Managerial actions and stock transactions during financial distress: Some empirical evidence

Should the current managers remain in control of the firm during financial distress? We address this issue by examining whether managers who take value-maximizing actions also refrain from abnormal selling of their own shares in the firm. Our empirical results show that managers in the action firms do not engage in abnormal selling even during periods of frequent earnings losses. These managers exhibit higher net purchases than the nonaction managers. Thus, trading behavior of the managers and the actions taken during poor performance both appear to be consistent with stockholder interests.     

Demutualization,outsider ownership,and stock exchange performance: empirical evidence

We employ a balanced panel data set of 28 stock exchanges to disentangle the effects of demutualization and outsider ownership on the operative performance of stock exchanges. For this purpose we calculate in a first step individual efficiency and factor productivity values via Data Envelopment Analysis. In a second step we regress the derived values on variables that—amongst others—represent the different governance regimes of exchanges in order to examine technical efficiency and factor productivity differences between (1) mutuals, (2) demutualized but customer-owned exchanges, and (3) publicly listed and thus at least partly outsider-owned exchanges. We find evidence that demutualized exchanges exhibit higher technical efficiency than mutuals. However, they perform relatively poor as far as productivity growth is concerned. Furthermore, we find no evidence that publicly listed exchanges possess higher efficiency and productivity values than demutualized exchanges with a customer-dominated structure.      

Deposit insurance and banking system risk: Some empirical evidence

This paper examines the effect of federal deposit insurance on the riskiness of the commercial banking system. It is generally acknowledged that a system affixed rate deposit insurance creates incentives for banks to increase their risk-taking activities. Yet very little empirical evidence exists confirming or refuting this supposition. The coefficient of variation of bank profits and the standard deviation of profits are used as measures of bank risk. How these measures of bank risk are affected by deposit insurance coverage, and other variables thought to affect bank risk, is examined. Deposit insurance is found to have a statistically significant positive effect on bank risk. This result provides empirical support for the FDIC Improvement Act requirement of risk related deposit insurance premiums starting January 1994.     

The MNE investment location decision: Some empirical evidence

Factors governing MNE investment are typically divided into three groups-infrastructural variables, location-specific risk factors and government policy variables. The first objective of this paper is to assess the influence of these factors on MNE location decisions. The second objective is to test whether government participation in location tournaments (whereby local governments offer incentives to MNEs to influence their location decisions) is worthwhile. Arthur (1986,1990) points out that such participation is worthwhile if government policy has irreversible effects that persist after policy is withdrawn. In the estimation of the model, neither risk nor infrastructural factors are found to have a significant effect on the MNE investment location decision. However, there seems to be some evidence indicating that past investment decisions tend to have irreversible effects. Thus, government participation in location tournaments may be worthwhile.     

Ownership structure and firm performance: Some empirical evidence from Spain

The ‘managerial’ and the ‘contractual’ theories of the firm imply different causes and consequences for the relationship between ownership and performance of firms. This paper provides a test of the two conflicting theories, using ownership and performance data from a sample of Spanish family- and non-family-controlled firms. We find evidence in support of the contractual theory of the firm, according to which firms choose their ownership structure maximizing economic value, net of contractual costs.     

The stochastic volatility in mean model: empirical evidence from international stock markets

In this paper we present an exact maximum likelihood treatment for the estimation of a Stochastic Volatility in Mean (SVM) model based on Monte Carlo simulation methods. The SVM model incorporates the unobserved volatility as an explanatory variable in the mean equation. The same extension is developed elsewhere for Autoregressive Conditional Heteroscedastic (ARCH) models, known as the ARCH in Mean (ARCH‐M) model. The estimation of ARCH models is relatively easy compared with that of the Stochastic Volatility (SV) model. However, efficient Monte Carlo simulation methods for SV models have been developed to overcome some of these problems. The details of modifications required for estimating the volatility‐in‐mean effect are presented in this paper together with a Monte Carlo study to investigate the finite sample properties of the SVM estimators. Taking these developments of estimation methods into account, we regard SV and SVM models as practical alternatives to their ARCH counterparts and therefore it is of interest to study and compare the two classes of volatility models. We present an empirical study of the intertemporal relationship between stock index returns and their volatility for the United Kingdom, the United States and Japan. This phenomenon has been discussed in the financial economic literature but has proved hard to find empirically. We provide evidence of a negative but weak relationship between returns and contemporaneous volatility which is indirect evidence of a positive relation between the expected components of the return and the volatility process. Copyright © 2002 John Wiley & Sons, Ltd.     

Alternative measures of rates of return: Some empirical evidence

Firm profitability is measured in most cases by an accounting rather than by the theoretically superior economic (or internal) rate of return. This paper explores the relationship between accounting and internal rates of return using COMPUSTAT data for 1013 large industrial firms over a 20-year period. The research was motivated by the controversy ongoing between scholars concerning the validity of the accounting rate of return as a proxy for economic profit. The method used in this paper is different from previous research in that cash flow profiles are estimated instead of being assumed. The results, while generally supporting the contention that accounting rates of return are poor proxies for underlying economic rates of return, also provide evidence that the distortions are not so great as to render them useless for performance measurement and managerial decision-making purposes.     

