Momentum Strategies of German Mutual Funds; we detect significant momentum behavior among funds with a European and global equity focus, and among funds predominantly investing in Asia; we do not find momentum trading funds to outperform the other fund

Momentum Strategies of German Mutual Funds

Alexander Franck  University of Giessen – Department of Financial Services

Andreas Walter  University of Giessen – Department of Financial Services

Johannes Witt  Independent

February 1, 2013

Abstract: 
The existence of the momentum effect in stock returns has been documented for the U.S. (e.g., Jegadeesh and Titman, 1993) and many other national equity markets worldwide (e.g., Griffin et al., 2003). However, little is known about the active employment of momentum strategies among institutional investors outside the U.S. In this respect, we provide first evidence of momentum behavior among German mutual funds.

We find the fund trades to follow stock returns on an aggregated institutional level. Moreover, we detect significant momentum behavior among funds with a European and global equity focus, and among funds predominantly investing in Asia. In contrast, German funds do not seem to employ momentum strategies when trading domestic stocks. While only half of the funds across the entire sample trade in accordance with past returns, 66% of the funds within the largest size quintile follow momentum strategies. Finally, we do not find momentum trading funds to outperform the other funds.

How Pervasive is Corporate Fraud?

How Pervasive is Corporate Fraud?

I. J. Alexander Dyck University of Toronto – Rotman School of Management

Adair Morse University of California, Berkeley – Haas School of Business; University of Chicago – Booth School of Business

Luigi Zingales University of Chicago Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of Chicago – Polsky Center for Entrepreneurship; European Corporate Governance Institute (ECGI)

February 22, 2013

Abstract: 
We estimate what percentage of firms engage in fraud and the economic cost of fraud. Our estimates are based on detected frauds, and frauds that we infer are started but are not caught. To identify the ‘iceberg’ of undetected fraud we take advantage of an exogenous shock to the incentives for fraud detection: Arthur Andersen’s demise, which forces companies to change auditors. By assuming that the new auditor will clean house, and examining the change in fraud detection by new auditors, we infer that the probability of a company engaging in a fraud in any given year is 14.5%. We validate the magnitude of this estimate using alternative methods. We estimate that on average corporate fraud costs investors 22 percent of enterprise value in fraud-committing firms and 3 percent of enterprise value across all firms.

Short Interest, Returns, and Fundamentals

Short Interest, Returns, and Fundamentals

Ferhat Akbas  University of Kansas

Ekkehart Boehmer EDHEC Business School

Bilal Erturk Oklahoma State University – Stillwater – Department of Finance

Sorin M. Sorescu Texas A&M University – Department of Finance

February 10, 2013

Abstract: 
We show that short interest predicts stock returns because short sellers are able to anticipate bad news, negative earnings surprises, and downward revisions in analyst earnings forecasts. They appear to have information about these events several months before they become public. Most importantly, the cross-sectional relation between short interest and future stock returns vanishes when controlling for short sellers’ information about future fundamental news. Thus, short sellers contribute, in a significant manner, to price discovery about firm fundamentals, but the source of their information remains an open question.

What Do Stock Price Levels Tell Us about the Firms?

What Do Stock Price Levels Tell Us about the Firms?

Konan Chan National Chengchi University (NCCU)

Fengfei Li University of Hong Kong

Tse-Chun Lin University of Hong Kong – Faculty of Business and Economics

Ji-Chai Lin Louisiana State University, Baton Rouge – E.J. Ourso College of Business Administration

February 26, 2013

Abstract: 
What do stock price levels tell us about the firms? Based on market microstructure theories, this paper hypothesizes that, ceteris paribus, high stock price levels impede informed trading on the stocks and reduce price informativeness because uninformed trading is needed to facilitate informed trading, and high stock prices may impose budget constraints on uninformed investors and limit their risk sharing capacity. This hypothesis suggests that since their stock prices are less informative, higher-price stocks’ listed options are more appealing to informed traders. Indeed, controlling for firm size, analyst coverage, and other determinants, we find that stock price informativeness about future earnings is lower and Roll et al.’s (2010) O/S, the relative trading of options over stock, is higher for firms with higher stock price levels. We also find that higher-price firms have lower investment sensitivity to stock price. For robustness checks, we further use a split sample as an event study and find evidence consistent with our hypothesis that firms can use stock splits to improve informed trading on their stocks and enhance price informativeness. Our findings imply that stock price levels matter in price informativeness and in where traders choose to trade. Furthermore, when firms need less feedback from the market, they tend to keep their stock prices at higher levels.

