Under-or-overreaction: Market responses to announcements of earnings surprises

We test whether the well-documented market reaction to the announcements of earnings surprises is a manifestation of an investor underreaction or overreaction to extremely good or bad earnings news. Using the market reaction in the three-day period surrounding the announcements of extreme earnings surprises (i.e., SUE) in quarter Q_t as a reference point, we show that firms reporting a high (low) SUE in subsequent quarter Q_t + 1 that confirms their initial quarter Q_t SUE ranking in the same highest or lowest SUE quintiles generate an incremental price run that moves in the same direction as that of the initial SUE. However, the price impact of the confirming SUE signal is weaker than that of its initial SUE. Our findings are robust to the Fama-French three-factor daily regression extended by the momentum factor and a number of other robustness tests. Our result is not consistent with the prevalent view that investors underreact to earnings news. To the contrary, the evidence suggests an initial investor overreaction to extreme SUE signals.     

Market microstructure: A survey

Market microstructure studies the process by which investors’ latent demands are ultimately translated into prices and volumes. This paper reviews the theoretical, empirical and experimental literature on market microstructure relating to: (1) price formation, including the dynamic process by which prices come to impound information, (2) market structure and design, including the relation between price formation and trading protocols, (3) Transparency, the ability of market participants to observe information about the trading process, and (4) Applications to other areas of finance including asset pricing, international finance, and corporate finance.     

Risk management implications of time-inconsistency: Model updating and recalibration of no-arbitrage models

A widespread approach in the implementation of asset pricing models is based on the periodic recalibration of its parameters and initial conditions to eliminate any conflict between model-implied and market prices. Modern no-arbitrage market models facilitate this procedure since their solution can usually be written in terms of the entire initial yield curve. As a result, the model fits (by construction) the interest rate term structure. This procedure is, however, generally time inconsistent since the model at time t = 0 completely specifies the set of possible term structures for any t > 0. In this paper, we analyze the pros and cons of this widespread approach in pricing and hedging, both theoretically and empirically. The theoretical section of the paper shows (a) under which conditions recalibration improves the hedging errors by limiting the propagation of an initial error, (b) that recalibration introduces time-inconsistent errors that violate the self-financing argument of the standard replication strategy. The empirical section of the paper quantifies the trade-off between (a) and (b) under several scenarios. First, we compare this trade-off for two economies with and without model specification error. Then, we discuss the trade-off when the underlying economy is not Markovian.     

Exact inference and optimal invariant estimation for the stability parameter of symmetric α-stable distributions

Hill estimation (Hill, 1975), the most widespread method for estimating tail thickness of heavy-tailed financial data, suffers from two drawbacks. One is that the optimal number of tail observations to use in the estimation is a function of the unknown tail index being estimated, which diminishes the empirical relevance of the Hill estimation. The other is that the hypothesis test of the underlying data lying in the domain of attraction of an α-stable law (α < 2) or of a normal law (α ≥ 2) for finite samples, is performed on the basis of the asymptotic distribution, which can be different from those for finite samples. In this paper, using the Monte Carlo technique, we propose an exact test method for the stability parameter of α-stable distributions which is based on the Hill estimator, yet is able to provide exact confidence intervals for finite samples. Our exact test method automatically includes an estimation procedure which does not need the assumption of a known number of observations on the distributional tail. Empirical applications demonstrate the advantages of our new method in comparison with the Hill estimation.     

The home bias is here to stay

Over the last 15 years, dramatically decreasing foreign investment costs have not reduced the home bias. We show that the home bias induced by a given cost is proportional to the factor ρ/(1 − ρ), where ρ is the average correlation between markets. This factor is very sensitive to the correlation, especially when the correlation is high. Empirically, correlations have been steadily increasing from 0.4 in the 90’s to about 0.9 today. Thus, the decreasing extra costs are increasingly magnified, explaining the persistence of the home bias, and predicting its continuation.     

