PRIOR UNCERTAINTY,ANALYST BIAS,AND SUBSEQUENT ABNORMAL RETURNS

In this paper we examine the relation between analysts' overoptimism and uncertainty as proxied by the standard deviation of earnings forecasts. We find a positive relation between overoptimism and uncertainty, but very little or no optimism when uncertainty is low. If the uncertainty surrounding a firm is high, analysts have fewer reputational concerns when they act on their inclinations to issue optimistic forecasts. Portfolio strategies based on these findings generate abnormal returns. The results suggest that greater prior uncertainty leads to higher analyst optimism, which in turn causes market overvaluation and profitable portfolio strategies.     

INVESTMENT TRUST DISCOUNTS AND ABNORMAL RETURNS: UK EVIDENCE

Attempts to explain the apparent anomaly of the discount to Net Asset Value of investment trust (or closed-end fund) shares have had little success. The present study of UK monthly data finds that investment trust shares selected on the basis of high (low) discounts tend to experience high (low) abnormal returns in the year following selection, which implies mean reversion in the discounts and hence market inefficiency. Furthermore, evidence is presented that the Net Asset Value and the price of investment trust shares are cointegrated, which implies the existence of profitable trading rules based on the identification of Error Correction Mechanisms.     

SECURITY ANALYST FORECASTS AND THE EARNINGS YIELD ANOMALY

This paper tests for existence of a positive relationship between the earnings yield anomaly and the earnings forecast error (EFE) effect. The earnings yield anomaly recognizes that stocks with low price-earnings ratios produce positive risk-adjusted returns. The EFE effect refers to the positively related stock price response to differences in reported earnings per share (EPS) and the EPS previously forecast by security research analysts. The within group method is used in order to remove the effect of the EFE. Empirical research findings based on 1979-1988 data, indicate that the EFE effect does not account for the earnings yield anomaly.     

PE RATIOS,EARNINGS EXPECTATIONS,AND ABNORMAL RETURNS

This study provides evidence that the price-earnings (PE) ratio effect is not homogeneous across firms with similar PE ratios. Instead, firms with the lowest PE ratios and those with the lowest expected annual earnings per share outperform all other groups in January. These results can be partially attributed to security analysts consistently underestimating reported earnings of firms with the lowest level of expected earnings and the lowest PE ratios. A negative October effect is also found for the same-firms, which appears to be caused by downward revisions in analysts' forecasts between September 16 and November 16.     

THE ROBUSTNESS OF ABNORMAL RETURNS FROM THE EARNINGS YIELD CONTRARIAN INVESTMENT STRATEGY

We examine the sensitivity of the abnormal profitability of the earnings' yield (E/P)‐based contrarian investment strategy to the following two risk measurement issues: (a) return‐measurement interval over which systematic risk is estimated and (b) time variation in systematic risk. We conduct our analysis using the capital asset pricing model to parameterize risk. We find that the estimates of systematic risk of E/P‐ranked portfolios are not sensitive to the return‐measurement interval. Consequently the abnormal profits to the E/P‐based contrarian investment strategy observed in prior studies are not artifacts of the return‐measurement interval. Furthermore, although both the raw and abnormal returns to E/P‐ranked portfolios exhibit mean reversion, time variation in systematic risk ensuing from this mean‐reverting behavior does not substantially affect abnormal profits to E/P‐ranked portfolios. JEL classification: G11, G12, G14     

FINANCIAL LITERACY AND PENSION INVESTMENT DECISIONS

The call for enhanced financial literacy amongst consumers is a global phenomenon, driven by the growing complexity of financial markets and products, and government concerns about the affordability of supporting an ageing population. Worldwide, defined benefit pensions are giving way to the risk and uncertainty of defined contribution superannuation/pension funds where fund members now make choices and decisions that were once made on their behalf. An important prerequisite for informed financial decision‐making is adequate financial knowledge and skills to make competent investment decisions. This paper reports the findings of an online survey of the members of a large Australian public sector‐based superannuation fund and shows that although respondents generally understand basic financial matters, on average, their understanding of investments concepts, such as the relationship between risk and returns, is inadequate. These results highlight the need for education programs focusing specifically on developing fund members’ investment knowledge and skills to facilitate informed retirement savings decisions.     

