Search results

In capital markets, research risk factor loadings and characteristics are considered as opposing explanations for the cross-sectional dispersion in average stock returns. However, there is little known about the performance an investor would obtain who believes either in the characteristics explanation (CB-investor) or in the risk factor loadings explanation (RB-investor). The purpose of this paper is to compare the performance of CB- and RB-investors.

To compare the competing strategies, the authors propose a simple new approach to equity portfolio optimization in the style of Brandt et al. (2009) by modeling the portfolio weight in each asset as a function of the asset's risk factor loadings or characteristics. The authors perform an empirical analysis on the German stock market, exploiting the risk factor loadings from the Carhart (1997) four-factor model and the respective characteristics size, book-to-market equity ratio and momentum.

The results show that investment strategies relying on characteristics (particularly on momentum) outperform risk-based investment strategies in horse races. These findings hold in- and out-of-sample. Furthermore, the characteristics-based investment strategies outperform a value-weighted market portfolio strategy in- and out-of-sample.

The authors introduce a portfolio optimization approach that enables investors to directly link portfolio decisions to the firm’s characteristics or risk factor loadings.

The purpose of the paper is to examine the association between the corporate ownership characteristics and the timely remediation of internal control weaknesses over financial reporting under Section 404 of the Sarbanes‐Oxley Act (SOX) of 2002.

The paper employs both ordered and binary logistic regression models for a sample of 695 US firms who reported internal control weaknesses for the first time, pursuant to SOX Section 404, and evaluates the impact of the stock ownership characteristics on the timeliness in remediation of their control weaknesses.

The test results show that the corporate ownership characteristics, as a part of governance mechanism, play an incrementally critical role to influence firms' decisions to promptly remediate their internal control problems and improve the reliability of financial information. In addition, it was also found that a corporate board independent of its CEO is effective in monitoring timely remediation of control problems. Sub‐sample analyses for the company‐level and account‐specific internal control weaknesses produce similar results in support of the effect of corporate stock ownership characteristics on the timely remediation of internal control weaknesses.

First, the paper adds to the literature by demonstrating the incremental effect of the stock ownership characteristics on a firm's timeliness in remediation of control weaknesses, even after controlling the effect of audit committee and board characteristics in the analysis. Second, the paper shows that even in the post‐SOX years with enhanced regulatory oversight in corporate affairs, the effect of corporate ownership attributes as a part of governance is incrementally observable in a situation that calls for prompt managerial action to ensure the reliability of financial information. Third, for the first time, the study makes a separate detailed analysis on the association between the stock ownership attributes and the remediation of company‐level and account‐specific control weaknesses. The results provide valuable insights into the ownership governance effect on the remediation of the two types of control weaknesses that have different rigor, auditability (more or less auditable), and effects (pervasive or non‐pervasive) on financial reporting quality. Fourth, the study further enhances one's understanding of several important governance factors that help achieve a sound financial reporting system and restore investors' confidence in the system.

The purpose of this paper is to investigate how stock characteristics influence investor trading behavior and psychological pitfalls.

This study employs the methods of Solt and Statman (1989) and Kumar (2009) to examine investor trading activities.

Good companies do not usually have good stocks, while lottery-type stocks show better price performance than other stocks. Due to the representativeness and affect heuristics, the stocks of good companies are frequently transacted, while the low-priced stocks are infrequently transacted. Moreover, investors may display the gambler’s fallacy in the trade of stocks of good companies and the overconfidence and self-attribution bias in the trade of lottery-type stocks.

Investors trading lottery-type stocks demonstrate greater maturity than those that trade stocks of good companies; however, psychological pitfalls still dominate investor trading behavior.

The representativeness heuristic of “stocks of good companies are good stocks” results in the inclusion of stocks of good companies in a portfolio and poorer price performance, whereas the inclusion of lottery-type stocks in a portfolio brings higher returns within a short period of time.

Compared to earlier studies that focussed on the price performance of stocks of good companies and investor trading behavior in relation to lottery-type stocks, this study aims to investigate the influence of stock characteristics on price performance, trading activities, and psychological pitfalls.

We examine three corporate governance characteristics of preferred stock issuers relative to non-issuers: managerial equity ownership, board size, and block shareholder ownership. We find that the preferred issuers have significantly lower managerial equity ownership than their controls. The finding is consistent with our expectation that the use of preferred stock and managerial equity ownership both serve to reduce agency costs and thus, preferred issuers tend to have little incentive to resort to higher managerial ownership to lessen agency costs. Significantly larger board size for preferred issuers is evident, but we find no difference in block shareholder ownership.

The paper investigates whether stock liquidity of firms is valued by lending banks revealing that firms with higher liquidity in the capital market pay lower spreads for the loans they obtain. This relationship is causal as evidenced by using the decimalization of tick size as an exogenous shock-to-stock liquidity in a difference-in-differences setting. Reduction in financial constraint and improvement in corporate governance induced by higher stock liquidity are potential mechanisms through which liquidity impacts loan spreads. These higher liquidity firms also receive less stringent nonprice loan terms, for example, longer loan maturity and less required collateral.

This study aims to investigate which stock characteristics and corporate governance variables affect stock price overreaction and volatility during the COVID-19 pandemic period.

