The Performance of Actively Managed International Mutual Funds

International mutual funds allow individual investors to diversify abroad at a reasonable cost. This paper tests whether international funds that actively engage in country and security selection outperform passive global benchmarks. We apply a mean-variance efficiency test that incorporates the practical prohibition against short sales of open-end mutual funds. Our tests reject the efficiency of the world equity market portfolio over the sample period, and our funds as a group outperform the inefficient world index. However, we find no evidence of security selectivity ability using a 12-country benchmark. We do find that active international funds provide global diversification benefits. Tests using the Positive Period Weight (PPW) measure of Grinblatt and Titman (1989), which is robust to nonlinearity in fund and benchmark returns, yield similar results.     

International equity diversification and shortfall risk

International equity diversification benefits Canadian investors very substantially by reducing shortfall risk, as shown by results of a model that minimizes the risk of shortfall from a desired consumption level for a retired investor with an unknown date of death and stochastic investment returns. It does not benefit American investors materially. The United States equity market is a large proportion of the international equity market that is available to individual investors, and United States returns are highly correlated with other markets.     

Is Carl Icahn Good for Long-Term Shareholders? A Case Study in Shareholder Activism

The increase in activist campaigns by entrepreneurial investors and hedge funds in the past decade has raised considerable debate about their benefits for average shareholders. Although critics have longed charged that the proposals for change by such active investors typically do not increase the longer-run efficiency and values of the targeted companies, more recent studies have provided evidence of success, both in terms of increasing the market value of such companies and achieving at least some of the investors' expressed objectives. This article attempts to add to these findings by examining the case of a single well-known investor, Carl Icahn, whose career as a shareholder activist now spans at least three decades. The authors report, first of all, that Icahn's targets have included companies from a remarkable variety of industries, and that his stated objectives have varied with the industries of the targets. Although more of Icahn's targets appear to have been overleveraged than underleveraged, a significant minority have had payouts ratios that were judged to be too low and more cash than they needed. In terms of Icahn's effect on other shareholders, the authors report a significant positive stock price reaction—on the order of 10%—to the announcement of Icahn's taking a position in the target firm. When examining the subsequent performance of the target firms, the authors found a very large difference between those firms that were either taken private or acquired (within 18 months)—over a third of the target companies—and those that remained independent. The authors report that although the acquired group achieved significant positive stock market returns, the firms that remained independent suffered very negative (-60%) returns. Although Icahn's proposed changes could be responsible, as critics charge, for the performance of the latter group, the authors suggest that the success of many of these companies in fending off Icahn without enacting most of his proposed reforms is a more plausible explanation. At the same time, the authors report that Icahn was successful in achieving at least one of his stated objectives in well over half of the cases in which the target companies remained independent.     

Primacy in stock market participation: the effect of initial returns on market re-entry decisions

We examine whether initial returns influence investors’ decisions to return to the stock market following withdrawal. Using a survival analysis technique to estimate Finnish retail investors’ likelihood of stock market re-entry reveals that investors who experience lower initial returns are less likely to return, even after controlling for returns in the last month and average monthly returns for the duration of investing. This primacy effect is robust to accounting for endogeneity in investors’ exit decisions, and other behavioural biases such as recency and saliency of investment experience. Individual investors appear to be subject to primacy bias and tend to put a significant weight on initial experiences in re-entry decisions.     

The informativeness of domestic and foreign investors’ stock trades: Evidence from the perfectly segmented Chinese market

This paper uses the perfect market segmentation setting in China's stock market to compare the information content of the stock trades of domestic and foreign investors. We study 76 firms that issue both A-shares (for domestic investors) and B-shares (for foreign investors) and compare the price discovery role of the two segmented markets in China. Before Feb 19, 2001, the A-share market led the B-share market in price discovery, as the signed volume and quote revision of the A-share market had strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors were allowed to invest in the B-share market, we find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the [Hasbrouck (1995). One security, many markets: determining the contributions to price discovery, Journal of Finance 50, 1175–1199.] information share analysis reveals that A-shares continue to dominate the price discovery process.     

