Business Commons^™

Ringing The Bell: Does It Matter And Why?, Steven Dolvin, Hinh Khieu, Mark Pyles

Steven D. Dolvin

We explore the ongoing debate between market efficiency and behavioral finance by examining the market’ s reaction to what most investors would consider an information-neutral event: a firm ringing the opening or closing bell on the NYSE. Consistent with behavioral theories, we find that firms who ring the opening bell experience, on average, a positive abnormal return on the event day; however, we find that the reaction is concentrated in a particular group of participants. Specifically, we find the abnormal returns are driven almost entirely by firms who are celebrating the transfer of their stock listing to the NYSE. Given …

Can Cognitive Error Explain The Ipo Partial Adjustment Phenomenon?, Steven D. Dolvin

Steven D. Dolvin

Chapter 5 of: Klein, E. (2005). Stock exchanges, IPO's and mutual funds. New York: Nova Science Publishers.

The Impact Of Board Structure On Ipo Underpricing, Steven Dolvin, Jack Kirby

Steven D. Dolvin

Prior research has examined the impact of board structure on firm performance and found that characteristics such as board size affect both operating and stock price performance. Existing research has concentrated primarily on performance in periods well removed from a firm’s initial public offering (IPO), and relatively little research has examined the impact of board structure on the stock price performance of IPOs, particularly with regard to characteristics other than board size. This study fills this gap, finding that the key board characteristic is the percentage external directors on the board. The authors find that the greater the percentage of …

Off The Rack Versus Savile Row: The Value Of Custom Tailoring For Equity Investors, Steven Dolvin, John Gonas

Steven D. Dolvin

eparately managed accounts (SMAs) generally carry a higher fee structure than standard mutual funds, but managers tout the ability to customize accounts as being worthy of this higher cost. This customization may increase returns, or it may simply allow for more personalized tax management or control over other unique circumstances. • Very little research exists on the relative return benefit of SMAs compared with actively managed mutual funds. We fill this gap by examining firms that offer concurrently managed funds-SMAs as well as matching mutual funds run by the same manager(s) and following the same general strategy. • We find …

Market Structure, Changing Incentives, And Underwriter Certification, Steven Dolvin

Steven D. Dolvin

Early studies find that higher quality underwriters are associated with lower underpricing; however, more recent evidence suggests the opposite relation. By controlling for influences associated with the changing market structure of the underwriter industry, I provide a potential explanation for this conflict, that is, that higher quality underwriters do certify initial public offerings, resulting in lower underpricing. However, effects associated with increasing market shares tend to offset certification benefits, particularly for issues underwritten by the largest investment banks.

Ipo Underpricing: The Owner’S Perspective, Steven Dolvin

Steven D. Dolvin

Most corporate finance textbooks include a chapter on raising capital, giving particular attention to initial public offerings (IPOs). For IPOs, underpricing is defined as the percentage change from the offer price to the closing price on the first trading day. Textbooks universally treat underpricing as the indirect cost of issuance; however, this fails to account for the share issuance decision. Because owners do not typically sell all (or even most) of their shares, underpricing overstates the wealth lost by preexisting owners. I provide simple, real-life examples for instructors to use in courses such as corporate finance, entrepreneurship, or alternative investments.

The Influence Of Simulation Performance On Student Interest, Steven Dolvin, Mark Pyles

Steven D. Dolvin

Previous studies examine the potential benefits of using classroom games and simulations, finding that their use generally increases knowledge and interest level. However, few (if any) of these studies examine whether performance in such simulations is relevant to these outcomes. Particularly in investments, where trading simulations are common, the performance relative to peers and the market can be objectively determined based on portfolio return. Thus, we extend the existing literature by studying the impact of portfolio performance on knowledge level and interest in the profession. We find that simulation performance has no significant influence on the students' feelings with regard …

Herding Behavior In Student Managed Investment Funds, Craig Caldwell, Steven Dolvin

Steven D. Dolvin

Student Managed Investment Funds (SMIFs) have grown in number; unfortunately, there has been little research on the efficacy of these funds. We fill this gap by exploring the potential consequences of student investment management. We find that investment decisions are often impacted by herding behavior, which results in underperformance. We further examine characteristics that influence the likelihood of herding, finding that pre-existing knowledge of the company under consideration, as well as amplified time constraints, increase the probability that herding occurs. In contrast, we find that increased education, both general and targeted behavioral education, reduces the likelihood (and impact) of herding.

