Showing papers on "Stock (geology) published in 2008"
TL;DR: Goyal and Welch as mentioned in this paper showed that many predictive regressions beat the historical average return, once weak restrictions are imposed on the signs of coefficients and return forecasts, and that the implied predictability of returns is substantial at longer horizons.
Abstract: Goyal and Welch (2007) argue that the historical average excess stock return forecasts future excess stock returns better than regressions of excess returns on predictor variables. In this article, we show that many predictive regressions beat the historical average return, once weak restrictions are imposed on the signs of coefficients and return forecasts. The out-of-sample explanatory power is small, but nonetheless is economically meaningful for mean-variance investors. Even better results can be obtained by imposing the restrictions of steady-state valuation models, thereby removing the need to estimate the average from a short sample of volatile stock returns. (JEL G10, G11) Towards the end of the last century, academic finance economists came to take seriously the view that aggregate stock returns are predictable. During the 1980s, a number of papers studied valuation ratios, such as the dividend-price ratio, earnings-price ratio, or smoothed earnings-price ratio. Value-oriented investors in the tradition of Graham and Dodd (1934) had always asserted that high valuation ratios are an indication of an undervalued stock market and should predict high subsequent returns, but these ideas did not carry much weight in the academic literature until authors such as Rozeff (1984), Fama and French (1988), and Campbell and Shiller (1988a, 1988b) found that valuation ratios are positively correlated with subsequent returns and that the implied predictability of returns is substantial at longer horizons. Around the same time, several papers pointed out that yields on short- and long-term treasury and corporate bonds are correlated with subsequent stock returns (Fama and Schwert,1977;KeimandStambaugh,1986;Campbell,1987;FamaandFrench, 1989).
2,258 citations
TL;DR: In this article, the authors explore the determinants of corporate failure and the pricing of financially distressed stocks whose failure probability, estimated from a dynamic logit model using accounting and market variables, is high.
Abstract: This paper explores the determinants of corporate failure and the pricing of financially distressed stocks whose failure probability, estimated from a dynamic logit model using accounting and market variables, is high. 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 low failure risk. These patterns are more pronounced for stocks with possible informational or arbitrage-related frictions. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress. THE CONCEPT OF FINANCIAL DISTRESS has been invoked in the asset pricing literature to explain otherwise anomalous patterns in the cross-section of stock returns (Chan and Chen (1991) and Fama and French (1996)). The idea is that certain companies have an elevated probability that they will fail to meet their financial obligations; the stocks of these financially distressed companies tend to move together, so their risk cannot be diversified away; and investors charge a premium for bearing such risk. 1 The premium for distress risk may not be captured by the standard Capital Asset Pricing Model (CAPM) if corporate failures
1,406 citations
TL;DR: In this article, the authors study the effect of lack of trust on stock market participation and find that less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less.
Abstract: We study the effect that a general lack of trust can have on stock market participation. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function of the objective characteristics of the stocks and the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. In Dutch and Italian micro data, as well as in cross-country data, we find evidence consistent with lack of trust being an important factor in explaining the limited participation puzzle. THE DECISION TO INVEST IN stocks requires not only an assessment of the risk‐ return trade-off given the existing data, but also an act of faith (trust) that the data in our possession are reliable and that the overall system is fair. Episodes like the collapse of Enron may change not only the distribution of expected payoffs, but also the fundamental trust in the system that delivers those payoffs. Most of us will not enter a three-card game played on the street, even after observing a lot of rounds (and thus getting an estimate of the “true” distribution of payoffs). The reason is that we do not trust the fairness of the game (and the person playing it). In this paper, we claim that for many people, especially people unfamiliar with finance, the stock market is not intrinsically different from the three-card game. They need to have trust in the fairness of the game and in the reliability of the numbers to invest in it. We focus on trust to explain differences in stock market participation across individuals and across countries. We define trust as the subjective probability individuals attribute to the possibility of being cheated. This subjective probability is partly based on objective
1,246 citations
TL;DR: This paper found that an increase in real oil price is associated with a significant increase in the short-term interest rate in the U.S. and eight out of 13 European countries within one or two months.