Institutional Holding Periods; Our results are consistent with the agency problem that arises when clients cannot distinguish when a manager is “actively doing nothing” versus “simply doing nothing” as well as managers having overconfidence in their own short-term trading ability

Institutional Holding Periods

Bidisha Chakrabarty 

Saint Louis University – John Cook School of Business

Pamela C. Moulton 

Cornell University

Charles Trzcinka 

Indiana University Bloomington – Department of Finance
February 20, 2013

Abstract: 
We find wide dispersion in trade holding periods for institutional money managers and pension funds, using a large database of fund-level transactions. All of the institutional funds execute round-trip trades lasting over a year; 96% of them also execute trades lasting less than one month, although short-duration trades have negative returns on average. We find only limited evidence that institutions choose trade holding periods based on portfolio optimization and no evidence that short-duration institutional trades are driven by the disposition effect. Our results are consistent with the agency problem that arises when clients cannot distinguish when a manager is “actively doing nothing” versus “simply doing nothing” as well as managers having overconfidence in their own short-term trading ability.

Can Any Mutual Fund Capture the Value Premium? Market-based value portfolios and passive value style indexes simply do not outperform growth portfolios and growth indexes over time. Therefore, we ask whether any managed fund can capture the elusive value premium that undoubtedly appears in the academic data

Can Any Mutual Fund Capture the Value Premium?

Kenneth E. Scislaw 

Drexel University Lebow College of Business

David G. McMillan 

University of Stirling
September 19, 2012

Abstract: 
If the value premium exists as a function of risk, then value investment portfolios should systematically outperform growth portfolios over time. A long lineage of research is very clear on the matter. Unfortunately, recent tests of managed portfolios and market indexes have failed to support the risk thesis. Market-based value portfolios and passive value style indexes simply do not outperform growth portfolios and growth indexes over time. Therefore, we ask whether any managed fund can capture the elusive value premium that undoubtedly appears in the academic data. Moreover, we do so by examining the returns of one particular fund that was specifically designed to capture it. In the end, we find the fund has indeed been successful. However, in decomposing the returns of this particular fund, in order to illuminate how others might replicate its success, we find substantial evidence that the value return premium is in fact partially a growth stock discount story. This finding goes a long way in explaining why managed growth fund returns have equalled managed value fund returns over time, despite predictions to the contrary from a long lineage of academic research.

The Boats that Did Not Sail: Asset Price Volatility and Market Efficiency in a Natural Experiment

The Boats that Did Not Sail: Asset Price Volatility and Market Efficiency in a Natural Experiment

Peter Koudijs 

Stanford GSB
February 2013
NBER Working Paper No. w18831

Abstract: 
Financial markets are thought to be inefficient when they move too much relative to the arrival of information. How big is this inefficiency? In today’s markets, this is difficult to determine because the arrival of information is hard to identify. In this paper, I present a natural experiment from history in which the flow of information was regularly interrupted for exogenous reasons. This allows me to study volatility in the absence of news, and to identify the degree of inefficiency. During the 18th century a number of English securities were traded on the Amsterdam exchange. Relevant information from England reached Amsterdam on mail boats. I reconstruct their arrival dates. When no mail boats arrived, virtually no other relevant information reached the Amsterdam market. I measure price volatility during periods with and without news. Even in the absence of new information, security prices moved significantly. Between 50 and 75% of overall volatility did not reflect the arrival of news. A significant fraction of this residual is driven by the incorporation of private information into prices. Once this is taken into account, 20 to 50% of the overall return variance is unexplained by information. This suggests that the Amsterdam market moved more than can be explained by the arrival of news but that the majority of price movements was still the result of efficient price discovery.

