The effect of debt capacity on the long-term stock returns of debt-free firms

This article examines the long-term stock market performance of debt-free firms with high and low levels of debt capacity to see whether they are different. We use Fama and French’s (1993) three-factor and Carhart’s (1997) four-factor models to examine the subsequent 1, 2, 3, 4 and 5-year stock returns of firms that stayed debt free for 3- and 5-year periods. We measure debt capacity as the expected asset liquidation value of a firm, which is proxied by the firm-level tangibility measure defined by Berger, Ofek, and Swary (1996). We find that regardless of the level of debt capacity, zero-debt firms generate positive abnormal returns in the long run after controlling for key risk factors. We also find support for the notion that preserving debt capacity in the form of higher tangibility reinforces the positive abnormal returns over and above the effect of a zero-leverage policy.     

Which is the best: A comparison of asset pricing factor models in Chinese mutual fund industry

Factor models are commonly used in estimating risk-adjusted fund performance. We compare the commonly used factor models in empirical asset pricing studies and find that Fama and French (2015) five-factor model outperforms other models in the Chinese mutual fund industry and in most fund segments. The factor models we tested are more effective in explaining the return of index funds than other types. Meanwhile, we also find that the capital asset pricing model (CAPM) better controls the estimated alpha dispersion than other models. Though most multifactor models including Carhart (1997) have higher R-squared than CAPM, the cross-sectional differences between them are not statistically significant.     

Luck versus skill over time: time-varying performance in the cross-section of mutual fund returns

ABSTRACT

Using returns histories spanning January 1984 to October 2014 of 5785 actively managed US closed-end equity mutual funds, we address the ‘thorny problems’ highlighted by Fama and French (The Journal of Finance, 2010, vol. 65, p. 1925) that arise due to their resampling procedure. This prevents them from capturing time variation in the parameters of equilibrium asset pricing models. These problems are addressed by combining innovative procedures which allow for testing of multiple break dates on fund-specific parameters along with cross-section bootstraps that remain valid in the presence of time-varying parameters. We find that substantial proportion – 8% – of the estimated versions of the asset pricing model have significant changes in their parameters. The effects of this time variation on the cross-section distribution of the risk-adjusted performance measure are significant and substantially increase centiles of the right tail of this distribution when compared to those produced without time-varying parameters. Our evidence regarding the lack of actively managed US equity mutual funds that generate excess returns is significantly weaker than those of Fama and French but our results do not overturn their pessimistic conclusion regarding the lack of skilled managers. We do find, unlike Fama and French, that managers generating negative returns are just unlucky but have no skill.     

The Pricing of Italian Equity Returns

In this paper, we investigate the relationship between common risk factors and average returns for Italian stocks. Our research has identified the Italian stock market's economic variables by using the results from factor analyses and time series regressions. We study several multi‐factor models combining the relevant macroeconomic variables with the mimicking equity portfolios SMB (small minus big) and HML (high minus low) proposed by Fama and French (1993). The key question we want to ask ourselves, is whether the influential role of the size and book‐to‐market equity factors in explaining average stock returns can stand up well when competing with some macroeconomic factors. In other words, do stock returns carry some risk premium that is independent of either the market return or the economic forces that underlie the common variation in returns? Our empirical work estimates risk premiums using both traditional two‐pass procedures and one‐pass (full information) methodologies. We show that only the market index and variables linked to interest rate shifts are consistently priced in the Italian stock returns. The role of other factors, and in particular both the size and the price‐to book ratio, are crucially dependent on the estimation procedure. (J.E.L.: G11, G12).     

Asset Pricing and Cost of Equity in the Tunisian Banking Sector: Panel Data Evidence

In spite of popularity and theoretical simplicity of the one-factor Capital Asset Pricing Model (CAPM) used in the valuation of financial assets, researchers are more concerned with the important extension proposed by Fama and French (1993) , that is, the Three-Factor Pricing Model (TFPM). Alongside beta, average stock returns could be explained by some size and book-to-market supplementary effects. With these two complementary models, estimation of the cost of equity is carried out for the Tunisian banking sector. In order to account for inter-individual heterogeneity, estimation of parameters is conducted according to random coefficient specifications within the context of panel data analysis.     

