Leverage and the Cross‐Section of Equity Returns

Building on theoretical asset pricing literature, we examine the role of market risk and the size, book‐to‐market (BTM), and volatility anomalies in the cross‐section of unlevered equity returns. Compared with levered (stock) returns, unlevered market beta plays a more important role in explaining the cross‐section of unlevered equity returns, even after controlling for size and BTM. The size effect is weakened, while the value premium and the volatility puzzle virtually disappear for unlevered returns. We show that leverage induces heteroskedasticity in returns. Unlevering returns removes this pattern, which is otherwise difficult to address by controlling for leverage in regressions.     

Who Gambles in the Stock Market?

This study shows that the propensity to gamble and investment decisions are correlated. At the aggregate level, individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery-type stocks increases during economic downturns. In the cross-section, socioeconomic factors that induce greater expenditure in lotteries are associated with greater investment in lottery-type stocks. Further, lottery investment levels are higher in regions with favorable lottery environments. Because lottery-type stocks underperform, gambling-related underperformance is greater among low-income investors who excessively overweight lottery-type stocks. These results indicate that state lotteries and lottery-type stocks attract very similar socioeconomic clienteles.     

Income Hedging,Dynamic Style Preferences,and Return Predictability

We propose a theoretical measure of income hedging demand and show that it affects asset prices. We focus on the value factor and first demonstrate that our demand estimates are correlated with the actual demands of retail and mutual fund investors. We then show that the aggregate high‐minus‐low (HML) demand predicts HML returns. Exploiting the state‐level variation in income risk, we demonstrate that state‐level hedging demands predict state‐level HML returns. A long‐short portfolio that exploits this hedging‐induced predictability earns an annualized risk‐adjusted return of 6%.     

Boom and Gloom

We study the performance of investments made at different points of an investment cycle. We use a large data set covering hotels in the United States, with rich details on their location, characteristics, and performance. We find that hotels built during hotel construction booms underperform their peers. For hotels built during local hotel construction booms, this underperformance persists for several decades. We examine possible explanations for this long‐lasting underperformance. The evidence is consistent with information‐based herding explanations.     

State‐Level Business Cycles and Local Return Predictability

This study examines whether local stock returns vary with local business cycles in a predictable manner. We find that U.S. state portfolios earn higher future returns when state‐level unemployment rates are higher and housing collateral ratios are lower. During the 1978 to 2009 period, geography‐based trading strategies earn annualized risk‐adjusted returns of 5%. This abnormal performance reflects time‐varying systematic risks and local‐trading induced mispricing. Consistent with the mispricing explanation, the evidence of predictability is stronger among firms with low visibility and high local ownership. Nonlocal domestic and foreign investors arbitrage away the predictable patterns in local returns in 1 year.     

CASE STUDY: ECONOMIC VIABILITY OF COMPONENT MANAGEMENT FOR A NEW DESIGN

This paper explores the viability of standardization of design and manufacturing techniques to expedite product development and control design proliferation using an example of a leading transport refrigeration unit manufacturer. As an incremental approach to implementing standardization in a product development environment, a conceptual framework for component management decision support system is presented to build a case for its technical feasibility. The primary objective of this research case study is to provide an economic justification for implementing the proposed system. A three level decision making hierarchy is proposed with economic optimization for levels 1 and 2 representing standardization of system modules and capacity decisions for a product line respectively and thermodynamic optimization for level 3 representing control systems to keep the system dynamically balanced in changing environments. Other potential applications amenable to classification are identified.     

COINTEGRATION OF STOCK MARKETS BETWEEN NEW ZEALAND, AUSTRALIA AND THE G7 ECONOMIES: SEARCHING FOR CO-MOVEMENT UNDER STRUCTURAL CHANGE

This paper examines whether the New Zealand equity market is integrated with the equity markets of Australia and the G7 economies by applying both the Johansen (1988 ) and Gregory and Hansen (1996 ) approaches to cointegration. The Johansen (1988 ) test suggests that there is no long-run relationship between the New Zealand stock market and any of the other stock markets considered in the study. The Gregory and Hansen (1996 ) test finds that the New Zealand and United States stock market is cointegrated, but the New Zealand stock market is not cointegrated with the other stock markets in the study. This suggests that in order to avoid some of the risk through international portfolio diversification there is potential for investors to purchase shares in the New Zealand market and either the Australian market or most of the world's leading equity markets.     

Voluntary Disclosure with Informed Trading in the IPO Market

We examine voluntary disclosure and capital investment by an informed manager in an initial public offering (IPO) in the presence of informed and uninformed investors. We find that in equilibrium, disclosure is more forthcoming—and investment efficiency is lower—when a greater fraction of the investment community is already informed. Moreover, managers disclose more information when the likelihood of an information event is higher, more equity is issued, or the cost of information acquisition is lower. Investment efficiency and the expected level of underpricing are non‐monotonic in the likelihood that the manager is privately informed.     

ESTIMATING IMPORT AND EXPORT DEMAND ELASTICITIES FOR MAURITIUS AND SOUTH AFRICA

In this paper, we re‐estimate the import and the export demand functions for Mauritius and South Africa using time series data. We use the bounds tests for cointegration and find evidence of a long‐run relationship between import demand, income and prices for both countries. Our long run elasticities reveal that domestic income and relative prices have significant effects on the import demand for both countries, with income being the most important determinant. Furthermore, we find that while South Africa's export demand is not responsive to relative prices or income; for Mauritius income is statistically significant.     

Retail Investor Sentiment and Return Comovements

Using a database of more than 1.85 million retail investor transactions over 1991–1996, we show that these trades are systematically correlated—that is, individuals buy (or sell) stocks in concert. Moreover, consistent with noise trader models, we find that systematic retail trading explains return comovements for stocks with high retail concentration (i.e., small‐cap, value, lower institutional ownership, and lower‐priced stocks), especially if these stocks are also costly to arbitrage. Macroeconomic news and analyst earnings forecast revisions do not explain these results. Collectively, our findings support a role for investor sentiment in the formation of returns.