AQR’s Cliff Asness: My Top 10 Peeves

Financial Analysts Journal Volume 70 · Number 1

My Top 10 Peeves

Clifford S. Asness

The author discusses a list of peeves that share three characteristics: (1) They are about investing or finance in general, (2) they are about beliefs that are very commonly held and often repeated, and (3) they are wrong or misleading and they hurt investors.

The ABCs Of A Crash: No Alpha, All Beta, & Consensus Contagion

The ABCs Of A Crash: No Alpha, All Beta, & Consensus Contagion

Tyler Durden on 06/21/2014 19:33 -0400

The vicious circle of central-bank inspired low volatility begetting increasing fragility (instead of 2004-2007’s virtuous circle)is nowhere more clear that in the collapse of alpha generation opportunities and the implicit capitulation of every hedge fund, retail investor, and Goldman muppet to be all-in on stocks. Removing collateral, gating bond funds, and constant warnings that they bonds (not stocks) may be frothy has done nothing but herd an ever more brainwashed investing public into an ever more concentrated ownership of stocks. This, as Citi’s Matt King explains, has distorted markets to no longer follow fundamentals (no matter what you are pitched on TV or by your broker). Read more of this post

‘Consistent’ Earnings Surprises

‘Consistent’ Earnings Surprises

Byoung-Hyoun Hwang 

Cornell University – Dyson School of Applied Economics and Management; Korea University – Department of Finance

Baixiao Liu 

Florida State University

Dong Lou 

London School of Economics & Political Science (LSE)
May 5, 2014

Abstract: 
We hypothesize that analysts with a bullish stock recommendation have an interest in not being subsequently contradicted by negative firm-specific news. As a result, these analysts report downward-biased earnings forecasts so that the company is less likely to experience a negative earnings surprise. Analogously, analysts with a bearish recommendation report upward biased earnings forecasts so that the firm is less likely to experience a strong positive earnings surprise. Consistent with this notion, we find that stock recommendations significantly and positively predict subsequent earnings surprises, as well as narrow beats versus narrow misses. This predictability is concentrated in situations where the motivation for such behavior is particularly strong. Stock recommendations also predict earnings-announcement-day returns. A long-short portfolio that exploits this predictability earns abnormal returns of 125 basis points per month. Read more of this post

Lululemon: ‘A Sheer Debacle in Risk Management’ Stanford Study

Lululemon: ‘A Sheer Debacle in Risk Management’ Stanford Study

by ManiJune 20, 2014, 12:05 pm

A Stanford study notes despite companies disclosing risk factors in their SEC filings, there is often a disconnect between identifying and managing the risks

Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL) struggled to respond to anticipated product quality issues and contain the fallout on social media, notes a recent Stanford University (Larcker, David F. and Larcker, Sarah M. and Tayan, Brian, Lululemon: A Sheer Debacle in Risk Management (June 17, 2014).

In a research note dated June 17, 2014, authored by David Larcker, Sarah Larcker and Brian Tayan of Stanford, with the title: “Lululemon: A Sheer Debacle in Risk Management”, they point out that despite anticipating the risks, companies such as Lululemon are ill-prepared to manage them when they materialize.

Lululemon’s anticipated risks in time

As reported earlier, Lululemon Athletica inc. (NASDAQ:LULU) (TSE:LLL) is still facing problems in attracting customers because of the major PR fiasco in 2013. Read more of this post

Reforming China’s Monopolies

Reforming China’s Monopolies

Peijun Duan 

Central Party School

Anthony Saich 

Harvard University – Harvard Kennedy School (HKS)
May 7, 2014
HKS Working Paper No. RWP14-023

Abstract: 
This working paper focuses on an aspect of governance that is crucial to the next phase of China’s development: reducing state monopolies in order to enhance economic efficiency and promote more equitable growth. It is important to note that monopoly control in the Chinese political economy is not simply an economic phenomenon but also a phenomenon deeply embedded in a comprehensive system of power. Monopolies in the economic sphere (resources, prices, markets, and assets) are serious, but they are derived from the legacy of the centrally planned economy. They are also rooted in the traditional structure of Chinese society and its culture. In this paper, we will present a comprehensive examination of the phenomenon of monopoly control in the Chinese system.

On Value Traps

06 Jun

On Value Traps

David Merkel

One thing that floors me regarding my readers, is who reads me.  I have many professional readers who read me regularly, and I thank you for doing so.  Tonight’s piece stems from an e-mail from one of my professional readers:

Hi David,

Big compliments for your blog, it’s probably the best on the net and one of the very few I am reading these days. I really like your overall approach to investing and I am using some of your methods myself with success in my ZZZ Fund (ZZZ on Bloomberg) like having an even-weighted portfolio of 30-40 stocks with regular rebalancing or focusing on the strongest players in weak industries (southern European banks anyone?). Read more of this post

Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

Marco Becht 

Université Libre de Bruxelles (ULB) – Solvay Brussels School of Economics and Management; European Corporate Governance Institute (ECGI)

Andrea Polo 

Universitat Pompeu Fabra – Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Stanford University – Arthur & Toni Rembe Rock Center for Corporate Governance

Stefano Rossi 

Krannert School of Management; Centre for Economic Policy Research (CEPR)
May 30, 2014
European Corporate Governance Institute (ECGI) – Finance Working Paper No. 422/2014
Rock Center for Corporate Governance at Stanford University Working Paper No. 188

Abstract: 
Corporate acquisitions can be ruinous for acquirer shareholders. Can shareholder voting prevent such corporate disasters? Previous empirical studies based on U.S. data are inconclusive because shareholder approval is discretionary. We study the U.K. setting where bids for relatively large targets are subject to mandatory shareholder approval. Our findings suggest that under the U.K. listing rules shareholder voting can deter bad acquisitions. We find that shareholders gain 8 cents per dollar at the announcement of a Class 1 deal or $13.6 billion over 1992-2010 in aggregate. In the United States acquirers lost $214 billion in matched deals during the same period. In the U.K. relatively smaller Class 2 transactions do not require a vote and shareholders lost $3 billion. Our results are robust to confounding effects and other controls. A Multidimensional Regression Discontinuity Design (MRDD) inspired test supports a causal interpretation of our findings. Class 1 deals just above the assignment threshold perform better than Class 2 deals just below. Our evidence suggests that mandatory voting makes boards more likely to refrain from overpaying or from proposing deals that are not in the interest of shareholders.