We contribute to the growing debate on the relation between macroeconomic risk and stock price momentum. Not only is momentum seasonal, so is its net factor exposure. We show that winners and losers only differ in macroeconomic factor loadings in January, the one month when losers overwhelmingly outperform winners. In the remainder of the year, when momentum does exist, winner and loser factor loadings offset nearly completely. Furthermore, the magnitude of macroeconomic risk premia appears to seasonally vary contra momentum. In contrast, the relatively new profitability factor does a much better job of capturing the described seasonality.
{"title":"Macroeconomic Risk and Seasonality in Momentum Profits","authors":"Susan Ji, J. Martin, Chelsea Yao","doi":"10.2139/ssrn.2154658","DOIUrl":"https://doi.org/10.2139/ssrn.2154658","url":null,"abstract":"We contribute to the growing debate on the relation between macroeconomic risk and stock price momentum. Not only is momentum seasonal, so is its net factor exposure. We show that winners and losers only differ in macroeconomic factor loadings in January, the one month when losers overwhelmingly outperform winners. In the remainder of the year, when momentum does exist, winner and loser factor loadings offset nearly completely. Furthermore, the magnitude of macroeconomic risk premia appears to seasonally vary contra momentum. In contrast, the relatively new profitability factor does a much better job of capturing the described seasonality.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"17 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133952969","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2014-06-01DOI: 10.5089/9781498367134.001.A001
Manmohan Singh
This paper focuses on how changes in financial plumbing of the markets may impact themonetary policy options as central banks contemplate lift off from zero lower bound (ZLB). Under the proposed regulations, banks will face leverage ratio constraints. As a result of quantitative easing (QE), banks want balance sheet “space” for financial intermediation/ non-depository activities. At the same time, regulatory changes are boosting demand for high quality liquid assets. The paper also discusses the role of repo markets and the importance of collateral velocity and the need to avoid wedges between repo and monetary policy rates when leaving ZLB.
{"title":"Financial Plumbing and Monetary Policy","authors":"Manmohan Singh","doi":"10.5089/9781498367134.001.A001","DOIUrl":"https://doi.org/10.5089/9781498367134.001.A001","url":null,"abstract":"This paper focuses on how changes in financial plumbing of the markets may impact themonetary policy options as central banks contemplate lift off from zero lower bound (ZLB). Under the proposed regulations, banks will face leverage ratio constraints. As a result of quantitative easing (QE), banks want balance sheet “space” for financial intermediation/ non-depository activities. At the same time, regulatory changes are boosting demand for high quality liquid assets. The paper also discusses the role of repo markets and the importance of collateral velocity and the need to avoid wedges between repo and monetary policy rates when leaving ZLB.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"30 1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122090148","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We find the low volatility anomaly is present in all but the smallest of stocks. Portfolios can be formed on either total or idiosyncratic volatility to take advantage of this anomaly, but we show measures of idiosyncratic volatility are key. Standard risk-adjusted returns suggest that there is no low volatility anomaly from 1996 through 2011, but we find this result arises from model misspecification. Caution must be taken when analyzing high volatility stocks because their returns have a nonlinear relationship with momentum during market bubbles.
{"title":"Dissecting the Low Volatility Anomaly","authors":"Bradford D. Jordan, Timothy Riley","doi":"10.2139/ssrn.2140054","DOIUrl":"https://doi.org/10.2139/ssrn.2140054","url":null,"abstract":"We find the low volatility anomaly is present in all but the smallest of stocks. Portfolios can be formed on either total or idiosyncratic volatility to take advantage of this anomaly, but we show measures of idiosyncratic volatility are key. Standard risk-adjusted returns suggest that there is no low volatility anomaly from 1996 through 2011, but we find this result arises from model misspecification. Caution must be taken when analyzing high volatility stocks because their returns have a nonlinear relationship with momentum during market bubbles.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"77 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-08-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126810387","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper uses intraday U.S. bond transaction and stock quote data to investigate whether corporate bonds lead stocks in price discovery of underlying firm value. I use Hasbrouck's (1995) "information share" approach to determine the relative contribution of corporate bonds to price discovery. Based on a sample of 214 firms, I find that corporate bond markets contribute 12.6% on average to price discovery from 2009 to 2011. Corporate bond market price discovery increases with the riskiness of the underlying firm value, and is related to contemporaneous market conditions. The findings are consistent with the informed trading theory and Merton (1973) model.
