Rules of Thumb versus Industry Glide Paths: Some Bootstrapping Evidence

The authors compare the performance of retirement portfolios using the average glide path of five popular target date funds to general rules of thumb for asset allocation. Surprisingly, the industry average target date fund has similar return and risk as the “120 minus your age rule”. In addition, a simple “140 minus your age rule” produces greater expected savings at retirement and a lower failure rate for average US investors retiring in their early 60s. A naïve approach such as the “120 minus your age” rule or the “140 minus your age” can benefit average US employees by reducing transaction costs, improving retirement balances and increasing the probability of a comfortable retirement through an easy-to-understand investing rule

Does leveraged stock buyback improve firms’ profitability?

We provide a structural explanation about how and when leveraged stock buyback improves firms’ profitability. We find operating profit on equity and operating profit sensitivity on debt are crucial factors to consider when determining the source of stock repurchase. Our theoretical reasoning and empirical tests show that companies with high operating profit on equity and low operating profit sensitivity on debt have a higher chance of improving profit through leveraged buyback. We also suggest a structural form to estimate leveraged buyback and cash buyback based on financial variables instead of companies’ disclosure

Idiosyncratic volatility and cash flow volatility: New evidence from S&P 500

Employing firm-level data of S&P 500 constituent companies from 1990 to 2016, we offer new evidence on the strong time series and cross-sectional relationships between Idiosyncratic stock return volatility (Ivol) and cash flow volatility even after controlling for illiquidity and firm size, which also vary by period of economic condition. Our results show that Ivol is well explained by the volatility of the three components of DuPont ROE. Aggregate asset turnover volatility alone explains 81.8% of the time series variation of aggregate Ivol, and all independent variables explain 94.7% of the aggregate Ivol. While profit margin volatility and asset turnover volatility have significant relationships with Ivol during the sample period, the volatility of equity multiplier shows significance during the two recession periods in early and late 2000s