Showing papers on "Stock (geology) published in 2005"
TL;DR: In this paper, the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003 were explored and the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant.
Abstract: This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.
1,440 citations
TL;DR: This article found that households exhibit a strong preference for local investments and that the average household generates an additional annualized return of 3.2% from its local holdings relative to its non-local holdings, suggesting that local investors can exploit local knowledge.
Abstract: Using data on the investments a large number of individual investors made through a discount broker from 1991 to 1996, we find that households exhibit a strong preference for local investments. We test whether this locality bias stems from information or from simple familiarity. The average household generates an additional annualized return of 3.2% from its local holdings relative to its nonlocal holdings, suggesting that local investors can exploit local knowledge. Excess returns to investing locally are even larger among stocks not in the SP but the wise man saith, “Put all your eggs in one basket and—watch that basket.” Mark Twain, 1894 THE FINANCE LITERATURE HAS YIELDED a large number of in-depth studies concerning the investments managed by professional money managers, yet historically, relatively little has been known about the individual investors’ money management, in no small part because of the shortage of high-quality data available for academic research. This is despite the fact that United States individual investors have been holding around 50% of the stock market in direct stock
1,188 citations
TL;DR: This article found that short-sale constraints are most likely to bind among stocks with low institutional ownership, and that stock loan supply tends to be sparse and short selling more expensive when institutional ownership is low.
1,099 citations
TL;DR: The authors examined the link between managers' equity incentives and earnings management and found that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold.
Abstract: This paper examines the link between managers' equity incentives—arising from stock‐based compensation and stock ownership—and earnings management. We hypothesize that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold. Using stock‐based compensation and stock ownership data over the 1993–2000 time period, we document that managers with high equity incentives sell more shares in subsequent periods. As expected, we find that managers with high equity incentives are more likely to report earnings that meet or just beat analysts' forecasts. We also find that managers with consistently high equity incentives are less likely to report large positive earnings surprises. This finding is consistent with the wealth of these managers being more sensitive to future stock performance, which leads to increased reserving of current earnings to avoid future earnings disappointm...
1,022 citations
01 Jan 2005
TL;DR: In this paper, the authors investigated the relationship between economic growth and financial development in developing countries over 1988-2001 and found that while banks performance has a negative impact on growth, stock markets positively promote growth.
Abstract: This thesis investigates the relationship between economic growth and financial development in developing countries over 1988-2001. Previous studies have generally used averaged data, for both developing and developed countries, and inappropriate estimation methods. In an attempt to reach some definitive conclusions, Generalised Method of Moments dynamic estimation is used with a newly collected panel of annual data to assess the relationship. The results show that while banks performance has a negative impact on growth, stock markets positively promote growth. To reach an overall conclusion about the impact of finance on growth and to solve the problems associated with the existence of multicollinearity among the different measures of financial development, principal components analysis is used to generate new, comprehensive measures of financial development. In assessing the link between the new measures and financial development and growth, the results support the existence of an overall positive relationship. The thesis also examines the behaviour of interest rates in developing and industrialised countries using individual and panel unit root tests. The results are sensitive to the choice of the test, country and time unit.
882 citations
TL;DR: The authors examined the relationship between corporate social performance and stock returns in the UK and found that the poor financial reward offered by such firms is attributable to their good social performance on the employment and to a lesser extent the environmental aspects.
Abstract: This study examines the relationship between corporate social performance and stock returns in the UK. Using a set of disaggregated social performance indicators for environment, employment and community activities, we are able to more closely evaluate the interactions between social and financial performance than would be the case for an aggregate measure. While scores on a composite social performance indicator are significantly negatively related to stock returns, we find that the poor financial reward offered by such firms is attributable to their good social performance on the employment and to a lesser extent the environmental aspects. Interestingly, we find that considerable abnormal returns are available from holding a portfolio of the socially least desirable stocks. These relationships between social and financial performance cannot be rationalised by multi-factor models for explaining the cross-sectional variation in returns or by industry effects.
758 citations
TL;DR: This paper found that constrained stocks underperform during the period 1988-2002 by a significant 215 basis points per month on an equally weighted basis, although by only an insignificant 39 basis points on a valueweighted basis.
648 citations
TL;DR: In this article, the authors show that the year-by-year equity decisions of more than half of the sample firms violate the pecking order model and that most firms issue or retire equity each year and the issues are on average large and not typically done by firms under duress.