How not to measure sustainable value (and how one might)

Sustainability is a complex multidimensional concept that entails economic, environmental, and social aspects. The sustainable value (SV) method developed by F. Figge and T. Hahn [Ecol. Econ. 48(2004) 173-187] is one of the most promising attempts to measure sustainability performance of firms. SV measures corporate contributions to sustainability by valuing resource use based on the opportunity cost, which must be estimated. This paper critically examines Figge and Hahn's estimator for opportunity cost, and shows that the proposed estimator rests on a number of strong, unrealistic assumptions. Evidence from Monte Carlo simulations conducted by authors shows that the proposed estimator performs very poorly even under ideal conditions. Having identified shortcomings in the SV method, we review some econometric approaches with a proven statistical foundation, which might be usefully applied in the present context.     

Exploring the effect of crisis on cooperatives: a Bayesian performance analysis of French craftsmen cooperatives

ABSTRACT

The aim of this paper is to understand the economic performance of craftsmen cooperatives during the crisis period. These cooperatives have the distinctive feature of being supply cooperatives. We use an exhaustive dataset for the French craftsmen cooperatives (2004–2014). We estimate Bayesian Translog econometric models in order to underline the impact of the 2008 crisis on these cooperatives. On the one hand, cooperatives’ turnover and economies of scales decrease during the crisis, the effect is lower for elder cooperatives and varies across sectors. On the other hand, there is a convergence towards the mean for the various generations of cooperatives. These findings are robust to alternative econometric specifications.     

Industry-level determinants of the linkage between credit and stock markets

This paper examines the relationship between US credit default swaps (CDS) and stock returns on an industry-wide basis across a number of investment horizons, with particular focus on the major determinants of such a relationship. Wavelet analysis is first applied to extract the CDS–stock wavelet correlation for each US industry. Then, Bayesian Model Averaging is employed to identify the key driving factors of the industry CDS–stock wavelet correlations at short- and long-term horizons. The empirical results indicate that the wavelet correlations between the industry CDS and stock returns are primarily negative over time and across time scales. Moreover, the CDS–stock correlation at longer horizons exhibits a much more stable pattern than its counterpart at shorter time frames. The results also demonstrate that the volatility of US Treasury and stock markets, as measured by the MOVE and VIX indices, respectively, the volatility of volatility, as captured by the VVIX index, and US economic policy uncertainty, as measured by the EPU index, are the most robust determinants of the correlation between CDS and stock returns at shorter and longer horizons for most US industries. In contrast, the Fama–French systematic equity factors exhibit a practically negligible explanatory power on the CDS–stock link.     

The Cross–section of Risk Premia in the Italian Stock Market

Our analysis compares multi–factor models with Italian stock market data for the period 1990–2000. The first, the simple CAPM, is the relevant benchmark because of its simplicity. The second, the extended Fama–French model (including the momentum portfolio), is the best candidate for substituting the one–factor model. The third is a multi–factor model including sectors; and the fourth is a multi–factor model including the change in short–term interest rates as an extra factor. The results of our research are mildly positive. The Fama–French multi–factor model behaves rather well in time series tests. However, in the cross–section, the average premia are not significantly different from zero, supporting the idea that they are not able to explain the cross–section of returns in the Italian market. Moreover, there is weak evidence that the factor portfolios have predictive power for macroeconomic variables characterizing the state of the economy. What may explain the results? There are two main components: first is the presumably large size of shocks to returns in the Italian case, which makes it difficult to explore the relation among expected returns; second is the presence of extra factors which are not accounted for in our analysis. (J.E.L.: G11, G12).     

Forecasting profitability and earnings: a study of the UK market (1982–2000)

An approach recently developed by Fama and French (2000 Fama, EF and French, KR. 2000. Forecasting profitability and earnings. The Journal of Business, 73: 161–75.  ) is applied to the study of whether UK company profitability is mean-reverting. A sample of roughly 987 firms per year for a period from 1982–2000 is used, drawn from Datastream. In a simple partial adjustment model convergence towards the mean at a rate of about 25% per year is found. The results are very similar in direction to those of Fama and French (2000 Fama, EF and French, KR. 2000. Forecasting profitability and earnings. The Journal of Business, 73: 161–75.  ) but the results do not display significant non-linearities. The change in profitability appears to be more strongly influenced by dividends in the UK.     

