Finance and Financial Management Commons^™

An Introduction To Financial Analysis, Annetta M. Gibson

Faculty Publications

Presentation for Treasurers, Euro-Asia Division, July 18, 2013.

Lies! Lies! Lies!, Annetta M. Gibson

Faculty Publications

Presented at the General Conference Auditing Service Seminar, January, 2013

Cross-Border Mergers And Acquisitions And Country Risk Ratings: Evidence From U.S. Financials, Halil Kiymaz

Faculty Publications

This study reports how country risk and macroeconomic conditions influence the wealth gains of U.S. financial firms involved in international mergers and takeovers. The findings suggest that U.S. financials experience weakly significant wealth gains around announcement date. The wealth gains are significant for takeovers in Latin America. There are also differences in wealth gains of subsector affiliations of financial firms. While banks experiencing wealth loss, both insurance and investment services firms having significant wealth gains. The country risk, including economic, political, and financial risk ratings, help to explain the wealth gains to financial bidders.

The Impact Of Securitization On The Expansion Of Subprime Credit, Taylor Nadauld, Shane M. Sherlund

Faculty Publications

This paper investigates the relationship between securitization activity and the extension of subprime credit. The analysis is motivated by two sets of compelling empirical facts. First, the origination of subprime mortgages exploded between the years 2003 and 2005. Second, the securitization of subprime loans increased substantially over the same time period, driven primarily by the five largest independent broker/dealer investment banks. We argue that the relative shift in the securitization activity of investment banks was driven by forces exogenous to factors impacting lending decisions in the primary mortgage market and resulted in lower ZIP code denial rates, higher subprime origination …

Legislating Stock Prices, Lauren Cohen, Karl B. Diether, Christopher Malloy

Faculty Publications

We demonstrate that legislation has a simple, yet previously undetected, impact on stock prices. Exploiting the voting record of legislators whose constituents are the affected industries, we show that the votes of these “interested” legislators capture important information seemingly ignored by the market. A long-short portfolio based on these legislators' views earns abnormal returns of over 90 basis points per month following the passage of legislation. Industries that we classify as beneficiaries of legislation experience significantly more positive earnings surprises and positive analyst revisions in the months following passage of the bill, as well as significantly higher future sales and …

Planning Prompts As A Means Of Increasing Preventive Screening Rates, Katherine L. Milkman, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

In the U.S., 18,800 lives could be saved annually if those advised to obtain colorectal screenings based on national guidelines complied (Zauber et al., 2012). Subtle suggestions embedded in a decision-making environment can change people's choices (Thaler and Sunstein, 2008). Past research has shown that prompting people to form plans about where and when they will complete an intended behavior increases engagement in activities ranging from voting to vaccination (Gollwitzer and Sheeran, 2006; Milkman et al., 2011; Nickerson and Rogers, 2010). When plans are formed, they link intended behaviors with a concrete future moment and course of action, creating cues …

Testimonials Do Not Convert Patients From Brand To Generic Medication, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian, Gwendolyn Reynolds

Faculty Publications

Objectives—To assess whether the addition of a peer testimonial to an informational mailing increases conversion rates from brand-name prescription medications to lower-cost therapeutic equivalents, and whether the testimonial’s efficacy increases when information is added about an affiliation the quoted individual shares with the recipient.

Research Design and Methods—5,498 union members were randomly assigned to receive one of three different informational letters: one without a testimonial (No Testimonial Group), one with a testimonial from a person whose shared union affiliation with the recipient was not disclosed (Unaffiliated Testimonial Group), and one with a testimonial from a person whose shared union affiliation …

Analysis Of Reits And Reit Etfs Cointegration During The Flash Crash., Stoyu Ivanov

Faculty Publications

In this study I revisit the “disintegration hypothesis” of financial assets around a major crisis event. I examine whether the Vanguard Real Estate Investment Trust and iShares Dow Jones US Real Estate Index Fund exchange traded funds disintegrate from the ten largest Real Estate Investment Trusts during the 14:45 Flash Crash on May 6, 2010. I find that six of the ten largest REITs are not cointegrated with the Vanguard Real Estate Investment Trust prior to the Flash Crash and that five of the ten largest REITs are not cointegrated with iShares Dow Jones US Real Estate Index Fund prior …

Analysis Of The Effects Of Pre-Announcement Of S&P 500 Index Changes., Stoyu Ivanov

Faculty Publications

In this study we attempt to answer the question – does the start of pre-announcing of S&P 500 index changes in October 1989 have an effect on the trading pattern of added or deleted firms? We document that prior to October 1989 the excess returns of added or deleted firms follow a white noise process around the event, whereas after the start of pre-announcing the excess returns can be described as nonstationary. This indicates significant excess profits to be captured around the addition or deletion event after S&P started pre-announcing changes in October 1989 but not prior to that date.