644 citations
TL;DR: In this article, the authors explore the hypothesis that investors spread information and ideas about stocks to one another directly, through word-of-mouth communication, and show that this pattern shows up even when the fund manager and the stock in question are located far apart, so it is distinct from anything having to do with local preference.
Abstract: A mutual fund manager is more likely to buy (or sell) a particular stock in any quarter if other managers in the same city are buying (or selling) that same stock. This pattern shows up even when the fund manager and the stock in question are located far apart, so it is distinct from anything having to do with local preference. The evidence can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth. IN THIS PAPER, WE EXPLORE THE HYPOTHESIS that investors spread information and ideas about stocks to one another directly, through word-of-mouth communication. This hypothesis comes up frequently in informal accounts of the behavior of the stock market. 1 For example, in his bestseller Irrational Exuberance, Shiller (2000) devotes an entire chapter to the subject of “Herd Behavior and Epidemics,” and writes
571 citations
TL;DR: In this paper, the optimal dynamic portfolio decisions for investors who acquire housing services from either renting or owning a house were examined and it was shown that when indifferent between owning and renting, investors who own a house hold a lower equity proportion in their net worth (bonds, stocks, and home equity), reflecting the substitution effect, yet hold a higher equity proportion of their liquid portfolios (bond and stocks) reflecting the diversification effect.
Abstract: We examine the optimal dynamic portfolio decisions for investors who acquire housing services from either renting or owning a house Our results show that when indifferent between owning and renting, investors owning a house hold a lower equity proportion in their net worth (bonds, stocks, and home equity), reflecting the substitution effect, yet hold a higher equity proportion in their liquid portfolios (bonds and stocks), reflecting the diversification effect Furthermore, following the suboptimal policy of always renting leads investors to overweigh in stocks, while following the suboptimal policy of always owning a house causes investors to underweigh in stocks For many investors, a house is the largest and most important asset in their portfolios The 2001 Survey of Consumer Finances (SCF) shows that about two-thirds of US households own their primary residences and home value accounts for 55% of a homeowner’s total assets, on average At the same time, approximately 50% of US households hold stocks and/ or stock mutual funds (including holdings in their retirement accounts), and stock investment accounts for less than 12% of household assets Even for households owning stocks, they account for less than 40% of household assets Housing differs from other financial assets in that housing serves a dual purpose It is both a durable consumption good from which the owner derives utility and also an investment vehicle that allows the investor to hold home equity Further, compared with other financial assets such as bonds and stocks, the housing investment is often highly
567 citations
TL;DR: In this paper, the authors investigate the short-run response of stock prices to the arrival of macroeconomic news and find that on average, an announcement of rising unemployment is good news for stocks during economic expansions and bad news during economic contractions.
Abstract: We find that on average, an announcement of rising unemployment is good news for stocks during economic expansions and bad news during economic contractions. Unemployment news bundles three types of primitive information relevant for valuing stocks: information about future interest rates, the equity risk premium, and corporate earnings and dividends. The nature of the information bundle, and hence the relative importance of the three effects, changes over time depending on the state of the economy. For stocks as a group, information about interest rates dominates during expansions and information about future corporate dividends dominates during contractions. THIS STUDY INVESTIGATES THE SHORT-RUN response of stock prices to the arrival of macroeconomic news. The particular news event we consider is the Bureau of Labor Statistic’s (BLS) monthly announcement of the unemployment rate. We establish that the stock market’s response to unemployment news arrival depends on whether the economy is expanding or contracting. On average, the stock market responds positively to news of rising unemployment in expansions, and negatively in contractions. Since the economy is usually in an expansion phase, it follows that the stock market usually rises on the announcement of
TL;DR: In this article, the authors argue that price formation in equity markets has a significant geographic component linked to the trading patterns of local residents, and that the local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents.
Abstract: We document strong comovement in the stock returns of firms headquartered in the same geographic area. Moreover, stocks of companies that change their headquarters location experience a decrease in their comovement with stocks from the old location and an increase in their comovement with stocks from the new location. The local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents. We argue that price formation in equity markets has a significant geographic component linked to the trading patterns of local residents.
TL;DR: This study documents that the abnormal stock returns are negative before unscheduled executive option awards and positive afterward, suggesting that executives have gradually become more effective at timing awards to their advantage and possibly explaining why the results in this study differ from those in past studies.
