐specific component of future earnings news. Our resul...

Hedge funds and the technology bubble

Abstract: This paper documents that hedge funds did not exert a correcting force on stock prices during the technology bubble. Instead, they were heavily invested in technology stocks. This does not seem to be the result of unawareness of the bubble: Hedge funds captured the upturn, but, by reducing their positions in stocks that were about to decline, avoided much of the downturn. Our findings question the efficient markets notion that rational speculators always stabilize prices. They are consistent with models in which rational investors may prefer to ride bubbles because of predictable investor sentiment and limits to arbitrage. TECHNOLOGY STOCKS ON NASDAQ ROSE to unprecedented levels during the 2 years leading up to March 2000. Ofek and Richardson (2002) estimate that at the peak, the entire internet sector, comprising several hundred stocks, was priced as if the average future earnings growth rate across all these firms would exceed the growth rates experienced by some of the fastest growing individual firms in the past, and, at the same time, the required rate of return would be 0% for the next few decades. By almost any standard, these valuation levels are so extreme that this period appears to be another episode in the history of asset price bubbles. Shiller (2000) argues that the stock price increase was driven by irrational euphoria among individual investors, fed by an emphatic media, which maximized TV ratings and catered to investor demand for pseudonews. Of course, only few economists doubt that there are both rational and irrational market participants. However, there are two opposing views about whether rational traders correct the price impact of behavioral traders. Proponents of the

An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases

Abstract: We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development (R&D) expenditures by a significant amount. We find consistent evidence of a misreaction, as manifested in the significantly positive abnormal stock returns that our sample firms' shareholders experience following these increases. We also find consistent evidence that our sample firms experience significantly positive long-term abnormal operating performance following their R&D increases. Our findings suggest that R&D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction).

Asset Market Linkages in Crisis Periods

Abstract: We characterize asset return linkages during periods of stress by an extremal dependence measure Contrary to correlation analysis, this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships Our estimates for the G-5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets However, for the assessment of financial system stability the widely disregarded cross-asset perspective is particularly important For example, our data show that stock-bond contagion is approximately as frequent as flight to quality from stocks into bonds Extreme cross-border linkages are surprisingly similar to national linkages, illustrating a potential downside to international financial integration

Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations

Abstract: We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns. This is a revised version of a paper previously titled 'Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Analysts' Expectations' that was originally posted on April 21, 2004.

Short Interest, Institutional Ownership, and Stock Returns

Abstract: Stocks are short sale constrained when there is a strong demand to sell short and a limited supply of shares to borrow. Using data on both short interest, a proxy for demand, and institutional ownership, a proxy for supply, we find that constrained stocks underperform during 1988-2002 by a significant 215 basis points per month on an EW basis, although by only an insignificant 39 basis points per month on a VW basis. For the overwhelming majority of stocks, short interest and institutional ownership levels make short selling constraints unlikely.

The Walk-down to Beatable Analyst Forecasts: The Role of Equity Issuance and Insider Trading Incentives*

Abstract: It has been alleged that firms and analysts engage in an “earnings-guidance game” where analysts first issue optimistic earnings forecasts and then “walk down” their estimates to a level that firms can beat at the official earnings announcement. We examine whether the walkdown to beatable targets is associated with managerial incentives to sell stock after earnings announcements on the firm’s behalf (through new equity issuance) or from their personal accounts (through option exercises and stock sales). Consistent with these hypotheses, we find that the walk-down to beatable targets is most pronounced when firms or insiders are net sellers of stock after an earnings announcement. These findings provide new insights on the impact of capital-market incentives on communications between managers and analysts.

Short‐Selling Prior to Earnings Announcements

Abstract: This paper examines short-sales transactions in the five days prior to earnings announcements of 913 Nasdaq-listed firms. The tests provide evidence of informed trading in pre-announcement short-selling because they reveal that abnormal short-selling is significantly linked to post-announcement stock returns. Also, the tests indicate that short-sellers typically are more active in stocks with low book-to-market valuations or low SUEs. The levels of pre-announcement short-selling, however, mostly appear to reflect firm-specific information rather than these fundamental financial characteristics. We believe that these results should encourage financial market regulators to consider providing more extensive and timely disclosures of short-selling to investors.

