Finance and Financial Management | Open Access Articles

Walking The Talk Of Wall Street, Singapore Management University

Perspectives@SMU

The rules of the game on Wall Street may be ever changing but a professor of economics at Princeton University, Burton Malkiel, has held on to his views on how the game should be played for almost four decades.

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Markowitz 2.0: Innovations For Asset Allocation, Knowledge@Smu

Knowledge@SMU

The idea of conducting financial analysis on asset classes, while widely accepted today, was a new concept in the 1950s. It was so new that Nobel Prize winner in economics Harry Markowitz almost did not receive his doctorate because his thesis on portfolio optimisation was deemed as “not economics” by his supervisor. Dr Paul Kaplan, quantitative research director at Morningstar, introduces an updated model of Markowitz’s portfolio optimisation model at a seminar in SMU.

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Walking The Talk Of Wall Street, Knowledge@Smu

Knowledge@SMU

Years after he theorised that a blindfolded monkey throwing darts at stock listings can select a portfolio that would perform as well as one chosen by experts, Princeton economist Burton Malkiel is sticking by it. In the tenth edition of his investment classic, A Random Walk Down Wall Street, Malkiel explains why the experts are overrated, and why sticking with a buy-and-hold strategy using a broad stock market index fund will outperform the professionally managed ones.

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Spin-Offs And Operating Performance, Gary L. Caton, Jeremy C. Goh, Frank Kerins

Research Collection Lee Kong Chian School Of Business

This study examines the relation between changes in industry-adjusted operating performance associated with corporate spin-offs and the market’s assessment of the spin-off as either a value increasing or value decreasing activity. I find that the average change in industry-adjusted operating performance associated with my sample of spin-offs is not significantly different from zero. However, I also present evidence suggesting that this average result is misleading because some spin-offs appear to be value increasing while others are value decreasing. I establish that a positive and significant relation exists between parent company revaluation and a) the change in industry-adjusted operating performance of …

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A Theory Of Strategic Mergers, Gennaro Bernile, Evgeny Lyandres, Alexei Zhdanov

Research Collection Lee Kong Chian School Of Business

We examine firms’ strategic incentives to engage in horizontal mergers. In a real options framework, we show that strategic considerations may explain abnormally high takeover activity during periods of positive and negative demand shocks. Importantly, this pattern emerges solely as a result of firms’ strategic interaction in output markets. We show that the U-shaped relation between the state of demand and the propensity of firms to merge, documented in past studies, is driven by horizontal mergers in industries that are: (1) relatively more concentrated, (2) characterized by relatively strong competitive interaction among firms, and (3) characterized by relatively low merger-related …

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Hedge Funds And Analyst Conflict Of Interest, Sung Gon Chung, Melvyn Teo

Research Collection School Of Accountancy

Are sell-side analysts reluctant to go against the investment views of their hedge fund clients? We show that analysts tend to upgrade stocks recently bought and downgrade stocks recently sold by hedge funds. Relative to other buy and strong buy recommendations, similar recommendations on stocks predominantly held by hedge funds parlay into poorer three-month and six-month stock returns. Hedge funds concurrently offload their stock holdings when analysts issue flattering reports. In line with an agency based explanation, our results are more pronounced for important brokerage clients such as high dollar turnover hedge funds and hedge funds who are prime brokerage …

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Rational Financial Management: Evidence From Seasoned Equity Offerings, Michael Barclay, Fangjian Fu, Clifford Smith

Research Collection Lee Kong Chian School Of Business

Current theories of capital structure have difficulty explaining the aspects of financing behavior we document. In contrast to the tradeoff theory, seasoned equity offers frequently move firms away from their target leverage ratios. At odds with the pecking-order theory, SEO firms typically are financially healthy companies with low leverage, unused debt capacity and substantial cash balances. Inconsistent with the market-timing theory, SEOs appear to be driven by capital requirements associated with large investment projects rather than by market-timing considerations. Moreover, firms issue debt following SEOs, not only to finance investment, but to increase leverage toward its target level. Each of …

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Large Mutual Fund Families: Bigger May Not Always Be Better, Singapore Management University

Perspectives@SMU

Size is not everything but it may be intuitive for the novice investor to place his money in a mutual fund from large fund families thinking that it will outperform the smaller ones.

