The Impact of Rating Agency Reputation on Local Government Bond Yields

This study examines a sample of 12,562 dual-rated local government bond issues including 6,104 split-rated issues to determine which rating agency has the greatest impact on yields. Using a database of municipal bond issues from 1986 to 2002, we show that Moody’s rated significantly more issues than S&P, and that Moody’s ratings were more conservative. However, from 1993 to 1997, there was a reduction in ratings disagreements and in Moody’s market share. Beginning in 1995, Moody’s received negative publicity related to a Department of Justice anti-trust investigation. Moody’s appears to have responded by sharply increasing their relative conservatism in 1997. From 1986 to 1994, Moody’s ratings had a greater impact on bond yields than S&P ratings, but their dominant influence on yields disappears in the recent sample period from 1995 to 2002.

Overreaction to stock market news and misevaluation of stock prices by unsophisticated investors: Evidence from the option market

This paper examines investors' option activity on value and growth stocks before earnings announcements. The main finding is that unsophisticated investors enter option positions that load up on growth stocks relative to value stocks in the days leading up to earnings announcements. This occurs despite the fact that at earnings announcements value stocks outperform growth stocks by a wide margin. The paper's results provide evidence that unsophisticated option market investors (1) overreact to past news on underlying stocks and (2) mistakenly believe that mispriced stocks will move even further away from fundamentals at impending scheduled news releases.     

Statistically based quarterly earnings expectation models for nonseasonal firms

We present empirical evidence on the relative predictive power of statistically based quarterly earnings expectation models for firms that are characterized as nonseasonal in nature. We are particularly interested in nonseasonal firms for two reasons. First, it appears that a sizable and growing percentage of firms exhibit quarterly earnings patterns that are clearly nonseasonal in nature. We present new evidence that is consistent with this trend. Specifically, 36% of our sample firms (n = 296) are nonseasonal compared to 12% reported in Lorek and Bathke (J Acc Res 22:369–379, 1984) (n = 29); 17% in Brown and Han (J Acc Res 38:149–164, 2000) (n = 155); and 28.2% in Bathke et al. (J Business Inquiry 5:39–49, 2006) (n = 167). Second, we also find that 43.6% of the nonseasonal firms in our sample have no analyst coverage. Therefore, interest in the predictive ability of statistically based models for such firms is greatly enhanced. Our predictive findings indicate that the random walk model provides significantly more accurate pooled, one-step ahead quarterly earnings predictions across 40 quarters in the 1994–2003 holdout period than the first-order autoregressive model popularized in the literature. We attribute the superior performance of the random walk model to at least three contributing factors: (1) its parsimonious nature; (2) the reduced levels of autocorrelation observed in our quarterly earnings data relative to previous work; and (3) a significantly greater frequency of loss quarters evidenced by nonseasonal versus seasonal firms.

Comparison of body mass index and waist circumference as predictors of all-cause mortality in a male insured lives population

Obesity assessed by body mass index (BMI) is associated with increased mortality risk, but there is uncertainty about whether BMI is the best way to measure obesity. Waist circumference (WC) has been proposed as a better measure. The Swiss Re BMI/WC Study was conducted to determine whether BMI or WC is a better predictor of future all-cause mortality in a large male insurance population. Using Cox proportional hazard models, risk ratios for increasing BMI and WC were 1.033 (P < .001) and 1.027 (P < .001), respectively. Risk ratios for obesity defined by BMI > or = 30 kg/m2 and WC > or = 40 inches were 1.33 (P < .001) and 1.20 (P = .002), respectively. In this study, BMI and WC are essentially equivalent in their ability to predict mortality risk in a male insurance population. Obesity, measured by either BMI or WC, has important underwriting and pricing implications.     

Stock-price manipulation

It is generally agreed that speculators can make profits frominsider trading or from the release of false information. Bothforms of stock-price manipulation have now been made illegalIn this article, we ask whether it impossible to make profitsfrom a different kind of manipulation, in which an uninformedspeculator simply buys and sells shares. We show that in a rationalexpectations framework, where all agents maximize expected utility,it is possible for an uninformed manipulator to make a profit,provided investors attach a positive probability to the manipulatorbeing an informed trader.     

The Contributions of Stewart Myers to the Theory and Practice of Corporate Finance*

In a 40‐plus year career notable for path‐breaking work on capital structure and innovations in capital budgeting and valuation, MIT finance professor Stewart Myers has had a remarkable influence on both the theory and practice of corporate finance. In this article, two of his former students, a colleague, and a co‐author offer a brief survey of Professor Myers's accomplishments, along with an assessment of their relevance for the current financial environment. These contributions are seen as falling into three main categories:

• ? Work on “debt overhang” and the financial “pecking order” that not only provided plausible explanations for much corporate financing behavior, but can also be used to shed light on recent developments, including the reluctance of highly leveraged U.S. financial institutions to raise equity and the recent “mandatory” infusions of capital by the U.S. Treasury.
• ? Contributions to capital budgeting that complement and reinforce his research on capital structure. By providing a simple and intuitive way to capture the tax benefits of debt when capital structure changes over time, his adjusted present value (or APV) approach has not only become the standard in LBO and venture capital firms, but accomplishes in practice what theorists like M&M had urged finance practitioners to do some 30 years earlier: separate the real operating profitability of a company or project from the “second‐order” effects of financing. And his real options valuation method, by recognizing the “option‐like” character of many corporate assets, has provided not only a new way of valuing “growth” assets, but a method and, indeed, a language for bringing together the disciplines of corporate strategy and finance.
• ? Starting with work on estimating fair rates of return for public utilities, he has gone on to develop a cost‐of‐capital and capital allocation framework for insurance companies, as well as a persuasive explanation for why the rate‐setting process for railroads in the U.S. and U.K. has created problems for those industries.

     

How Informative Is Floating NAV When Securities Trade Infrequently?

We examine if a floating net asset value (NAV) increases the transparency of risk for investors. Using closed‐income fixed income funds we find little evidence that a floating NAV helps investors better understand the value and risk of a fund when a fund's assets trade infrequently. This potentially informs the debate regarding the adoption of a floating NAV in the money market industry. Our results suggest that it is unlikely that the benefits of floating NAV will outweigh the costs.