Productivity,Scale and Efficiency in the U.S. Textile Industry

In this paper we employ panel data techniques to address several issues related to the recent performance of the textile industry. We build on the research and results obtained by Ramcharran (in Empirical Econ 26:515–524, 2001) for the textile industry as a whole, by extending the analysis to the sector level. Using data for 23 sectors over 39 years (1958–1996), we estimate a variable elasticity of substitution (VES) production function; the results allow us to construct time-series of marginal products of inputs and elasticities of scale and substitution. We find evidence in support of the use of a VES function and conclude that there are systematic differences among textile sectors’ productivity and performance.     

Interest rate,size and book-to-market effects in Australian financial firms

The Fama–French three-factor model (1993) has been extensively used to study the pricing of nonfinancial stocks. This study provides the first examination of the pricing of Australian financial stocks using the Fama–French framework. The four-factor model (market, size, book-to-market and momentum) augmented with the level, slope and curvature of the interest rate term structure is used to examine the pricing of Australian financial stocks. The interest rate factors have not been previously considered for pricing Australian stocks within the Fama–French framework. Consistent with US evidence, we use a system-based estimation to show that the size and book-to-market factors are not priced in the cross section of the equity returns of Australian financial stocks. Momentum and term spread are priced in the equity returns of both financial and nonfinancial stocks. These findings are robust to the inclusion of control variables such as default spread, the inflation rate and a dummy variable for the global financial crisis.     

上市公司经营者报酬结构性差异的实证研究

本文通过研究上市公司经营者的任职状况、报酬结构与企业绩效之间的关系 ,发现 :经营者的持股比例与经营绩效有显著性弱相关关系 ;报酬水平的激励强度更多的与“横向”“纵向”比较的相对值有关 ;两职兼任的经营者年薪、持股比例与其绩效均不具有显著相关性 ,而实行年薪制的经营者呈显著性弱相关性。本研究说明资产规模、行业特性、区域范围、股权结构对经营者年薪、持股比例和经营绩效具有深刻影响 ,完善上市公司经营者报酬激励的方向应是建立多元化的报酬结构。     

中国股票市场的二因素模型

参照Fama和French鉴定美国股票市场三因素模型的方法，研究中国股票市场的资产定价模型。在中国股票市场，账面市场效应并不存在，但与规模相关的某种系统风险因素在股票定价中起到了重要作用。由此鉴定出中国股票定价的二因素模型。     

Sustainable competitive advantage and stock performance: the case for wide moat stocks

‘In business, I look for economic castles protected by unbreachable “Moats”’. Warren Buffett Companies that have sustainable competitive advantages should be able to create a barrier (Moat) to prevent or lessen competition from other firms. The wider the Moat the greater the barrier and the more secure the company’s profitability. Using the Morningstar classification of ‘Wide Moat’ stocks, we construct annually rebalanced equal- and value-weighted portfolios to analyse their performance in order to determine if they deliver superior performance relative to standard benchmark portfolios. The period for our analysis extends from June 2002 through May 2014. We find that the ‘Wide Moat’ portfolios outperform both the S&P 500 and Russell 3000 indices generating higher average monthly and annualized returns, Sharpe Ratio, Sortino Ratio, Treynor Ratio, Omega Ratio, Upside Potential Ratio, M², M² Alpha, and cumulative returns. When we compute alpha using Carhart four-factor and Fama–French five-factor models, we find that ‘Wide Moat’ portfolios had significantly positive risk-adjusted alphas with both the models. ‘Wide Moat’ portfolios also lost less value during the 2007–2009 financial crisis compared to both S&P 500 and Russell 3000. In conclusion, we find that ‘Wide Moat’ stocks have created significant value for their investors over the course of our study.     

Drivers of expected returns in Istanbul stock exchange: Fama–French factors and coskewness

We investigate the impact of coskewness on the variation of portfolio excess returns in Istanbul Stock Exchange (ISE) over the period July 1999 to December 2005. We form portfolios according to size, industry, size and book-to-market ratio, momentum and coskewness and compare alternative asset pricing models. The traditional capital asset pricing model (CAPM) and the three-factor model of Fama and French are tested in the multivariate testing procedure of Gibbons–Ross–Shanken (1989). Coskewness is introduced as a fourth factor and its incremental effect over CAPM and Fama–French factors is examined both in multivariate tests and in cross-sectional regressions. The findings reveal that coskewness is able to explain the size premium in ISE. Hence, the basic two-moment CAPM without the coskewness factor would underestimate the expected return of size portfolios. Multivariate test results indicate that coskewness reduces the pricing bias, albeit insignificantly. Cross-sectional analysis uncovers that coskewness has a significant additional explanatory power over CAPM, especially for size and industry portfolios. However, coskewness does not have a significant incremental explanatory power over Fama–French factors in ISE.     