Matching Contributions And Saving Outcomes: A Behavioral Economics Perspective, Brigitte C. Madrian

Faculty Publications

Including a matching contribution increases savings plan participation and contributions, although the impact is less significant than the impact of nonfinancial approaches. Conditional on participation, a higher match rate has only a small effect on savings plan contributions. In contrast, the match threshold has a substantial impact, probably because it serves as a natural reference point when individuals are deciding how much to save and may be viewed as advice from the savings program sponsor on how much to save. Other behavioral approaches to changing savings plan outcomes—including automatic enrollment, simplification, planning aids, reminders, and commitment features—potentially have a much …

Financial Literacy, Financial Education And Economic Outcomes, Justine S. Hastings, Brigitte C. Madrian, William L. Skimmyhorn

Faculty Publications

In this article we review the literature on financial literacy, financial education, and consumer financial outcomes. We consider how financial literacy is measured in the current literature, and examine how well the existing literature addresses whether financial education improves financial literacy or personal financial outcomes. We discuss the extent to which a competitive market provides incentives for firms to educate consumers or offer products that facilitate informed choice. We review the literature on alternative policies to improve financial outcomes, and compare the evidence to evidence on the efficacy and cost of financial education. Finally, we discuss directions for future research.

What Goes Up Must Come Down? Experimental Evidence On Intuitive Forecasting, John Beshears, James J. Choi, Andreas Fuster, David Laibson, Brigitte C. Madrian

Faculty Publications

Do laboratory subjects correctly perceive the dynamics of a mean-reverting time series? In our experiment, subjects receive historical data and make forecasts at different horizons. The time series process that we use features short-run momentum and long-run partial mean reversion. Half of the subjects see a version of this process in which the momentum and partial mean reversion unfold over 10 periods (‘fast’), while the other subjects see a version with dynamics that unfold over 50 periods (‘slow’). Typical subjects recognize most of the mean reversion of the fast process and none of the mean reversion of the slow process.

Consumers’ Misunderstanding Of Health Insurance, George Loewenstein, Joelle Y. Friedman, Barbara Mcgill, Sarah Ahmad, Suzanne Linck, Stacey Sinkula, John Beshears, James J. Choi, Jonathan Kolstad, David Laibson, Brigitte C. Madrian, John A. List, Kevin G. Volpp

Faculty Publications

We report results from two surveys of representative samples of Americans with private health insur-ance. The first examines how well Americans understand, and believe they understand, traditional healthinsurance coverage. The second examines whether those insured under a simplified all-copay insuranceplan will be more likely to engage in cost-reducing behaviors relative to those insured under a traditionalplan with deductibles and coinsurance, and measures consumer preferences between the two plans. Thesurveys provide strong evidence that consumers do not understand traditional plans and would betterunderstand a simplified plan, but weaker evidence that a simplified plan would have strong appeal toconsumers or change their …

Simplification And Saving, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

The daunting complexity of important financial decisions can lead to procrastination. Weevaluate a low-cost intervention that substantially simplifies the retirement savings planparticipation decision. Individuals received an opportunity to enroll in a retirement savingsplan at a pre-selected contribution rate and asset allocation, allowing them to collapsea multidimensional problem into a binary choice between the status quo and the pre-selected alternative. The intervention increases plan enrollment rates by 10–20 percentagepoints. We find that a similar intervention can be used to increase contribution rates amongemployees who are already participating in a savings plan.

Fair Value Of Liabilities: The Financial Economics Perspective, David F. Babbel, Jeremy Gold, Craig B. Merrill

Faculty Publications

In this paper we present the fundamental approaches of financial economics to valuation. Three methods are demonstrated by which financial economists account for risk. We illustrate how these methods relate to one another and how they can be applied in the valuation of risky corporate bonds, guaranteed investment contracts (GICs) with and without interest rate contingencies, and whole life insurance. Next, we discuss how these models treat orthogonal risks, such as the kind often covered by insurance contracts. Demand side and supply side diversification are treated, and liquidity risk is then considered. We conclude with a summary of the benefits …

Sb Ipos And Ipo Anomalies: An Empirical Analysis Of The Small Firm Uniqueness Hypothesis, James C. Brau, J. Troy Carpenter

Faculty Publications

The purpose of this paper is to provide a direct test of the small-firm uniqueness hypothesis advanced by Ang (1991). We do this by using the SB-IPO program of the SEC as our instrument to define a small firm. Having identified small firms, we test the three IPO anomalies to see if small firms differ from large firms along these dimensions. We find that SB IPOs experience the three anomalies; however, they do so in disparate ways than mainline IPOs do. In sum, we provide support for the small firm uniqueness hypothesis.