Developing Corporate Governance Research Through Qualitative Methods: A Review of Previous Studies

Developing Corporate Governance Research Through Qualitative Methods: A Review of Previous Studies

Terry McNulty 

University of Liverpool

Alessandro Zattoni 

University of Bocconi – Strategic and Entrepreneurial Management 

Thomas Douglas 

affiliation not provided to SSRN

March 2013
Corporate Governance: An International Review, Vol. 21, Issue 2, pp. 183-198, 2013

Abstract: 
Manuscript Type. Review. Research Question/Issue. The article is concerned with the prevalence, character, and development of qualitative research within the field of corporate governance. The paper provides an overview of published qualitative research in the field of corporate governance based on a structured literature search of papers published in scholarly peer‐reviewed journals between 1986 and 2011. Research Findings/Insights. A fine‐grained search based on key words resulted in a sample of 78 qualitative corporate governance studies. A review and content analysis of these studies show that qualitative studies in governance have grown in number since the 1990s, but remain a small fraction of the published work on corporate governance. Studies are mostly developed by UK and European scholars, published in European journals and tend to explore boards of directors more than other governance related actors and mechanisms. These studies utilize a range of disciplines, predominantly management, adopting a wide range of methods, the most prevalent being that of the interview, often in combination with other methods to get a better account of the empirical phenomenon. Theoretical/Academic Implications. The search reveals an eclectic range of theories, spanning several disciplines, which is serving to generate, elaborate, and refine theorizing about corporate governance and the associated meanings, mechanisms, processes and relationships. There is much scope and need for more qualitative studies of significant rigor and relevance which explore the array of interactions and processes involved in corporate governance, across different levels of analysis and contexts. Practitioner/Policy Implications. After over two decades of research and reform of corporate governance, problems of practice remain, and corporate governance prescription via codes and other forms of regulation is increasing in search of better governance. Qualitative research can assist policy‐makers and practitioners to develop more efficient governance mechanisms, by shedding light on the efficacy of policy prescription. Qualitative research provides a basis for rethinking and challenging some of the dominant assumptions and meanings about how governance actors and institutions actually function.

Wealth Transfers via Equity Transactions

Wealth Transfers via Equity Transactions

Richard G. Sloan 

University of California at Berkeley – Haas School of Business

Haifeng You 

Hong Kong University of Science & Technology (HKUST) – Department of Accounting
February 15, 2013

Abstract: 
Previous research indicates that firms issue (repurchase) shares when their stock is overpriced (underpriced). Such transactions transfer wealth from transacting stockholders to ongoing stockholders. We quantify the magnitude of these wealth transfers and analyze their implications. The wealth transfers are economically significant, averaging approximately 6% of pre-transaction market capitalization for equity issuers. They are particularly large for equity issuers with ex ante indications of overpricing, where they average 14% of pre-transaction market capitalization. We analyze the implications of these wealth transfers for equity valuation, corporate financial policy and value-oriented investment strategies.

Textual Sentiment Analysis in Finance: A Survey of Methods and Models

Textual Sentiment Analysis in Finance: A Survey of Methods and Models

Colm Kearney 

Monash University – Faculty of Business and Economics

Sha Liu 

Trinity College Dublin – School of Business
January 31, 2013

Abstract: 
The study of sentiment in qualitative information has implications for both the efficient market hypothesis and the behavioural finance. It provides an alternative perspective to test market efficiency over and above quantitative information, and may help explain the ‘anomalies’ in the market. In this paper, we survey the textual sentiment analysis literature, compare and discuss the information sources, content analysis methods, and financial models that have been used. We then summarize the essential findings of the interrelations between textual sentiment and firm performance or stock market activities. We believe that textual sentiment is a potential pricing factor because it captures hard-to-quantify aspects of material information. We also suggest the promising directions for future research.