Business Week Board Rankings And Subsequent Stock Returns, Steven Dolvin

Steven D. Dolvin

Recent corporate bankruptcies have placed renewed focus on the role of a firm's board of directors; therefore, I study rankings of the best and worst boards of directors as published by Business Week. Similar to prior studies examining survey data, I find that the portion of the rankings determined via investment manager survey is biased by the "halo effect." However, I also find that the rankings as a whole, and particularly the portion calculated via quantitative analysis, do provide information that can be used in a trading strategy capable of generating positive abnormal returns, thereby implying that board strength does …

The Influence Of University Financial Education On Asset Allocation, Steven Dolvin, John Gonas, Mark Pyles

Steven D. Dolvin

Using survey data from students at three universities, we examine the influence of an Investments Analysis course on student perception of the ideal asset allocation for a retirement portfolio. Consistent with previous studies that examine financial education in the workplace, a critical outcome of university investment education is the apparent alleviation of a conservative bias that is typically prevalent among uninformed investors. This change results in an increasing willingness to take larger stock positions, which produces higher expected returns and larger portfolio betas. Most importantly, however, the net effect is more efficient portfolios, particularly for those students who begin with …

Can Venture Capitalists Tame The Wolves? An Analysis Of Fraudulent Underwriters, Ipo Characteristics, And Vc Certification, Steven Dolvin

Steven D. Dolvin

A recent hit movie, The Wolf of Wall Street, highlighted the fraudulent activity of the investment bank Stratton Oakmont. Unfortunately, this was not the only such financial firm convicted of illegal behavior during the 1990s; there were at least 34 Initial Public Offering (IPO) underwriters that were the subject of SEC enforcement during this period. I examine the characteristics of IPOs underwritten by these investment banks, particularly as they compare to other IPOs. I find that IPOs underwritten by sanctioned investment banks (particularly those that were less active in the IPO market) were significantly different with respect to both firm …

Analysts Get Sad Too: The Effects Of Seasonal Affective Disorder On Stock Analysts’ Earnings Estimates, Steven Dolvin, Mark Pyles, Qun Wu

Steven D. Dolvin

Previous research finds that stock analysts exhibit both optimistic and pessimistic biases in their earnings forecasts, with the net result being a consistent but declining overestimation of forecasted earnings. We extend this research by examining the potential effect of seasonal affective disorder (SAD), a documented psychological condition that produces heightened pessimism and risk aversion during the fall and winter months, on stock analysts' earnings estimates. Our results suggest that analysts are generally optimistic in their forecasts but significantly less so during SAD months. We also find this relation to be most pronounced for analysts located in northern states, who should …

The Efficacy Of Trading Based On Moving Average Indicators, Steven Dolvin

Steven D. Dolvin

The debate over market efficiency continues to rage, yet it is difficult to argue with published evidence surrounding the efficacy of momentum trading based on moving average indicators. While prior studies find that a comparison of the market price to the 200-day simple moving average provides a profitable trading strategy, such studies overlook many other popular price comparisons and calculation methodologies. Thus, I explore different trading rules, comparing strategies based on combinations of market price, 50-day, 100-day, and 200-day moving averages. In addition, I calculate moving averages using three alternative methods: simple, linear, and exponential. I find that a comparison …

Venture Capitalist Certification Of Ipos, Steven Dolvin

Steven D. Dolvin

This article analyses a set of 4606 IPOs from the 1986 to 2000 period, specifically focusing on the certification effect associated with venture capital backing. It concludes that venture capitalists, particularly those of higher quality, are associated with lower issuance costs (both direct and indirect), increased upward price adjustments, and shorter lockup periods, all of which are consistent with a valuable certification role. In addition, it is found that even lower quality venture capitalists perform a certification role; however, it is specific to a set of penny stock (i.e. high information asymmetry) IPOs.

Seasonal Affective Disorder And Ipo Underpricing: Implications For Young Firms, Steven Dolvin, Stephanie Fernhaber

Steven D. Dolvin

A critical event in the life of a firm is when it undergoes an initial public offering (IPO). Drawing on the Seasonal Affective Disorder (SAD) literature, which evidences a psychological condition that produces heightened pessimism and risk aversion during the fall and winter months, this study focuses on understanding the potential implications of SAD for young firms. Our results confirm the influence of SAD on IPO underpricing and demonstrate that younger firms experience even higher underpricing during periods most heavily associated with SAD. However, we find that using a higher-quality underwriter or changing the share retention decision can mitigate this …