1,180 citations
TL;DR: This paper found that companies that provided contributions to elected federal deputies experienced higher stock returns than firms that did not around the 1998 and 2002 elections, suggesting that contributions help shape policy on a firm-specific basis.
1,061 citations
TL;DR: This article found that board size is negatively associated with the variability of monthly stock returns, annual accounting return on assets, Tobin's Q, accounting accruals, extraordinary items, analyst forecast inaccuracy, and R&D spending.
1,010 citations
TL;DR: In this paper, the authors examined the crosssectional relation between firm asset growth and subsequent stock returns and found that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns.
Abstract: We test for firm-level asset investment effects in returns by examining the crosssectional relation between firm asset growth and subsequent stock returns. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm’s annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns. ONE OF THE PRIMARY FUNCTIONS OF CAPITAL MARKETS is the efficient pricing of real investment. As companies acquire and dispose of assets, economic efficiency demands that the market appropriately capitalizes such transactions. Yet, growing evidence identifies an important bias in the market’s capitalization of corporate asset investment and disinvestment. The findings suggest that corporate events associated with asset expansion (i.e., acquisitions, public equity offerings, public debt offerings, and bank loan initiations) tend to be followed by periods of abnormally low returns, whereas events associated with asset contraction (i.e., spinoffs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns. 1 In
919 citations
TL;DR: In this paper, the authors find that the absence of dividend growth predictability gives stronger evidence than does the presence of return predictability, and that long-horizon return forecasts give the same strong evidence.
Abstract: If returns are not predictable, dividend growth must be predictable, to generate the observed variation in divided yields. I find that the absence of dividend growth predictability gives stronger evidence than does the presence of return predictability. Long-horizon return forecasts give the same strong evidence. These tests exploit the negative correlation of return forecasts with dividend-yield autocorrelation across samples, together with sensible upper bounds on dividend-yield autocorrelation, to deliver more powerful statistics. I reconcile my findings with the literature that finds poor power in long-horizon return forecasts, and with the literature that notes the poor out-of-sample R 2 of return-forecasting regressions. (JEL G12, G14, C22) Are stock returns predictable? Table 1 presents regressions of the real and excess value-weighted stock return on its dividend-price ratio, in annual data. In contrast to the simple random walk view, stock returns do seem predictable. Similar or stronger forecasts result from many variations of the variables and data sets.
813 citations
TL;DR: This article examined international stock return comovements using country-industry and country-style portfolios and found that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston-Rouwenhorst (1994) model.
Abstract: We examine international stock return comovements using country-industry and country-style portfolios. We first establish that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston-Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, we do not find evidence for an upward trend in return correlations, excpet for the European stock markets. Second, the increasing imporatnce of industry factors relative to country factors was a short-lived, temporary phenomenon. Third, we find no evidence for a trend in idiosyncratic risk in any of the countries we examine.
705 citations
TL;DR: This paper found that socially responsible investing (SRI) impacts on stock returns by lowering the book-to-market ratio and not by generating positive alphas, which is consistent with the theoretical work suggesting that SRI is reflected in demand differences between SRI and non-SRI stock.
Abstract: We relate US portfolio returns, book-to-market values and excess stock returns to different dimensions of socially responsible performance. We find that socially responsible investing (SRI) impacts on stock returns by lowering the book-to-market ratio and not by generating positive alphas. Our result is consistent with the theoretical work suggesting that SRI is reflected in demand differences between SRI and non-SRI stock. It also explains why so few studies are able to establish a link between alpha’s and SRI.
652 citations
TL;DR: This article used mutual fund flows as a measure of individual investor sentiment for different stocks, and found that high sentiment predicts low future returns, which is related to the value effect: high sentiment stocks tend to be growth stocks, interpretable as companies increasing the supply of shares in response to investor demand.
