Firm efficiency and stock returns

In this paper, we investigate the role of firm efficiency in asset pricing using a sample of US publicly listed companies for the period 1988–2007. We employ non-parametric data envelopment analysis (DEA) on various input/output combinations, focusing on sales and market value as output measures in the construction of the frontier technologies. Using these performance measures, we examine whether efficient firms perform differently from inefficient firms following standard financial analysis procedures. First, we employ performance attribution regressions, by forming portfolios based on efficiency scores and tracking the performance of the various portfolios over time. Second, we perform cross-sectional/panel regressions to determine whether firm efficiency indeed has explanatory power for the cross-section of stock returns. Our results suggest that firm efficiency plays an important role in asset pricing and that efficient firms significantly outperform inefficient firms even after controlling for known risk factors.     

Lagged order flows and returns: A longer-term perspective

In this paper, we consider the large-sample relation between returns and lagged order flows over horizons of up to 2 months. The analysis is motivated by work in market microstructure which suggests that the effects of inventory control on stock returns should be discernible over horizons longer than those considered in the literature. We begin our analysis by developing a simple model of inventory effects in the presence of public information. Using mid-quote return data, we then find some evidence of return predictability using order flows, even after controlling for lagged returns, which is consistent with our theoretical setting. The relation is present only for negative imbalances and is stronger in large firms rather than small ones. Overall, the analysis is consistent with the notion that inventory control effects span several weeks.     

Earnings and stock returns: evidence from Germany

Past research in the US indicates that stock prices and earnings per share are related. Evidence pertaining to this relationship in other countries is not as extensive. This paper extends two recent studies focusing on Germany, and provides additional information concerning the important informative role played by DVFA earnings. DVFA earnings are a metric jointly constructed by the Deutscher Vereinigung für Finanzanalyse und Anlageberatung and the Schmalenbach-Gesellschaftwith the purpose of providing investors and others interested in share value with a more meaningful measure of economic income than the traditional published earnings figure     

Autocorrelation,return horizons,and momentum in stock returns

In this study we examine Lewellen’s (Rev Financ Stud 15:533–563 2002) claim that momentum in stock returns is not due to positive autocorrelation as behavioral models suggest. Using portfolio-specific data, we find the autocovariance component of the momentum profit to be negative, suggesting no return continuations. However, we also find that the autocorrelations calculated from short-term (e.g., monthly) returns are quite different from long-horizon (e.g., annual) autocorrelations. While the first-order autocorrelations of 6– and 12-month returns tend to be negative, the autocorrelations across twelve lags in monthly returns of the industry, size, and B/M portfolios are in general positive. Our results show that these portfolios exhibit return continuations when returns are measured on a monthly basis. Therefore, our finding appears to be consistent with the behavioral models, which suggest positive autocorrelation in stock returns.     

Efficiency and stock returns: evidence from the insurance industry

This study investigates whether the capital market values the efficiency of firms. After tracing stock returns and efficiency changes of 399 listed insurance firms in 52 countries during the 2002–2008 period, the paper reports a positive and statistically significant relationship between profit efficiency change and market adjusted stock returns. However, there is no robust evidence that cost efficiency change is associated with stock returns.     

US elections and monthly stock market returns

Using monthly market returns over a period of 104 years, we investigate possible relationships between stock market performance and various occurrences in American elections. Unlike most prior studies, we find little relationship between the two. In the relatively few cases where we do find statistically significant relationships, the degree of explanatory power is quite small. Specifically, market returns do not appear to vary based on partisan control of the government, a result that is robust to the inclusion or exclusion of macroeconomic control variables. Further, the often-discussed “second-half” effect, which predicts higher returns during the second half of a given presidential term, turns out to be both weaker and less straightforward than is commonly believed. Overall, neither election results nor the election cycle appears to offer much help in predicting stock market returns.      

Jump tails,extreme dependencies,and the distribution of stock returns

We provide a new framework for estimating the systematic and idiosyncratic jump tail risks in financial asset prices. Our estimates are based on in-fill asymptotics for directly identifying the jumps, together with Extreme Value Theory (EVT) approximations and methods-of-moments for assessing the tail decay parameters and tail dependencies. On implementing the procedures with a panel of intraday prices for a large cross-section of individual stocks and the S&P 500 market portfolio, we find that the distributions of the systematic and idiosyncratic jumps are both generally heavy-tailed and close to symmetric, and show how the jump tail dependencies deduced from the high-frequency data together with the day-to-day variation in the diffusive volatility account for the “extreme” joint dependencies observed at the daily level.     

