Swaminathan G. Badrinath and Stefano Gubellini
Glode provides theoretical and empirical evidence that, in aggregate, funds underperform during economic expansions and outperform during contractions. The authors find that this…
Abstract
Purpose
Glode provides theoretical and empirical evidence that, in aggregate, funds underperform during economic expansions and outperform during contractions. The authors find that this result is not robust to the more appropriate conditional CAPM and to alternative methods for estimating market states. The purpose of this paper is therefore to thoroughly analyze mutual fund performance across the business cycle by disaggregating funds into different investment objectives to determine which funds possess this cyclical performance and which do not.
Design/methodology/approach
In this paper, the authors employ a conditional asset pricing model that better captures the variations in the pricing kernel in different economic states. The empirical model adjusts for time‐variation in both risk (beta) and performance (alpha). The authors specify economic states using an ex‐ante measure, the expected market risk premium. This measure is continuous and better captures changing economic circumstances than the ex‐post, binary NBER cycle dates that are common in the mutual fund literature.
Findings
In this conditional framework, the authors find that recession protection is only offered by certain types of equity mutual funds. Managers of small‐cap and mid‐cap growth equity funds are able to deliver such state‐dependent performance but managers of value funds do not. In a comparison of active mutual funds with passive counterparts, it is found that both the stocks held by the small‐cap managers as well as their stewardship of the portfolio contribute to that performance.
Originality/value
Drawing from the recent asset pricing literature, the authors are the first to adapt an integrated conditional CAPM framework to examine the state‐dependent performance of mutual funds. Rather than report aggregate equity mutual fund performance, the authors provide an analysis for subsets of mutual funds separated by investment styles. Both managers of and investors in these funds will benefit from an understanding of how portfolio performance is impacted by changing economic conditions.
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MITCHELL RATNER, GULSER MERIC and ILHAN MERIC
This study examines the cross‐autocorrelation of size‐based portfolio returns in a sample of 15 major European markets using daily data from January 1990 through December 1999…
Abstract
This study examines the cross‐autocorrelation of size‐based portfolio returns in a sample of 15 major European markets using daily data from January 1990 through December 1999. Previous studies have primarily used U.S. data. This study extends previous research by considering results in multiple European exchanges. We examine whether a difference in size‐based portfolios exists by testing cross‐autocorrelation, granger‐causality, and asymmetric responses in the European markets. The results confirm that large stock portfolio returns lead small stock portfolio returns in most European countries, and that cross‐autocorrelation is present both within and between European financial markets.
This study documents that high book‐to‐market (value) and low book‐to‐market (glamour) stock prices react asymmetrically to both common and firm‐specific information…
Abstract
This study documents that high book‐to‐market (value) and low book‐to‐market (glamour) stock prices react asymmetrically to both common and firm‐specific information. Specifically, we find that value stock prices exhibit a considerably slow adjustment to both common and firm‐specific information relative to glamour stocks. The results show that this pattern of diferential price adjustment between value and glamour stocks is mainly driven by the high arbitrage risk borne by value stocks. The evidence is consistent with the arbitrage risk hypothesis, predicting that idiosyncratic risk, a major impediment to arbitrage activity, amplifies the informational loss of value stocks as a result of arbitrageurs’ (informed investors) reduced participation in value stocks because of their inability to fully hedge idiosyncratic risk.
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Rasha Ashraf and Narayanan Jayaraman
We investigate institutional investors’ trading behavior of acquiring firm stocks surrounding merger activities for the period 1992–2001. We label investment companies and…
Abstract
We investigate institutional investors’ trading behavior of acquiring firm stocks surrounding merger activities for the period 1992–2001. We label investment companies and independent investment advisors as active institutions and banks, nonbank trusts, and insurance companies as passive institutions. We analyze the trading behavior of active and passive institutions surrounding merger announcements and their eventual resolution. Our results indicate that active institutions significantly increase their holdings of acquiring firm stocks for mergers with higher announcement period abnormal return and this increase is more pronounced for stock mergers than cash mergers. Active institutions display preference for stock proposals at the merger announcement on the basis of their prior beliefs and this is explained by the “overreaction phenomenon.” However, they update their beliefs between announcement and final resolution as more information arrives into the market. Finally, active institutions appear to correct their overreaction behavior by displaying their greater preference for cash proposals as compared to stock proposals at the quarter of eventual outcome. The trading behavior of passive institutions suggests that these institutions disregard the market response of merger announcement in trading acquiring firm stocks at the announcement quarter. The passive institutions gradually update their beliefs and utilize the information released at the announcement in rebalancing their portfolios at the final resolution.
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– The purpose of this paper is to critically review the literature on contrarian and momentum trading strategies and identify areas for future research.