Abstract: This study documents that the abnormal stock returns are negative before unscheduled executive option awards and positive afterward. The return pattern has intensified over time, suggesting that executives have gradually become more effective at timing awards to their advantage, and possibly explaining why the results in this study differ from those in past studies. Moreover, I document that the predicted returns are abnormally low before the awards and abnormally high afterward. Unless executives possess an extraordinary ability to forecast the future marketwide movements that drive these predicted returns, the results suggest that at least some of the awards are timed retroactively.
TL;DR: In this paper, the authors use returns-earnings regressions as a proxy for investor perceptions of earnings quality and auditor tenure, and find that the influence of past earnings on one-year-ahead earnings forecasts becomes greater as tenure increases.
Abstract: We analyze how investors and information intermediaries perceive auditor tenure. Using earnings response coefficients from returns‐earnings regressions as a proxy for investor perceptions of earnings quality, we document a positive association between investor perceptions of earnings quality and tenure. Further, we find that the influence of reported earnings on stock rankings becomes larger with extended tenure, although the association between debt ratings and reported earnings does not vary with tenure. Finally, we find that the influence of past earnings on one‐year‐ahead earnings forecasts becomes greater as tenure increases. In general, our results are consistent with the hypothesis that investors and information intermediaries perceive auditor tenure as improving audit quality. One implication of our study is that imposing mandatory limits on the duration of the auditor‐client relationship might impose unintended costs on capital market participants.
TL;DR: This paper studied the relationship between corporate governance policy and idiosyncratic risk in stock returns and found that firms with fewer anti-takeover provisions display higher levels of idiosyncratic risks, trading activity, and more information about future earnings in stock prices.
Abstract: We study the relationship of corporate governance policy and idiosyncratic risk in stock returns. Firms with fewer anti-takeover provisions display higher levels of idiosyncratic risk, trading activity, private information flow, and more information about future earnings in stock prices. Trading interest by institutions, especially those active in merger arbitrage, strengthens the relationship of governance to idiosyncratic risk. Our results indicate that openness to the market for corporate control leads to more informative stock prices by encouraging collection of and trading on private information. Consistent with an information-flow interpretation, the component of volatility unrelated to governance is associated with the efficiency of corporate investment.
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TL;DR: In this paper, the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003 were explored and the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant.
Abstract: This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.
TL;DR: In this paper, the authors argue that the causal effect of democracy can be measured by a country's regime status in a particular year (T), which is correlated with its growth performance in a subsequent period (T+l).
Abstract: Recent studies appear to show that democracy has no robust association with economic growth. Yet all such work assumes that the causal effect of democracy can be measured by a country's regime status in a particular year (T), which is correlated with its growth performance in a subsequent period (T+l). The authors argue that democracy must be understood as a stock, rather than a level, measure. That is, a country's growth performance is affected by the number of years it has been democratic, in addition to the degree of democracy experienced during that period. In this fashion, democracy is reconceptualized as a historical, rather than a contemporary, variable—with the assumption that long-run historical patterns may help scholars to understand present trends. The authors speculate that these secular-historical influences operate through four causal pathways, each of which may be understood as a type of capital: physical capital, human capital, social capital, and political capital. This argument is tested in a crosscountry analysis and is shown to be robust in a wide variety of specifications and formats.
TL;DR: In this paper, the authors proposed that the general level of optimism/pessimism in society is reflected by the emotions of financial decision-makers and that the stock market itself is a direct measure or gauge of social mood.
Abstract: The general level of optimism/pessimism in society is reflected by the emotions of financial decision-makers. Because these emotions are correlated across economic participants, our hypothesis leads to three important outcomes. First, social mood determines the types of decisions made by consumers, investors, and corporate managers alike. Extremes in social mood are characterized by optimistic (pessimistic) aggregate investment and business activity. Second, due to the efficient and emotional nature of stock transactions, the stock market itself is a direct measure or gauge of social mood. Third, since the tone and character of business activity follows, rather than leads, social mood, stock market trends help forecast future financial and economic activity. Specific predictions about stock market levels and trading volume, market volatility, firm expansion, leverage use, and IPO and M&A activity are also given.