The yearend effect in stock returns over business cycles: A technical note

This paper provides evidence in support of the claim that the well-knownJanuary effect is influenced by the stage of the business cycle. Using monthly data for the S&P Composite Index for the period from November 1948 through December 1988 and the standard methodology for seasonal anomalies, the authors show that theJanuary effect is present during the entire period examined as well as in the expansionary phases of that period. However, its existence was not detected during the contractionary phases of that period.     

Acquiring firms' stock returns: Methods of payment,change in leverage,and management ownership

This study examines the effects of the method of payment, change in leverage, and management equity ownership on the acquiring firm's stock returns around the initial announcement date of the merger. Results indicate that stockholders of mergers financed with stocks suffer significant losses. These losses are larger when management ownership is low and smaller in mergers that resulted in acquiring firm leverage decreases. Stockholders of acquiring firms involved in cash mergers gain significant abnormal returns, provided that acquiring firms increase their leverage and that managerial ownership is high. When management equity ownership is low, leverage has no effect on stock returns. When management ownership is high, mergers which resulted in acquiring firm leverage increases have significant positive effects, and those which resulted in acquiring firm leverage decreases have negative but insignificant effects.     

Market index returns,macroeconomic variables,and tax-loss selling

This study provides the most direct macro-level test to date of the tax-loss selling hypothesis as an explanation of the January effect. By examining relationships between macroeconomic variables that should be related to tax-loss selling and market index measures of the January effect, this study provides an approach that addresses the market microstructure problems that are inherent in much of the prior research regarding tax-loss selling. This study also addresses some of the methodological and variable specification concerns in prior macro-level testing, resulting in stronger support for taxloss selling. The authors wish to acknowledge the editor and anonymous referees for helpful comments and suggestions.     

Short sale and stock returns: Evidence from the Taiwan Stock Exchange

Using short sale data of the Taiwan Stock Exchange from January 1991 to September 2004, we examine the informational role played by short interest in stock price formation. Consistent with previous findings based on the US and Australian stock markets, our results show that heavily shorted stocks generate significant and negative risk-adjusted abnormal returns. Moreover, the negative abnormal returns decrease in magnitude and also become statistically insignificant as the holding period extends from 1 month to 1 year. In addition, we test the effect on stock price overvaluation of the interaction of a short sale constraint and a dispersion of opinion. When using turnover ratio as a proxy for a dispersion of opinion, we find that even when the holding period is 6 months, the overvaluation is still significant. Moreover, when a high degree of a dispersion of opinion is captured by a high relative short interest and a high relative margin trade level, the overvaluation remains statistically significant even for a 1-year holding period.     

Corporate environmental policy and abnormal stock price returns: An empirical investigation

This paper examines the correlation between the excess stock market returns and the adoption of an environmental protocol by companies. The underlying hypothesis that I test is whether evidence of the adoption of environmental policy, prosecution by an environmental agency or the routinized training of staff in environmental protocols, which proxies for the willingness of managers to invest for the long term, is associated with superior economic returns to shareholders. I find that both the adoption of an environmental policy and prosecution for breach of environment standards have significant explanatory power in an analysis of excess returns. Copyright © 2001 John Wiley & Sons, Ltd. and ERP Environment     

Asymmetric loss functions and the rationality of expected stock returns

We combine the innovative approaches of Elliott, Komunjer, and Timmermann (2005) and Patton and Timmermann (2007) with a block bootstrap to analyze whether asymmetric loss functions can rationalize the S&P 500 return expectations of individual forecasters from the Livingston Surveys. Although the rationality of these forecasts has often been rejected, earlier studies have relied on the assumption that positive and negative forecast errors of identical magnitudes are equally important to forecasters. Allowing for homogenous asymmetric loss, our evidence still strongly rejects forecast rationality. However, if we allow for variation in asymmetric loss functions across forecasters, not only do we find significant differences in preferences, but also we can often no longer reject forecast rationality. Our conclusions raise serious doubts about the homogeneous expectations assumption often made in asset pricing, portfolio construction and corporate finance models.     

Predictability of stock returns and asset allocation under structural breaks

This paper adopts a new approach that accounts for breaks to the parameters of return prediction models both in the historical estimation period and at future points. Empirically, we find evidence of multiple breaks in return prediction models based on the dividend yield or a short interest rate. Our analysis suggests that model instability is a very important source of investment risk for buy-and-hold investors with long horizons and that breaks can lead to a negative slope in the relationship between the investment horizon and the proportion of wealth that investors allocate to stocks. Once past and future breaks are considered, an investor with medium risk aversion reduces the allocation to stocks from close to 100% at short horizons to 10% at the five-year horizon. Welfare losses from ignoring breaks can amount to several hundred basis points per year for investors with long horizons.     

