Can small investors exploit the momentum effect?

This study uses UK data and investigates whether small investors can exploit the continuation effect in share prices. Individual traders are not in a financial position to buy and sell short hundreds of firms, as suggested by existing academic research, and thus this study uses extreme performance companies to implement the strategy. We find that strong momentum gains appear when extreme winners and losers are employed. These returns remain strong even after considering the transaction costs of implementing such strategies, including commissions, stamp duty, selling-short costs, and bid-ask spread. Overall, we show that a relatively large number of small investors can enjoy momentum gains, providing some evidence against stock market efficiency.     

The effect of pseudo‐immediacy on intertemporal choices

An interesting phenomenon, which we dub the ‘pseudo‐immediacy effect’, was detected in intertemporal choices. The majority of our participants preferred the smaller but sooner (SS) outcome to the larger but later (LL) outcome when a pseudo‐immediacy reward was framed, but a higher proportion of participants preferred the LL outcome to the SS outcome when the pseudo‐immediate format was removed. Such a shift violated the invariance principle which requires that the preference order between options does not depend on the manner in which they are described. With reference to the pseudo‐certainty effect reported by Kahneman and Tversky in 1984 Kahneman, D. and Tversky, A. 1984. Choice, values, and frames. American Psychologist, 39: 341–50. [Crossref], [Web of Science ®] , [Google Scholar], our findings typically support the notion that risk and delay are psychologically equivalent and that the same psychological process underlies risk and intertemporal choice.     

On the effort-saving effect of audit committee–auditor interlocking

Using unique data on audit hours from China, this paper investigates the effort-saving effect of the audit committee–auditor interlocking (AClk). We find that AClk is negatively associated with audit effort without any deterioration in audit quality. The results suggest that AClk has an effort-saving effect through information sharing between interlocked audit committee members and auditors. However, auditors retain the effort-saving benefits of AClk without sharing them with their client firms. Further analysis shows that the effort-saving effect of AClk is more pronounced for client firms whose auditors have industry expertise, for client firms that share the same individual auditor, or for client firms that share audit committee members with financial expertise.     

The effect of exchange rate fluctuations on multinationals’ returns

This paper examines if the type of exchange rate used or size of the movement in the exchange rate matters in estimating exchange-rate exposure of U.S. manufacturing firms. We find that switching from a broad trade-weighted exchange rate to a 2-digit SIC industry exchange rate increases slightly the number of significantly exposed firms. We also find that firms’ stock returns may be affected differently in periods of crisis and non-crisis; some firms have significant exposure only in crisis periods while others have significant exposure only during normal fluctuations in exchange rates.     

Accounting licensure,quality, and the “cadillac effect”

Empirical evidence from several professions suggests that licensing laws usually do not enhance the quality of service received by consumers, as alleged by licensing advocates. Moreover, licensing often reduces the availability of low-cost service to low-income consumers (the “Cadillac Effect”). This study applies these concerns to public accountancy. By comparing the malpractice coverage and fee structure of certified public accountants with their noncertified counterparts, the study finds that accounting licensure 1) is not related to service quality, and 2) may result in small businesses having to incur higher costs for accounting services.     

Is the January effect still alive in the futures markets?

The January effect concerns the fact that small capitalization stocks have historically outperformed large capitalized stocks in January. We analyze evidence as to whether this anomaly can be exploited in the futures markets as a speculative investment or to add risk-adjusted value to portfolio performance. We find that the January effect is still alive in the futures markets on the Value Line minus S&P 500 spread trade, but that the marginal liquidity of the Value Line stock index futures contract has made it very risky to exploit the effect. Historically from 1982/3 to 2004/5, the trade has been profitable. This anomaly was also exploitable through a Russell 2000 minus S&P 500 spread trade from 1993/4 to 2004/5.

The effect of outcome and process accountability on customer–supplier negotiations

Prior studies on customer–supplier negotiations ( and ) find that negotiators who have access to relevant activity-based cost information are not always able to use this information to improve joint outcomes. Our study extends this literature by examining how the type of accountability (process and outcome accountability) influences the extent to which negotiators can obtain lower joint costs. We hypothesize and test a model that predicts that the type of accountability affects negotiated outcomes through its effect on negotiators’ fixed-pie bias revisions and the negotiation tactics they employ during customer-supplier negotiations. Results from an experiment show that negotiators held accountable for their negotiation processes are better able to reduce their fixed-pie biases and achieve lower joint costs compared to those who are held accountable for their negotiation outcomes. Using rich data based on taped negotiations, we demonstrate that the effect of accountability on joint costs is indirect through its effect on negotiators’ choice of negotiation tactics and the extent to which negotiators can reduce their fixed-pie biases.     