Modeling and forecasting stock return volatility using a random level shift model

We consider the estimation of a random level shift model for which the series of interest is the sum of a short-memory process and a jump or level shift component. For the latter component, we specify the commonly used simple mixture model such that the component is the cumulative sum of a process which is 0 with some probability (1 ? α) and is a random variable with probability α. Our estimation method transforms such a model into a linear state space with mixture of normal innovations, so that an extension of Kalman filter algorithm can be applied. We apply this random level shift model to the logarithm of daily absolute returns for the S&P 500, AMEX, Dow Jones and NASDAQ stock market return indices. Our point estimates imply few level shifts for all series. But once these are taken into account, there is little evidence of serial correlation in the remaining noise and, hence, no evidence of long-memory. Once the estimated shifts are introduced to a standard GARCH model applied to the returns series, any evidence of GARCH effects disappears. We also produce rolling out-of-sample forecasts of squared returns. In most cases, our simple random level shift model clearly outperforms a standard GARCH(1,1) model and, in many cases, it also provides better forecasts than a fractionally integrated GARCH model.     

Gaining a competitive edge through acquisitions: Evidence from the telecommunications industry

I study the announcement effects of all acquisitions in the recent telecom wave on both the acquirers and their industry competitors. I find evidence of negative rival returns (? 0.55%, t-stat = 2.47) by focusing on non-horizontal acquisitions where rivals are less susceptible to experience positive returns due to increased market power or expectation that some will become future targets themselves. I find that this effect is worse for closer rivals defined as having similar size and being in the same primary service area as the acquirer. Competitor returns are positively correlated with those of the acquirers suggesting that the negative impact experienced by competitors is driven by acquisitions in which the acquirer itself is earning negative abnormal returns. Results are broadly consistent with the Competitive Advantage Hypothesis that posits acquisitions are a means of corporate restructuring in a changing environment, awarding the acquirer a competitive edge and thereby making these acquisitions costly for their non-merging competitors.     

How costly is the Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability

The Sarbanes-Oxley Act (SOX) was intended to protect investors by improving the accuracy and reliability of corporate disclosures. However, critics have argued that the costs of SOX far outweigh its intended benefits. Prior studies based on stock-price reactions to SOX-related events document mixed evidence on the expected impact of SOX. In contrast, we provide evidence on the net realized costs of SOX by examining its impact on operating profitability. We find that average cash flows decline by 1.3% of total assets after SOX. These costs are more significant for smaller firms, for more complex firms, and for firms with lower-growth opportunities. Annually, these costs range from $6 million for smaller firms to $39 million for larger firms. Further, we document that net SOX-related costs are not limited to one-time expenses associated with internal-control design and implementation. In aggregate, for the 1428 firms in our sample, these costs amount to about $19 billion per year. Profitability is lower for up to four years post-SOX. To our knowledge, ours are the first estimates of the realized net costs imposed by SOX.     

Predictive regression: An improved augmented regression method

This paper proposes three modifications to the augmented regression method (ARM) for bias-reduced estimation and statistical inference in the predictive regression. They are in relation to improved bias-correction, stationarity-correction, and the use of matrix formulae for bias-correction and covariance matrix estimation. The improved ARM parameter estimators are unbiased to the order of n^− 1, and always satisfy the condition of stationarity. With the matrix formulae, the improved ARM can easily be implemented for a high order model with multiple predictors. From an extensive Monte Carlo experiment, it is found that the improved ARM delivers substantial gain in parameter estimation, statistical inference, and out-of-sample forecasting in small samples. As an application, the improved ARM is applied to monthly US stock return data to evaluate the predictive power of dividend yield in univariate and bivariate predictive models.     

Google Internet search activity and volatility prediction in the market for foreign currency

I study whether evolution in the number of Google Internet searches for particular keywords can predict volatility in the market for foreign currency. I find that data on Google searches for the keywords economic crisis + financial crisis and recession has incremental predictive power beyond the GARCH(1,1). These results support the mixture of distributions hypothesis in that volatility is linked to the stochastic rate at which information flows into the marketplace. These results also demonstrate the potential for Google to become a storehouse of information for financial markets.     

Time to equilibrium in exchange rates: G-10 and Eastern European economies

This paper reports different times-to-equilibrium for G-10 developed economies and the Eastern European emerging economies. By applying a novel method of value-weighted index to highly-trade-linked economies, we test the purchasing power parity to the full length of time-to-equilibrium. The times-to-equilibrium obtained are: 6 years for developed and 2 years for emerging economies. These results are consistent with the sticky price hypothesis: economies trading in highly aggregated capital goods take longer time to reach price equilibrium in the face of overshooting exchange rates: the opposite is true for primary exporters. This finding is new for these two groups, and could be compared usefully with the earlier reports of long half-life for developed countries. Also, our method of measurement establishes the actual time of the theory prediction on price-to-currency relationship. It is possible to apply this methodology to study more groups of countries.     

