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Full-Text Articles in Finance and Financial Management

A Comparison Of Partially Adaptive And Reweighted Least Squares Estimation, Brian H. Boyer, James B. Mcdonald, Whitney K. Newey Jan 2003

A Comparison Of Partially Adaptive And Reweighted Least Squares Estimation, Brian H. Boyer, James B. Mcdonald, Whitney K. Newey

Faculty Publications

The small sample performance of least median of squares, reweighted least squares, least squares, least absolute deviations, and three partially adaptive estimators are compared using Monte Carlo simulations. Two data problems are addressed in the paper: (1) data generated from non-normal error distributions and (2) contaminated data. Breakdown plots are used to investigate the sensitivity of partially adaptive estimators to data contamination relative to RLS. One partially adaptive estimator performs especially well when the errors are skewed, while another partially adaptive estimator and RLS perform particularly well when the errors are extremely leptokurtotic. In comparison with RLS, partially adaptive estimators …

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Investor Overconfidence And Trading Volume, Meir Statman, Steven Thorley, Keith Vorkink Jan 2003

Investor Overconfidence And Trading Volume, Meir Statman, Steven Thorley, Keith Vorkink

Faculty Publications

The proposition that investors are overconfident about their valuation and trading skills can explain high observed trading volume. With biased self-attribution, the level of investor overconfidence and thus trading volume varies with past returns. We test the trading volume predictions of formal overconfidence models and find that share turnover is positively related to lagged returns for many months. The relationship holds for both market-wide and individual security turnover, which we interpret as evidence of investor overconfidence and the disposition effect, respectively. Security volume is more responsive to market return shocks than to security return shocks, and both relationships are more …

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Testing Forward Exchange Rate Unbiasedness Efficiently: A Semiparametric Approach, Douglas J. Hodgson, Oliver Linton, Keith Vorkink Jan 2003

Testing Forward Exchange Rate Unbiasedness Efficiently: A Semiparametric Approach, Douglas J. Hodgson, Oliver Linton, Keith Vorkink

Faculty Publications

We apply semiparametric efficient estimation procedures for a seemingly unrelated regression model where the multivariate error density is elliptically symmetric to study the efficiency of the foreign exchange market. We consider both cointegrating regressions and standard stationary regressions. The elliptical symmetry assumption allows us to avoid the curse of dimensionality problem that typically arises in multivariate semiparametric estimation procedures, because the multivariate elliptically symmetric density function can be written as a function of a scalar transformation of the observed multivariate data. We test the unbiasedness hypothesis on both weekly and daily exchange rate data and strongly reject unbiasedness at the …

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Some Loans Are More Equal Than Others: Third-Party Originations And Defaults In The Subprime Mortgage Industry, William P. Alexander, Scott D. Grimshaw, Grant R. Mcqueen, Barrett A. Slade Jan 2003

Some Loans Are More Equal Than Others: Third-Party Originations And Defaults In The Subprime Mortgage Industry, William P. Alexander, Scott D. Grimshaw, Grant R. Mcqueen, Barrett A. Slade

Faculty Publications

We show how agency problems between lenders (principals) and third-party originators (TPO; agents) imply that TPO-originated loans are more likely to default than similar retail-originated loans. The nature of the agency problem is that TPOs are compensated for writing loans, but are not completely held accountable for the subsequent performance of those loans. Using a hazard model with jointly estimated competing risks and unobserved heterogeneity, we find empirical support for the TPO/default prediction using individual fixedrate subprime loans with first liens secured by residential real estate originated between January 1, 1996, and December 31, 1998. We find that apparently equal …

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Propping And Tunneling, Eric Friedman, Simon Johnson, Todd Mitton Jan 2003

Propping And Tunneling, Eric Friedman, Simon Johnson, Todd Mitton

Faculty Publications

In countries with weak legal systems, there is a great deal of tunneling by the entrepreneurs who control publicly traded firms. However, under some conditions entrepreneurs prop up their firms, i.e., they use their private funds to benefit minority shareholders. We provide evidence and a model that explains propping. In particular, we suggest that issuing debt can credibly commit an entrepreneur to propping, even though creditors can never take possession of any underlying collateral. This helps to explain why emerging markets with weak institutions sometimes grow rapidly and why they are also subject to frequent economic and financial crises. Journal …

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Concealing And Confounding Adverse Signals: Insider Wealth-Maximizing Behavior In The Ipo Process, James S. Ang, James C. Brau Jan 2003

Concealing And Confounding Adverse Signals: Insider Wealth-Maximizing Behavior In The Ipo Process, James S. Ang, James C. Brau

Faculty Publications

We study a known negative signal, the sale of insider shares in an IPO and find that insiders adopt two concealment strategies consistent with wealth-maximizing behavior. First, insiders underreport the number of personally owned shares in the prominent original prospectus and use an obscure amendment to communicate the true higher level of shares to be offered. Second, when insiders increase shares in a later amendment, they tend to either increase secondary shares disproportional to primary share increases, or to reduce primary shares to wholly or partly conceal the increase in secondary shares offered. Insiders confound the negative secondary share signal …

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Efficient Estimation Of Conditional Asset-Pricing Models, Douglas J. Hodgson, Keith Vorkink Jan 2003

Efficient Estimation Of Conditional Asset-Pricing Models, Douglas J. Hodgson, Keith Vorkink

Faculty Publications

A semiparametric efficient estimation procedure is developed for the parameters of multivariate generalized autoregressive conditional heteroscedasticity-in-mean models when the disturbances have a conditional distribution assumed to be elliptically symmetric but otherwise unrestricted. Under highlevel assumptions, the resulting estimator achieves the asymptotic semiparametric efficiency bound. The elliptical symmetry assumption allows us to avert the curse of dimensionality problem that would otherwise arise in estimating the unknown error distribution. This framework is suitable for the estimation and testing of conditional asset-pricing models, such as the conditional capital asset-pricing model. We apply our procedure in an empirical study of stock prices, with Monte …

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An Assessment Of Air Force Development Portfolio Management Practices, Michael A. Greiner, Kevin J. Dooley, Dan L. Shunk, Ross T. Mcnutt Apr 2002

An Assessment Of Air Force Development Portfolio Management Practices, