Heroes and Victims:Fund Manager Sense-making, Self-legitimation and Storytelling

This paper explores how fund managers continue to do their job when on one level they know they cannot all be exceptional. They do this by telling stories, constructing satisfying narratives to explain to themselves, as well as others, why their investments work out and providing equally plausible reasons for when they underperform. Using the story typology of Gabriel (2000. Storytelling in Organizations: Facts, Fictions, and Fantasies. Oxford: Oxford University Press.) – epic, tragic, comic and romantic, we explore two sets of fund manager narratives. First, we analyse the transcripts of interviews with 50 equity fund managers in some of the world's largest investment houses. Second, we examine a similar number of published fund manager reports to their investors. In both cases, we show how storytelling is used by asset managers to make sense of what they do and justify their value to themselves as well their clients and employers. Similar processes are employed in both sets of narratives, one verbal and informal, the other written and formal. Our study serves to highlight how storytelling is an integral part of the work of the professional investor

Do analysts know but not say? The case of goingconcern opinions

This study explores whether security analysts recognize firms’ going-concern problems and report appropriately to investors. We find that analysts signal their anticipation of the publication of a going-concern modified (GCM) audit report in two ways: 1) they downgrade more aggressively stock recommendations of GCM firms than stock recommendations of control firms as the event date approaches; 2) they are more likely to cease coverage of a GCM firm than a control firm over the one-year period prior to the GCM date. We further show that analysts react to the publication of an actual GCM audit report by stopping coverage of such firms immediately subsequent to the event disclosure. Our results suggest that analysts know that the future viability of GCM firms is jeopardized but do not say it clearly to retail investors, who constitute the main clientele of these firms. Consistent with the SEC concerns about analyst recommendations, we conclude that investors cannot rely solely on analyst recommendations since they are reluctant to report negatively (i.e, “underperform” or “sell”) even in this extreme bad news domain. We further conclude that analyst relative pessimism and coverage cessation is likely to be associated with negative expectations about firms’ future prospects.Analyst behaviour, stock recommendations, bad news announcements, goingconcern reports.

The shadow in the balance sheet: The spectre of Enron and how accountants use the past as a psychological defence against the future

Accounting frameworks play a crucial role in enabling us to make sense of business. These frameworks provide a common language for individuals, organizations and broader economic groupings to understand and make decisions about the commercial realm in which they operate. From a psychodynamic perspective, the language of accounting also plays an important role. On the one hand it offers a way to tame the uncertainty and unknowability of the future by representing it in the same comforting terms as it does the past, thus reducing anxiety. Accounting provides a ‘shorthand’, which achieves a balance between positive and negative, debit and credit, asset and liability. On the other hand, accounting can also provide an arena in which fantasies about the future can be staged. However, the use of accounting language is problematic, particularly when it comes to dealing with the future. First, accounting frameworks are inherently backward looking and second, the reassuring sense of clarity and predictability they give are bought at the price of unrealistic simplification. The shadow is never far away and is a constant source of surprises in the unfolding future of a business. Rationalizing and sanitizing the shadow through accounting language may alleviate anxiety but fails to provide an escape from its effects, and echoes from the shadow side of business are capable of shaking the world in the form of accounting scandals. Governments and businesses have reacted to scandals such as Enron and Worldcom by tightening legislation and refining accounting standards but little, if anything, has been done to bring us any closer to confronting the shadow of business where these scandals have their r

Why does business support the arts? : philanthropy, marketing or legitimation?

This thesis examines the motivation by UK firms for one aspect for corporate philanthropy – support for the arts. The literature has shown that there is an increase in strategic philanthropy – business giving which is designed to meet the objectives of business and society, yet there is no clarity on what the underlying motives are for business giving. This research develops a framework around the dimensions of relative business-society attention and relative stakeholder attention to identify patterns of motivation. The dominant economic motivations of marketing and legitimation were identified through a content analysis of sixty texts which describe business support for the arts. These motivations were further understood through thirty-nine interviews with business managers and managers in the arts and arts-based consultancies; although a small number of firms was shown to act primarily from an intention to benefit society in some way. In all cases, business support for the arts includes a significant economic component, whether the primary motivation is pro-business or pro-society. The analysis of these interviews shows that business supports the arts across the three areas of business benefits – especially branding and customer relations, employee support and community relations yet the importance of these areas varies according to the underlying principle motivation of marketing or legitimation. Further, the research shows that firms with higher business exposure undertake corporate support for the arts as an exercise in legitimation. This thesis contributes to the corporate philanthropy literature by providing a model to understand motivation for corporate giving and by showing how these motivations can be understood in a continuum of corporate philanthropy in the case of business support for the arts in the UK. This continuum shows basic motivation mapped against degree of business exposure, stakeholder focus and type of art form supported.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Bad news disclosures and market bias : do investors underreact?