A set of stock characteristics and corporate governance variables which may affect price overreaction and volatility were identified following a review of the literature. A dummy variable was created for the cross-sectional analysis to take into account the unique sector effect in the consumer staples sector. Out of sample analysis was conducted to confirm the robustness of the main results.

The empirical results consistently show that size, dividend and trading volume determine the stock price reactions when the market is in turmoil during the pandemic period. Board size and average board tenure exhibit moderate effects on reducing the stock price reactions, but the effects become insignificant while controlling for the firm characteristics in the regressions. The results remain robust when tested out of the sample. More interestingly, a consumer staples sector effect is identified and tested. The test results show that the consumer staples sector effect mitigates the stock price reactions.

The results have practical implications for investors who aim to manage desired levels of risk in their portfolios during the pandemic. The results also provide meaningful insights to stock market speculators regarding pandemic-related speculation opportunities.

This study makes a meaningful connection between the irrational stock market anomalies and the COVID-19 pandemic.

The purpose of this paper is to analyze the implications of the risk versus characteristic debate from the perspective of a mean-variance investor.

Expected returns and the variance-covariance matrix are estimated based on various characteristic and risk models and evaluated for the purpose of mean-variance portfolios.

Return estimates from characteristic models are most informative to investors. Risk-factor models provide the most informative estimates of the risk. A mean-variance investor should rely on combinations of the two model types.

Although the risk vs characteristic debate is a binary academic debate, our findings from an investor's perspective suggest to make use of the best of both worlds.

Previous research has found that industry concentration and firm efficiency affect stock returns. However, it is not clear if concentration is a byproduct of efficiency and hence its effect on stock returns is driven by efficiency. This paper aims to examine the relationships between industry concentration, firm efficiency and average stock returns. Mainly, it aims to answer if the effects of industry concentration and firm efficiency on stock returns are independent and significant.

The stochastic frontier approach is used to estimate firm efficiency. The Herfindahl index is used to measure industry concentration. Regression and vector autoregressive analyses are performed to examine cross-sectional and lagged relationships between concentration, efficiency, profitability and stock returns. The characteristics-based benchmark approach is also used to investigate performance of test portfolios.

Industry concentration and firm efficiency have independent and significant effects on average stock returns through profit margins and market shares, which are related to firms’ profitability. Industry concentration has a greater positive impact on market shares than on profit margins, whereas firm efficiency has a greater positive impact on profit margins than on market shares. In sum, highly efficient firms in highly concentrated markets have lower distress risks and hence provide lower average stock returns.

The paper shows the linkages between industry concentration, firm efficiency, profitability and stock returns that have not been documented together in prior studies. Businesses can better understand the impact of concentration and efficiency on market shares and profit margins. Researchers may consider incorporating concentration and efficiency, both of which are meaningful microeconomic variables, into an asset pricing model. Investors can enhance their returns by having a zero-cost portfolio with long and short positions in stocks of firms with different levels of concentration and efficiency.

The purpose of this paper is to investigate the connection between the accrual quality and the growth/value characteristics (and their return premia) at firm level.

The paper employs a battery of univariate and multivariate cross‐sectional tests. Fama‐MacBeth regressions with main effects and interaction effects are used to identify the relation between accrual quality, book‐to‐market and returns. The analysis is conducted on the overall sample, as well as after conditioning on up and down markets.

Value (growth) stocks are more likely to be associated with high (low) accrual quality. Value stocks earn higher returns mainly in down markets, while poor accrual quality firms have significantly higher returns during up markets, but significantly lower returns during down markets. There is a significant interaction effect between accrual quality and the value premium, which only exhibits in the down markets (i.e. stocks with poor accrual quality earn a higher value premium in down markets than stocks with good accrual quality).

Results in this paper help disentangle between various explanations proposed for the accrual quality premium and the value premium. These findings are consistent with the idea that the same underlying risk factor generating the value premium also generates the cross‐sectional variation in accrual quality responsible for the accrual quality premium. From the corporate managers' perspective, the results imply that value firms can mitigate their higher costs of capital by providing high quality of accounting information. From an analyst's perspective, the study suggests that considering both accrual quality and growth characteristics can help make better portfolio allocation decisions than when these are considered separately.

The purpose of this paper is to evaluate the pricing implication of aggregate market wide investor sentiment risk for cross sectional return variation in the presence of other market wide risk factors.

The paper employs the Fama and French time series regression approach to examine the impact of market risk premium, size, book‐to‐market equity, momentum and liquidity as risk factors on stock return. Given the importance of inherent imperfect rationality or sentiment risk, the paper further investigates the impact of investor sentiment on the cross section of stock return.

The choice of a five factor model is apparently persuasive for consideration in investment decisions. Stocks are hard to value and difficult to arbitrage with characteristics which are significantly influenced with the sentiment risk. It is naïve to argue for the universal pricing implication of sentiment risk in a multifactor model framework.

The test assets portfolios are not segregated as per any industry criteria.

Investment managers can use a contrarian investment strategy, for the stocks that are hard to value and riskier to arbitrage to gain excess return when the market follows a downward trend.

This makes the first attempt towards the investigation of the impact of the sentiment risk on cross sectional return variation from an emerging market perspective on such a diversified and large test asset portfolios. The paper has extended the available literature by investigating the impact of sentiment risk after controlling the liquidity risk factor in a multifactor specification. This measure of market wide irrational sentiment index is more comprehensive.