Abstract
Purpose
The purpose of this paper is to critically review the literature on contrarian and momentum trading strategies and identify areas for future research.
Design/methodology/approach
Critical review and discussion of the literature.
Findings
The extant literature is dynamic and is typified by a number of open questions.
Research limitations/implications
The open questions in the literature relate mainly to the driving forces of investment performance, and the role of risk and asset pricing as well as behavioral human traits. The literature is vast and therefore difficult to classify, cover and discuss.
Practical implications
The paper indicates the possible need for: the development of different asset pricing models and propositions that can have practical implications at a more international context.
Originality/value
The paper provides a critical review of the literature and identifies open issues for future research.
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Omar Farooq and Khondker Aktaruzzaman
The purpose of this paper is to provide empirical evidence on the informational role played by ownership concentration.
Abstract
Purpose
The purpose of this paper is to provide empirical evidence on the informational role played by ownership concentration.
Design/methodology/approach
The authors use bivariate vector autoregressive models to document the informational role of ownership concentration.
Findings
The findings suggest that the returns of firms with concentrated ownership structure lead the returns of firms with dispersed ownership structure in Morocco during the period between 2004 and 2014. The authors argue that this lead-lag relationship arises because a better information environment in firms with concentrated ownership structure enables quick incorporation of relevant information. The results are robust under different information regimes.
Originality/value
The authors believe that this paper is one of the first evidence on the informational role of ownership concentration in Morocco.
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D. Ajit, Han Donker and Sapan Patnaik
The purpose of the study is to examine the implementation of Enterprise Resource Planning (ERP) on the announcement of firms’ stock market returns. The authors investigate the…
Abstract
Purpose
The purpose of the study is to examine the implementation of Enterprise Resource Planning (ERP) on the announcement of firms’ stock market returns. The authors investigate the stock market reaction on ERP adopters and ERP vendor firms in the USA during 1990-2010. The study examines firm- and non-firm-specific factors including the role of the financial analyst in explaining the determinants of the cumulative abnormal returns surrounding ERP announcements of adopting firms.
Design/methodology/approach
Data on ERP system implementation announcements of 112 US firms for the period 1990-2010 were collected from LexisNexis Academics. The authors estimate abnormal returns using an event study methodology for each of the ERP announcements based on the Fama–French three-factor and Fama–French-momentum four-factor models for ERP adopters and for vendors. Subsequently, the authors explain the determinants of abnormal returns in terms of firm and non-firm behavioral variables using cross-section regression methodology.
Findings
The empirical results establish that cumulative abnormal returns of US firms on ERP system implementation announcements are positive, signifying that investors view this decision positively and that ERP implementation contributes to enhanced business value in the future. On the contrary, the impact of ERP announcements on vendors is muted. We find that the extent of financial analyst coverage negatively impacts abnormal returns, while the extent of stock market liquidity has a significant positive impact on abnormal returns.
Research limitations/implications
This study is based on a sample of ERP implementing firms which are predominantly large firms and on technology provided by one vendor that is predominantly monopolistic.
Practical implications
Firms’ attitudes toward implementing an ERP system for future efficiency gains and the implications on the stock market (and indirectly, on the cost of equity of adopters) provide valuable insights for firms and stock markets.
Originality/value
This study brings clarity to the debate on stock market impacts of ERP implementation announcements – stock markets cheer such announcements. The study also contributes to the literature by examining firm-specific factors (such as performance, size and leverage) and non-firm-specific factors (such as market risk and analyst coverage) in explaining the determinants of abnormal returns of firms announcing ERP investment.
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Omar Farooq and Zakir Pashayev
This paper aims to document the information transmission capacity of Shariah-compliant firms.
Abstract
Purpose
This paper aims to document the information transmission capacity of Shariah-compliant firms.
Design/methodology/approach
The vector auto-regression (VAR) model is used to test the information transmission capacity of Shariah-compliant firms in India during the period between 2010 and 2015.
Findings
The findings show that the returns of non-Shariah-compliant firms lead the returns of Shariah-compliant firms. It is argued that non-Shariah-compliant firms possess certain financial characteristics (higher leverage, higher accounts receivable and higher cash holdings) that make their information environment better than information environment of Shariah-compliant firms. The authors argue that superior information environment leads to timely incorporation of market-wide information, thereby causing the returns of non-Shariah-compliant firms to lead the returns of Shariah-compliant firms. It is also shown that the result holds in various market conditions.
Originality/value
It is believed that prior literature does not adequately address the information transmission capacity of the stock prices of Shariah-compliant firms. The gap is filled by documenting that stock prices of Shariah-compliant firms that are more informative than stock prices of non-Shariah-compliant firms.