Evaluating mutual fund performance in an emerging Asian economy: The Malaysian experience

This paper examines the performance of 311 mutual funds from January 1990 to December 2005 in Malaysia by using composite portfolio performance measures, the single market model, the Fama and French three-factor model, and the Carhart four-factor model across investment horizons. Overall, we have found evidence that mutual fund performances yield superior returns with relatively lower systematic risks. A 3-year investment appears to be the preferred investment horizon with the highest annualized returns of 9.23%. The results of the single market model, the Fama–French three-factor model, and the Carhart four-factor model have all indicated that beta, size, book-to-market value, and momentum factors are significant factors in explaining equity fund returns with the Carhart four-factor model being the relatively better model among the three. The beta factor has demonstrated the highest coefficient and significance. The results further indicate that the average equity funds in Malaysia hold smaller market capitalization stocks and value oriented stocks, as well as buying past-winning and selling past-losing stocks.     

Do Corporate Site Visits Impact Stock Prices?

We examine the stock price impact of corporate site visits using a unique data set of site visits to listed firms in China. Our main findings are as follows. First, the market reaction around corporate site visits is statistically and economically significant and is stronger for group visits, visits conducted by mutual fund managers, visits covering accounting and finance topics, visits to firms with poor information environments, and visits to manufacturing firms. Second, the stock returns around site visits are positively associated with firms’ future performance. Third, the changes in visiting funds’ holdings are more predictive of firms’ future performance than those of nonvisiting funds. Overall, this study contributes to the literature by providing evidence that site visits are important venues for investors to collect information about firms and make informed trades.     

Equity Valuation Effects of the Pension Protection Act of 2006*

We investigate the equity valuation effects of the Pension Protection Act of 2006 (PPA 2006). The PPA 2006 has two main provisions: (1) firms must fully fund their pension plans within seven years (previously allowed 30 years to fund 90 percent of the pension liability) and (2) firms receive a tax deduction for contributions up to 150 percent of the pension liability (previously 100 percent). After controlling for the effects of SFAS 158, growth opportunities, the cost of external funds, and other information released during our sample period, we examine pension firms’ abnormal returns surrounding key dates in the legislative process leading to the adoption of the PPA 2006. First, we find a mean negative abnormal return of ?4.20 percent during the period in which the PPA 2006 was first voted on by Congress. The mean (median) firm in our sample experienced a $310 million ($60 million) decline in market capitalization. Second, we find that the valuation effect was more negative for firms with larger unfunded pension liabilities and larger capital expenditure requirements, while firms with higher marginal tax rates experienced a positive effect. Third, we find no evidence of differential valuation effects for firms in different “at risk” categories as defined by the PPA 2006. Finally, we find a significant number of pension freezes occurred during our sample period. Our results are stronger when excluding these firms from our sample.     

Financial Statement Comparability and the Efficiency of Acquisition Decisions

This study examines whether acquirers make better acquisition decisions when target firms’ financial statements exhibit greater comparability with industry peer firms. We predict and find that acquirers make more profitable acquisition decisions when target firms’ financial statements are more comparable—as evidenced by higher merger announcement returns, higher acquisition synergies, and better future operating performance. We also find that post‐acquisition goodwill impairments and post‐acquisition divestitures are less likely when target firms’ financial statements are more comparable. Finally, we find that acquirers benefit most from comparability when acquirers’ ex ante information asymmetry is higher, acquirers operate in volatile operating environments, and management knows relatively less about the target. In total, our evidence suggests targets’ financial statement comparability helps acquirers make better acquisition‐investment decisions and fosters more efficient capital allocation.     

Accruals Quality,Stock Return Seasonality,and the Cost of Equity Capital: International Evidence

Mashruwala and Mashruwala (2011) argue that inconsistent earlier findings regarding whether accruals quality (AQ) is priced in equity markets (Core, Guay, and Verdi 2008; Kim and Qi 2010) may be explained by seasonality in returns deriving from tax‐loss selling. Finding no evidence of annual AQ premia for U.S. firms, Mashruwala and Mashruwala report that significant monthly premia concentrate in January, with the remainder of the year demonstrating negative or insignificant returns to AQ and attribute this strong seasonality to tax‐loss selling by investors, rather than information risk. However, the end of the tax year for U.S. investors coincides with the calendar year and the financial year for the majority of firms, which may suggest alternative explanations for seasonal variation in returns. We extend Mashruwala and Mashruwala's study, using an international sample including countries where incentives for tax‐loss selling exist, but in which the standard tax and financial years differ (Japan and the United Kingdom), and where the tax and financial years conclude in a month other than December (Australia), as well as employing a longer U.S. sample. We find some evidence of an AQ premium in the United States, which although dominated by January returns, remains significant annually. However, these findings are sensitive to the inclusion of low price stocks and the choice of asset pricing test. In Japan, the United Kingdom, and Australia we document consistent evidence that an AQ premium exists on average throughout the year, and in samples excluding the first month of the tax year. The sensitivity of our U.S. results to the January period may reflect the conflation of numerous seasonal influences on returns, not all of which necessarily reflect mispricing.     

