Investor Sentiment and Short-Term Returns for Size-Adjusted Value and Growth Portfolios

We examine the sentiment levels of individual investors relative to subsequent short-term market returns for 1992-2010. We find that sentiment, proxied by percentage of investors who are “bullish” on the market, is significantly negatively related to the subsequent three- and six-month performance of the market. The negative relationship is consistent with the contrarian notion of sentiment. In other words, high (low) levels of bullishness tend to be followed by subsequent low (high) returns. This is true even with the inclusion of standard control explanatory variables (Fama-French [1993]). While the significant results hold for the overall market, they are clearly driven by growth, rather than value stocks. Contrary to some earlier studies, we also note significant explanatory power for sentiment when looking at returns of small-, mid-, and large-cap growth stocks. We also noted that the long-term moving average of monthly bullishness increased from 33.3% to 39.0% over the last 18 years. In our study period, about 5% of the total sentiment observations are above 56% (very bullish) and about 5% are below 27% (quite bearish). Finally, we find some strength in the lagged auto-correlation structure for the sentiment variable that lasts for just about three to nine months

The Stock-REIT Relationship and Optimal Asset Allocations

In this paper, the marginal effects of changes (due to non-stationarity or estimation errors) in the REIT-stock risk premium and the REIT-stock correlation on the optimal portfolio asset mix of REITs, stocks, and bonds are determined. Employing a mean variance utility function and considering different levels of investor risk aversion, the findings reveal that the expected return of REITs, relative to that of stocks, is a much more important factor than the REIT-stock correlation in making portfolio decisions. A 1% change in the forecast return for REITs dramatically impacts optimal portfolio allocations for investors of all risk levels. A significant change of 0.1 in the REIT stock correlation, on the other hand, has only minimal impact on optimal portfolio weights

Faculty practices in undergraduate investments courses

Purpose – The purpose of this paper is to examine the practices of professors teaching the introductory class in investments. Design/methodology/approach – A sample of 101 syllabi of the first investments course taught in various AACSB accredited business schools around the country was collected. Several dimensions of course content are summarized: the primary textbook selections, other required and recommended materials including the use of spreadsheets, financial calculators, financial magazines such as the Wall Street Journal (WSJ), and/or stock market games, grading policies including assessment components and their weights, and course contents based on various investments topics. Findings – Classroom practices of investments professors differ considerably. There is virtually nothing that is universally applied by investments faculty. There are, however, many areas such as key content to include in the course where a large majority tends to agree with each other. Originality/value – While there is obviously not a single right way to teach investments, many professors may be able to improve their classes or their assessment methods by trying some of the things that others are doing. Including stock market games, for example, might enlighten the students and encourage more classroom discussion.Business schools, Curricula, Investments, Teaching methods

Long-run equity performance of firms that restate financial statements

© 2019, Emerald Publishing Limited. Purpose: The authors investigate how the stock market reacts to financial restatements using the restatements data from the United States Government Accountability Office (GAO-06-678). In particular, the purpose of this paper is to examine the long-run equity performance of the restating firms, for holding periods of one to five years after the announcements of restatements. Design/methodology/approach: This paper measures the long-run stock performance of restating firms with the buy-and-hold abnormal returns and time-series regression analyses based on Fama–French’s (1993) three-factor model and Carhart’s (1997) four-factor model. Findings: The authors find that restating firms significantly underperform in the long run compared with their peers matched by industry, size and book-to-market. Restating firms’ underperformance is confirmed with time-series regression analyses based on Fama–French’s (1993) three-factor model and Carhart’s (1997) four-factor model. Further, the authors find the negative long-run abnormal performance of restating firms is primarily driven by large firms. The authors also report that self-prompted restatements and improper revenue accounting-triggered restatements result in worse long-run abnormal performance. Originality/value: This paper is the first paper that thoroughly investigates the long-run stock returns of the firms that restate financial statements by fully considering the size effect

Homeownership and mixed-asset portfolio allocations

Homeownership represents both a consumption and an investment decision for individuals. Considering the investment benefits of the home, we estimate the total returns and risk associated with the investment in single-family homes. Then, using a mean-variance utility function, we consider the impact of homeownership and mortgage loan financing on the optimal asset allocation decisions of individuals and contrast this with advice that does not include the home as part of the portfolio. While optimal portfolio weights are dependant upon both the degree of risk aversion of the individual investor and the relative importance of the home in the overall net worth picture, we show that, in general, the higher the home-to-net worth ratio, the higher the optimal portfolio allocation to stock. For most investors, including the home in the optimization decision leads to higher allocations to risky stock than suggested by traditional advice that ignores the home.Homeownership Portfolio allocation