What do the Fama–French factors add to C-CAPM?

This study extends standard C-CAPM by including two additional factors related to firm size (SMB) and book-to-market value ratio (HML) — the Fama–French factors. C-CAPM is least able to price firms with low book-to-market ratios. The explanation of these returns, as well as the returns on the SMB and HML portfolios, is significantly improved by the inclusion of the HML factor. The component of the risk premia explained by consumption varies across size. We suggest that a possible explanation for the role of HML is its association with the investment growth prospects of firms.     

Do industries contain predictive information for the Fama–French factors?

We examine whether the returns of US industry portfolios predict the returns and volatility of Fama and French's small-minus-big (SMB) and high-minus-low (HML) factors. The analysis reveals that all 30 industry returns strongly forecast one-month-ahead SMB factor returns. Moreover, a significant number of industry returns predict the volatility of the SMB and HML factors by up to two or three months. These findings suggest that US industry returns contain profitable information on Fama–French SMB and HML factors, and since most investors cannot extract the profitable information contained in industry returns in a timely manner, this information gradually diffuses in equity markets.     

The microstructure of fear,the Fama–French factors and the global financial crisis of 2007 and 2008

We analyze minute by minute equity price data from 1 August 2005 to 31 October 2008 to study the relationship between the three sources of systematic risk in Fama and French's (1993) model and the market's expectation of total risk as represented by the VIX (the “fear factor”). Our findings confirm the predicted relationship between the equity risk-premium and risk (Merton, 1980). We find that the size-premium is driven by investors who are flying-to-quality (Abel, 1988; Barsky, 1989). We also find that investors became increasingly sensitive to changes in the VIX during the global financial crisis.     

Fama–French factor timing: The long-only integrated approach

There is ample evidence that factor momentum exists in the standard long–short mixed approach to factor investing. However, the excess returns are put under scrutiny due to the high implementation costs. We present a novel real-life approach that relies on the long-only integrated approach to factor investing. Instead of exploiting the potential momentum in factor portfolios, our strategy builds on the momentum of the optimal factor score weights in the integrated approach, which allows us to additionally profit from the serial dependence in the factors' interaction effects. One limitation of short-term timing strategies is their high turnover. By including the information of the covariance matrix and minimising the strategy's risk to the market portfolio, we can substantially reduce turnover. The resulting timing alpha remains significant even after transaction costs in a robust statistical test framework across the major stock markets.     

Are financial derivatives related to intra-entities' tax aggressiveness? UK evidence

This study investigates the effect of hedged versus nonhedged financial derivative instruments on the intra-entities' tax aggressiveness. Our findings provide evidence that multinational enterprises manage derivatives instruments to avoid their tax expenses aggressively. Specifically, nonhedged derivatives are an excellent determinant of the tax aggressiveness practices of corporate groups. Besides, this study speaks to the central role of governance quality in mitigating this aspect of tax aggressiveness and provides practical guidance to tax authorities and regulators for establishing new policies for governing financial derivative instruments and preventing tax aggressiveness from negatively affecting firms and society.     

Cross-sectional tests of the CAPM and Fama–French three-factor model

Grouping does not produce a wide range of betas. Consequently, cross-sectional tests of the CAPM are bound to lack power. This paper provides a simple way to alleviate the problem by repackaging the data with zero-weight portfolios. When the CAPM is true and the data are repackaged, simulation shows that the average values of the intercept and slope converge to their true values more rapidly and there are striking increases in R² and the power of the tests. Empirical results are dramatically different in datasets with and without the zero-weight portfolios.     

Is the intrinsic value of a macroeconomic news announcement related to its asset price impact?

The literature documents a heterogeneous asset price response to macroeconomic news announcements. We relate this heterogeneity to a novel measure of the intrinsic value of an announcement—the announcement’s ability to nowcast GDP growth, inflation, and the federal funds target rate—and find that differences across the intrinsic values of several U.S. macroeconomic announcements explain a significant fraction of the variation in the impact each of these announcements has on U.S. Treasury yields. We also decompose the intrinsic value into the announcement’s relation to fundamentals, a timeliness premium, and a revision premium, and find that the former two characteristics are the most important ones in explaining the heterogeneous response.     