Performance Persistence of Dutch Pension Funds

This paper studies the investment performance of pension funds with a focus on their ability in implementing their intended investment strategy. We use a sample of Dutch industry-wide pension funds, which are obliged by law to report their investment performance according to the so-called z-score. The z-score is a risk-adjusted performance measure with benchmark settings predefined by Dutch law. We find that pension funds as a group cannot beat their self-selected benchmarks consistently. Applying a cross-sectional portfolio approach we find evidence that the largest pension funds outperform the smallest funds.     

The Valuation Effect of Accounting Standard 158 on Firms with High and Low Financial Risk

SFAS 158 mandated balance sheet disclosure of the funded status of firms’ Defined Benefit Pension Plan using the Projected Benefit Obligation (PBO) to estimate the pension liability. SFAS 158 caused a market phenomenon because the use of the PBO engendered dramatically higher estimates of pension liability and hence the perception of risk. Our work focuses on two aspects of this change in pension accounting: first, how will industry firms change their accounting strategy in light of the new rules, and second, how will firms’ stock prices be affected by the new allegedly better estimate of pension liability? Our research suggests that firms’ accounting strategies changed in that they use higher discount rates to estimate pension liability which offset the dramatic impact of using the PBO. In addition, we find that high financial risk firms’ tendencies to use higher discount rates increase with the firms’ leverage and decrease with liquidity. To test the market reaction we utilize standard event study methodology to investigate the effects of SFAS 158 on stock returns. Our findings suggest that firms with high (low) financial risk earn negative (positive) abnormal returns on and around relevant event dates preceding the implementation of SFAS 158.     

Information Precision and Long‐Run Performance of Initial Public Offerings

Due to a lack of an information history, IPO firms' information precision is not only generally low but also likely to be estimated initially with considerable error. I hypothesize and find that the deviation between expected and realized information precision is predictably associated with the magnitude and the persistence of long‐run abnormal returns after an IPO. Specifically, an upward (downward) revision of information precision results in positive (negative) abnormal returns over the period in which investors update their beliefs. In addition, the positive abnormal returns of firms with unexpectedly high realized information precision are less persistent than the negative abnormal returns of firms with unexpectedly low realized information precision, which can extend up to 18 months after the IPO. The findings imply that long‐term investors in IPO stocks do not necessarily behave irrationally, but that both positive and negative post‐IPO abnormal performance is also consistent with rational investors gradually updating the perceived information precision parameter of these stocks.     

Does peace boost stock prices? Evidence from the Korean stock market

This study analyzes the impact on the Korean stock market of the inter-Korean summits in 2000, 2007, and 2018 and the North Korea–United States summit in 2018 using the event study methodology. Three portfolios, which have high exposures to North Korea risks are constructed: stocks related to Kaesong Industrial Complex (KS portfolio), stocks related to inter-Korean economic cooperation (IEC portfolio), and stocks related to the defense industry (DEF portfolio). Empirical analysis show that the cumulative abnormal returns (CARs) of KS, IEC, and DEF portfolios react positively or negatively to each summit. These results imply that peace does not simply play a role in boosting stock prices and that the stock price reflects all available information related to the summits, including the process and agreement of the summits' discussion and political context. The robustness test (performed by changing the event day to the announcement rather than the agreement) shows that KS and IEC portfolios reflect positive expectation and that the DEF portfolio reflects negative expectation in the financial market. Although each CAR pattern varies, it is true that the stock price reflects all available information of summits swiftly. In other words, our paper shows that the efficient market hypothesis holds in the Korean stock market.     