TL;DR: In this article, the authors investigate learning during mergers and acquisitions (M&As) and find that the market reaction to a merger and acquisition announcement predicts whether the companies later consummate the deal and the relation cannot be explained by the market's anticipation of the closing decision or its perception of the deal quality at the announcement.
Abstract: I find that the market reaction to a merger and acquisition (M&A) announcement predicts whether the companies later consummate the deal The relation cannot be explained by the market's anticipation of the closing decision or its perception of the deal quality at the announcement Merging companies appear to extract information from the market reaction and later consider it in closing the deal Furthermore, the relation varies with deal characteristics, suggesting that companies seem to have a higher incentive to learn from the market when canceling the announced deal is easier or when the market has more information that the companies do not know IMAGINE AFTER PRIVATE NEGOTIATIONS, the CEOs of two companies conclude that a merger will create value They then reach a deal and announce it to the public Outside investors, however, disagree with the proposed merger after being informed They believe that the managers have overlooked certain weaknesses of the plan, and if carried out, it will reduce the total value of the two companies The investors express their opposition in many ways, including trading down the companies' stock prices What do the managers do in such a situation? Do they ignore the market and consummate the merger anyway, or do they learn from the market and cancel the deal? In this paper, I investigate learning during mergers and acquisitions (M&As) "Learning" means, specifically, that the managers of merging companies extract information from the stock market reaction to the M&A announcement and consider the information in making the closing decision In short, learning implies information flows from the market to the company Typically, only a small number of top managers and their advisors make M&A decisions Market participants, including stock analysts and institutional investors, can be better positioned than those insiders of the merging companies to analyze the international, macroeconomic, and industry issues that are relevant to the deal
TL;DR: The authors examined the economic consequences of a regulatory change mandating OTCBB firms to comply with reporting requirements under the 1934 Securities Exchange Act and found that firms previously not filing with the SEC experience positive stock returns and permanent increases in liquidity, suggesting positive externalities from disclosure regulation.
TL;DR: In this paper, a strong relationship between short-run reversals and stock return illiquidity, even after controlling for trading volume, was found, and it was shown that contrarian trading strategy profits are smaller than the likely transactions costs because the high turnover, low liquidity stocks face large transaction and market impact costs.
Abstract: This paper documents a strong relationship between short-run reversals and stock return illiquidity, even after controlling for trading volume. The largest reversals and the potential contrarian trading strategy profits occur in the high turnover, low liquidity stocks, as the price pressures caused by non-informational demands for immediacy are accommodated. Thus, the high frequency negative autocorrelations are more likely to result from stresses in the market for liquidity. The contrarian trading strategy profits are smaller than the likely transactions costs because the high turnover, low liquidity stocks face large transaction and market impact costs. This lack of profitability and the fact that the overall findings are consistent with rational equilibrium paradigms suggest that the violation of the efficient market hypothesis due to short-term reversals is not so egregious after all.
TL;DR: In this paper, the authors examined the optimal consumption and portfolio choice problem of long-horizon investors who have access to a riskless asset with constant return and a risky asset (‘stocks’) with constant expected return and time varying precision.
Abstract: This paper examines the optimal consumption and portfolio choice problem of long-horizon investors who have access to a riskless asset with constant return and a risky asset (‘stocks’) with constant expected return and time varying precision – the reciprocal of volatility. Markets are incomplete, and investors have recursive preferences defined over intermediate consumption. The paper obtains a solution to this problem that is exact for investors with unit elasticity of intertemporal substitution of consumption, and approximate otherwise. The optimal portfolio demand for stocks includes an intertemporal hedging component that is negative when investors have coefficients of relative risk aversion larger than one, and the instantaneous correlation between volatility and stock returns is negative, as typically estimated from stock return data. Our estimates of the joint process for stock returns and precision (or volatility) using US data confirm this finding. But we also find that stock return volatility does not appear to be variable and persistent enough to generate large intertemporal hedging demands.
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TL;DR: In this paper, the authors provide empirical evidence of a strong causal relation between the structure of managerial compensation and investment policy, debt policy, and firm risk, and find that riskier policy choices in general lead to compensation structure with higher vega and lower delta.