Constructing Fama–French Factors from Style Indices: Evidence from the Islamic Equity Market

This study has contributed to the analysis of the Fama–French three-factor model by proving the validity of model using the newly constructed Fama–French factors from Malaysian Islamic stock market. With generalized method of moments and robustness tests, our results compliment earlier studies by comparing the results over two sub-periods, before and after the financial crises and the fall of Lehman Bros. The results of the analysis suggest that the reversal of size effects exists after periods of financial crisis. This is the first attempt to create FF factors and test the model from Islamic equity style indices.     

On the validity of the augmented Fama and French’s (1993) model: evidence from the Hong Kong stock market

This paper investigates the performance of four-factor asset pricing model using Hong Kong stock returns. Our four-factor model is constructed by adding a momentum factor into the Fama and French’s (J Finance Econ 33(1):3–56, 1993) three-factor model. We find that the four-factor model may explain return variation using Hong Kong data. Our results show evidence that all the four factors are significant in the model and intercepts are not significant. In addition, the reasonably high values of adjusted R ² and the insignificance of an additional explanatory variable of residual standard deviation provide supportive evidence to the model. The robustness of the model is also checked for two effects: up- and down-market conditions and seasonal behavior.     

The dividend–price ratio does predict dividend growth: International evidence

Unpredictable dividend growth by the dividend–price ratio is considered a ‘stylized fact’ in post war US data. Using long-term annual data from the US and three European countries, we revisit this stylized fact, and we also report results on return predictability. We make two main contributions. First, we document that for the US, results for long-horizon predictability are crucially dependent on whether returns and dividend growth are measured in nominal or real terms, and this difference is due to long-term inflation being strongly negatively predictable by the dividend–price ratio. The impact of inflation is to reinforce real return predictability and to reduce – or change direction of – real dividend growth predictability. This provides an explanation for the strong predictability of long-horizon real returns in the ‘right’ direction, and the strong predictability of long-horizon real dividend growth in the ‘wrong’ direction, that we see in US post war data. Second, we find that predictability patterns in three European stock markets are in many ways different from what characterize the US stock market. In particular, in Sweden and Denmark dividend growth is strongly predictable by the dividend–price ratio in the ‘right’ direction while returns are not predictable. The results for the UK are mixed. Our results are robust to a number of changes in the modeling framework. We discuss the results for dividend growth predictability in terms of the ‘dividend smoothing hypothesis’.     

Are all dividends created equal? Australian evidence using dividend‐increase track records

Recent research indicates that the signal sent by a dividend change is more powerful for longer histories of unchanged dividends. We study the dividend history of Australian firms to investigate whether the signalling power of a dividend increase varies with the frequency of repetition. We find that the first three consecutive dividend increases are associated with significantly positive abnormal returns, and subsequent increases are generally not significant, even after controlling for the interaction effect with the simultaneously announced earnings information. Our results support the hypothesis that repeating a dividend increase eventually leads to a reputation for further increases and weakens the value of subsequent increases as a means of disseminating management's private information.     

Is sovereign risk related to the banking sector?

We examine whether the banking sector within a nation is related to sovereign risk. We hypothesize that more competitive and sophisticated financial systems are less prone to panics or bank runs, and consequently will be associated with superior sovereign credit ratings. Using Ordered Probit with Aggregate Time Effects methodology, our results show that banking sector characteristics such as concentration in the banking system, liquidity of bank assets, and size of financial system are significantly related to sovereign credit ratings. Since the use of these sovereign ratings is ubiquitous in international finance in varied applications such as determination of the cost of international borrowing by governments, international cost of capital for FDI, and others, the relationships identified in this paper have important public policy implications.     

Are extreme returns priced in the stock market? European evidence

This paper revisits some recently found evidence in the literature on the cross-section of stock returns for a carefully constructed dataset of euro area stocks. First, we confirm recent results for US data and find evidence of a negative cross-sectional relation between extreme positive returns and average returns after controlling for characteristics such as momentum, book-to-market, size, liquidity and short term return reversal. We argue that this is the case because these stocks have lottery-like characteristics, which is attractive to certain investors. Also, these stocks tend to be very volatile so that arbitrageurs are discouraged from correcting potential mispricing. As a consequence, these stocks are often overpriced and hence face lower expected returns. Second, when we control for extreme returns, the recently found negative relationship between idiosyncratic risk and future returns is less robust. In our models, after adding maximum returns, the relationship is insignificant and sometimes even positive. We also find that idiosyncratic skewness and coskewness play an important role for asset pricing, as predicted by several theoretical models.     