Why Do Large Firms' Prices Anticipate Earnings Earlier than Small Firms' Prices?*

This paper presents evidence that the positive association between firm size and price leads of earnings is not solely a function of private search incentives for firm‐specific information. Specifically, we find that small‐firm prices also lag large‐firm prices with respect to industry‐wide information. Our empirical analysis extends Collins, Kothari, and Rayburn 1987 and Freeman 1987, who document that security‐price leads of earnings are positively associated with market capitalization. In particular, we examine the association between firm size and the timing of security returns for two components of annual earnings changes: the average change for a firm's industry and the firm's idiosyncratic change. We find that large firms' prices have a longer lead than small firms' prices with respect to both components. Large firms' early lead on industry‐wide earnings suggests that returns of large firms predict returns of same‐industry small firms. To test this implication, we construct a portfolio of long (short) positions in small firms when the prior month's returns of large firms in their industry are above (below) average for large firms in other industries. This zero investment portfolio earns 4.5 percent over 12 months.     

中国企业海外退市思考:进退之间的徘徊

2010年以来,美国资本市场中国概念股遭遇退市危机。美国机构刻意做空、中国企业自身财务信息虚假和信息披露不充分、中国概念股的边缘化以及上市维系费用过高导致了此次退市危机。短期应对策略包括加强与投资者沟通、股票回购、与第三方机构合作反击以及起诉恶意诋毁的做空机构。长期而言,中国企业应该强化对美国资本市场特点的认识,制定清晰资本市场发展战略,持续提升信息披露和内部控制水平,谨慎选择中介机构,或者通过私有化选择更适合的资本市场。     

The Effect of External Monitoring on Accrual‐Based and Real Earnings Management: Evidence from Venture‐Backed Initial Public Offerings*

This paper investigates the effect of venture capitalist (VC) quality on earnings management in firms conducting initial public offerings of their equity stock, focusing on manipulation of both accruals and real activities. I develop a measure of VC quality based on a principal components factor analysis using data that are obtainable for virtually all VC firms. This metric is highly correlated with VC funds’ financial returns, and with the likelihood of successful exits through initial public offerings or trade sales. After going public, companies backed by higher quality VCs have lower abnormal accruals, lower earnings management through real activities manipulation, and a lower likelihood of financial restatement. Companies backed by top‐quartile VCs do not appear to engage in real activities manipulation as a substitute for accruals manipulation. Companies backed by lower‐tier VCs exhibit earnings management behaviors which are indistinguishable from those of non‐VC‐backed companies. The results continue to hold when controlling for endogeneity. Overall, the results suggest that higher quality VCs are better able to constrain opportunistic financial reporting by their portfolio companies going public.     

Pricing and Mispricing of Accounting Fundamentals in the Time‐Series and in the Cross Section

This study examines the extent to which parsimonious and general cross‐sectional valuation models, restricted to include only publicly available historical accounting information, explain share prices in the cross section, identify periods when market mispricing may be more pervasive, and also identify which shares within those cross sections are more likely to be mispriced. Our model simply includes historical book value, earnings, dividends, and growth, but it explains on average over 60 percent of the cross‐sectional variation in share prices in annual estimations across 1975–2011. We also examine the extent to which the residuals indicate mispricing. The quintile of stocks picked by our model as most likely underpriced outperform the quintile of stocks picked as most likely overpriced by an average of 9.9 percent over the following 12 months, after controlling for size. We also predict and find that value residuals are better predictors of future abnormal returns: (i) among firms that are not covered by analysts; (ii) among firms that face fewer accounting measurement challenges; and (iii) when we estimate value model parameters by industry/year. We also predict and find our approach works better in periods when the mapping of fundamentals into prices is weaker. This study contributes a novel and straightforward approach to map accounting fundamentals into share prices in order to identify mispricing in time‐series and in the cross section.     

The failure of ‘nationalization by attraction’: Britain's cross‐class alliance against earnings‐related pensions in the 1950s1

In 1957, the Labour Party published radical proposals for a state earnings‐related pension scheme (‘national superannuation’) whose funds were to be invested in stock markets to generate high returns, and to help modernize and dynamize the British economy. This article explores a sophisticated campaign against the proposal by the insurance industry, and the resistance of the unions. In doing so, it considers the implications of this cross‐class alliance, not least in terms of a possible missed opportunity to build a ‘developmental state’ in the UK, but also in terms of the country's increasingly inadequate and inequitable system of pension provision.     