TL;DR: The authors found that post-1970, share issuance exhibits a strong cross-sectional ability to predict stock returns, which is more statistically significant than individual predictive ability of size, book-to-market, or momentum.
Abstract: Post-1970, share issuance exhibits a strong cross-sectional ability to predict stock returns. This predictive ability is more statistically significant than the individual predictive ability of size, book-to-market, or momentum. Our finding is related to research that finds that long-run returns are associated with share repurchase an nouncements, seasoned equity offerings, and stock mergers, although our results re maiil strong even after exclusion of the data used in these studies. We estimate the issuance relation pre-1970 and find no statistically significant predictive ability for most holding periods. Whether or not long-run stock returns following seasoned equity offerings, share repurchase announcements, and stock mergers reflect mispricing is the subject of debate in the finance literature. Proponents of the mispricing story include Loughran and Ritter (1995), who argue that long-run stock performance following seasoned equity offerings reflects negative abnormal returns, Iken berry, Lakonishok, and Vermaelen (1995, 2000) who show that share repur chase announcements precede positive abnormal returns, and Loughran and Vijh (1997), who argue that acquirers that complete stock mergers experience negative long-run excess returns. All of these studies focus on returns with holding periods of 3 or more years. The behavioral interpretation of this liter ature is that firms issue equity when it is overvalued and retire equity when it is undervalued. However, inference from long-run studies is very sensitive to statistical specification issues. Mitchell and Stafford (2000), for instance, show that inference from some long-run return specifications is influenced by whether hetereoskedasticty and cross-sectional correlation are controlled for adequately. Schultz (2003) shows that if the decision to issue or repur chase shares is correlated with past stock performance, a spurious estimation bias will produce average estimates of long-run returns that are similar in
TL;DR: The authors constructed a long daily panel of short sales using proprietary NYSE order data from 2000 to 2004 and found that short sellers are well informed and are important contributors to efficient stock prices.
Abstract: We construct a long daily panel of short sales using proprietary NYSE order data. From 2000 to 2004, shorting accounts for more than 12.9% of NYSE volume, sug- gesting that shorting constraints are not widespread. As a group, these short sellers are well informed. Heavily shorted stocks underperform lightly shorted stocks by a risk-adjusted average of 1.16% over the following 20 trading days (15.6% annualized). Institutional nonprogram short sales are the most informative; stocks heavily shorted by institutions underperform by 1.43% the next month (19.6% annualized). The re- sults indicate that, on average, short sellers are important contributors to efficient stock prices. THROUGHOUT THE FINANCIAL ECONOMICS LITERATURE, short sellers occupy an exalted place in the pantheon of investors as rational, informed market participants who act to keep prices in line. Theoreticians often generate a divergence be- tween prices and fundamentals by building models that prohibit or constrain short sellers (e.g., Miller (1977), Harrison and Kreps (1978), Duffie, Garleanu, and Pedersen (2002), Hong, Scheinkman, and Xiong (2006)). Empirical evidence uniformly indicates that when short sale constraints are relaxed, overvalua- tions become less severe, suggesting that short sellers move prices toward fun- damentals (examples include Lamont and Thaler (2003), Danielsen and Sorescu (2001), Jones and Lamont (2002), Cohen, Diether, and Malloy (2007)). But there is surprisingly little direct evidence that short sellers know what they are doing. There is indirect evidence in the existing literature. For example, Aitken et al. (1998) show that in Australia, where some short sales were immediately disclosed to the public, the reporting of a short sale causes prices to decline immediately. Some authors (but not all) find that short interest predicts fu- ture returns. 1 Dechow et al. (2001) find that short sellers generate positive
TL;DR: In this article, a four variable vector autoregression model is developed and estimated in order to investigate the empirical relationship between alternative energy stock prices, technology stock prices and oil prices, and interest rates.
TL;DR: In this article, the authors examined the short-horizon dynamic relation between the buying and selling by individuals and both previous and subsequent returns using a unique data set provided to them by the NYSE.