Economic policy and the presidential election cycle in stock returns

Many papers in the academic literature have documented a “Presidential Election” cycle in stock returns. Prior literature also documents that stock returns appear to be influenced by economic policy. The goal of this study is to examine the tools of fiscal and monetary policy to test for the presence of a presidential election cycle. The findings strongly suggest that the presidential election cycle in stock returns and the government’s economic policy influence on stock returns are two separate phenomena. Moreover, it is much more likely that stock returns are influencing economic policy rather than the other way around. However, the findings also suggest that tax legislation may drive the Presidential Election Cycle.     

Impact of diversification on the distribution of stock returns: International evidence

In the past, stock returns are often assumed to be normally distributed. Potential gains from international portfolio diversification are thus based on a mean-variance framework. However, numerous empirical results reveal that stock returns are actually not normally distributed. Although previous studies found that both skewness and kurtosis can be rapidly diversified away, these results are only valid for a random sample of a given portfolio size. This paper studies the joint effect of diversification and intervaling on the skewness and kurtosis of eleven international stock market indexes with a holding period spanning from one to six months. A complete set of all possible combinations of portfolios is used. It is found that diversification does not reduce either skewness or kurtosis. As the portfolio size increases, portfolio returns become more negatively skewed and more leptokurtic. As a result, a rational investor may not gain from international diversification.     

Size and book-to-market factors in the relationship between average stock returns and average book returns: some evidence from an emerging market

The present paper examines the association between average stock returns and average book returns and addresses the question as to whether there are common size and book-to-market factors in earnings and returns. The results of the empirical research, conducted in the Athens Stock Exchange, suggest that when the sample firms are grouped into size, book-to-market portfolios stock returns properly reflect differences in the evolution of accounting profitability. Moreover, it is found that the return on investment (ROI) measure contains size and book-to-market factors analogous to the mimic risk factors inherent in stock returns, in the sense that they capture information missed by ROI.     

Volatility of stock prices and market efficiency

Recently, historical price series along with the dividend series have been used to severely question the Efficient Markets Hypothesis. The literature suggests that the stock prices vary too much to be explained by subsequent changes in dividends. It is argued in this paper that these results require the assumption of stationarity of the price process and that this assumption is not compatible with the random walk model of Efficient Markets. A non-stationary dividend process, which is compatible with the random walk model of Efficient Markets, results in a reversal of earlier results. The new results are shown to be consistent with the empirical findings. Simulations are run to verify the results.     

Conditional correlations and volatility spillovers between crude oil and stock index returns

This paper investigates the conditional correlations and volatility spillovers between the crude oil and financial markets, based on crude oil returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of the crude oil spot, forward and futures prices from the WTI and Brent markets, and the FTSE100, NYSE, Dow Jones and S&P500 stock index returns, are analysed using the CCC model of Bollerslev (1990), VARMA-GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer, Hoti, and Chan (2008), and DCC model of Engle (2002). Based on the CCC model, the estimates of conditional correlations for returns across markets are very low, and some are not statistically significant, which means the conditional shocks are correlated only in the same market and not across markets. However, the DCC estimates of the conditional correlations are always significant. This result makes it clear that the assumption of constant conditional correlations is not supported empirically. Surprisingly, the empirical results from the VARMA-GARCH and VARMA-AGARCH models provide little evidence of volatility spillovers between the crude oil and financial markets. The evidence of asymmetric effects of negative and positive shocks of equal magnitude on the conditional variances suggests that VARMA-AGARCH is superior to VARMA-GARCH and CCC.     

Interest rate and bank stock returns asymmetry: Evidence from U.S. banks

We use the multivariate extension of Exponential Generalized Autoregressive Conditionally Heteroscedastic (EGARCH) of Nelson, Econometrica, 59: 347–370, 1991 to test for spillover effects and examine the extent of asymmetries between short- and long-term interest rates and portfolios of money center, large, and medium-size banks in the U.S. Our results indicate the existence of price and volatility spillovers from short- and long-term interest rates to the three bank portfolios. We also provide evidence of response asymmetries for the portfolios of money center and large banks, suggesting that money center and large banks are more sensitive to negative than positive short- and long-term interest rate changes.