Lenders’ Response to Peer and Customer Restatements

We investigate whether restatements announced by economically related firms influence the contract terms a borrower receives from lenders. A restatement by a major customer firm increases the loan spread of a borrower by 11 basis points, on average. The contagion effects of customer restatements are higher (45 basis points) when a borrower's switching costs are high. Restatements by peer firms in the same industry also increase a borrower's loan spread, and this increase occurs regardless of restatement severity. Moreover, the sensitivity of loan spread to peer restatements is significantly greater when the restating peer firms are also in the bank's lending portfolio, suggesting that a lender's personal experience with restatements in an industry makes it more attuned to the potential implications of these restatements for the borrowing firm. Finally, our results suggest that lenders utilize information from peer restatements to anticipate future restatements by the borrowing firm.     

Informational differences among institutional investors in an increasingly institutionalized market

Studying the informativeness of institutional trades, this paper examines informational differences among institutional investors in the Taiwan stock market. Evidence shows that the net trades of (domestic) mutual funds impound information superior to the net trades of foreign investors and securities dealers, regardless of the selected formation and holding periods. The information advantage of mutual funds does not result from their trading persistence but from their stock-picking skill. The advantage is positively related to information asymmetry proxied by the smallness of firms, even after controlling for the risks associated with institutional equity preferences.     

Portfolio Implications of Cointegration Between Labor Income and Dividends

This paper analyzes the implications of cointegration between labor income and dividends for the optimal portfolio weight for stocks. In a recent paper, Benzoni et al. (J Finance 62:2123–2167, 2007) claim that, as a result of cointegration, the optimal weight in stocks may be smaller for young investors than for older investors. This contradicts the traditional life-cycle models which typically imply portfolio weights that decrease with age. This paper shows that when stock returns are affected by other factors than dividend growth, for example due to time-varying discount rates, the portfolio implications of cointegration are much less severe. In a realistically calibrated model, the life-cycle pattern for the portfolio weight of stocks is flat, except for very young investors.     

A Lobbying Approach to Evaluating the Whistleblower Provisions of the Dodd‐Frank Reform Act of 2010

We evaluate the net costs and benefits of the whistleblower (WB) provisions adopted under the Dodd‐Frank Reform Act of 2010 by examining investor responses to events related to the proposed regulations. We focus our main analysis on a sample of firms that lobbied against implementation of the WB provisions by submitting a comment letter to the SEC. Lobbying firms are characterized by weaker existing WB programs and greater degrees of managerial entrenchment than a matched control sample of similar non‐lobbying firms. Short‐window excess stock returns around events related to implementation of the WB rules are significantly more positive for the portfolio of lobbying firms than for their matched controls; this effect is also more pronounced for lobbying firms with weaker existing WB programs. These results suggest that investors expect the new WB provisions to provide net benefits by improving shareholder protection.     

The Effects of the Tax Cuts and Jobs Act of 2017 on Defined Benefit Pension Contributions*

This study examines the effect of the Tax Cuts and Jobs Act of 2017 (TCJA) on corporate defined benefit pension contributions. The TCJA decreases the corporate tax rate from 35 percent in 2017 to 21 percent in 2018 and thereafter. This change incentivizes firms to increase 2017 pension contributions to take advantage of tax deductions at a higher rate. Consistent with this incentive, we find firms increase defined benefit pension contributions by an average of 25 to 31 percent in 2017 compared with earlier years. We also find that taxpaying firms are the primary contributors. Further, taxpaying firms with high levels of pension-related deferred tax assets contribute over three times as much as taxpaying firms with low levels of pension-related deferred tax assets. We also find firms that increase pension contributions in 2017 reduce 2018 contributions, consistent with intertemporal income shifting rather than a permanent change in pension funding strategy.     

Portfolio optimization under asset pricing anomalies

Fama and French (1993) find that the SMB and the HML factors explain much of the cross-section stock returns that are unexplained by the CAPM, whereas Daniel and Titman (1997) show that it is the characteristics of the stocks that are responsible rather than the factors. But both arguments are largely based only on expected return comparisons, and little is known about how important each of the two explanations matters to an investor's investment decisions in general and portfolio optimization in particular. In this paper, we show that a mean-variance maximizing investor who exploits the asset pricing anomaly of the CAPM can achieve substantial economic gain than simply holding the market index. Indeed, using monthly Japanese data on the first 50 largest stocks over the period 1980–1997, we find the optimized portfolio constructed from characteristics-based model is the best performing one and has monthly returns more than 0.81 percent (10.16 percent annualized) over the Nikkei 225 index with no greater risk.