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Large Mutual Fund Families: Bigger May Not Always Be Better, Knowledge@Smu

Knowledge@SMU

Investments are vital to one’s financial freedom. But investment strategy is an art which not everybody can master. Those who are new to investing may see mutual funds as an easy tool to make money. It has been traditionally thought that larger mutual fund families tend to perform better than their smaller counterparts. Do they really?

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An Improved Test For Statistical Arbitrage, Robert Jarrow, Melvyn Teo, Yiu Kuen Tse, Mitch Warachka

Research Collection Lee Kong Chian School Of Business

We improve upon the power of the statistical arbitrage test in Hogan, Jarrow, Teo, and Warachka (2004). Our methodology also allows for the evaluation of return anomalies under weaker assumptions. We then compare strategies based on their convergence rates to arbitrage and identify strategies whose probability of a loss declines to zero most rapidly. These strategies are preferred by investors with finite horizons or limited capital. After controlling for market frictions and examining convergence rates to arbitrage, we find that momentum and value strategies offer the most desirable trading opportunities.

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The Party's Over: The Role Of Earnings Guidance In Resolving Sentiment-Driven Overvaluation, Nicholas Seybert, Holly I. Yang

Research Collection School Of Accountancy

This paper shows that an important link between investor sentiment and firm over valuation is optimistic earnings expectations, and that management earnings guidance helps resolve sentiment-driven overvaluation. Using previously identified firm characteristics, we find that most of the negative returns to uncertain firms in months following high-sentiment periods fall within the three-day window around the issuance of management earnings guidance. Comparisons of guidance months to nonguidance months show that guidance issuance affects the magnitude and not just the daily distribution of negative returns. There is also some evidence of negative returns around earnings announcements for firms that previously issued guidance, …

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Financial Literacy And Numerical Ability: Keys To Better Mortgage Outcomes, Singapore Management University

Perspectives@SMU

While mortgage credit expansion had lead to a rapid increase of home ownership in the US, the reversal of home prices beginning in 2006 resulted in a substantial increase in mortgage delinquencies and an explosion in outright defaults. Its devastating impact on the associated mortgage backed securities led the US and the world to its worst financial and macroeconomic crisis since the Great Depression, with its deleterious effects still felt today.

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Risk Management In A Volatile Market, Knowledge@Smu

Knowledge@SMU

The September 2008 collapse of Lehman Brothers was the 9/11 on Wall Street. Since then, the global risk landscape has changed and swings in the equity markets have become more volatile Now, a study of statistically significant changes in global financial risks and sharp increases in conditional Value-at-Risk after September 2008 has suggested a technically superior technique for effective risk management.

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Enterprise, Not Aid, For Social Change, Kim Tan

Social Space

A wind of change is blowing through the world of aid and philanthropy. The old formula of aid and compassion doesn’t work anymore. In its place, Kim Tanproposes a new model based on enterprise and financial capital.

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Financial Literacy And Numerical Ability: Keys To Better Mortgage Outcomes, Knowledge@Smu

Knowledge@SMU

The US mortgage crisis and its dire after effects have highlighted the criticality of financial literacy. And while most people would have picked up fundamental mathematical principles in schools, not everyone appreciates how arithmetic translates within the complex world of finance. Yet, given what has transpired with the subprime crisis, is it important for borrowers to appreciate complicated financial concepts before taking up a loan? A study of the US mortgage market, presented at a SMU School of Economics Seminar Series, provides some clues as it uncovers links between basic numerical skills and financial fate.

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An Institutional Perspective And The Role Of The State For Chinese Ofdi, Bing Ren, Hao Liang, Ying Zheng

Research Collection Lee Kong Chian School Of Business

Napoleon called China a ‘sleeping dragon’, but recent economic developments as China enters the twenty-first century show that the dragon is awakening. China has maintained strong economic growth since 1979 and sustained a GDP increase of more than 9 percent over the years. The total volume of economic output increased from 2.8 percent in 1970 to 7.23 percent in 2008, ranking China as the third largest economy in the world (United Nation Statistics Division Statistical Databases). China launched its ‘Go Global’ policy in 1999 to encourage highperforming Chinese firms to invest abroad and upgrade their global competence. Since then, outward …

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Size And Return: A New Perspective, Fangjian Fu, Wei Yang