A Structural Model Of Human Capital And Leverage, Ryan Pratt

Faculty Publications

I study the effect of human capital on firms' leverage decisions in a structural dynamic model. Firms produce using physical capital and labor. They pay a cost per employee they hire, thus investing in human capital. In default a portion of this human capital investment is lost. The loss of human capital constitutes a significant cost of financial distress. Labor intensive firms are more heavily exposed to this cost and respond by using less leverage. Thus the model predicts a decreasing relationship between leverage and labor intensity. Consistent with this prediction, I show in the data that high labor intensity …

Revenge Of The Steamroller: Abcp As A Window On Risk Choices, Carlos Arteta, Mark Carey, Ricardo Correa, Jason Kotter

Faculty Publications

We empirically examine financial institutions’ motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in the summer of 2007. We find evidence consistent with important roles for both ownermanager agency problems and government-induced distortions, especially government control or ownership of banks.

Who Says There Is A High Consensus Among Analysts When Market Uncertainty Is High? Some New Evidence From The Commercial Real Estate Market, James D. Shilling, C. F. Sirmans, Barrett A. Slade

Faculty Publications

This paper seeks to determine whether analyst consensus is a function of the level of price informativeness, and therefore attempts to gauge the extent to which analyst consensus is high when market uncertainty is high. There is the view that a small or declining volume of trading implies less information and lower quality information, and that a lower level of price informativeness will lead analysts to put more weight on their private information at the time of forecasting. We add to this view the notion that when uncertainty is high there might be a positive option value of waiting. In …

Planning Prompts As A Means Of Increasing Rates Of Immunization And Preventive Screening, Hengchen Dai, Katherine L. Milkman, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

Building on psychological insights about the way people make decisions, behavioral scientists have proposed various methods to increase behaviors that promote welfare without limiting freedom of choice (Thaler & Sunstein, 2008). Recently, researchers have begun exploring the power of such methods for encouraging people to engage in beneficial health-related behaviors, particularly those that are often put off or forgotten (Loewenstein, Brennan, & Volpp, 2007). For example, motivated by evidence of substantial inertia at the status quo, researchers have demonstrated that if people are automatically assigned an appointment to receive a flu shot (while retaining the right to change or cancel …

Is China’S Outward Investment In Oil A Global Security Concern?, Ilan Alon, Aleh Cherp

Faculty Publications

The dramatic increase in investment by Chinese SOEs in overseas oil assets is primarily driven by energy security concerns. Whether such investment will benefit or harm energy security of other countries is hotly contested. On one hand, this investment can supplement the overall lack of investment in the sector, benefiting all consumers. On the other hand, it may exacerbate environmental and political problems associated with fossil fuels.

The Impact Of Corruption On Firm Tax Compliance In Transition Economies: Whom Do You Trust?, Anna Alon, Amy M. Hageman

Faculty Publications

Tax compliance is an important issue for governments and the public alike. To meet public needs and fund public mandates, firms around the world are expected to comply with tax laws. Factors that are related to organizational (firm) tax compliance have not been sufficiently examined in the literature. Due to the increasing global influence of transition economies, factors associated with firm tax compliance in transition economies are particularly of interest. Based on a sample of over 5,000 firms from 22 former Soviet Bloc transition economies, we find that higher levels of corruption and higher levels of particularized trust (reliance on …

Analysis Of Firm Risk Around S&P 500 Index Changes., Stoyu Ivanov

Faculty Publications

In this study we extend the work of Vijh (1994), barberis, Schleifer and Wurgler (2005), Denis, McConnell, Ovtchinnikov and Yu (2003) and Geppert, Ivanov and Karel (2011) by examining the effect of the addition to or deletion from the S&P 500 Index on the firm's Fama - French four factor model loadings before and after the event. We find that added to and deleted from the S&p 500 Index firms experience unique sensitivity to the small cap minus Big cap (SMB) and momentum (UMD) factors. this finding and robustness tests indicate that addition to and deletion from the S&P 500 …