Dividend Consistency: Rewards,Learning, and Expectations

The fact that many companies have a long track record of consistent dividend increases suggests that managers believe there is some benefit to establishing and maintaining such a pattern. Many companies, for example, follow a perennial policy of increasing the dividend in a particular quarter, maintaining it at the same level for the next three quarters, and then increasing it in the same quarter of the following year. But does the capital market reward companies for maintaining a consistent dividend policy? Do companies with a history of repeated dividend increases earn long‐term positive abnormal returns; and if so, how long do the returns persist? The authors find that companies earned significantly positive abnormal returns following each of the first five annual dividend increases, over and above the positive announcement‐month returns. Nevertheless, the reward decreases as the track record of dividend increases becomes longer. After the first dividend increase, companies enjoy significantly positive returns for the next two years. Companies that increase the dividend in the same quarter of the following year also enjoy significant positive returns, but returns that are smaller (and less statistically significant) than in the case of first‐time dividend increases. And as the dividend‐increase track record further lengthens, the size and statistical significance of the abnormal returns continues to shrink; and after the sixth dividend increase, the abnormal returns in the next twelve months are statistically indistinguishable from zero. In sum, although there is some support for maintaining a consistent dividend policy, the market response diminishes over time, and investors do not earn abnormal returns by buying stocks whose annual dividend has already been increased six or more times.     

Impact investing

We show that investors derive nonpecuniary utility from investing in dual-objective Venture Capital (VC) funds, thus sacrificing returns. Impact funds earn 4.7 percentage points (ppts) lower internal rates of return (IRRs) ex-post than traditional VC funds. In random utility/willingness-to-pay (WTP) models investors accept 2.5–3.7 ppts lower IRRs ex ante for impact funds. The positive WTP result is robust to fund access rationing and investor heterogeneity in fund expected returns. Development organizations, foundations, financial institutions, public pensions, Europeans, and United Nations Principles of Responsible Investment signatories have high WTP. Investors with mission objectives and/or facing political pressure exhibit high WTP; those subject to legal restrictions (e.g., Employee Retirement Income Security Act) exhibit low WTP.     

MEAN GINI CAPITAL ASSET PRICING MODEL: SOME EMPIRICAL EVIDENCE

The capital asset pricing model of Sharpe (1964) and Lintner (1965) provides a valid approach to portfolio selection if either the distribution of asset returns is jointly normal or the investor's preference function is quadratic. Various authors have questioned the validity of these assumptions, and Roll (1977) raises the question whether the traditional CAPM can be tested. An alternative Capital Asset Pricing Model has been proposed by Shalit and Yitzhaki (1984). In this model the extended mean Gini coefficient is used to measure risk. As little research has been conducted on this model, this paper estimates systematic risk as derived from the extended mean Gini model for a sample of Australian companies and compares the empirical security market line with the predicted extended mean Gini security market line.     

EXPLAINING PREMIUMS AND DISCOUNTS ON CLOSED-END EQUALITY COUNTRY FUNDS

Over the past decade or so, the surge of interest among U.S. investors in international investing has led to the creation of numerous foreign equity country funds. Like U.S. closed-end mutual funds, the prices of such closed-end country funds fluctuate widely in relation to their underlying net asset values (NAVs).
In this paper, the authors summarize the major findings of their recent study of the performance of 28 country funds relative to their NAVs over the period 1978–1995. While 20 of the 28 funds traded at average discounts to their net asset values, the discounts for the country funds were smaller than those of the average U.S. fund, and over a quarter of the funds sold at premiums.
In an attempt to explain such premiums or discounts, the authors examined primarily three factors: (1) the sensitivity of country-fund returns (relative to that of local market indices) to U.S. returns; (2) the possible effects of local government investment restrictions; and (3) the impact of exchange rate changes. Although most of the eight funds that traded at average premiums represented countries with significant restrictions on capital flows and foreign ownership, there were also a number of funds with similar restrictions trading at significant discounts. In exploring the reasons for such discounts, the authors noted that the returns to the country funds were "surprisingly sensitive" to U.S. market conditions, thus reducing the extent of their diversification benefits for U.S. investors. The article also raises the possibility that if such country funds are not "priced at the margin" by globally diversified investors, U.S investors' "country-risk sentiments" could cause such funds to trade at discounts.     