Research Collection Lee Kong Chian School Of Business

We document robust empirical evidence that, after controlling for idiosyncratic volatility, large stocks earn significantly higher returns than small stocks. Our empirical results indicate that idiosyncratic volatility is positively related to return, but negatively related to size. Hence, failure to control for idiosyncratic volatility generates a downward omitted variable bias and leads to the widely documented negative relation between size and return. We explain the two contrasting size-return relations, with and without the control for idiosyncratic volatility, in a parsimonious equilibrium model that incorporates three empirical regularities: some individual investors are under-diversified; small stocks have higher idiosyncratic volatilities than large …

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Frog In The Pan: Continuous Information And Momentum, Zhi Da, G. Gurun, Mitchell Craig Warachka

Research Collection Lee Kong Chian School Of Business

We develop and test a frog-in-the-pan hypothesis that predicts investors are less attentive to information arriving continuously in small amounts than to information with the same cumulative stock price implications arriving in large amounts at discrete timepoints. Intuitively, we hypothesize that a series of gradual frequent changes attracts less attention than infrequent dramatic changes. Consistent with our frog-in-the-pan hypothesis, we find strong evidence that continuous information induces stronger and more persistent return continuation. Over a six-month holding period, momentum decreases monotonically from 8.86% for stocks with continuous information during their formation period to 2.91% for stocks with discrete information. Higher …

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The Impact Of The Anti-Predatory Lending Laws On Mortgage Volume, Hyun Soo Choi

Research Collection Lee Kong Chian School Of Business

In this paper, I test the hypothesis that anti-predatory lending laws inhibited the volume of mortgage lending during the housing-bubble period. I use cross-state variation in the strictness of these laws and their application only to mortgage refinancing as opposed to home purchases to develop a difference-in-difference estimate of the impact of these laws on mortgage volume. Consistent with my hypothesis, I find that states with stricter laws had lower mortgage refinancing volume but exhibited no difference in home purchase mortgage volume. I also test whether by restricting mortgage refinancing, these laws impacted household expenditures and find that the laws …

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What Are Analysts Really Good At?, Ohad Kadan, Leonardo Madureira, Rong Wang, Tzachi. Zach

Research Collection Lee Kong Chian School Of Business

Sell-side analysts employ different benchmarks when defining their stock recommendations. Forexample, a ‘buy’ for some brokers means the stock is expected to outperform its peers in the same sector(“industry benchmarkers”), while for other brokers it means the stock is expected to outperform themarket (“market benchmarkers”), or just some absolute return (“total benchmarkers”). We use thesebenchmarks to analyze the role of stock picking, industry picking and market timing in contributing to theperformance of stock recommendations. We are able to do so given that different benchmarks suggest theuse of different sets of abilities. Analysis of the relation between analysts’ recommendations and theirlong-term …

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Asset Gathering By Hedge Fund Firms, Melvyn Teo

Research Collection BNP Paribas Hedge Fund Centre

We explore agency issues within hedge fund firms. We find that firms that launch many funds tend to underperform other firms by between 3 to 5 percent per year after adjusting for risk. These findings are strongest for firms offering funds that pursue many distinct strategies, invest in a variety of geographical regions, locate in a gamut of countries, and offer different base currencies. Our results allow fund investors to distinguish, ex-ante, firms that focus on delivering alpha from those that focus on gathering assets.

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Opportunities And Challenges For The Asset Management Industry, Knowledge@Smu

Knowledge@SMU

Singapore, with its open economy and stable business environment, is host to some of the world's largest asset management companies. It has been observed, however, that local asset management firms are lagging far behind; somehow unable to capitalise on the same opportunities available to the global giants. Speaking at a conference organised by SMU's Centre for Asset Securitisation and Management in Asia, a panel of industry experts shared their views on what it would take to get both local and Asia-based firms into the big league.

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A Multiechelon Inventory Problem With Secondary Market Sales, Alexandar Angelus

Research Collection Lee Kong Chian School Of Business

We consider a finite-horizon, multiechelon inventory system in which the surplus of stock can be sold (i.e., disposed) in the secondary markets at each stage in the system. What are called nested echelon order-up-to policies are shown to be optimal for jointly managing inventory replenishments and secondary market sales. Under a general restriction on model parameters, we establish that it is optimal not to both sell off excess stock and replenish inventory. Secondary market sales complicate the structure of the system, so that the classical Clark and Scarf echelon reformulation no longer allows for the decomposition of the objective function …