Stockholders’ Unrealized Capital Gains Position and the Market Response to Earnings Announcements

Stockholders’ Unrealized Capital Gains Position and the Market Response to Earnings Announcements

Eric Weisbrod 

University of Miami – Department of Accounting
February 4, 2013

Abstract: 
I examine whether stockholders’ average unrealized capital gains position in the equity of a given firm affects their response to the firm’s quarterly earnings announcements. Stockholders’ unrealized capital gains can affect their individual trading decisions via the capital gains tax “lock-in effect” or the tax-irrational bias known as the “disposition effect.” Prior literature is unclear about whether these two effects are significant determinants of the market reaction to earnings news. I design new tests that incorporate trade-by-trade data as well as quarterly institutional holdings data, and find robust evidence supporting the disposition effect. However, I also find that this announcement-window disposition effect is mitigated when tax incentives are stronger or more salient. Finally, I demonstrate that the disposition effect has important implications for measuring the degree to which the market incorporates earnings news. First, the disposition effect moderates the degree to which both opinion divergence and the differential precision of pre-announcement earnings information are reflected in abnormal trading volume. Second, the disposition effect diminishes the price adjustment to earnings news during the announcement window.

Why Do Incumbents Sometimes Succeed? Investigating the Role of Interorganizational Trust in the Adoption of Disruptive Technology

Why Do Incumbents Sometimes Succeed? Investigating the Role of Interorganizational Trust in the Adoption of Disruptive Technology

Michael W. Obal 

Temple University – Department of Marketing and Supply Chain Management
February 11, 2013

Abstract: 
Previous research has noted that new firms traditionally have more success with the diffusion of disruptive technologies than do incumbent firms. For the development of disruptive technologies, newer firms appear to be advantageous as they are generally more flexible in resource allocation. However, exceptions can be found in various industries in which incumbents have been able to succeed with their own disruptive technologies. One possible explanation for these exceptions is the influence of pre-existing levels of trust already developed between incumbents and potential buyers of disruptive technologies. In order to explore this further, this article provides a link between interorganizational trust and the adoption of new, disruptive technologies in industrial markets. We show how pre-existing, interorganizational trust impacts the perceptions a potential buyer has towards a disruptive technology and how these perceptions influence a buyers’ intention to adopt a new, disruptive technology. Beyond trust, we use perceived ease of use, perceived value, perceived usefulness and financial stability to create a predictive model for intention to adopt. Holistically, this article provides insight on how buyer-supplier relationships generally favor incumbent firms and can impact a buyers’ perception of a new, disruptive technology.

‘By a Silken Thread’: Regional Banking Integration and Pathways to Financial Development in Japan’s Great Recession

‘By a Silken Thread’: Regional Banking Integration and Pathways to Financial Development in Japan’s Great Recession

Mathias Hoffmann 

University of Zurich – Department of Economics Library; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Toshihiro Okubo 

University of Geneva – Graduate Institute of International Studies (HEI)
January 31, 2013
CESifo Working Paper Series No. 4090

Abstract: 
How do financial development and financial integration interact? We focus on Japan’s Great Recession after 1990 to study this question. Regional differences in banking integration affected how the recession spread across the country: financing frictions for credit-dependent firms were more severe in less integrated prefectures, which saw larger decreases in lending by nationwide banks and lower GDP growth. We explain these cross-prefectural differences in banking integration by reference to prefectures’ different historical pathways to financial development. After Japan’s opening to trade in the 19th century, silk reeling emerged as the main export industry. The silk reeling industry depended heavily on credit for working capital but comprised many small firms that could not borrow directly from larger banks. Instead, silk merchants in Yokohama, the main export hub for silk, provided silk reelers with trade loans. Many regional banks in Japan were founded as local clearing houses for such loans, and regional banks continued to account for above-average shares in lending in the formerly silk-exporting prefectures long after the decline of the silk industry. Using the cross-prefectural variation in the number of silk filatures in 1895 as an instrument, we confirm that the post-1990 decline was worse in prefectures where credit constraints were tightened through low levels of banking integration. Our findings suggest that different pathways to financial development can lead to long-term differences in de facto financial integration, even if there are no formal barriers to capital mobility between regions, as is the case in modern Japan.

