A critique of size-related anomalies

This article argues that the size-related regularities in assetprices should not be regarded as anomalies. Indeed, the oppositeresult is demonstrated. Namely, a truly anomalous regularitywould be if an inverse relation between size and return wasnot observed. We show theoretically (1) that the size-relatedregularities should be observed in the economy and (2) why sizewill in general explain the part of the cross-section of expectedreturns left unexplained by an incorrectly specified asset pricingmodel. In light of these results we argue that size-relatedmeasures should be used in cross-sectional tests to detect modelmisspecifications.     

The acquisition of information in a dynamic market

Summary This paper models the information acquisition process in an intertemporal rational expectations framework. It demonstrates that equilibria do not generally exist in intertemporal economies in which agents are assumed to know the state-contingent price path and the information acquisition process is endogenous. In addition, an example of a fully revealing equilibrium in which agents pay a strictly positive amount for information is provided. Finally, we also show that it is possible for an equilibrium to exist in which agents choose to purchase information even if all agents, including the agents who purchased the information, are made strictly worse off by the purchase.The author would like to thank Kerry Back, Gerry Feltham Rich Kihlstrom, Vasant Naik, Bryan Routledge, Harald Uhlig and Josef Zechner for their comments and suggestions. A special note of thanks is due to the (anonymous) referee.     

New ESG rating drivers in the cross-section of European stock returns

We assess the performance of two quantitative signals based on ESG scores across a large, multi-national cross-section of European stock returns. We test whether the cost of equity capital is more influenced by the upward momentum (measured over time) of the ESG scores of the firms issuing stocks or by their stability (identified as the volatility of the scores over time), measured around a changing mean level. We find that short-term ESG momentum over 1 month has a significant impact on the cross-section of stock returns, lowering the anticipated cost of capital and leading to positive average abnormal returns. This suggests that short-term ESG momentum may represent a novel, priced systematic risk factor. Furthermore, we find strong evidence that an ESG volatility spread strategy which buys low ESG score volatility stocks and sells high volatility ones, generates a substantial alpha and affects the ex-ante cost of capital. Both quantitative ESG signals result in portfolio sorting and long-short strategies that enhance the overall sustainability profile of the issuing firms without compromising the raw average of their ESG scores.     

Valuation and Return Dynamics of New Ventures

A dynamic model of a multistage investment project that capturesmany features of research and development (R&D) venturesand start-up companies is developed. An important feature theseproblems share is that firms learn about the potential profitabilityof the project throughout its life, but that technical uncertaintyabout the R&D effort is only resolved through additionalinvestment. Consequently the risks associated with the ultimatecash flows have a systematic component even while the purelytechnical risks are idiosyncratic. Our model captures thesedifferent sources of risk and allows us to study their interactionin determining the value and risk premium of the venture.     

Cultural variations in the use of marketing signals: a multilevel analysis of the motion picture industry

Movies are experiential products that include a myriad of cultural cues, and their box office performance varies across countries with different cultural backgrounds. The profusion of studies on the motion picture industry notwithstanding, this aspect has been largely ignored in the literature. Drawing on signaling theory, this study examines how a country’s cultural fabric moderates the impact of movie-related signals on the opening weekend box office performance. We test our hypotheses using a multilevel model and a comprehensive dataset of 1,116 movies released in 27 countries between 2007 and 2011. Results reveal that the impact of star power on box office performance is amplified in high uncertainty avoidance and indulgent cultures, while it is attenuated in high power distance cultures. Moreover, the positive relationship between sequels and performance wanes in individualist cultures. Movies with high production budgets perform better in culturally open countries, while critics’ reviews are more instrumental in high uncertainty avoidance cultures.     

Factors Influencing Brand Launch in a Global Marketplace

The purpose of this study is to explore the factors that influence the launch of brands into new markets in a global environment. Although multiple streams of literature exist with respect to the entry of brands into new markets and the diffusion of new brands within and across markets, the process of launching products and brands globally over time has received relatively limited attention. To address this issue, this study incorporates multiple indicators of activities that can contribute to experiential learning relevant for launching brands in a global marketplace. Market uncertainty and experiential learning provide a conceptual foundation for the development of relevant hypotheses, which are tested in the context of the global automotive industry from 1981 to 2004. A discrete time event history analysis with time‐varying independent variables is employed to estimate the effects of the independent variables on the probability of a brand being launched in a specific market. The global brand launch observations are extracted from a proprietary dataset containing the global dispersion of automotive brands including 22 countries of origin and 42 countries of brand entry. The sample yields 50,572 spells, derived from 99 companies, 173 brands, and 700 market entries. The results of this study contribute to the literature in a variety of ways. Market attractiveness positively influences the propensity of a brand to be launched into a new market. This supports the idea that potential demand conditions are an important managerial consideration in product introduction decisions. The results reveal significant effects with respect to the role of psychic distance and experiential learning. Brands are reluctant to launch into countries that are culturally and economically less similar to the home market. Yet firms tend to place a lower degree of emphasis on factors of cultural distance when launching brands into larger markets, and global experience enables companies to overcome the uncertainties associated with launching brands into international markets that are economically distant. The results also suggest that companies are more likely to introduce additional brands in markets where they already have a presence. Overall, global dispersion and geographic scope, coupled with local market knowledge facilitate the launch of brands globally. From a managerial perspective, this study suggests companies should focus on acquiring both local and global experience to facilitate the launch of products and brands in the global marketplace.     

Adjustable Rate Mortgages: Valuation

A simulation method is employed to value Adustable Rate Mortgages, (ARMS). It is used to price two typical instruments: an ARM linked to a Treasury interest rate and an ARM linked to a Cost of Funds Index. Contractual provisions such as the margin over the index, caps and floors on the ARM's rate or on the monthly prepayment, reset frequency, and the teaser rate are examined for their influence on value. The effects of interest rate trend and volatility are also analysed.This paper was written when both authors were employees of Goldman, Sachs & Co. in New York.The material in this paper is for private information, and Goldman, Sachs & co. is not soliciting any action based on it. Opinions expressed are the authors present opinions only. The material is based upon information which Goldman, Sachs & Co. considers reliable; but it does not represent that the material is accurate or complete, and it should not be relied upon as such. Goldman, Sachs & Co. may from time to time have a long or short position in, and buy or sell, securities mentioned.     

Examining the reliability of self-reported data on school participation

Many studies evaluate the impacts of Conditional Cash Transfer (CCT) programs on schooling using self-reports on enrollment and attendance even though there are reasons to doubt the reliability of these data. In this paper, we examine the extent to which school-age girls overstate their school participation. Using administrative data from a cash transfer experiment in Malawi and school attendance ledgers collected as part of the impact evaluation, we find that while all study participants overstate their enrollment and attendance rates, the extent to which this happens is significantly higher in the control group than the CCT arm. This finding implies that exclusive reliance on self-reported school participation data can lead to a serious underestimation of actual program impacts. We recommend that self-reports be supplemented using alternative sources of data on school participation that are appropriate to the experiment at hand — even if such efforts are likely to increase evaluation costs.