Progress along the path: evolving issues in the measurement of genuine saving

More than 10 years since a practical linkage between sustainable development and a measure of national wealth—expanded to include natural and environmental resources—was first posited, the empirical estimation of adjusted net savings, dubbed ‘genuine’ saving, has evolved considerably. In this paper we take stock of both progress achieved and the challenges that remain. We begin by recalling the key points made in Pearce and Atkinson (1993, Ecol Econ 8, 103), which presented the first cross-country estimates of savings rates adjusted to reflect depletion and degradation of the environment. We then briefly summarise the evolution of the theoretical argument linking savings and sustainability. However, the main focus of this paper is an aspect that concerned David Pearce greatly, namely the evolution of the measurement of genuine savings. We identify and consider the empirical evidence with regard to two particular measurement issues: the valuation of exhaustible resources and environmental degradation. Common to the both issues are concerns about measuring changes in national wealth in real world economies.      

Innovation and economic performance in services: a firm-level analysis

This paper explores the two-way relationship between innovationand economic performance in services using a longitudinal firm-leveldataset which matches data from the second Community InnovationSurvey, CIS II (1993–95), against a set of economic variablesprovided by the System of Enterprise Accounts (1993–98).The results presented show that innovation is positively affectedby past economic performance and that innovation activities(especially investments in ICTs) have a positive impact on bothgrowth and productivity. Furthermore, productivity and innovationact as a self-reinforcing mechanism, which further boosts economicperformance. These findings provide empirical support for theendogenous nature of innovation in services and the presencein this sector of competition models and selection mechanismsbased on innovation.     

Conditional correlations in the returns on oil companies stock prices and their determinants

The identification of the forces that drive stock returns and the dynamics of their associated volatilities is a major concern in empirical economics and finance. This analysis is extremely important for determining optimal hedging strategies. This paper investigates the stock prices’ returns and their financial risk factors for several integrated oil companies, namely Bp (BP), Chevron-Texaco (CVX), Eni (ENI), Exxon-Mobil (XOM), Royal Dutch (RD) and Total-Fina Elf (TFE). We measure the actual co-risk in stock returns and their determinants “within” and “between” the different oil companies, using multivariate cointegration techniques in modelling the conditional mean, as well as multivariate GARCH models for the conditional variances. The distinguishing features of this paper are: (i) focus on the determinants of the market value of each company using the cointegrated VAR/VECM methodology; (ii) specification of the conditional variances of VECM residuals with the Constant Conditional Correlation (CCC) multivariate GARCH model of Bollerslev [(1990) Review of Economics and Statistics 72:498–505] and the Dynamic Conditional Correlation (DCC) multivariate GARCH model of Engle [(2002) Journal of Business and Economic Statistics 20:339–350]; (iii) discussion of the performance of optimal hedge ratios calculated with the DCC estimates. The “within” and “between” DCC indicate time-varying interdependence between stock return volatilities and their determinants. Moreover, DCC models are shown to produce more accurate hedging strategies.     

Generalized method of moments and present value tests of the consumption-capital asset pricing model under transactions costs: evidence from the UK stock market

In this paper we test for the inclusion of the bid–ask spread in the consumption CAPM, in the UK stock market over the time period of 1980–2000. Two econometric models are used: first, Fisher’s (in J Appl Econometrics 9:S71–S94, 1994) asset pricing model is estimated by GMM. We obtain plausible values of all the structural parameters and transactions costs. We subsequently test the robustness of our results by extending the VAR approach proposed by Campbell and Shiller (in Rev Financ Stud 1:195–228, 1988). This is achieved with the inclusion of the normalised bid–ask spread as an independent variable in the pricing equation. Overall, the statistical tests are unable to reject the bid–ask spread as an independent explanatory variable in the C-CAPM. In addition, in the VAR specification we find that both the normalised and the absolute bid–ask spread is a significant predictor of the dividend to price ratio. The paper’s main conclusion is that transaction costs should be included in asset pricing models, as they possess independent explanatory power.