Are corruption and corporate tax avoidance in the United States related?

Review of Accounting Studies - We examine whether state-level corruption and corporate tax avoidance in the United States (U.S) are related. Using a sample of 36,078 U.S. firm-year...     

Who’s behind the wheel? The role of social and media news in driving the stock–bond correlation

Review of Quantitative Finance and Accounting - This study investigates the impact of both social and news sentiments indices on the dynamic stock–bond correlation across wavelet-based...     

Are audit partners’ compensation and audit quality related to their consulting revenues?

Recent accounting scandals have triggered renewed interest in the debate concerning whether audit firms should be banned from providing consulting services. Compared to the voluminous studies on consulting services to audit clients (i.e., non-audit services, hereafter NAS), little has been done to investigate consulting services to non-audit clients (hereafter CS). This study examines whether audit partners' revenues from CS are associated with: i) partners' compensation, and ii) audit quality (AQ), while controlling for revenues from NAS and auditing. We choose the Norwegian setting because of the unique and proprietary data on CS at the audit partner level. Our results provide initial evidence that partners' compensation is positively associated with their revenues generated from CS. Regarding AQ, our findings indicate no relation between AQ and partners' revenues from CS. This study contributes to the recent debate on multidisciplinary audit firms and should be of interest to regulators, audit firms, and users of audited financial statements.     

Are emerging market indicators of vulnerability to financial crises decoupling from global factors?

This paper assesses the extent to which common factors underlie indicators of vulnerability to financial crises in emerging market economies (EMEs) and whether this link is changing over time. We use a Bayesian dynamic common factor model to estimate their common component in a sample of up to 41 countries including both developed as well as emerging economies. This permits us to interpret the component in common to both of them as a global factor. We introduce time variation into the model to investigate whether indicators are decoupling from global factors over time. While decoupling can be observed in a few cases, the exposure to global factors in most countries tends to fluctuate around the mean. Broadly speaking then, the answer is no.     

Are the benefits of debt declining? The decreasing propensity of firms to be adequately levered

We observe a persistent increase in the percentage of firms with little or no debt in their capital structure over the last three decades. The fraction of firms with less than five percent debt in their capital structure increases from 14.01 percent in 1977 to 34.42 percent in 2010 while the percentage of all-equity firms increases 200 percent over the same period. We find that even after controlling for firm- and industry-specific variables that are relevant to capital structure policy, there is a deficiency in firms' propensity to be levered. Additionally, the deficiency is increasing over time and by 2010 the percent of firms that are nearly all-equity is twice the predicted level. Our findings are robust to different methodologies, specifications, and time periods. Overall, these results suggest that the well-documented benefits of leverage are less valuable over the sample period and that the determinants of firms' capital structure decisions have evolved since the 1970s.     

Are exchange rates serially correlated? New evidence from the Euro FX markets

This paper examines the serial uncorrelatedness hypothesis in the Euro FX markets by testing for autocorrelation in daily FX returns of 82 countries over the period of 1999–2010. We use three newly developed tests that are robust to conditional heteroskedasticity of unknown forms and that do not choose a lag parameter arbitrarily. They are Escanciano &; Lobato (2009)'s automatic Box–Pierce Q_p test, Nankervis &; Savin (2010)'s generalized Andrews–Ploberger test and Deo (2000)'s robust Durlauf test. We find no significant autocorrelation in the FX returns of around 58 to 62 countries, suggesting that majority of the Euro FX markets are weak-form efficient.     

Do firms use the trade credit channel to manage growth?

While many theories of accounts payable and receivable are related to firm performance, there has not been a direct test whether firms actively use them to manage their growth. We argue that it is not just the accounts payable but also the accounts receivable that matter. While the former help to alleviate imperfections in the financial market, the latter do so in the product market. Using over 2.5 million observations for 600.000 firms in 8 euro area countries in the period 1993–2009, we show that firms use the trade credit channel to manage growth. In countries where the trade credit channel is more present, the marginal impact is lower, but the total impact is still higher. Further, firms that are more vulnerable to financial market imperfections, rely more on the trade credit channel to manage growth. Finally, we show that also the overall conditions of the financial market matter for the importance of the trade credit channel for growth.