DOC 2015-03 Master of Finance

Legislative Authority. Constitution of the Academic Senate of the University of Dayton, Article ll.B.

Do Non-Professional Investors Influence Managers and Financial Analysts?

With the advent of online social networks, individuals' sentiment and opinions about firms are more accessible and processable. These individuals are often non - professional investors (NPIs). This thesis investigates whether NPIs' sentiment and opinions are noise or information on two types of social networks-namely social media and crowdsourcing platforms, and whether their sentiment and opinions can help management and financial analysts predict the disclosures. The first objective of this thesis is to investigate whether managers consider NPI sentiment towards their firms in issuing optimistic earnings guidance to create desirable market reactions. I infer firm-level NPI sentiment from social media discussions on StockTwits, comprising over 17 million tweets of 118,685 users concerning 3,212 distinct firms between May 2008 and January 2017. Following Aboody et al. (2018), I adopt the overnight stock return to measure NPI reaction and find that NPI reaction to positive guidance is stronger when their sentiment is high and that managers are more likely to issue positive guidance at these times. This association between the likelihood of issuing positive guidance and NPI sentiment is stronger in firms in which NPIs have greater proportionate shareholdings and where managers' equity incentives are highly contingent on short-term stock price increases. The findings are consistent with managers opportunistically manipulating guidance to exploit NPI sentiment and contribute to research by opening a research avenue on the role of NPI sentiment in management decision making. The second objective of this thesis is to investigate whether financial analysts exploit NPIs' earnings expectations towards a firm to 'walk down' their forecasts with an aim to create beatable forecasts. I infer NPIs' earnings expectation from crowdsourced earnings estimates on Estimize, comprising 879,015 'street earnings' estimates submitted by 70,926 investors in the period from January 2012 through to September 2018. I document a positive association between analyst forecast revision and the change in investors' earnings expectations. I also find that the likelihood of analysts issuing forecasts that generate pessimistic errors is high when they revise their forecasts down. The findings are consistent with analysts opportunistically manipulating earnings forecasts to exploit investors' expectations of future earnings. This study extends the literature on how market forces constrain analysts' conflicts of interest by demonstrating that new crowdsourcing technologies disrupt the market for traditional earnings forecast providers. It also informs the regulators on how the sharing of opinions by NPIs on these public platforms may potentially expose themselves to exploitation by more sophisticated market participants who possess the processing power to harness these scattered pieces of information of enormous volume

Architecting system of systems: artificial life analysis of financial market behavior

This research study focuses on developing a framework that can be utilized by system architects to understand the emergent behavior of system architectures. The objective is to design a framework that is modular and flexible in providing different ways of modeling sub-systems of System of Systems. At the same time, the framework should capture the adaptive behavior of the system since evolution is one of the key characteristics of System of Systems. Another objective is to design the framework so that humans can be incorporated into the analysis. The framework should help system architects understand the behavior as well as promoters or inhibitors of change in human systems. Computational intelligence tools have been successfully used in analysis of Complex Adaptive Systems. Since a System of Systems is a collection of Complex Adaptive Systems, a framework utilizing combination of these tools can be developed. Financial markets are selected to demonstrate the various architectures developed from the analysis framework --Introduction, page 3

The evolution of work and the growing contingency of labor practices in the Massachusetts life sciences industry

Thesis: M.C.P., Massachusetts Institute of Technology, Department of Urban Studies and Planning, 2018.Cataloged from PDF version of thesis.Includes bibliographical references (pages 57-61).Contingent work has been used to describe a wide range of non-standard, short-term employment arrangements to include self-employment, home-based work, on-call work, temporary work, contracting, and other alternative employment arrangements. In 2005, the Bureau of Labor Statistics estimated that about four percent of total employment in the U.S. was comprised of contingent workers. Just five years later this figure nearly doubled to 7.9 percent according to a report by the U.S. Government Accountability Office, though more liberal measurements record this number to be closer to 40 percent (2015). Another five years later in a report published by Katz and Krueger, the estimate doubled once again to 15.8 percent (2016). It is clear that the use of contingent labor to complete work tasks is increasingly an essential element utilized by businesses as they shed non-essential functions in order to focus on their core competencies. This reflects a belief that a lean operating model will optimize companies' cost structures and provide flexibility to react efficiently during down and upturns in the economy. The use of contingent labor modifies the conventional relationship between capital and labor in the formation of skill. Previously, skill was described as encompassing general and specific skills. General skills represent the skills and experiences workers bring to the job from formal training and tacit knowledge gained in previous work contexts. Specific skills represent skill augmentation that derives directly from the work experience gained by working with a unique employer. The labor contract typically includes the combination of both skill enhancing experiences. Rents are collected by both parties up to the value of each party's marginal product and hence contribution to labor productivity. Today's utilization of contingent labor ignores the significant costs associated with recruiting and training new hires as well as the indeterminable loss in value from utilizing a workforce that is less incented to see their companies succeed. The lack of specific skills of contingent workers diminishes productivity and causes the firm to incur training costs, which may not be recovered due to the shorter job tenure. This thesis investigates the use of contingent work in the Massachusetts life science industry. The demands of capital markets are fiercely pressuring companies to grow and generate large returns for its investors. However, this places an uneven amount of focus on the commercialization of its products causing the industry to hone in on its core competencies and shed non-essential functions, thereby expanding the use of contingent labor. This thesis is framed by the discussion of a looming imperative amidst industry constraints and the subsequent effects created by the dichotomy. The first part of this thesis describes the evolution of work and the emergence of financial pressures compelling the life science industry to utilize contingent labor in several of its key R&D and manufacturing functions despite the obvious benefits associated with career jobs to both the employer and employee. The demands of capital markets continue to drive specific actions of the life science industry (imperative), however the industry is characterized by high cost, long production cycles, tremendous volatility, and a critical reliance on capital flows (industry constraints). Chapter five presents the findings, which examines the net results from the interplay between the imperative and constraints. What effects is this imperative having on life science companies facing these constraints and how are they reacting (subsequent effects)? Many are beginning to behave irrationally and at odds with its long-term goals diminishing the innovative potential of the industry as a whole and adversely impacting the workforce powering the entire mechanism. This thesis attempts to coalesce these broad themes to tell the story of what is happening to work in the Massachusetts life science industry.by Richard Yoo.M.C.P

