The Impact of Analyst Forecast Errors on Fundamental Indexation: The Australian Evidence

AbstractEvidence from many developed markets suggests that fundamental indices outperform capitalisation-weighted indices. Existing studies suspect a story of market mispricing, yet a mechanism has not been identified. Using Australian data, we study the relation between analyst forecast errors and the performance of various fundamental indices. We find that fundamental indices contain a relatively higher exposure to stocks with low analyst long-term growth forecasts. Valuations for these stocks are ex ante overly pessimistic and drive the statistical significance of alphas produced by fundamental indexation. We show how hedging against analyst forecast errors can generate additional alpha for investors using fundamental indexation.</jats:p

Leveraged investments and agency conflicts when cash flows are mean reverting

© 2016 Elsevier B.V.. We analyse the effect of mean-reverting cash flows on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. In a partial equilibrium setting we find that such agency costs are significantly lower under mean-reverting (MR) dynamics, when compared to the ubiquitous geometric Brownian motion (GBM). The difference is attributed to the stationarity of the MR process. In addition, through the application of a novel agency cost decomposition, we show that for a larger speed of mean reversion, agency costs are driven mainly by suboptimal timing decisions, as opposed to suboptimal financing decisions. In contrast, under the standard GBM assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates

Forecasting bank leverage: an alternative to regulatory early warning models

© 2016, Springer Science+Business Media New York. Bank regulators have worked to develop statistical models predicting bank failures, but such models cannot be estimated during periods of few failures. We address this problem using an alternative approach, forecasting the leverage ratio as a continuous variable that avoids the small sample problem. The leverage ratio is a natural choice in this setting both because of its historically consistent ability to predict failures and because of regulators’ primary focus on bank capitalization. Our model selection draws on both the earlier literature and more recent stress-testing studies. Out-of-sample performance shows promise as a supplement to the standard approach

Factors driving risk in the us banking industry the role of capital, franchise value and lobbying

©Emerald Group Publishing Limited. Purpose – The purpose of this paper is to investigate how several key risk factors, including capital-to-asset ratio (CAR), franchise value and lobbying, affect various measures of risk in the US banking industry before, during and after the financial crisis. The empirical analysis covers the period 2004-2013 Design/methodology/approach – Using recent bank holding company data, this research explores several factors driving risk in the US banking industry. The authors follow recent regulatory models and use a cross-sectional approach that can be employed as a complement to established regulatory bank failure and early warning models to detect and prevent bank crisis and to guide policy intervention over time. Findings – The findings provide evidence that the CAR has a negative relationship with bank risk. The authors also show that banks’ franchise values exhibit a positive relationship with bank risk in non-crisis years and a negative relationship during the crisis. The authors further find evidence suggesting that lobbying decreases bank risk in non-crisis years and increases risk during the crisis. Originality/value – Previous studies have controversially discussed the effect of factors driving bank risk. The authors contribute to the discussion and provide the first empirical study to analyze the effects of lobbying activities by bank holding companies on bank risk before, during and after the financial crisis

Enhancing risk-adjusted return using time series momentum in sovereign bonds

© 2015, Institutional Investor, Inc. All rights reserved. This article studies an actively managed bond strategy based on time series momentum in sovereign bond markets. The author assesses the performance of an active strategy and investigates diversification benefits in comparison with a passive buy-and-hold strategy when each strategy is combined with international equity indexes. The analysis provides evidence that the active strategy offers higher expected returns without increasing return volatility. Importantly, and in comparison with the passive strategy, the active strategy results in both significant return and diversification enhancements when combined with international equity indexes. Therefore, the author suggests that his active momentum strategy can serve fund managers as an alternative to common long-only passive bond strategies to enhance the riskadjusted return of a combined portfolio of sovereign bonds and equities

The Effectiveness of Ethics Training on the Development of Moral Judgement in Finance Students

This paper reports on the effects of a freestanding ethics course in a university finance curriculum on the moral development of students. While a number of studies have examined the effects of such educational initiatives on business and accounting students, very few studies have focused on the finance discipline. A Modified Defining Issues Test (MDIT) was thus developed and used in a test-retest methodology to examine whether students in the Ethics in Finance course at the UTS Business School possessed enhanced moral development after taking the course. We find evidence of a statistically significant improvement in moral reasoning understood from a Kohlbergian perspective. This effect was, however, more pronounced in males than females with females beginning from a higher base of moral development and improving only slightly. While a number of suggestions are made for future research that might improve on the work reported in this paper, our results justify

Embedding Ethics in the Business Curriculum: A Multi-Disciplinary Approach

In response to recent corporate ethical and financial disasters there has been increased pressure on business schools to improve their teaching of corporate ethics. Accreditation bodies, such as the Association to Advance Collegiate Schools of Business (AACSB), now require member institutions to develop the ethical awareness of business students, either through a dedicated subject or an integrated coverage of ethics across the curriculum. This paper describes an institutional approach to the incorporation of a comprehensive multi-disciplinary ethics framework into the business curriculum. We discuss important implications for the assessment of ethics within institutional assurance practices, and address critical issues related to the support of academics when required to incorporate new ethics material within their subject which may be outside their field of expertise. As an example, the successful application of the framework within the marketing discipline is presented and discussed