{"title":"Price Discovery in the Stock and Corporate Bond Markets","authors":"Yifei Mao","doi":"10.2139/ssrn.2140186","DOIUrl":"https://doi.org/10.2139/ssrn.2140186","url":null,"abstract":"This paper uses intraday U.S. bond transaction and stock quote data to investigate whether corporate bonds lead stocks in price discovery of underlying firm value. I use Hasbrouck's (1995) \"information share\" approach to determine the relative contribution of corporate bonds to price discovery. Based on a sample of 214 firms, I find that corporate bond markets contribute 12.6% on average to price discovery from 2009 to 2011. Corporate bond market price discovery increases with the riskiness of the underlying firm value, and is related to contemporaneous market conditions. The findings are consistent with the informed trading theory and Merton (1973) model.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131605361","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
New IRS rules on accounting for cost basis often impose on investors a decision regarding cost basis when selling shares. We investigate in a very practical way the likely benefits from choosing the highest-in, first-out (HIFO) method for tracking shares. Our results show that for realistic scenarios where investors plan for retirement, HIFO accounting can add about 2% to the investor’s total wealth at the retirement date. Above average tax rates and greater volatility increase the value of using HIFO accounting.
{"title":"Likely Benefits from HIFO Accounting","authors":"Robert J. Atra, Yuntaek Pae","doi":"10.2139/ssrn.2151955","DOIUrl":"https://doi.org/10.2139/ssrn.2151955","url":null,"abstract":"New IRS rules on accounting for cost basis often impose on investors a decision regarding cost basis when selling shares. We investigate in a very practical way the likely benefits from choosing the highest-in, first-out (HIFO) method for tracking shares. Our results show that for realistic scenarios where investors plan for retirement, HIFO accounting can add about 2% to the investor’s total wealth at the retirement date. Above average tax rates and greater volatility increase the value of using HIFO accounting.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"152 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-09-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123310812","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study investigates whether banks use dividends to signal asset quality and liquidity to their debtholders. We exploit an exogenous shock to the asset opaqueness and perception of risks of Brazilian banks caused by the global financial turmoil of 2008. Our empirical identification takes advantage of the cross-sectional heterogeneity of types of depositors in Brazilian banks and the existence of several owner-managed banks (for which shareholder-targeted signaling is implausible) to identify that information-sensitive depositors (institutional investors) are targets of dividend signaling by banks. These costly signaling efforts are particularly strong during financial crises when asset opaqueness, informational asymmetry and depositors’ concerns regarding bank liquidity are exacerbated. From a policy perspective, our results favor the imposition of limits on bank dividends during financial crises, because the banks’ need to signal their financial health through dividends during crises intensifies the pro-cyclical effects of bank capital on lending.