The seminal market efficiency paradigm in finance is being increasingly challenged by evidence apparently inconsistent with its predictions. Such "anomalies" tend to show that the market does not fully incorporate information upon its release in an unbiased way. Recent literature in finance identifies two potential types of anomalous market reaction to news disclosuresl overreaction, and underreaction. The overreaction phenomenon does not find much empirical support but market underreaction, on the other hand, appears quite robust, particularly in the case of bad news which the market appears to take time to process in many situations. My PhD explores these issues. The first part of my thesis tests the hypothesis that if investors rationally incorporate new pessimistic (optimistic) information then after controlling for risk, bad (good) news firms will not under- (over-) react. I test this hypothesis in the going-concern modified audit report disclosure domain. Going-concern opinions offer an appropriate test for the underreaction model as such information releases are associated with acute psychological stress and where a clear distinction between bad and good news can easily be made by considering the parallel case of going-concern withdrawal events. The second part of my thesis extends my work to investigate the market underreaction phenomenon conditional on the underlying bankruptcy regime of the institutional environment. Specifically, I explore the market response to the information content of closely related going-concem modified audit report disclosures (bad news) conditional on the underlying bankruptcy codes in very similar institutional and market environments differing only in the nature of bankruptcy regimes. More specifically, I work with the debtor-friendly U. S. and the creditor- friendly U. K. legal regimes. I hypothesize that investors in a creditor-friendly bankruptcy regime (the U. K. ) will react more adversely to the publication of first-time going-concem modified audit report indicating increased risk of loss than do investors in a debtor- friendly bankruptcy regime (the U. S. ). This is because of a remarkable divergence across the bankruptcy codes of the two different countries with regards to the rights of claimholders in the event of a default on debt contracts. The idea is to test whether there is any difference in investor response to similar bad news signals highlighting financial distress across different institutional environments. In the first part of my thesis, I find that there is asymmetric market response to first- time going-concern modified audit report disclosures (bad news) and withdrawal of the going-concern modified audit report disclosure (good news). Using a large sample of 845 U. S. firms from 1994-2002,1 find that the market underreacts to going-concern modified audit report disclosures (bad news), resulting in a downward drift of around -16% over the one-year period subsequent to the publication of going-concern modified audit opinion, but treats its withdrawal (good news) consistent with theory with no subsequent abnormal returns. To ensure that my empirical results are robust I employ various methodologies and also conduct additional tests to control for alternative explanations to my market underreaction story such as post-earnings announcement drift, momentum etc. My main results on market underreaction to going-concern modified audit report disclosures remain unchanged. I also test if there is an opportunity to eam profits by trading on this underreaction anomaly but find that any profit opportunity is illusory and highly risky. I conduct additional analyses that explore the trading behaviour of different classes of investors in my sample firms. This analysis is important as it could highlight whether institutional investors and retail investors exhibit similar trading biases. Results reveal that institutional investors reduce their holdings in such stocks on a timely basis in contrast to retail investors who appear to increase their holdings in such distressed stocks. The evidence is even clearer when such analysis is conducted by splitting my going-concern sample by subsequent outcomes. I conclude that de. spite clear adverse signals about the firm's continuing financial viability being conveyed to investors by the publication of the going-concem modified audit report, this information is not being fully impounded by the market, in contrast to the good news conveyed by going-concern withdrawals. My findings add to the existing literature calling into question the ability of the market to rationally price stocks in the case of acute public-domain bad news disclosures, as opposed to good news releases. My results suggest that my evidence of stock mispricing and extended post-goi ng-c once rn drift might then be explained by a limits to arbitrage argument with naYve (retail) investors keeping stock prices artificially high by trading inappropriately in these stocks due to behavioural biases identified in the literature and skilled investors (professional arbitrageurs) having limited incentive to trade in these small firms because of high costs. In terms of the second main theme of my thesis, my empirical analysis comparing the market response to going-concern modified opinions in the U. S. and the U. K. shows that, as hypothesized, investors in a creditor-friendly regime (the U. K. ) react more adversely, -3 1 %, than investors in a debtor-friendly regime (the U. S. ), - 18%, in the eight year time-period (1995-2002). One particular reason is that the U. S. bankruptcy regime is biased more towards the rights of' debtors, whereas the U. K. regime is biased more towards the rights of creditors and once a firrn enters bankruptcy proceedings in the U. K., it is unlikely that stockholders' equity has any residual value. These results provide evidence of the important role of legal regimes on the informativeness of accounting inforination. My results suggest that as standard-setters pursue uniform accounting and auditing standards across the world, they need to take into account how such standards interact with local legal regimes and consequently their informativeness to investors and other financial statement users. As such, these results present crucial empirical evidence that adds to the ongoing debate about the relevance of global standards among standard- setters, regulators and academics. Overall, my thesis makes important theoretical and empirical contributions to the behavioural finance, market pricing, and accounting literature in the bad news disclosure domain.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Are analysts biased? : an analysis of analysts' stock recommendations for stocks that perform contrary to expectations