Corporate Governance and the Shareholder: Asymmetry, Confidence, and Decision-Making

In the decade following the ten-plus percent stockmarket collapse of 2000, regulators enacted a myriad of regulations in response to increasing angst experienced by U.S. capital market retail investors. Systemic asymmetric disclosures have fractured investor confidence prompting many commentators to characterize the relationship between Wall Street and the investment community on main street as dire. Though copious works exist on the phenomenon of corporate behaviors, especially matters of shareholder welfare, weak boards, pervious governance mechanisms, and managerial excess, current literature has revealed a dearth in corporate governance praxis specific to the question and effects of asymmetric disseminations and its principal impact on the retail/noninstitutional accredited investor\u27s (NIAI) confidence and decision-making propensities. This phenomenological study is purposed to bridging the gap between the effects of governance disclosure and the confidence and decision-making inclinations of NIAIs. Conceptual frameworks of Akerlof\u27s information theory and Verstegen Ryan and Buchholtz\u27s trust/risk decision making model undergirded the study. A nonrandom purposive sampling method was used to select 21 NIAI informants. Analysis of interview data revealed epistemological patterns/themes confirming the deleterious effects of asymmetrical disseminations on participants\u27 investment decision-making and trust behaviors. Findings may help academicians, investors, policy makers, and practitioners better comprehend the phenomenon and possibly contribute to operating efficiencies in the capital markets. Proaction and greater assertiveness in the investor/activist community may provide an impetus for continued regulatory reforms, improved transparency, and a revitalization of public trust as positive social change outcomes

CULTIVATING QUALITY: TEN TOOLS MANAGERS CAN USE TO GET LONG-TERM COMMITTED SHAREHOLDERS

Special Note: This Article is part of The Quality Shareholder Initiative at the Center for Law, Economics and Finance (C-LEAF), at The George Washington University Law School, Prof. Lawrence A. Cunningham, Faculty Director. Considerable effort goes into forging tools a corporation can use to shape its shareholder base. Much effort is geared toward promoting long investor time horizons, presumed to be a valuable but rare appetite among many shareholders. Less attention has been focused on promoting greater commitment, though attracting shareholders willing to stake large percentages of their portfolio in a given company’s stock may prove way more valuable than having numerous large index funds on the shareholder list. In three ways, this article adds to the toolkit on shareholder cultivation. First, this article stresses that a shareholder’s relative portfolio concentration in a particular company’s stock is as important as average holding periods. Such an orientation is unusual in corporate life. But today’s world is dominated by index fund investors whose portfolio diversification limits their ability to act as informed shareholders. A focus on relative portfolio concentration is therefore becoming critical. Second, this discussion introduces, and is motivated by, new evidence showing a correlation between a high density of such shareholders and superior corporate performance. In fact, shareholders exhibiting both traits—patience and conviction—have long been cultivated by an elite group of companies whose long-term performance has benefited. The most famous is Warren Buffett’s Berkshire Hathaway and there are scores of other less famous but equally accomplished. Third, focusing on such quality shareholders, as Buffett long ago dubbed them, this article offers numerous tools a corporation may use to achieve a shareholder base with a high density of quality shareholders. These include communications strategies, such as stressing long-term performance metrics in corporate disclosure, and substantive practices, such as prioritizing the art of capital allocation. Managers and quality shareholders themselves are the target audience

Essays of inter-firm linkages and return predictability

In this thesis, I study whether stock returns are predictable. Specifically, I study whether the focal firm’s linked partners or linked peers can forecast its future returns. The literature of return predictability has found that a lot of forecasting variables, which are mainly constructed by the focal firm’s own characteristics, can predict its future returns, but the predictive power from explicitly or implicitly linked firms is not fully explored and understood. The study of interfirm return predictability has become an interesting and important research field, since it challenges current asset pricing theory and models. In this thesis, my research questions are whether inter-firm return predictability exists in the ownership network (namely one new “explicit” network) and whether it exists in the similar employee satisfaction network (namely one new “implicit” network). The overall contribution of the thesis is to find new evidence of return predictability in the inter-firm networks. These new inter-firm return predictabilities are not only an interesting practical fact with implications for investing and hedging, but also have essential implications for new asset pricing factors. In Chapter 2 and Chapter 3, I find the subsidiary-parent return predictability and parent-subsidiary return predictability in a global sample and different regional samples. In Chapter 4, I find that the returns of similar employeesatisfaction-linked firm peers have predictive power over focal firm returns. These results have important implications to call for a new asset pricing model that explicitly incorporates value-relevant information from various inter-firm networks