Investor Overconfidence and Trading Volume

The proposition that investors are overconfident about theirvaluation and trading skills can explain high observed tradingvolume. With biased self-attribution, the level of investoroverconfidence and thus trading volume varies with past returns.We test the trading volume predictions of formal overconfidencemodels and find that share turnover is positively related tolagged returns for many months. The relationship holds for bothmarket-wide and individual security turnover, which we interpretas evidence of investor overconfidence and the disposition effect,respectively. Security volume is more responsive to market returnshocks than to security return shocks, and both relationshipsare more pronounced in small-cap stocks and in earlier periodswhere individual investors hold a greater proportion of shares.(JEL G11, G12)     

The Mayers-Rice conjecture: A counterexample

Mayers and Rice conjecture that an investor with better information will on average plot above the security market line as drawn by uninformed investors. This paper demonstrates that this conjecture is false in general, by constructing a counterexample. However, the Mayers-Rice conjecture is really part of a much broader hypothesis concerning whether increases in expected returns correspond to increases in expected utilities. It is shown that this latter hypothesis is true when the investor has an exponential or logarithmic utility function.     

Estimating the time Varying Components of international stock markets' risk

In this study an alternative approach for assessing securities' risk is applied. Various authors have argued that security returns are not homoskedastic but exhibit variation over time. They have observed that large changes tend be followed by more large changes in either direction, and so volatility must be predictably high after large changes. This phenomenon of securities' volatility, referred to as clustering, has important implications for security pricing and risk management. Among the most popular techniques currently used to capture the clustering effect and to forecast future volatilityare those belonging to the family of Autoregressive Conditional Heteroskedastic (ARCH) models. The main aim of this paper is to investigate whether such volatility modelling can be used to capture the time variation not only in the total risk of a security return but also its systematic and unsystematic components. Using weekly local stock market data, the time varying beta with the World Index has been estimated via a bivariate GARCH-M model. The GARCH-M parameterization used here is a dynamic specification of the SIM. The hypothesis that this dynamic specification holds cannot be rejected for 11 out of 13 local portfolios. The results provide evidence that both the systematic and the non-systematic counterparts are also changing over time. However, in some markets those risk changes may take place with some delay. This suggests that some of the low correlation coefficients computed for certain stock market returns may not be due to differences in business cycles among those countries, but may be caused by the non-synchronous response to world market developments. This finding should have important implications in many investment decisions such as portfolio selection, market timing and risk hedging.     

行为模型新解及其实证检验

在以信息逐步扩散和投资者有限理性为主要假设的行为模型中,特定信息交易者和市场信息交易者的比例对股价行为有着重要影响：当特定信息交易者占多数时,个股收益更容易呈现正自相关;当市场信息交易者占多数时,个股收益更容易呈现负自相关。该模型可以解释成熟股市中存在基于总收益的动量效应,而中国股市中不存在基于总收益的动量效应,仅存在基于公司特定收益的动量效应;并解释了市场平均收益呈现负自相关等。另外,实证分析支持了传统的CAPM和APT定价模型中的带越小,动量效应越显著的结论。     

Taxes and portfolio composition

This paper explores investors portfolio behavior when security returns can be described by one of the forms of the CAPM model and investors pay taxes. The conditions under which an investor holds the market portfolio are explored. In addition the extent to which securities are held in proportions which differ from market weights are shown to be functions of tax rates, dividend policies, and the variance covariance structure between all securities.     

Who exacerbates the extreme swings in the Chinese stock market?