The School’s Out effect: A new seasonal anomaly!

We provide evidence of a new seasonal anomaly during the school vacation or School’s Out (SO) period in nine East Asia and five Mediterranean stock markets. One of its characteristics is that many investors are distracted by child care activities in family-oriented economies where the school vacations last for at least five weeks. The other is that retail investors play a prominent role in these markets. The SO effect manifests itself in a lowering of weekly share turnover by 13% in East Asia and 25% in the Mediterranean markets and in a drop in the corresponding stock returns by 0.4% and 0.3%, respectively. The falls in turnover and, to a lesser extent, returns are robust to a potential confound with other seasonal effects such as the Gone Fishin’ and Sell in May and Go Away effects where these effects overlap.     

Does the major market influence transfer? Alternative effect on Asian stock markets

Based on the time-varying regression model of Chow et al. (J Comp Econ 39(4):577–583, 2011. doi: 10.1016/j.jce.2011.06.001), this paper simultaneously analyzes the ebb and flow of change by China and the U.S. as leading players in relation to their comovement on various Asian stock markets. We include several important controls for worldwide economy performance, the stock market return rates of major importing nations, and linear/non-linear time trend fixed effects to stress the influence of China and U.S. on eight Asian economies. The empirical results indicate the increasing influence of the China stock market during the subprime mortgage crisis. Moreover, the U.S. market remains influential on the Chinese region, but loses/decreases its influence, especially on the Four Asian Tigers, significantly during/after the subprime mortgage crisis.     

Where are the smart investors? New evidence of the smart money effect

Previous research debates whether investors are smart enough to invest in funds that subsequently outperform. This paper documents a robust smart money effect among top-performing small fund investors, even after controlling for the momentum factor. I further explore the reason for the smart money effect and find that such outperformance comes from the market-timing ability of smart investors. Market-timing ability distinguishes smart investors from investors who naively chase the winners.     

Investors’ perception of corporate governance: a spillover effect of Taiwan corporate scandals

The discovery of a series of corporate scandals in Taiwan between 16 June and 15 September 2004 offers a unique opportunity to investigate the perceptions of investors on the value of corporate governance, whilst avoiding any interactions with other exogenous factors such as the lower expected returns on all firms’ investment opportunities during the East Asian or Global financial crises. The main line of reasoning in this study is that at times when news of scandals flows into the market, the perceptions of certain type of investors will lead to a change in their trading habits for non-scandal portfolios. With a comprehensive analysis of order and trade data for all investors identified by investor code, it is found that a substantial proportion of investors ceased trading altogether during the scandal period. This response was particularly discernible among small and medium individuals, despite the fact that the firms in these portfolios were not associated with the scandals. We further examine the ordering behavior of those investors who still traded in the market. It shows that small individual investors began to enter the market more passively, regardless of whether the firms’ ownership structure. And they consistently underperformed in both ownership-structure portfolios. However, foreign institutions and large individuals place more aggressive orders for stocks in firms with strong cash-flow rights leverage and perform particularly well in those portfolios.     

Revisiting the intertemporal risk–return relation: asymmetrical effect of unexpected volatility shocks

We suggest that an unexpected volatility shock is an important risk factor to induce the intertemporal relation, and the conflicting findings on the relation could be attributable to an omitting variable bias resulting from ignoring the effect of an unexpected volatility shock on the relation. With the effect of an unexpected volatility shock incorporated in estimation, we find a strong positive intertemporal relation for the US monthly excess returns for 1926:12–2008:12. We also find a significant link between the asymmetric mean-reversion and the intertemporal relation in that the quicker reversion of negative returns is attributed to the negative intertemporal relation under a prior negative return shock.     

How firms manage their cash flows: an examination of diversification’s effect

We extend recently documented evidence that diversified firms hold significantly less cash than specialized firms to consider differences in how diversified and specialized firms adjust their cash flows to achieve their target cash balance. We find that diversified firms have higher free cash flows as a result of equal operating cash flows and lower investment in comparison to specialized firms. Diversified firms save less cash by placing less reliance on external financing; by issuing less debt and equity, and distributing higher cash dividends. Our findings support the hypothesis that diversified firms are able to hold less precautionary cash as they are in better position to finance investment opportunities internally from operating cash flows.     