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Charting Your Financial Goals, Benedict Koh

Research Collection Lee Kong Chian School Of Business

Every one of us has financial goals but not many of us know how to go about achieving them. We often lack investment knowledge or expertise to design an investment plan that optimises our savings. Consequently, we adopt the default approach of leaving all our savings in bank deposits. By doing so, we have already made an asset allocation decision, one that is very conservative. Over time, we soon realise that this conservative investment plan is simply not working as our savings are not compounding fast enough to keep up with inflation. We need to invest more wisely so that …

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Stochastic Capacity Investment And Flexible Vs. Dedicated Technology Choice In Imperfect Capital Markets, Onur Boyabatli, L. Bertil Toktay

Research Collection Lee Kong Chian School Of Business

This paper analyzes the impact of endogenous credit terms under capital market imperfections in a capacity investment setting. We model a monopolist firm that decides on its technology choice (flexible versus dedicated) and capacity level under demand uncertainty. Differing from the majority of the stochastic capacity investment literature, we assume that the firm is budget constrained and can relax its budget constraint by borrowing from a creditor. The creditor offers technology-specific loan contracts to the firm, after which the firm makes its technology choice and subsequent decisions. Capital market imperfections impose financing frictions on the firm. Our analysis contributes to …

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Longevity Risk Management In Singapore's National Pension System, Joelle H. Y. Fong, Olivia S. Mitchell, Benedict S. K. Koh

Research Collection Lee Kong Chian School Of Business

Although annuities are a theoretically appealing way to manage longevity risk, in the real world relatively few consumers purchase them at retirement. To counteract the possibility of retirees outliving their assets, Singapore’s Central Provident Fund, a national deﬁned contribution pension scheme, has recently mandated annuitization of workers’ retirement assets. More signiﬁcantly, the government has entered the insurance market as a public sector provider for such annuities. This article evaluates the money’s worth of life annuities and discusses the impact of the government mandate and its role as an annuity provider on the insurance market.

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Designing A More Efficient And Fairer Tax System, Knowledge@Smu

Knowledge@SMU

A competent tax system should meet an economy's fiscal needs, but that cannot exist without a tax design that understands, pre-empts, and ultimately shapes human behaviours. Drawing from the UK's Mirrlees Review, Richard Blundell, research director at the London-based Institute of Fiscal Studies, delivered a lecture at Singapore Management University's School of Economics on the principles of the tax reform, and the challenges that await governments in formulating a coherent and economically efficient tax structure.

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Supporting Global Metals Markets: The Role Of The London Metals Exchange, Knowledge@Smu

Knowledge@SMU

Most people would expect automobiles and electronics, comprised of many important metal parts, to be sold at relatively stable prices. Little do consumers appreciate, however, the backend market mechanisms that keep these prices stable. A prospective car buyer does not have to monitor his or her dream car's daily price fluctuations, for example, precisely because the parts that go into its manufacture maintain steady prices. This is, in part, the doing of metal exchanges that regulate the demand and supply of metals. Liz Milan, managing director of the London Metals Exchange Asia, explained this and more at a seminar organised …

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Dating The Timeline Of Financial Bubbles During The Subprime Crisis, Peter C. B. Phillips, Jun Yu

Research Collection School Of Economics

A new recursive regression methodology is introduced to analyze the bubble characteristics of various financial time series during the subprime crisis. The methods modify a technique proposed in Phillips, Wu, and Yu (2011) and provide a technology for identifying bubble behavior with consistent dating of their origination and collapse. The tests serve as an early warning diagnostic of bubble activity and a new procedure is introduced for testing bubble migration across markets. Three relevant financial series are investigated, including a financial asset price (a house price index), a commodity price (the crude oil price), and one bond price (the spread …

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Specification Sensitivity In Right-Tailed Unit Root Testing For Explosive Behavior, Peter C. B. Phillips, Shu-Ping Shi, Jun Yu

Research Collection School Of Economics

Right-tailed unit root tests have proved promising for detecting exuberance in economic and financial activities. Like left-tailed tests, the limit theory and test performance are sensitive to the null hypothesis and the model specification used in parameter estimation. This paper aims to provide some empirical guidelines for the practical implementation of right-tailed unit root tests, focusing on the sup ADF test of Phillips, Wu and Yu (2011), which implements a right-tailed ADF test repeatedly on a sequence of forward sample recursions. We analyze and compare the limit theory of the sup ADF test under deferent hypotheses and model specifications. The …