Abstract: This paper investigates the dynamic relation between net individual investor trading and short-horizon returns for a large cross-section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk-averse individuals provide liquidity to meet institutional demand for immediacy. FOR A VARIETY OF REASONS, financial economists tend to view individuals and institutions differently. In particular, while institutions are viewed as informed investors, individuals are believed to have psychological biases and are often thought of as the proverbial noise traders in the sense of Kyle (1985) or Black (1986). One of the questions of interest to researchers in finance is how the behavior of different investor clienteles or their interaction in the market affects returns. In this paper we focus on the interaction between individual investors and stock returns. Specifically, we examine the short-horizon dynamic relation between the buying and selling by individuals and both previous and subsequent returns using a unique data set provided to us by the NYSE. The data set was constructed from the NYSE’s Consolidated Equity Audit Trail Data (CAUD) files that contain detailed information on all orders that execute on the exchange. For each stock on each day we have the aggregated volume of executed buy and sell orders of individuals. This information enables us to create a measure of net individual investor trading. We examine the extent to which intense net buying or selling by individuals in a stock is related to the stock’s past returns and the extent to which such intense net trading by individuals predicts future returns. Consistent with earlier
TL;DR: This paper investigated the cross-sectional relation between media coverage and expected stock returns and found that stocks with no media coverage earn higher returns than stocks with high media coverage even after controlling for well-known risk-factors.
Abstract: By reaching a broad population of investors, mass media can alleviate informational frictions and affect security pricing even if it does not supply genuine news. We investigate this hypothesis by studying the cross-sectional relation between media coverage and expected stock returns. We find that stocks with no media coverage earn higher returns than stocks with high media coverage even after controlling for well-known risk-factors. These results are more pronounced among small stocks and stocks with high individual ownership, low analyst following, and high idiosyncratic volatility. Our findings suggest that the breadth of information dissemination affects stock returns.
TL;DR: This article examined how the relation between earnings and payout policy has evolved over the last three decades and found that repurchases are increasingly used in place of dividends, even for firms that continue to pay dividends.
TL;DR: In this article, the authors find that changes in oil prices strongly predict future stock market returns in many countries in the world and find statistically significant predictability in 12 out of the 18 countries and in a world market index.
TL;DR: This paper examined whether analysts resident in a country make more precise earnings forecasts for firms in that country than non-resident analysts and found an economically and statistically significant local analyst advantage even after controlling for firm and analyst characteristics.
TL;DR: In this paper, the authors examined the cross-sectional relation between idiosyncratic volatility and expected stock returns and concluded that no robustly significant relation exists between the idiosyncratic risk and expected returns.
Abstract: This paper examines the cross-sectional relation between idiosyncratic volatility and expected stock returns. The results indicate that i) the data frequency used to estimate idiosyncratic volatility, ii) the weighting scheme used to compute average portfolio returns, iii) the breakpoints utilized to sort stocks into quintile portfolios, and iv) using a screen for size, price, and liquidity play critical roles in determining the existence and significance of a relation between idiosyncratic risk and the cross section of expected returns. Portfoliolevel analyses based on two different measures of idiosyncratic volatility (estimated using daily and monthly data), three weighting schemes (value-weighted, equal-weighted, inverse volatility-weighted), three breakpoints (CRSP, NYSE, equal market share), and two different samples (NYSE/AMEX/NASDAQ and NYSE) indicate that no robustly significant relation exists between idiosyncratic volatility and expected returns.
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TL;DR: This article examined the effect of aviation disasters on stock prices and found evidence of a significant negative event effect with a market average loss of more than $60 billion per aviation disaster, whereas the estimated actual loss is no more than$1 billion.