THE STRUCTURE AND CONTENT OF EXECUTIVE AGENCY FINANCIAL STATEMENTS

This paper reports the results of a survey of the published financial statements of executive agencies entering the Price Waterhouse Best Agency Report and Accounts Competition. The survey illustrates the application of GAAP designed for one environment in a different context and the difficulties that result under these circumstances from the absence of direct analogies for some classes of event. Some suggestions for improvements in reporting are made, includ- ing: the publication of standardised, sector-wide, guidance; standardisation of formats and terminology; the use of the 'expenditure less income' format for the operating statement in appropriate cases; and the clarification of insur- ance arrangements.     

LOW PRICE, PRICE-EARNINGS RATIO, MARKET VALUE, AND ABNORMAL STOCK RETURNS

In this research, the individual and net effects of low price, low price/earnings (P/E) ratio, and small size on the risk-adjusted excess returns are investigated for the fourth quarter of 1975 to the fourth quarter of 1985. The entire sample is divided into quintiles, and the resulting portfolios are rebalanced at the end of each quarter. Low price, low P/E ratio, and small value portfolios did experience greater excess returns. By applying the experimental control technique, the net effect of stock price is significant after controlling the size. Similarly, the net effect of the market value is significant after the stock price is controlled. The net effect of the P/E ratio is insignificant after controlling either the stock price or the market value.     

MAINBANKS AND INVESTMENT EFFICIENCY IN FINANCIAL DISTRESS

We explore the effects of mainbanks on investment efficiency in financial distress. The previous literature argues that firms with close financial relationships with banks have lower costs of financial distress because of a reduced underinvestment problem. Although benefits may accrue to such close relationships, we contend shortcomings are possible as well. A firm in financial distress without a mainbank may be forced to reduce investment or sell assets to a buyer who has a higher value. However, for a firm with a mainbank, this disciplinary force is weakened. To firms with poor investment opportunities, the presence of mainbanks may actually induce an overinvestment problem. The empirical findings reported here are consistent with this idea. JEL classification: G31, G33, G34.     

THE INFORMATION CONTENT OF INFLATION-ADJUSTED FINANCIAL STATEMENTS

This paper seeks to examine whether current cost accounting information provides additional useful information to users of accounts by examining the impact of such information on stockmarket activity. The statistical tests compare the share price movement of companies reporting current cost informa- tion with a control group of matched companies reporting only historic cost information. Wherever possible allowance is made for the impact of other information released at the same time as accounting information. The results seem to indicate that the release of current cost information had no traceable effects on the share market prices of the companies concerned.     

ESTIMATING RETURNS ON FINANCIAL INSTRUMENTS: TIME VERSUS MONEY-WEIGHTED RETURNS

The present paper addresses the problem of estimating returns on financial instruments when there is incomplete information about the instrument's cash flows. Two return metrics are analysed; namely, the money-weighted return and the time-weighted return. Returns are usually reported in the financial media on a money-weighted basis. However, there is increasing evidence that returns measured on a time-weighted basis are more appropriate for the evaluation of financial performance. The present note outlines the relationship between the two return metrics and examines some estimation procedures which may be used.     

THE IMPACT OF UNEXPECTED EARNINGS AND DIVIDENDS ON ABNORMAL RETURNS TO EQUITY

This paper contributes to the empirical literature which documents the existence of a positive association between unexpected earnings and/or dividend announcements and abnormal returns to equity. The paper addresses some of the methodological limitations evident in the literature. In particular, one methodological difficulty encountered by previous studies is that since earnings and dividend announcements are usually made contemporaneously it is difficult to assess the marginal effect of either announcement on security returns. This problem is dealt with by constructing portfolios of securities which are randomized with respect to unexpected earnings (dividends), but which are systematically ranked on unexpected dividends (earnings). The results indicate that unexpected earnings announcements have a significant marginal impact on abnormal returns. In addition, there is evidence of an impact of unexpected dividends on returns, but it is weaker than unexpected earnings.