Divergent Opinions and Value Stock Performance

Those who believe that capital markets—that is, markets for stocks and bonds—operate efficiently and asset prices fully reflect all publicly available information are engaged in an ongoing debate about the exact interpretation of the “value premium” with those who reject this view. Value premium refers to the superior returns generated by the purchase of value stocks relative to growth, or glamour, stocks. Rationalists, the group believing in market efficiency, argue that because value stocks are fundamentally riskier than growth stocks, the value premium is compensation for bearing risk. Behavioralists, the group arguing that market asset prices don’t reflect all publicly available information, however, claim that value stocks produce higher returns mostly because investors consistently overestimate the future earnings of growth stocks relative to value stocks. The essence of this argument is that investors are excessively pessimistic about value stocks because they tie their earnings expectations to past earnings. That is, investors make systematic errors in predicting future growth in earnings for value stocks, and investors’ excessive pessimism about these stocks causes the superior performance of value stocks relative to growth stocks. This behavioral explanation of the value premium is known as the “extrapolation” or “errors-in-expectations” explanation, and many researchers support it

Family Control and Financing Decisions

Empirical studies examining the financing decisions of the firm focus exclusively on publicly held firms, not family-controlled firms despite their economic importance. This study investigates the external financing behavior of family-controlled firms, using a comprehensive sample of 777 large European firms during the period 1998 to 2008. We document that, unlike nonfamily-controlled firms, the external financing decisions of family-controlled firms are influenced by control incentives and information asymmetry considerations. We find that family firms have a strong preference for debt financing, a noncontrol diluting security, while they are more reluctant to raise capital through equity offerings in comparison to nonfamily firms. We also find that credit markets, view family firms as more risk-averse and that family firms invest more in low-risk (fixed-asset capital expenditures (CAPEX)), than in high-risk investments (R&D expenditures) confirming their non-risk seeking behavior.Family firms, financing decisions, equity issues, debt issues, capital structure.

Security Analysis, Agency Costs, and UK Firm Characteristics

This paper assesses the monitoring power of security analysts from the manager-shareholder conflict perspective. Using a sample of UK firms tracked by security analysts, our evidence supports the view that security analysis acts as a monitoring mechanism in reducing agency costs. We also find that security analysts are more effective in reducing agency costs for smaller and more focused firms rather than larger and more diversified firms suggesting that for larger and more complex firms security analysis is less effective. The UK findings suggest that the monitoring role of security analysts is not restricted to the U.S. capital market environment.

THE OPERATIONAL HEDGING PROPERTIES OF INTANGIBLE ASSETS: THE CASE OF NON-VOLUNTARY FOREIGN ASSET SELLOFFS

In this paper we examine the valuation effects and long-term performance of U.S. multinational firms involved in forced transfers of their foreign operating assets during the 1965-1988 period. The evidence suggests that the operational hedging ability of the firm to address country risk (nationalization threats) is related to the level of its intangible assets. While it is well known that firms with high levels of intangible assets prefer foreign direct investment, our results show that intangible assets have hidden properties of protection against country risk as well. We document significantly negative abnormal returns only for divesting firms with low levels of intangible assets, but not for firms with high levels of intangible assets. In addition, we show that low (high) growth firms are involved in partial (complete) withdrawals, and show that the long-term economic performance of firms choosing the complete withdrawal strategy is better than those that opt to remain. We argue that management's attempt to maintain economic links in a hostile foreign environment can be attributed in part to the firm's low growth opportunities, performance, and lack of contingent plans to address country risk

Are CEOs to Blame for Corporate Failure? Evidence from Chapter 11 Filings

This study examines whether chief executive officers (CEOs) are to blame for corporate failures. Using alternative CEO managerial ability measures, we document that high-ability (low-ability) CEOs are less (more) likely to be associated with bankruptcy. We also find that reorganized firms run by high-ability incumbent CEOs experience improved financial performance after filing for Chapter 11. Firms that hire high-ability CEOs with bankruptcy experience also realize improved financial performance. Our evidence indicates that the likelihood of corporate bankruptcy is unrelated to the presence of high-ability managers and that bankruptcy does not adversely affect the post-bankruptcy careers of high-ability CEOs