The finance literature suggests that analysts’ stock recommendations have negligible impact on market prices. Some studies suggest this lack of market impact may be partly driven by the affiliations between investment banks and the firms their brokerage arms cover (conflicts of interest). However, most of these studies fail to take into account other factors including institutional and trading issues and psychological biases which may well be just as important in influencing analysts when they gather, process and interpret information about stocks. The aim of the current study is to establish the factors which are associated with analysts issuing stock recommendations that lack market impact. I find that nonconforming analysts’ stock recommendations are associated with overconfidence bias (as measured by optimism in the language they use) and representativeness bias (as measured by previous stock price performance, market capitalisation, book-to-market and change in target price). Thus, stocks that receive a buy rating and subsequently underperform the respective benchmark are associated with a high level of optimism in the tone of the language used by analysts in their investment reports that they prepare to justify their recommendations, have positive previous price momentum, have large market capitalisation, have low book-to-market ratio and have their target prices changed in the same direction as the stock recommendation. Not surprisingly, there is also a relationship between the investment bank issuing the recommendation and the firm. In addition, stocks that are awarded sell rating and subsequently outperform the benchmark have characteristics opposite to those of nonconforming buys. Finding that potential conflicts of interest significantly predict analysts’ nonconforming stock recommendations supports recent policy-makers’ and investors’ allegations that analysts’ recommendations are driven by the incentives they derive from investment banking deals. These allegations have led to implementation of rules governing analysts’ and brokerage houses’ behaviours. However, finding that cognitive biases play a major role in the type of recommendation issued suggests that these rules may work only in as far as regulating conflicts of interest, but will have a limited role in regulating psychological bias, as my results suggest that analyst bias is inherent in their work. Surveys of what fund managers expect of analysts indicate low rankings of analysts’ investment advice as manifested in their recommendations (e.g., All-America Research Team Survey 2002). My results further indicate that fund manager concern is likely to continue because not all behavioural factors in analyst stock recommendations can be controlled.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Hedge Funds as phantastic objects:A psychoanalytic perspective on financial innovations

This chapter draws on psychoanalytic theory, and especially the work of M. Klein and W. R. Bion, to explain the magical appeal of hedge funds to investors, and why they are willing to put so much of their funds and, by extension, their trust into such "exotic" and secretive investment vehicles. It explains the rapid growth in aggregate hedge fund assets under management until June 2008, followed by their subsequent dramatic collapse, in terms of the conflicting emotions such investments evoke, and considers the implications of the excitement-generating potential underlying all financial innovations. Adopting the methodological approach of critical discourse analysis, the chapter explores how hedge funds were represented in the financial press, interviews with hedge fund managers, investor comments, and Congress hearings, before and after the burst of the hedge fund "bubble". The chapter suggests that financial regulators need to recognise explicitly the key role powerful unconscious processes play in all financial activity at both individual and market levels

Skewness sentiment and market anomalies

This study demonstrate that skewness preference of investors is an important driver of various market anomalies. Using a combined measure of mispricing based on 11 prominent anomaly strategies, we show that return predictability associated with the mispricing component of market anomalies is stronger among firms with higher idiosyncratic skewness. The predictability differences are driven by the higher underperformance of high skewness firms in Short anomaly portfolios. Skewness does not affect the performance of Long anomaly portfolios. Portfolio holdings data from a retail brokerage firm show that investors with stronger skewness preference assign relatively larger weights to stocks in Short anomaly portfolios

Are analysts biased? An analysis of analysts' stock recommendations that perform contrary to expectations

This paper seeks to test whether analysts are prone to behavioral biases when making stock recommendations. In particular, we work with stocks whose performance subsequent to a new buy or sell recommendation is in the opposite direction to the recommendation. We find that these “nonconforming” recommendations are associated with overconfidence bias (as measured by optimism in the language analysts use), representativeness bias (as measured by previous stock price performance, market capitalization, and book-to-market), and potential conflicts of interest (as measured by investment banking relationships). Our results demonstrate that potential conflicts of interest significantly predict analyst nonconforming stock recommendations. This supports recent policy-makers’ and investors’ allegations that analysts’ recommendations are driven by the incentives they derive from investment banking deals. These allegations have led to implementation of rules governing analyst and brokerage house behavior. However, our finding that psychological biases also play a major role in the type of recommendation issued suggests that these rules may work only in as far as regulating conflicts of interest, but will have a limited role in regulating the cognitive biases to which analysts appear to be prone. Our results suggest that, as a result of this, analyst stock recommendations are likely to continue to lack investment value