We investigate which investors buy or sell relatively more on the days when the absolute value of market returns or the daily range of market index prices exceeds 5% in the Chinese stock market. Unlike Dennis and Strickland [Journal of Finance 57(5): 1923–1949 (2002)] who find that institutional investors are buying (selling) more when there is a large market increase (decline) in U.S. equity markets, we find that institutional investors in China are systematically buying more than the less sophisticated individual investors during extreme market swings, particularly on extreme market-down days. We reveal that institutional investors in China (primarily pension funds), provide a stabilizing influence during market downturn days. Our findings highlight the benefits of having active institutional investors in an extremely volatile emerging market dominated by less sophisticated individual investors.     

Locals,foreigners, and multi-market trading of equities: Intraday evidence from Thailand

We study stock market orders and trades in a developing country, Thailand, where foreign ownership limits partially segment local and foreign investors into two distinct markets. Some foreigners forgo voting rights and distributions to trade on the “local board”, while some locals forgo such benefits and pay a price premium to trade on the “foreign board”. Regardless of nationality, these cross-market traders typically submit orders when liquidity is high, fill orders at relatively beneficial prices, exploit patterns in stock prices across markets, display profitable holding-period returns, and enhance price discovery. This suggests that skilled, informed trading that affects market quality does not depend on trader nationality.     

INVESTMENT PERFORMANCE OF COMMON STOCKS IN RELATION TO INSIDER OWNERSHIP

In this paper, the authors empirically examine whether corporations with high degrees of insider ownership enjoy superior returns compared with firms with more diffuse ownership. In addition, the authors evaluate the effects of insider ownership on security returns in relations to the well-known effects of size and earnings yield (or price-earnings) ratios. Results indicate that, in addition to Basu's price-earnings effect, insider ownership is a new statistically significant variable that is associated with abnormal returns. This return anomaly might occur because the market pays an inadequate price for top managements' equity ownership, a firm-specific fundamental variable that has a theoretical foundation in agency theory.     

Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets

This study examines global diversification benefits from the perspective of local investors in the frontier markets in the Gulf Cooperation Council using two diversification measures: the correlation index and return dispersion. The findings suggest a strong link between market volatility and both diversification measures in all markets, with the exception of Bahrain, indicating that investors in these frontier markets will face significant challenges achieving desired levels of diversification using domestic stocks only. However, I also find that significant amount of market risk in these countries can be eliminated by supplementing domestic portfolios with positions in advanced markets. Finally, I show that risk minimization strategies using foreign traded assets also lead to favorable risk adjusted returns for investors in these markets, stressing the potential benefits of financial liberalization in developing markets.     

Empirical relationship between macroeconomic volatility and stock returns: Evidence from Latin American markets

Emerging market stock returns have been characterized as having higher volatility than returns in the more developed markets. But previous studies give little attention to the fundamentals driving the reported levels of volatility. This paper investigates whether dynamics in key macroeconomic indicators like exchange rates, interest rates, industrial production and money supply in four Latin American countries significantly explain market returns. The MSCI world index and the U.S. 3-month T-bill yield are also included to proxy the effects of global variables. Using a six-variable vector autoregressive (VAR) model, the study finds that the global factors are consistently significant in explaining returns in all the markets. The country variables are found to impact the markets at varying significance and magnitudes. These findings may have important implications for decision-making by investors and national policymakers.     

Shareholder investment horizons and the market for corporate control

This paper investigates how the investment horizon of a firm's institutional shareholders impacts the market for corporate control. We find that target firms with short-term shareholders are more likely to receive an acquisition bid but get lower premiums. This effect is robust and economically significant: Targets whose shareholders hold their stocks for less four months, one standard deviation away from the average holding period of 15 months, exhibit a lower premium by 3%. In addition, we find that bidder firms with short-term shareholders experience significantly worse abnormal returns around the merger announcement, as well as higher long-run underperformance. These findings suggest that firms held by short-term investors have a weaker bargaining position in acquisitions. Weaker monitoring from short-term shareholders could allow managers to proceed with value-reducing acquisitions or to bargain for personal benefits (e.g., job security, empire building) at the expense of shareholder returns.