Abstract: Behavioral economic studies reveal that negative sentiment driven by bad mood and anxiety affects investment decisions and may hence affect asset pricing. In this study we examine the effect of aviation disasters on stock prices. We find evidence of a significant negative event effect with a market average loss of more than $60 billion per aviation disaster, whereas the estimated actual loss is no more than $1 billion. In two days a price reversal occurs. We find the effect to be greater in small and riskier stocks and in firms belonging to less stable industries. This event effect is also accompanied by an increase in the perceived risk: implied volatility increases after aviation disasters without an increase in actual volatility.
TL;DR: This paper analyzed the relationship between retail investor trading behavior and the cross-section of future stock returns and found that stocks with intense sell-initiated small-trade volume, measured over the past several months, outperform those with intense buy-intrinsic small trade volume.
Abstract: This paper uses volume arising from small trades to analyze the relationship between retail investor trading behavior and the cross-section of future stock returns. The central finding is that stocks with intense sell-initiated small-trade volume, measured over the past several months, outperform stocks with intense buy-initiated small-trade volume. This return difference accrues from the first month after the portfolio formation up to two years later. Among small- and medium-sized firms, the return difference continues in the third year. The results suggest that stocks favored by retail investors subsequently experience prolonged underperformance relative to stocks out of favor with retail investors.
TL;DR: In this article, the authors analyze a sample of 330 firms making unaudited disclosures required by Section 302 and 383 firms making audited disclosures requiring by Section 404 of the Sarbanes-Oxley Act and conclude that Section 302 disclosures are informative and point to lower credibility of disclosing firms' financial reporting.
Abstract: We analyze a sample of 330 firms making unaudited disclosures required by Section 302 and 383 firms making audited disclosures required by Section 404 of the Sarbanes‐Oxley Act. We find that Section 302 disclosures are associated with negative announcement abnormal returns of −1.8 percent, and that firms experience an abnormal increase in equity cost of capital of 68 basis points. We conclude that Section 302 disclosures are informative and point to lower credibility of disclosing firms' financial reporting. In contrast, we find that Section 404 disclosures have no noticeable impact on stock prices or firms' cost of capital. Further, we find that auditor quality attenuates the negative response to Section 302 disclosures and that accelerated filers—larger firms required to file under Section 404—have significantly less negative returns (−1.10 percent) than non‐accelerated filers (−4.22 percent). The findings have implications for the debate about whether to implement a scaled securities regulation system ...
TL;DR: In this paper, the authors predict and find that accounting restatements that adversely affect shareholder wealth at the restating firm also induce share price declines among non-restating firms in the same industry and that investors impose a larger penalty on the stock prices of peer firms with high earnings and high accruals when peer and restating firms use the same external auditor.
Abstract: We predict and find that accounting restatements that adversely affect shareholder wealth at the restating firm also induce share price declines among non‐restating firms in the same industry. These share price declines are unrelated to changes in analysts' earnings forecasts, but instead seem to reflect investors' accounting quality concerns. Peer firms with high industry‐adjusted accruals experience a more pronounced share price decline than do low‐accrual firms. This accounting contagion effect is concentrated among revenue restatements by relatively large firms in the industry. We also find that investors impose a larger penalty on the stock prices of peer firms with high earnings and high accruals when peer and restating firms use the same external auditor. Our results are consistent with the notion that some accounting restatements cause investors to reassess the financial statement information previously released by non‐restating firms.
TL;DR: The authors show that for persistent regressors, a characteristic of most of the predictive variables used in the literature, the estimators are almost perfectly correlated across horizons under the null hypothesis of no predictability.