Abstract: This paper provides empirical evidence of a strong causal relation between the structure of managerial compensation and investment policy, debt policy, and firm risk. Controlling for CEO pay-performance sensitivity (delta) and the feedback effects of firm policy and risk on the structure of the managerial compensation scheme, we find that higher sensitivity of CEO wealth to stock volatility (vega) implements riskier policy choices, including relatively more investment in R&D, less investment in property, plant and equipment, more focus on fewer lines of business, and higher leverage. At the same time, we find that riskier policy choices in general lead to compensation structure with higher vega and lower delta. Stock-return volatility, however, has a positive effect on both vega and delta.
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TL;DR: In this paper, the authors examined the role of idiosyncratic risk and liquidity in determining stock returns and found that stock returns are increasing with the level of the idiosyncratic risks and decreasing in a stock's liquidity.
Abstract: The roles played by idiosyncratic risk and liquidity in determining stock returns have recently received a great deal of attention. However, recent empirical tests have not examined the interaction between these two factors. As others have shown (and this paper confirms) stocks idiosyncratic risk and liquidity are negatively correlated. To what extent then is each variable responsible for the observed cross sectional patterns in stock returns? Overall, using monthly data, the paper finds that stock returns are increasing with the level of idiosyncratic risk and decreasing in a stock's liquidity. However, while both liquidity and idiosyncratic risk play a role in determining returns, the impact of idiosyncratic risk is much stronger and often eliminates liquidity's explanatory power. The point estimates indicate that a one standard deviation change in idiosyncratic risk has between 2.5 and 8 times the impact of a corresponding change in liquidity on cross sectional expected returns.
TL;DR: In this paper, the authors studied the long-run and short-run dynamics between stock prices and exchange rates and the channels through which exogenous shocks impact on these markets by using cointegration methodology and multivariate Granger causality tests.
TL;DR: The median of inventory holding periods were reduced from 96 days to 81 days, and the greatest reduction was found for work-in-process inventory, which declined by about 6% per year.
Abstract: This paper examines the inventories of publicly traded American manufacturing companies between 1981 and 2000. The median of inventory holding periods were reduced from 96 days to 81 days. The average rate of inventory reduction is about 2% per year. The greatest reduction was found for work-in-process inventory, which declined by about 6% per year. Finished-goods inventories did not decline. Firms with abnormally high inventories have abnormally poor long-term stock returns. Firms with slightly lower than average inventories have good stock returns, but firms with the lowest inventories have only ordinary returns.
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TL;DR: In this paper, the authors provide a new explanation to the limited stock market participation puzzle: less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less.
Abstract: We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data.
TL;DR: In this paper, an empirical study was conducted using an unbalanced panel data from ten MENA region countries to investigate the relationship between financial development and economic growth and found that there is no significant relationship between banking and stock market development and growth.
Abstract: Since few decades, a wide theoretical debate is concerned with the fundamental relationship between financial development and economic growth as well as the separate impact of banks on growth and financial markets on growth. Recent studies shed some light on the simultaneous effect of banks and financial development on growth. The empirical study is conducted using an unbalanced panel data from ten MENA region countries. Econometric issues will be based on estimation of a dynamic panel model with GMM estimators. Thus, peculiarities of MENA region countries will be detected. The empirical results reinforce the idea of no significant relationship between banking and stock market development, and growth. The association between stock markets and growth is even negative after controlling for bank development. This lack of relationship must be linked either to underdeveloped financial systems in the MENA region that hamper economic growth or to unstable growth rates in the region that affect the quality of the association between finance and growth. Moreover, in most transition economies the stock markets are very thin. This may lead to excessively volatile share prices. According to Singh (1997), stock price volatility may seriously hamper economic development.
TL;DR: In this article, the authors examine the information embedded in the stock and option markets prior to takeover announcements and find that call-volume imbalances are strongly related to next-day stock returns.
Abstract: Which market attracts informed investors prior to extreme informational events? We examine the information embedded in the stock and option markets prior to takeover announcements. Normally, buyer‐seller initiated stock volume imbalances are predictors of next‐day stock returns and option volume is uninformative. However, prior to takeover announcements, call‐volume imbalances are strongly related to next‐day stock returns. Cross‐sectional analysis shows that takeover targets with the largest preannouncement call‐imbalance increases experience the highest announcement‐day returns. These findings suggest that, with pending extreme informational events, the options market plays an important role in price discovery.
TL;DR: In this article, the authors studied asset allocation decisions in the presence of regime switching in asset returns and found that four separate regimes, characterized as crash, slow growth, bull and recovery states, are required to capture the joint distribution of stock and bond returns.