A Nation of Gamblers: Real Estate Speculation and American History

A Nation of Gamblers: Real Estate Speculation and American History

Edward L. Glaeser 

Harvard University – John F. Kennedy School of Government, Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)
February 2013
NBER Working Paper No. w18825 

Abstract:      
The great housing convulsion that buffeted America between 2000 and 2010 has historical precedents, from the frontier land boom of the 1790s to the skyscraper craze of the 1920s. But this time was different. There was far less far less real uncertainty about fundamental economic and geographic trends, making the convulsion even more puzzling. During historic and recent booms, sensible models could justify high prices on the basis of seemingly reasonable projections about stable or growing prices. The recurring error appears to be a failure to anticipate the impact that elastic supply will eventually have on prices, whether for cotton in Alabama in 1820 or land in Las Vegas in 2006. Buyers don’t appear to be irrational but rather cognitively limited investors who work with simple heuristic models, instead of a comprehensive general equilibrium framework. Low interest rates rarely seem to drive price growth; under-priced default options are a more common contributor to high prices. The primary cost of booms has not typically been overbuilding, but rather the financial chaos that accompanies housing downturns.

Institutional Ownership and Return Predictability across Economically Unrelated Stocks

Institutional Ownership and Return Predictability across Economically Unrelated Stocks

George Gao 

Cornell University – Samuel Curtis Johnson Graduate School of Management

Pamela C. Moulton 

Cornell University

David Ng 

Cornell University
February 12, 2013

Abstract: 
We document strong weekly return predictability across the stocks of firms that are from industries with no customer-supplier linkages (economically unrelated stocks). This predictability arises from common institutional ownership rather than from the slow information diffusion underlying previously documented lead-lag effects. The return predictability occurs only among stocks with common institutional investors, and the profitability of a long-short portfolio strategy based on the predicted returns varies positively with the level of common institutional ownership. Our results are not explained by weekly reversals, momentum, or nonsynchronous trading. Our findings suggest that institutional portfolio reallocations can induce return predictability among otherwise unrelated stocks.

Disclosure Checklists and Bias in Audit Judgments

Disclosure Checklists and Bias in Audit Judgments

Marcel Van Rinsum 

RSM Erasmus University

Victor S. Maas 

Erasmus University Rotterdam (EUR); Erasmus School of Economics; Erasmus Research Institute of Management (ERIM)

David Stolker 

Independent
January 30, 2013

Abstract: 
We investigate whether using a disclosure checklist affects auditors’ judgments of the acceptability of aggressive reporting methods. The use of decision aids such as checklists in audit settings is increasing and existing research generally suggests that checklist use can improve decision-making quality. We argue that the use of a disclosure checklist can also have detrimental effects as it increases auditors’ acceptance of aggressive reporting methods by inducing cognitive biases. Our data, collected using an experiment with experienced auditors of a Big Four company as participants, supports this prediction. Specifically, in line with theory that checklist use can induce automation bias, we find that auditors using a disclosure checklist are more lenient in their evaluation of aggressive reporting. Furthermore, we find that this effect is stronger for auditors who have been hired by a company’s management board than for auditors who have been hired by an independent audit committee, which is consistent with theory that checklist use can also induce pro-client acceptability bias. We discuss the implications of these findings for research and practice.

Do Managers Tacitly Collude to Withhold Industry-Wide Bad News?

Do Managers Tacitly Collude to Withhold Industry-Wide Bad News?

Jonathan L. Rogers 

University of Chicago – Booth School of Business

Catherine M. Schrand 

University of Pennsylvania – Accounting Department

Sarah L. C. Zechman 

University of Chicago – Booth School of Business
February 1, 2013
Chicago Booth Research Paper No. 13-12

Abstract: 
That managers would choose to withhold firm-specific bad news is not only intuitive, but supported by theory, observed disclosure patterns, and survey responses. When the bad news is industry-wide, however, explaining withholding as a sustainable equilibrium is more complicated. If any one firm chooses to disclose, the news effectively becomes public, creating incentives for other firms to disclose. Withholding is only sustainable if all firms cooperate (“tacitly collude”), which depends on their own incentives, and their conjectures about the incentives of other firms in the industry to cooperate. We document cases of increased intra-industry opacity in the annual 1’2K, controlling for changes in fundamentals, consistent with tacit collusion to hide news. Tacit collusion is more likely in industries with more significant equity incentives and more concentrated industries, and less likely in industries in which observable/public macro-economic data relevant to firm valuation is available. The collusion episodes are followed by abnormally poor industry level accounting and market performance two to three years out. The results have implications for understanding when market forces are sufficient to generate voluntary disclosure of industry-wide news.