Sentiment-Scaled CAPM and Market Mispricing

This study explores the conditional version of the capital asset pricing model on sentiment to provide a behavioural intuition behind the value premium and market mispricing. We find betas (β) and the market risk premium to vary over time across different sentiment indices and portfolios. More importantly, the state β derived from this sentiment-scaled model provides a behavioural explanation of the value premium and a set of anomalies driven by mispricing. Different from the static β-return relation that gives a flat security market line, we document upward security market lines when plotting portfolio returns against their state βs and portfolios with higher state βs earn higher returns

When Fund Management Skill is More Valuable?

Does fund management skill allow managers to identify mispriced securities more accurately and thereby make better portfolio choices resulting in superior fund performance when noise trading- a natural setting to detect skill - is more prevalent? We find skilled-fund managers with superior past performance to generate persistent excess risk-adjusted returns and experience significant capital inflows, especially in high sentiment times, high stock dispersion and economic expansion states when price signals are noisier. This pattern persists after we control for lucky bias, using the false discovery rate approach, which permits to disentangle manager skill from luck

Discounted Stocks and Excess Analyst Coverage

In this paper we examine whether the negative excess value of stocks (stock discounts in the Berger and Ofek (1995) spirit) is associated with low excess analyst coverage over the 1979-1997 period. We define excess analyst coverage as the difference between a firm’s actual analyst following and its imputed coverage. We hypothesize that firms with high excess (low) analyst coverage are exposed to less (more) information asymmetry between managers and investors, managerial misconduct and uncertainty about future earnings than do other firms. Therefore, stocks with low excess analyst coverage profile are expected to trade at low prices, as they would be more difficult for investors to value. Our findings provide evidence in support of the view that excess analyst coverage explains a significant portion of stocks’ discount, indicating that higher (lower) excess analyst coverage leads to more (less) informative stock prices and offers an information-based explanation on why stocks trade at a premium (discount) . Our empirical results are also consistent with the notion that stocks of firms with high managerial power (i.e., low investor rights/weak corporate governance) trade at a discount. Finally, our analysis indicates that the information inherent in the dispersion of analyst forecasts, a surrogate for investor uncertainty, plays an important role in the determination of asset prices

DISCOUNTED STOCKS AND EXCESS ANALYST COVERAGE

In this paper we examine whether the negative excess value of stocks (stock discounts in the Berger and Ofek (1995) spirit) is associated with low excess analyst coverage over the 1979-1997 period. We define excess analyst coverage as the difference between a firm’s actual analyst following and its imputed coverage. We hypothesize that firms with high excess (low) analyst coverage are exposed to less (more) information asymmetry between managers and investors, managerial misconduct and uncertainty about future earnings than do other firms. Therefore, stocks with low excess analyst coverage profile are expected to trade at low prices as they would be more difficult for investors to value. Our findings provide evidence in support of the view that excess analyst coverage explains a significant portion of stocks’ discount, indicating that higher (lower) excess analyst coverage leads to more (less) informative stock prices and offers an information-based explanation on why stocks trade at a premium (discount) . Our empirical results are also consistent with the notion that stocks of firms with high managerial power (i.e., low investor rights/weak corporate governance) trade at a discount. Finally, our analysis indicates that the information inherent in the dispersion of analyst forecasts, a surrogate for investor uncertainty, plays an important role in the determination of asset prices

Does firing a CEO pay off?

We examine whether involuntary CEO replacements pay off by improving firm prospects. We find CEO successors’ acquisition investments to be associated with significantly higher shareholder gains relative to their predecessors and the average CEO. This improvement in post-turnover acquisition performance appears to be a function of board independence, hedge fund ownership, and the new CEO’s relative experience. CEO successors also create sizeable shareholder value by reversing prior investments through asset disposals and discontinuing operations and by employing more efficient investment strategies. Our evidence suggests that firing a CEO pays off