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Full-Text Articles in Finance and Financial Management

Walking The Talk Of Wall Street, Singapore Management University

Perspectives@SMU

Markowitz 2.0: Innovations For Asset Allocation, Knowledge@Smu

Knowledge@SMU

Walking The Talk Of Wall Street, Knowledge@Smu

Knowledge@SMU

Spin-Offs And Operating Performance, Gary L. Caton, Jeremy C. Goh, Frank Kerins

Research Collection Lee Kong Chian School Of Business

A Theory Of Strategic Mergers, Gennaro Bernile, Evgeny Lyandres, Alexei Zhdanov

Research Collection Lee Kong Chian School Of Business

Hedge Funds And Analyst Conflict Of Interest, Sung Gon Chung, Melvyn Teo

Research Collection School Of Accountancy

Rational Financial Management: Evidence From Seasoned Equity Offerings, Michael Barclay, Fangjian Fu, Clifford Smith

Research Collection Lee Kong Chian School Of Business

Large Mutual Fund Families: Bigger May Not Always Be Better, Singapore Management University

Perspectives@SMU

Large Mutual Fund Families: Bigger May Not Always Be Better, Knowledge@Smu

Knowledge@SMU

An Improved Test For Statistical Arbitrage, Robert Jarrow, Melvyn Teo, Yiu Kuen Tse, Mitch Warachka

Research Collection Lee Kong Chian School Of Business

The Party's Over: The Role Of Earnings Guidance In Resolving Sentiment-Driven Overvaluation, Nicholas Seybert, Holly I. Yang

Research Collection School Of Accountancy

Financial Literacy And Numerical Ability: Keys To Better Mortgage Outcomes, Singapore Management University

Perspectives@SMU

Risk Management In A Volatile Market, Knowledge@Smu

Knowledge@SMU

Enterprise, Not Aid, For Social Change, Kim Tan

Social Space

Financial Literacy And Numerical Ability: Keys To Better Mortgage Outcomes, Knowledge@Smu

Knowledge@SMU

An Institutional Perspective And The Role Of The State For Chinese Ofdi, Bing Ren, Hao Liang, Ying Zheng

Research Collection Lee Kong Chian School Of Business

Size And Return: A New Perspective, Fangjian Fu, Wei Yang

Research Collection Lee Kong Chian School Of Business

Frog In The Pan: Continuous Information And Momentum, Zhi Da, G. Gurun, Mitchell Craig Warachka

Research Collection Lee Kong Chian School Of Business

The Impact Of The Anti-Predatory Lending Laws On Mortgage Volume, Hyun Soo Choi

Research Collection Lee Kong Chian School Of Business

What Are Analysts Really Good At?, Ohad Kadan, Leonardo Madureira, Rong Wang, Tzachi. Zach

Research Collection Lee Kong Chian School Of Business

Asset Gathering By Hedge Fund Firms, Melvyn Teo

Research Collection BNP Paribas Hedge Fund Centre

Opportunities And Challenges For The Asset Management Industry, Knowledge@Smu

Knowledge@SMU

A Multiechelon Inventory Problem With Secondary Market Sales, Alexandar Angelus

Research Collection Lee Kong Chian School Of Business

Charting Your Financial Goals, Benedict Koh

Research Collection Lee Kong Chian School Of Business

Stochastic Capacity Investment And Flexible Vs. Dedicated Technology Choice In Imperfect Capital Markets, Onur Boyabatli, L. Bertil Toktay

Research Collection Lee Kong Chian School Of Business

Longevity Risk Management In Singapore's National Pension System, Joelle H. Y. Fong, Olivia S. Mitchell, Benedict S. K. Koh

Research Collection Lee Kong Chian School Of Business

Designing A More Efficient And Fairer Tax System, Knowledge@Smu

Knowledge@SMU

Supporting Global Metals Markets: The Role Of The London Metals Exchange, Knowledge@Smu

Knowledge@SMU

Dating The Timeline Of Financial Bubbles During The Subprime Crisis, Peter C. B. Phillips, Jun Yu

Research Collection School Of Economics

Specification Sensitivity In Right-Tailed Unit Root Testing For Explosive Behavior, Peter C. B. Phillips, Shu-Ping Shi, Jun Yu

Research Collection School Of Economics