Towards an orientation of higher education in the post Rio + 20 process: How is the game changing?

The purpose of this paper is to identify and assess the implications of sustainable development for the future orientation of higher education, especially after the 2012 United Nations Conference on Sustainable Development (Rio + 20). A qualitative trend analysis is being used for this purpose, in the context of which three macro trends are combined: (1) higher education that has been developed via five periods; (2) sustainable development that has evolved through three stages; and (3) the nexus between sustainable development and higher education which has strengthened through three phases. The simultaneous analysis of the macro trends regarding their possible interactive effects (through an expert panel discussion) demonstrates that higher education and universities under the influence of sustainable development elements are entering into a new era in which the function of “higher education for sustainable development” could be interpreted as the seeds of a newly emerging mission for universities. In this regard, it is expected that the concept of “sustainable university” is likely to become more common to meet the emerging mission. Consistent with the Rio + 20 outcomes, the authors analyzed the concept of “sustainable university” and identified the fact that it is practically divided into three interrelated and complementary categories, namely social-, environmental-, and economic-oriented university in pursuit of actualizing sustainable development.     

Command-and-control: Alternative futures of geoengineering in an age of global weirding

In July 2012, Russ George, the founder of Planktos Inc., organized efforts to dump 100 tons of iron sulfate off the coast of Canada to engineer a plankton bloom that would, ostensibly, absorb carbon dioxide and store it in the depths of the Pacific Ocean. As George's geoengineering experiment is one of the largest and first of its kind, many were quick to denounce his rogue action while others were delighted to see that he succeeded as a large algae bloom was reported to have emerged. Using the George event as a point of entry for exploring alternative futures of geoengineering in an age of global weirding, this project fuses the 2 × 2 scenario modeling technique with the “Mānoa School” four-futures method by situating command and control, along X (control) and Y (command) axes as two critical uncertainties and key drivers of change that will impact the design, development, and diffusion of climate mitigation engineering initiatives, which some see as holding the only solution to avert global catastrophe and others condemn as a postnormal remedy.     

The implications of fossil fuel supply constraints on climate change projections: A supply-side analysis

Climate projections are based on emission scenarios. The emission scenarios used by the IPCC and by mainstream climate scientists are largely derived from the predicted demand for fossil fuels, and in our view take insufficient consideration of the constrained emissions that are likely due to the depletion of these fuels. This paper, by contrast, takes a supply-side view of CO₂ emission, and generates two supply-driven emission scenarios based on a comprehensive investigation of likely long-term pathways of fossil fuel production drawn from peer-reviewed literature published since 2000. The potential rapid increases in the supply of the non-conventional fossil fuels are also investigated. Climate projections calculated in this paper indicate that the future atmospheric CO₂ concentration will not exceed 610 ppm in this century; and that the increase in global surface temperature will be lower than 2.6 °C compared to pre-industrial level even if there is a significant increase in the production of non-conventional fossil fuels. Our results indicate therefore that the IPCC’s climate projections overestimate the upper-bound of climate change. Furthermore, this paper shows that different production pathways of fossil fuels use, and different climate models, are the two main reasons for the significant differences in current literature on the topic.     

The effect of Sarbanes-Oxley on the timely disclosure of restricted stock trading

Our paper investigates the effect of the Sarbanes-Oxley Act (SOX) on the disclosure timeliness of restricted stock trading. Insiders selling restricted stock are required to file a Form 144 because the stock is restricted and also a Form 4 because they are an insider. We confirm that mandatory filing requirements under Section 403 of SOX reduced the Form 4 disclosure delay for restricted stock transactions from 24 days in the pre-SOX period to the mandated 2 days in the post-SOX period. Although SOX did not mandate changes to Form 144 filings, we expect that disclosure timeliness of Form 144 filings is likely impacted by SOX. We find that Form 144 filings of restricted stock sales have become less timely. In the post-SOX period, Form 144, the intent to sell restricted stock, is almost always reported after the Form 4 disclosure of the executed trade. Thus, an unintended consequence of SOX is that by making the Form 4 filing more timely than the Form 144, market participants will know about a trade sooner, but have less information about the type of equity traded. An implication of this finding is that Section 403 of SOX may not have unambiguously improved investor protection as intended.     