Fundamentals Of Investments, 7th Ed., Steven Dolvin, Thomas Miller

Steven D. Dolvin

Fundamentals of Investment, Valuation and Management Canadian Edition was written to: 1. Focus on students as investment managers, giving them information they can act on instead of concentrating on theories and research without the proper context. 2. Offer strong, consistent pedagogy, including a balanced, unified treatment of the main types of financial investments as mirrored in the investment world. 3. Organize topics in a way that makes them easy to apply--whether to a portfolio simulation or to real life--and support these topics with hands-on activities. The approach of this text reflects two central ideas. First, there is a consistent focus …

An Update On The Performance Of Actively Managed Etfs, Steven Dolvin

Steven D. Dolvin

Actively managed ETFs are a relatively recent introduction to the investing landscape, and understanding their performance against passive funds is becoming increasingly important. Consistent with preliminary studies, I find that active funds are more volatile than their passive counterparts and do not provide an absolute return advantage. Thus, active ETFs are generally not good substitutes for existing passively managed funds. However, in contrast to prior studies, I find that performance metrics based on relative risk (e.g., Information and Treynor ratios) suggest that active funds may be good additions to existing portfolios for their diversification benefits. I also find that these …

Fundamentals Of Investments: Valuation And Management, Steven Dolvin, Bradford Jordan, Thomas Miller

Steven D. Dolvin

Seasonal Affective Disorder And The Pricing Of Ipos, Steven D. Dolvin, Mark K. Pyles

Steven D. Dolvin

Purpose - It has been found that stock market returns vary seasonally with the amount of daylight, and they attribute this effect to seasonal affective disorder (SAD), which is a psychological condition that causes depression and heightened risk aversion during the fall and winter months. The goal of this study is to examine whether this effect also manifests itself in the pricing of initial public offerings (IPOs). Design/methodology/approach - The authors conduct an empirical analysis on IPO data collected over the period 1986-2000. Specifically, we examine potential pricing differences between IPO that go public during the fall and winter months, …

“Off The Rack” Versus “Savile Row” The Value Of Custom Tailoring For Equity Investors, Steven D. Dolvin, Brent W. Ambrose, John Gonas

Steven D. Dolvin

Equity asset managers within professional investment advisory firms will often manage both discretionary fee-based accounts as well as open-ended mutual funds - using comparable domestic equity investment disciplines. When retail and institutional investors choose between these products, their decision often hinges on performance and portfolio customization. After reconciling each product’s gross performance for calculation methodology, management and trading costs, and systematic risk measures, we find that concurrently-managed (where the same personnel manage a separately managed account and an open-ended mutual fund over the same time period using identical investment disciplines) small-cap separately managed accounts outperform small-cap actively-managed open-ended mutual funds …

Further Examination Of Equity Returns And Seasonal Depression, Steven D. Dolvin, Mark K. Pyles, Qun Wu

Steven D. Dolvin

Seasonal Affective Disorder (SAD) induces investors to shift resources away from risky investments (such as equity) and towards safer alternatives (such as fixed income) during the Fall, while stimulating the opposite action in the Winter. Existing studies, however, fail to account for the possibility that SAD could further motivate investors to shift exposure among different subsets of equity, rather than simply across broad asset categories. We explore this possibility by examining the impact of SAD on the returns of “safe” and “risky” equity sectors (i.e., industries), as well as on equity at different levels of market capitalization. We find the …

Momentum Trading In Sector Etfs, Steven Dolvin, Jill Kirby

Steven D. Dolvin

If markets were efficient, then strategies based on past price behavior would be essentially worthless. However, many traders follow investment plans that are designed to exploit momentum, particularly across sectors. This article examines one common, related trading rule: “There’s Always a Bull Market Somewhere.” Under this approach, investors buy (sell) past 12-month winners (losers). Prior studies find a positive abnormal return in the subsequent 12-month period following implementation of this strategy; however, no study examines the impact of such rules on the short-term trading patterns (returns and volume) of related securities. This article fills this gap, finding that ETFs representing …

The Effect Of Instructional Technologies On The Finance Classroom, Steven D. Dolvin, J. Michael Morgan, Mark Pyles

Steven D. Dolvin

Using a survey technique, we evaluate the effect of PowerPoint, online lecture notes, financial calculators, and machine readable forms (MRF) on students' assessment of the quality of instruction, perceived knowledge level, satisfaction, post-course interest in the subject, and average grade in introductory finance courses. We also examine these opinions on a relative basis by comparing the responses of Finance majors versus non-Finance majors. The results suggest that certain technologies are received better than others and further, that the perceived quality of instructional techniques is largely contingent on the student's choice of major.