Analysis Of Bank Performance In California And The Rest Of The Twelfth Federal Reserve District, Stoyu Ivanov

Faculty Publications

In this study I examine the performance and sensitivity of performance to macro factors of banks headquartered in California and banks headquartered in the rest of the states in the Twelfth Federal Reserve District. I find that prior to the financial crisis which started in the fourth quarter of 2007 the non-California banks outperformed California banks; however, towards the end of the financial crisis California banks outperformed non-California banks. I also find higher macro factor sensitivities of non-California banks indicating more macro risk carried by these institutions. The higher risk explains the superior performance in expansions and underperformance in recessions …

Reit Etfs Performance During The Financial Crisis., Stoyu Ivanov

Faculty Publications

In this study the “disintegration hypothesis” is tested. It is examined whether the Vanguard Real Estate Investment Trust and iShares Dow Jones US Real Estate Index Fund exchange traded funds disintegrate from their underlying indexes during the recent financial crisis. Failure to support the “disintegration hypothesis” of the exchange traded fund and underlying index is found. It is also found that the Vanguard Real Estate Investment Trust exchange traded fund is consistently cointegrated with its underlying index the MSCI US REITs Index, before, during and after the financial crisis. It is also found that the iShares Dow Jones US Real …

Alternative Models Of Funding Higher Education: Past And Present Trends, Gus Gregorutti

Faculty Publications

The present study is built around the following general research question: why is Adventist higher education in a tight budget? This is approached using a comparative time frame analysis of past and present needs and characteristics affecting funding tertiary education. The main idea throughout this paper is that the different funding systems are setting up models of Adventist higher education that aren’t always the best fit for the institutional ideology and organization. Possible alternatives to shift into a more suitable funding system are provided and discusses as well. 

The Mexican Idea Of Twoyear University Degrees: A Model Of Opportunities And Challenges, Gus Gregorutti

Faculty Publications

This study had the following general goals: a) Map some of the political and social factors that prompted the establishment of two-years Technological Universities in Mexico; b) Describe the main features of the model and how it differs from other models; c) Discuss Neoliberal Human Capital Theory as one of the main theoretical backdrop for expanding this kind of institutions; and finally, d) Assess the model’s strengths and weaknesses. To accomplish these goals, the study drew data from existing policies and from a set of six interviews to human resources directors in Monterrey area, Northern Mexico. These recruiters belonged to …

Misvaluing Innovation, Lauren Cohen, Karl B. Diether, Christopher Malloy

Faculty Publications

We demonstrate that a firm’s ability to innovate is predictable, persistent, and relatively simple to compute, and yet the stock market ignores the implications of past successes when valuing future innovation. We show that two firms that invest the exact same in research and development (R&D) can have quite divergent, but predictably divergent, future paths. Our approach is based on the simple premise that while future outcomes associated with R&D investment are uncertain, the past track records of firms may give insight into their potential for future success. We show that a long-short portfolio strategy that takes advantage of the …

Why Did Financial Institutions Sell Rmbs At Fire Sale Prices During The Financial Crisis?, Craig B. Merrill, Taylor Nadauld, René M. Stulz, Shane M. Sherlund

Faculty Publications

Much attention has been paid to the large decreases in value of non-agency residential mortgage-backed securities (RMBS) during the financial crisis. Many observers have argued that the fall in prices was partly caused by fire sales. We use capital requirements and accounting rules to identify circumstances where financial institutions had incentives to engage in fire sales and then examine whether such sales occurred. For financial institutions subject to credit-sensitive capital requirements, capital requirements increase as an asset’s credit becomes impaired. When accounting rules require such an asset’s value to be marked-to-market and the fair value loss to be recognized in …

Soft Strategic Information And Ipo Underpricing, James C. Brau, James Cicon, Grant Mcqueen

Faculty Publications

Using content analysis we measure the impact of soft information, derived from words in IPO registration documents, on IPO pricing efficiency. First, using 2,298 U.S. IPOs from 1996 to 2008, we find that an IPO document’s strategic tone correlates positively with the stock’s first-day return; more frequent usage of positive and/or less frequent usage of negative strategic words lead to more IPO underpricing. Second, we find that an IPO document’s strategic tone is negatively correlated with the stock’s long-run return. Together, these findings imply that investors initially misprice soft information in registration statements, which mispricing is eventually corrected. Additionally, we …