Stock-based compensation,financial analysts,and equity overvaluation

Review of Accounting Studies - Stock-based compensation (SBC) reduces the value of shareholder equity, ceteris paribus, and is a significant and growing expense for many firms. Despite its...     

Inferring the Cost of Capital Using the Ohlson–Juettner Model

We compare risk premia (RP) inferred using the Ohlson-Juettner (RP_OJ) and residual income valuation (RP_RIV) models in three ways: (1) correlation with risk factors; (2) correlation with RP estimated by multiplying current realizations of risk factors by coefficients obtained from regressing prior-year RP on prior-year risk factors; and (3) correlation with ex post returns. RP_OJ has expected correlations with risk factors, a modest correlation with RP estimated from prior-year regressions, and an economically significant association with ex post returns. RP_RIV has generally higher correlations, but regression coefficients are sensitive to whether the industry median ROE is computed with or without loss firms.     

Evolving Efficiency of Dually-Listed Indian Stocks: A Nonlinear Perspective

This paper examines the degree of efficiency of Indian ADRs and their underlying stocks trading in NSE/BSE from an adaptive markets hypothesis (AMH) perspective that is theoretically grounded in nonlinear serial dependence. For this purpose, the authors employ the windowed as well as the rolling hinich bicorrelation test procedures on ADRs and the underlying stocks issued by Indian firms such as, and limited to, Dr. Reddy’s Laboratories, HDFC Bank, ICICI Bank, Infosys, Wipro, Tata Motors, and Sterlite Industries. The study’s findings indicate that the degree of market efficiency witnessed at the level of individual scrips (ADRs or underlying domestic stocks) differs considerably from the degree of efficiency of the broader stock market in which such scrips trade. Further, the degree of efficiency witnessed amidst all US and Indian scrips considered for this study was found to be heterogeneous in nature and in-turn warrants a ranking approach. Lastly, the degree of efficiency witnessed in certain (not all) dually-listed Indian scrips was found to be homogenous across trading locations. However, this does not happen to be the case for all other dually-listed scrips considered for this study. The study’s findings bring to light the need for disaggregated, firm level market efficiency studies aimed at examining firm-level market efficiency at different trading locations and in-turn identifying the antecedents behind homogeneity (or lack-thereof) in firm-level market efficiency across multiple trading locations.

     

Bank bailouts and corporate insider trading during the financial crisis of 2007–2009

Jagolinzer et al. (The information content of insider trades around government intervention during the financial crisis. Working paper, 2014) examine insider trading at banks that were bailed out by the U.S. taxpayers. They provide evidence that insiders of bailed-out banks profitably purchased their banks’ shares over a 9 month period after the Troubled Assets Relief Program (TARP) was announced in October 2008. They find that the purchases were profitable for up to 12 months after the purchases. However, Liu et al. (J Bank Finance 37:5048–5061, 2013) find that shareholder gains at the bailed out banks occurred only after the banks paid back the TARP funds, which in most cases occurred after 2010. In this paper we extend Jagolinzer et al.’s (2014) analysis to financial institutions that did not receive TARP funding as well as to non-financial firms. We find that insiders of the non-TARP financial and the non-financial firms traded their shares profitably after the TARP program was announced. Insider share purchases at these firms were highly profitable for up to 12 months after the purchases. However, insider purchases at the bailed-out banks were slightly profitable only for a month after the purchases, after which the shares that were bought declined in value. Our results for the TARP banks do not corroborate Jagolinzer et al.’s (2014) results, but are consistent with the evidence in Liu et al. (2013) and several other papers that examine the wealth effects of TARP program announcements and fund repayments.