The effect of communication design and recipients’ numeracy on responses to UXO risk

Risk communications aim to affect recipients’ understanding of specific risks, their trust and liking of the materials, affective responses, and associated behaviors. We developed communications about the number of construction workers expected to get hurt if building were permitted at the former Fort Ord weapons training site in California, despite its contamination with unexploded ordnance (UXO). We created eight versions, which presented text only or bar graph with text, the numerator of the risk (the number of workers expected to be hurt) with or without emphasis on the denominator (the total number of workers), and uncertainty information (the probability that different numbers of workers would be hurt) or not. Recipients varied in numeracy. We examined the effect of these communication features on recipients’ (1) understanding, (2) trust and liking of the materials, (3) affective responses, and (4) support for construction and for construction workers if construction were to be implemented. Low-numerate individuals showed less understanding across all versions of the communication, yet preferred graph-with-text displays relatively more than text-only displays as compared to high-numerate individuals. Emphasizing the denominator increased understanding of text-only displays but decreased support for construction and construction workers for all communication versions. Moreover, recipients were more supportive of construction and construction workers after receiving text-only displays without uncertainty information or graph-with-text displays with uncertainty information, seemingly due to communications with those features being trusted and liked more. We discuss the implications for communicating risks in general and for communicating UXO-related risks to the community surrounding Fort Ord.     

The effect of cost information on buyer–supplier negotiations in different power settings

We investigate the influence of total cost of ownership (TCO) information on buyer–supplier negotiations in different power settings. Based on social exchange theory and recent literature on information processing, we expect that buyers with detailed TCO information and less power than their negotiation partners may try to (re)gain control over their own outcomes by sharing information. The results of our experiment indicate that the performance disadvantage of less powerful buyers is less pronounced when the buyer has detailed TCO information, whereas more powerful buyers do not seem to be able to profit from TCO information. These somewhat counterintuitive findings are explained through detailed analysis of the buyer’s negotiation behavior, which shows that less powerful buyers who have access to TCO data use problem solving techniques more frequently than powerful buyers, who tend to rely on distributive bargaining techniques instead. We conclude that power can motivate a failure to share TCO information, resulting in less effective interfirm negotiation outcomes.     

The effect of investment tax incentives: evidence from China’s value-added tax reform

We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.     

The effect of near- versus distant-future mindsets on socially responsible investors’ mutual fund preferences

Socially responsible investing (SRI) has seen tremendous growth in recent years. For SRI investors, choosing among potential SRI investments often requires making trade-offs between social responsibility and financial aspects of the investment. In this study, we examine contexts where investors are more versus less willing to make such trade-offs, specifically in the context of SRI-guided mutual funds among Muslim investors. We expect that priming a near-future mindset will make respondents less likely to trade-off social responsibility for financial considerations, whereas priming a distant-future mindset will make respondents more likely to make such trade-offs. Using a discrete choice experimental design among Saudi Arabian adults, we find support for our hypotheses. Managerial implications and directions for future research are discussed.     

Call it good,bad or no news? The valuation effect of debt issues

Studies investigating market reactions to changes in capital structure aim to find the impact of private information conveyed. However, these studies ignore that financial decisions are not made randomly but are conditional on managers’ private information. Using a sample of U.S. leverage‐increasing public companies with public long‐term debt offerings, we find that debt offerings convey no new information to the markets after considering the conditionality of decisions. We also show that results can be biased if the deterministic role played by private information ex ante is omitted, which may explain the conflicting valuation evidence found in the literature.     

The effect of ownership on the prudential behavior of banks – The case of China

Although the relationship between bank ownership and performance is the current focus of much research, this paper investigates the relationship between ownership and the prudential behavior of banks. Using Chinese data, I show that lending by state-owned banks has been less prudent than lending by joint-equity banks, but has improved over time. This is consistent with the hypothesis that accountability to shareholders and depositors gives joint-equity banks a better incentive than state-owned banks to engage in prudent lending, and with the hypothesis that the reform of the banking system has improved the incentive for state-owned banks to behave more prudently in their lending.     

Size effect,methodological issues and ‘risk-to-default’: evidence from the UK stock market

The hedging effectiveness of dynamic strategies is compared with static (traditional) ones using futures contracts for the five leading currencies. The traditional hedging model assumes time invariance in the joint distribution of spot and futures price changes thus leading to a constant optimal hedge ratio (OHR). However, if this time-invariance assumption is violated, time-varying OHRs are appropriate for hedging purposes. A bivariate GARCH model is employed to estimate the joint distribution of spot and futures currency returns and the sequence of dynamic (time-varying) OHRs is constructed based upon the estimated parameters of the conditional covariance matrix. The empirical evidence strongly supports time-varying OHRs but the dynamic model provides superior out-of-sample hedging performance, compared to the static model, only for the Canadian dollar.