The Cross-Section of Volatility and Expected Returns

Abstract: We examine the pricing of aggregate volatility risk in the cross-section of stock returns Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns In addition, we find that stocks with high idiosyncratic volatility relative to the Fama and French (1993) model have abysmally low average returns This phenomenon cannot be explained by exposure to aggregate volatility risk Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility

On the Out-of-Sample Importance of Skewness and Asymmetric Dependence for Asset Allocation

Abstract: Recent studies in the empirical Þnance literature have reported evidence of two types of asymmetries in the joint distribution of stock returns. The Þrst is skewness in the distribution of individual stock returns, while the second is an asymmetry in the dependence between stocks: stock returns appear to be more highly correlated during market downturns than during market upturns. In this paper we examine the economic and statistical signiÞcance of these asymmetries for asset allocation decisions in an out-of-sample setting. We consider the problem of a CRRA investor allocating wealth between the risk-free asset, a small-cap and a large-cap portfolio, using monthly data. We use models that can capture time-varying means and variances of stock returns, and also the presence of time-varying skewness and kurtosis. Further, we use copula theory to construct models of the time-varying dependence structure that allow for greater dependence during bear markets than bull markets. The importance of these two asymmetries for asset allocation is assessed by comparing the performance of a portfolio based on a normal distribution model with a portfolio based on a more sexible distribution model. For a variety of performance measures and levels of risk aversion our results suggest that capturing skewness and asymmetric dependence leads to gains that are economically signiÞcant, and statistically signiÞcant in some cases.

What determines Chinese stock returns

Abstract: This study applied the three-factor model to A-shares in the Chinese equity market, one of the fastest growing markets ever. The sample period is July 1996 through June 2002. Size was found to explain the cross-sectional differences in returns, but contrary to findings for the U.S. market, the book-to-market ratio was not helpful. As in the U.S. experience, beta did not account for return differences among individual stocks. Because of the speculative nature of Chinese capital markets, the large proportion of government-owned shares, and the low quality of the companies' accounting information, the free float (that is, the ratio of shares in a public company that are freely available to the investing public to total company shares) was added to the study to serve as a proxy for company fundamentals. The three-factor model that included proxies for size and free float significantly increased the explanatory power of the market model—from 81 percent to 90 percent.

Taking Stock: Monetary Policy Transmission to Equity Markets

Abstract: This paper analyses the effects of U.S. monetary policy on stock markets.We present evidence that individual stocks react in a highly heterogeneous fashion to U.S. monetary policy shocks and relate this heterogeneity to financial constraints and Tobin's q. First, we show that there are strong industry-specific effects of U.S. monetary policy. Second, we also find that for the 500 individual stocks comprising the S&P500 the firms with low cash flows, small size, poor credit ratings, low debt to capital ratios, high price-earnings ratios, or a high Tobin's q are affected significantly more by monetary policy.

The Social Construction of Market Value: Institutionalization and Learning Perspectives on Stock Market Reactions

Abstract: This study advances a social constructionist view of financial market behavior. The paper suggests that the market's reaction to particular corporate practices, such as stock repurchase plans, are not, as financial economists contend, simply a function of the inherent efficiency of such practices. Rather, stock market reactions are also influenced by the prevailing institutional logic and the degree of institutionalization of the practice. The theory first predicts that the emergence of the agency perspective on corporate governance in the mid-1980s represented a powerful new institutional logic that would lead the market to reverse its prior aggregate reaction to stock repurchase plans in the United States. The paper then considers the potential for institutional decoupling of repurchase plans and develops competing hypotheses about how the market value of these policies might have changed as more firms formally adopted, but did not implement, the plans over time. In contrast to a financial economic pers...

The Overseas Listing Decision: New Evidence of Proximity Preference

Abstract: Using a cross section of effectively the entire universe of overseas listings across world markets, we examine the market preferences of firms listing their stock abroad. We find that geographic, economic, cultural, and industrial proximity play the dominant role in the choice of overseas listing venue. Contrary to the notion that firms maximize international portfolio diversification gains in listing abroad, cross-listing activity is more common across markets for which diversification gains are relatively low. Our findings imply that the same proximity constraints that are believed to lead to "home bias" in investment portfolio decisions also exert a profound influence on financing decisions. Copyright 2004, Oxford University Press.

Value‐Glamour and Accruals Mispricing: One Anomaly or Two?

Abstract: We investigate whether the accruals anomaly is a manifestation of the glamour stock phenomenon documented in the finance literature. Value (glamour) stocks, characterized by low (high) past sales growth, high (low) book‐to‐market (B/M), high (low) earnings‐to‐price (E/P), and high (low) cash flow‐to‐price (C/P), are known to earn positive (negative) future abnormal returns. Note that “C” or cash flow is operationalized in the finance literature as earnings adjusted for depreciation. Sloan (1996) shows that firms with low (high) total accruals earn positive (negative) future abnormal returns. We find that a new variable, operating cash flows measured as earnings adjusted for depreciation and working capital accruals, scaled by price (CFO/P) captures mispricing attributed to the four traditional value‐glamour proxies and accruals. Interpretation of this finding depends on the reader's priors. If the reader believes that value‐glamour phenomenon can be operationalized only as C/P, and not CFO/P, then one wou...