{"title":"Bank Dividends and Signaling to Information-Sensitive Depositors","authors":"C. Forti, R. Schiozer","doi":"10.2139/ssrn.2139725","DOIUrl":"https://doi.org/10.2139/ssrn.2139725","url":null,"abstract":"This study investigates whether banks use dividends to signal asset quality and liquidity to their debtholders. We exploit an exogenous shock to the asset opaqueness and perception of risks of Brazilian banks caused by the global financial turmoil of 2008. Our empirical identification takes advantage of the cross-sectional heterogeneity of types of depositors in Brazilian banks and the existence of several owner-managed banks (for which shareholder-targeted signaling is implausible) to identify that information-sensitive depositors (institutional investors) are targets of dividend signaling by banks. These costly signaling efforts are particularly strong during financial crises when asset opaqueness, informational asymmetry and depositors’ concerns regarding bank liquidity are exacerbated. From a policy perspective, our results favor the imposition of limits on bank dividends during financial crises, because the banks’ need to signal their financial health through dividends during crises intensifies the pro-cyclical effects of bank capital on lending.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"45 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134543864","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The purpose of the regulated halts on stock exchange markets is to spread the information on the market and to protect the interests of the small shareholders. The aim of this work is to empirically investigate the price limits on the French stock exchange market. We analyze the impact of such halts on the main market factors: return, volatility and volume. Our study concerns intraday data relating to securities that belong to the CAC40 stock index over the period January 1998-December 2001. Finally, we put forward a mitigated effectiveness of the price limits, depending on the period.
{"title":"How Do Price Limits Influence French Market Microstructure? A High Frequency Data Analysis in Terms of Return, Volatility and Volume","authors":"Karine Michalon","doi":"10.2139/ssrn.2139657","DOIUrl":"https://doi.org/10.2139/ssrn.2139657","url":null,"abstract":"The purpose of the regulated halts on stock exchange markets is to spread the information on the market and to protect the interests of the small shareholders. The aim of this work is to empirically investigate the price limits on the French stock exchange market. We analyze the impact of such halts on the main market factors: return, volatility and volume. Our study concerns intraday data relating to securities that belong to the CAC40 stock index over the period January 1998-December 2001. Finally, we put forward a mitigated effectiveness of the price limits, depending on the period.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"205 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132118458","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Advances in computing technology have greatly enhanced methods for numerical calculations of present value and related measures such as duration and convexity. Nevertheless, closed form solutions continue to play an important role both in the classroom and in the real world. For example, it is well known that if r is the rate of discount and if C1 denotes the value in period 1 for a cash flow that grows at constant percentage rate, g, then the present value of the future cash flow can be represented as C1 / (r – g). Yet how many students or practitioners, and dare we ask how many finance professors, are aware that the duration of a perpetual cash flow that grows at a uniform geometric rate can be represented as (1 r) / (r –g) ? For that matter, how widely is it known that a simple closed form solution exists for the present value of a cash flow that exhibits cyclical variation over time or a cash flow that grows by a constant dollar amount each period rather than by a constant percentage amount? The objective of this paper is to demonstrate that these results, and countless others, can be derived from one simple but previously under developed property of the traditional present value operator.
{"title":"New Properties of the Old Present Value Operator","authors":"Stephen A. Buser","doi":"10.2139/ssrn.2138379","DOIUrl":"https://doi.org/10.2139/ssrn.2138379","url":null,"abstract":"Advances in computing technology have greatly enhanced methods for numerical calculations of present value and related measures such as duration and convexity. Nevertheless, closed form solutions continue to play an important role both in the classroom and in the real world. For example, it is well known that if r is the rate of discount and if C1 denotes the value in period 1 for a cash flow that grows at constant percentage rate, g, then the present value of the future cash flow can be represented as C1 / (r – g). Yet how many students or practitioners, and dare we ask how many finance professors, are aware that the duration of a perpetual cash flow that grows at a uniform geometric rate can be represented as (1 r) / (r –g) ? For that matter, how widely is it known that a simple closed form solution exists for the present value of a cash flow that exhibits cyclical variation over time or a cash flow that grows by a constant dollar amount each period rather than by a constant percentage amount? The objective of this paper is to demonstrate that these results, and countless others, can be derived from one simple but previously under developed property of the traditional present value operator.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"70 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126884652","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the roles board of directors can play in CEO succession planning, by asking the questions, whom should the firm choose as replacement CEOs in unexpected CEO turnover, and what is the impact of this decision on shareholder wealth? More specifically, we build on the director expertise literature and investigate whether the selection of replacement CEOs from the board facilitates a smoother transition and maintain firm continuity. We focus on unexpected CEO turnover, as it provides an exogenous setting allowing us to examine the impact of the CEO replacement decision on costs associated with the succession and on shareholder wealth post succession. Overall, our results indicate that in addition to its monitoring and advising roles, the board of directors can also oversee the company when needed. While selecting replacement CEO from existing board members may allow the company to quickly fill the CEO position, thereby reducing uncertainty and transitional costs (measured by new CEO turnover, senior management turnover and delay), it may not be beneficial to shareholders. We provide evidence that replacing departing CEO with a board member is negatively associated with stock performance for up to two years.