Abstract: The prevailing view in finance is that the evidence for long-horizon stock return predictability is significantly stronger than that for short horizons. We show that for persistent regressors, a characteristic of most of the predictive variables used in the literature, the estimators are almost perfectly correlated across horizons under the null hypothesis of no predictability. For the persistence levels of dividend yields, the analytical correlation is 99% between the 1- and 2-year horizon estimators and 94% between the 1- and 5-year horizons. Common sampling error across equations leads to ordinary least squares coefficient estimates and R 2 s that are roughly proportional to the horizon under the null hypothesis. This is the precise pattern found in the data. We perform joint tests across horizons for a variety of explanatory variables and provide an alternative view of the existing evidence. (JEL G12, G14, C12) Over the last two decades, the finance literature has produced growing evidence of stock return predictability, though not without substantial debate. The strongest evidence cited so far comes from long-horizon stock returns regressed on variables such as dividend yields, term structure slopes, and credit spreads, among others. A typical view is expressed in Campbell, Lo, and MacKinlay’s (1997, p.268) standard textbook for empirical financial economics, The Econometrics of Financial Markets: At a horizon of 1-month, the regression results are rather unimpressive: The R 2 statistics never exceed 2%, and the t-statistics exceed 2 only in the post-World War II subsample. The striking fact about the table is how much stronger the results become when one increases the horizon. At a 2-year horizon the R 2 statistic is 14% for the full sample ... at a 4-year horizon the R 2 statistic is 26% for the full sample.
TL;DR: In this paper, the authors examine stock price reactions to legislative events surrounding SOX and focus on whether such stock price effects are related cross-sectionally to the extent firms had managed their earnings.
Abstract: The Sarbanes‐Oxley Act (SOX) of 2002 is the most important legislation affecting corporate financial reporting enacted in the United States since the 1930s. Its purpose is to improve the accuracy and reliability of accounting information that is reported to investors. We examine stock price reactions to legislative events surrounding SOX and focus on whether such stock price effects are related cross‐sectionally to the extent firms had managed their earnings. Our univariate results suggest that significantly positive abnormal stock returns are associated with SOX events, and our primary analyses reveal considerable evidence of a positive relationship between SOX event stock returns and the extent of earnings management. These results are consistent with investors anticipating that the more extensively firms had managed their earnings, the more SOX would constrain earnings management and enhance the quality of financial statement information.
TL;DR: In this article, the authors presented a new pattern in the cross-section of expected stock returns, which is consistent with the existence of a persistent seasonal effect in stock returns and explained an economically and statistically significant magnitude of the crosssectional variation in average stock returns.
TL;DR: In this paper, a two-state regime switching model for the volatility and mean-of-consumption growth was proposed to calibrate a rational asset pricing model with regime switches in both the mean and standard deviation of consumption growth, and a significant portion of the run-up in asset valuation ratios observed in the late 1990s.
Abstract: Aggregate stock prices, relative to virtually any indicator of fundamental value, soared to unprecedented levels in the 1990s. Even today, after the market declines since 2000, they remain well above historical norms. Why? We consider one particular explanation: a fall in macroeconomic risk, or the volatility of the aggregate economy. Empirically, we find a strong correlation between low-frequency movements in macroeconomic volatility and low-frequency movements in the stock market. To model this phenomenon, we estimate a two-state regime switching model for the volatilityandmeanofconsumptiongrowth,andfindevidenceofashifttosubstantially lower consumption volatility at the beginning of the 1990s. We then use these estimates from postwar data to calibrate a rational asset pricing model with regime switches in both the mean and standard deviation of consumption growth. Plausible parameterizations of the model are found to account for a significant portion of the run-up in asset valuation ratios observed in the late 1990s. (JEL G12) It is difficult to imagine a single issue capable of eliciting near unanimous agreement among the many opposing cadres of economic thought. Yet if those who study financial markets are in accord on any one point, it is this: the close of the 20th century marked the culmination of the greatest surge in equity values ever recorded in U.S. history. Aggregate stock prices, relative to virtually any indicator of fundamental value,
TL;DR: In this article, the authors investigated the effects of the 1997 financial crisis on the efficiency of eight Asian stock markets, applying the rolling bicorrelation test statistics for the three sub-periods of pre-crisis, crisis, and postcrisis.
TL;DR: In this article, the authors developed a behavioral model for liquidity and volatility based on empirical regularities in trading order flow in the London Stock Exchange, which can be viewed as a very simple agent-based model in which all components of the model are validated against real data.