Reit Ipos And The Cost Of Going Public, Steven D. Dolvin, Mark Pyles

Steven D. Dolvin

We examine Initial Public Offerings (IPOs) of Real Estate Investment Trusts (REITs) that went public between 1986 and 2004. Consistent with previous studies, we find that REIT IPOs are associated with lower levels of underpricing relative to traditional issues. We also find that REITs are associated with smaller file price revisions. Both findings are potentially attributable to the lower level of uncertainty associated with pricing REITs. In contrast, using an alternative measure of issuance costs that incorporates the share retention decision by preexisting owners, we find no significant difference between REIT and non-REIT issues, suggesting the results of previous studies …

Reit Ipos And The Cost Of Going Public, Steven D. Dolvin, Mark Pyles

Steven D. Dolvin

We examine Initial Public Offerings (IPOs) of Real Estate Investment Trusts (REITs) that went public between 1986 and 2004. Consistent with previous studies, we find that REIT IPOs are associated with lower levels of underpricing relative to traditional issues. We also find that REITs are associated with smaller file price revisions. Both findings are potentially attributable to the lower level of uncertainty associated with pricing REITs. In contrast, using an alternative measure of issuance costs that incorporates the share retention decision by preexisting owners, we find no significant difference between REIT and non-REIT issues, suggesting the results of previous studies …

Market Efficiency At The Derby: A Real Horse Race, Steven D. Dolvin, Mark K. Pyles

Steven D. Dolvin

Using race data from each Kentucky Derby from 1920 to 2005, we examine whether the horse wagering market is efficient. Most prior studies in this arena test potential betting strategies that rely on posted odds, generally finding that it is extremely difficult to devise and implement any consistently successful wager (i.e., market efficiency). We extend these studies by examining underlying determinants of posted race odds, specifically focusing on the experience of auxiliary members (e.g., jockey, breeder and trainer) associated with each entrant. We find that past Derby experience is an important determinant of posted odds and that the odds-making system …

Underpricing, Overhang, And The Cost Of Going Public To Preexisting Shareholders, Steven Dolvin, Bradford Jordan

Steven D. Dolvin

IPO underpricing has been extensively studied; however, its impact on the wealth of preexisting shareholders has not been closely examined. We address the question of whether or not periods of high underpricing adversely affect preexisting shareholders. We find that high levels of underpricing are associated with increased share retention, which effectively offsets much of the potential cost. Overall, we find that the percentage of shareholder wealth lost is surprisingly stable over time, unlike underpricing itself. We also find that many factors known to be related to underpricing are not significant determinants of the cost of going public to preexisting owners.

Prior Debt And The Cost Of Going Public, Steven D. Dolvin, Merk K. Pyles

Steven D. Dolvin

Previous studies find that firms with prior debt, particularly publicly rated, have lower information asymmetry and experience a lower opportunity cost of going public, as measured by underpricing. Subsequent research suggests that underpricing may be an inaccurate measure of indirect issuance costs. Thus, we replicate and extend existing studies to examine whether previously issued debt reduces the true opportunity cost of issuance. We find that private debt issues have little effect; however, firms with public debt (particularly rated) have both significantly lower levels of underpricing and lower issuance opportunity costs, as well as narrower filing ranges and smaller price revisions, …

Market Efficiency At The Derby: A Real Horse Race, Steven D. Dolvin, Mark K. Pyles

Steven D. Dolvin

Using race data from each Kentucky Derby from 1920 to 2005, we examine whether the horse wagering market is efficient. Most prior studies in this arena test potential betting strategies that rely on posted odds, generally finding that it is extremely difficult to devise and implement any consistently successful wager (i.e., market efficiency). We extend these studies by examining underlying determinants of posted race odds, specifically focusing on the experience of auxiliary members (e.g., jockey, breeder and trainer) associated with each entrant. We find that past Derby experience is an important determinant of posted odds and that the odds-making system …

Underpricing, Overhang, And The Cost Of Going Public To Preexisting Shareholders, Steven D. Dolvin, Bradford D. Jordan

Steven D. Dolvin

IPO underpricing has been extensively studied; however, its impact on the wealth of preexisting shareholders has not been closely examined. We address the question of whether or not periods of high underpricing adversely affect preexisting shareholders. We find that high levels of underpricing are associated with increased share retention, which effectively offsets much of the potential cost. Overall, we find that the percentage of shareholder wealth lost is surprisingly stable over time, unlike underpricing itself. We also find that many factors known to be related to underpricing are not significant determinants of the cost of going public to preexisting owners.