Über das Theorem von Tchebycheff

Abstract

Eine Grösse X hänge in der Weise vom Zufall ab, dass sie verschiedene Werte x ₁, x ₂, … XII annimmt, je nachdem das Ereignis E ₁, oder das Ereignis E ₂ oder … oder das Ereignis E _n eintritt, wofür die Wahrscheinlichkeiten p ₁, p ₂, … p _n bestehen sollen; p ₁ + p ₂ + … + p _n = 1. Mann nennt X eine von Zufall abhängige Grösse oder X eine variable Grösse mit dem Wertevorrat (x ₁, x ₂, … x _n), wobei jedem einzelnen dieser Werte eine bestimmte Wahrscheinlichkeit zukommt. Zwei Grössen X, Y mit den Individualwerten x ₁, x ₂, … x _n; y ₁, y ₂, … y _m heissen unabhängig von einander, wenn die Wahrscheinlichkeit p _i von x _i dieselbe bleibt, welches auch der Wert von Y sei, und wenn auch die Wahrscheinlichkeit q _p von y _p dieselbe bleibt, welchen Wert auch X annehmen möge.     

Differences in the sophistication of Value-based Management – The role of top executives

This paper responds to recent calls for studying the diffusion of management practices beyond classifying companies as adopters and non-adopters (Ansari et al., 2010, Lounsbury, 2008). In particular, we examine how characteristics of CEOs and CFOs as well as perceived environmental uncertainty (PEU) of the top management team (TMT) affect the sophistication of Value-based Management (VBM) for which we develop a multi-dimensional construct.We base our analyses on a unique dataset that comprises archival data, interviews and survey data from top executives of German HDAX companies (58% response rate). The results of our Partial Least Squares (PLS) model (R² = 55%) support most of our hypotheses and provide interesting findings.We find that the CFOs in our sample have substantially more influence on VBM-sophistication than CEOs. In particular, we document that cognitive styles (educational background in business) of CFOs have a substantial impact on VBM-sophistication. Moreover, short-tenured CFOs are associated with high VBM-sophistication. As expected, the related negative effect of long tenure on VBM sophistication is practically offset if the CFO has an educational background in business.Another relevant finding is that high perceived environmental uncertainty of the top management team is significantly associated with lower VBM-sophistication. The results of our control variables moreover reveal that systematic risk (‘beta’) leads to higher VBM sophistication.     

Valuation of general contingent claims: Existence,uniqueness, and comparisons of solutions

The Black-Scholes equation for the price u(x,t) of a call option for a single share of common stock with dividend policy d(x,t) is $\text{1}\text{2}\text{σ}{}^2\text{x}{}^2\text{u}{}_{\mathrm{xx}}\text{+(rx?d(x,t))u}{}_{\mathrm{x}}\text{?ru?u}{}_{\mathrm{t}}\text{=0, 0<x, 0<t<T}$, with boundary conditions u(x,0)=max(0,x?E), 0≤x, u(0,t)=0, 0≤t≤T.The coefficients are unbounded and the equation is not uniformly parabolic. We prove an existence (and recall a uniqueness) theorem for a class of equations with boundary conditions that includes the Black-Scholes equation. These may be used to show that an American option must, or will not, sell for the same price as a European option.     

Dividend privileges and the value of voting rights: Evidence from Italy

The present paper proposes a new measure of the voting right, the Relative Vote Segment, which incorporates dividend privileges into the inferior class of shares. We test and compare it against the standard Relative Price Difference and the Nenova (2003) measure using 1998–2008 data from Italy, a country where dividend privileges are relevant. Results show that when dividend privileges are considered, the average voting right equals + 35.63%, while its estimated value corresponds to a significantly lower + 20.35% and + 1.29% with the Relative Price Difference and the Nenova (2003) measure, respectively. Negative values of voting rights drop significantly with our methodology. Results become even more clear-cut when we clean the sample of possible measurement errors. As far as the determinants of the voting premium are concerned, the choice of the measure does not appear to have a significant impact, as long as the dividend differences are controlled for.     

The nexus between financial integration and real economy: Solow-growth model concept

This paper aims to investigate the nexus between financial integration and the real economy in ASEAN + 3 economies based on the concept of Solow-Growth Model. The equity indices as a proxy for financial markets are collected from each ASEAN + 3 members and are segmented between two periods; before and after the financial cooperation agreement period. The finding presents several outcomes; 1) no cointegration nexus is found in the system during the pre-agreement periods; 2) the markets are found cointegrated during the post-agreement period, 3) financial integration is found to influence the real sectors of ASEAN + 3 economies. Finally, this study offers policy implications to improve financial integration for stabilizing the real economy.