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.     

Forecast persistence and clustering: Additional evidence

This study intends to address the persistence of the bias in analysts’ earnings forecasts and clustering effects of time, industry classification, and stock exchange listing. Following Kwag and Shrieves (2006), I use a look-back portfolio formation method that captures salient features of analysts’ past forecasting behavior and form quintile portfolios that describe the range of analysts’ forecasting behavior. Consistent with Kwag and Shrieves, empirical evidence suggests that analyst optimism and pessimism tend to persist. Time, industry classification, and stock exchange listing do not seem to influence such phenomenon. (JEL G14, G19)     

Optimal portfolio choice in the presence of domestic systemic risk: empirical evidence from stock markets

In this paper, we empirically investigate the consequences of domestic systemic risk for stock market investors. To tackle this issue, we consider two different investment strategies. One strategy is to be “crisis-conscious”, i.e., taking the possibility of systemic events into account, and the other one is to be “crisis-ignorant” and thus disregarding systemic risk. We compare the optimal portfolio choices and investment results of these strategies in an historical simulation, using almost three decades of historical stock price data. Our main findings are as follows: the crisis-conscious investor tends to choose less extreme portfolio weights for individual stocks than the ignorant investor. The overall risky investment is, however, of similar size for both. By ignoring the possibility of systemic events, the crisis-ignorant strategy performs significantly worse from the viewpoint of expected return as well as expected utility.     

Volatility estimation for stock index options: A GARCH approach

The objective of this paper is to compare the mispricing of option valuation models when alternate techniques are applied to the volatility estimation. Akgiray (1989) shows that out-of-sample forecasts of return variances of stock indices based on a GARCH model are superior predictors of the actual ex-post variances in comparison to forecasts generated using standard rolling regression methods. A second objective of this study is to examine if Akgiray's results carry over to option valuation. Although we find that the implied volatility technique results in the least mispricing, within the class of forecasts using only historic returns data, the use of GARCH models will also significantly reduce model mispricing.     

Note: Heteroscedasticity in the market model: Some evidence from the athens stock exchange

Over the last three decades a substantial amount of empirical research has been undertaken to investigate the behaviour of major securities markets. While some work has been done with data from the markets of developing countries, considerable testing must be undertaken for the world's emerging securities market. The objective of this paper is to present some Greek evidence of the heteroscedasticity in the market model. The paper examined 43 companies quoted on the Athens Stock Exchange and found substantial evidence of heteroscedasticity.     

Some empirical evidence on the real effects of nominal volatility

It has been argued that volatility in nominal macroeconomic aggregates has had a negative effect on real output, in particular that such volatility contributed to slow output growth in the early 1980s. This paper reexamines the effects of volatility in nominal macroeconomic aggregates in the context of a modern simultaneous equation framework where the volatility of, nominal macroeconomic variables is modeled as the conditional variance of two variables of interest: the federal funds rate and inflation. The empirical framework is the recently developed multivariate GARCH-in-mean vector autoregressive model. We confirm evidence that inflation volatility and tight monetary policy have directly affected output growth, but find that volatility in the federal funds rate has not.     

Budget deficits and stock prices: International evidence

The purpose of this research is to provide empirical evidence regarding deficits and their effects on stock prices. We investigate whether changes in deficits cause changes in stock prices and if so, in what direction. We use Granger causality tests and impulse response analysis of vector autoregressive models to assess the relationship between budget deficits and stock prices in several industrialized nations. The evidence from impulse response analysis and Granger causality tests shows that only in the U.S. deficit reductions have an inverse effect on equity returns.     

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     

Policy on the margin: Evaluating the impact of margin debt requirements on stock valuations

Rapidly rising stock prices in the 1990s raised worries about potential inflationary or destabilizing effects. The use of initial margin debt requirements by the Federal Reserve was proposed to reduce the run-up in stock prices. This paper evaluates the likely impact of margin debt requirements on stock valuations. The results suggest that higher margin requirements would have had no impact on stock market valuations in the 1990s, Moreover, other forms of consumer credit are relatively more important in determining household equity positions than margin debt, making the control of margin debt not an obvious public policy choice.(JEL E58, G18)     

Compensation-based stock trading by corporate executive and aggregate management ownership of the firm: Some additional evidence

Managers place a low value on equity-based compensation because it exposes them to the risk of the firm. Such undervaluation and the need to achieve diversification may force a manager to sell his own stock of the firm in response to equity-based awards. In this paper we examine whether such stock selling by an executive depends on the aggregate level of management ownership of the firm. We argue that stock selling occurs at a high level of aggregate ownership where an executive has a low probability of being replaced. Our findings support this “management ownership” argument of compensation-based stock trading. One implication is that the board's effort to minimize agency conflicts becomes less effective once aggregate ownership increases to a certain threshold level. (JEL G30, G32) This research was carried out with the support of the Western New England College research fund.