{"title":"Heir to the Throne: Choice of the Replacement CEO in Unexpected CEO Turnover","authors":"Mia L. Rivolta","doi":"10.2139/ssrn.2140136","DOIUrl":"https://doi.org/10.2139/ssrn.2140136","url":null,"abstract":"We examine the roles board of directors can play in CEO succession planning, by asking the questions, whom should the firm choose as replacement CEOs in unexpected CEO turnover, and what is the impact of this decision on shareholder wealth? More specifically, we build on the director expertise literature and investigate whether the selection of replacement CEOs from the board facilitates a smoother transition and maintain firm continuity. We focus on unexpected CEO turnover, as it provides an exogenous setting allowing us to examine the impact of the CEO replacement decision on costs associated with the succession and on shareholder wealth post succession. Overall, our results indicate that in addition to its monitoring and advising roles, the board of directors can also oversee the company when needed. While selecting replacement CEO from existing board members may allow the company to quickly fill the CEO position, thereby reducing uncertainty and transitional costs (measured by new CEO turnover, senior management turnover and delay), it may not be beneficial to shareholders. We provide evidence that replacing departing CEO with a board member is negatively associated with stock performance for up to two years.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131367628","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Equity is overvalued when its market value is far above its underlying value. Jensen (2005) proposes that overvaluation leads to value-destroying opportunistic earnings management. In this study I examine how equity overvaluation affects a firm’s financial opacity and its stock crash risk. I find that overvalued firms tend to use more earnings management (higher financial opacity) and they do so to conceal firm specific information from the investors, it is especially so for substantially overvalued firms. On the contrary, undervalued firms are willing to provide more firm-specific information to the market. Furthermore, I find that the reported ROEs of substantially overvalued firms are significantly higher than the unmanaged ROEs. But no significant difference of reported ROEs and unmanaged ROEs is detected among substantially undervalued firms. In addition, I show that overvalued firms have higher crash risk than otherwise identical but non-overvalued firms. At last, I find that a powerful CEO (proxy by CEO and chairman duality) can restrain an overvalued firm’s urge to manage earnings more aggressively.
{"title":"Overvaluation, Financial Opacity and Crash Risk","authors":"H. Wang, Wei Du","doi":"10.2139/ssrn.2135704","DOIUrl":"https://doi.org/10.2139/ssrn.2135704","url":null,"abstract":"Equity is overvalued when its market value is far above its underlying value. Jensen (2005) proposes that overvaluation leads to value-destroying opportunistic earnings management. In this study I examine how equity overvaluation affects a firm’s financial opacity and its stock crash risk. I find that overvalued firms tend to use more earnings management (higher financial opacity) and they do so to conceal firm specific information from the investors, it is especially so for substantially overvalued firms. On the contrary, undervalued firms are willing to provide more firm-specific information to the market. Furthermore, I find that the reported ROEs of substantially overvalued firms are significantly higher than the unmanaged ROEs. But no significant difference of reported ROEs and unmanaged ROEs is detected among substantially undervalued firms. In addition, I show that overvalued firms have higher crash risk than otherwise identical but non-overvalued firms. At last, I find that a powerful CEO (proxy by CEO and chairman duality) can restrain an overvalued firm’s urge to manage earnings more aggressively.","PeriodicalId":255253,"journal":{"name":"Midwest Finance Association 2013 Annual Meeting (Archive)","volume":"193 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122183307","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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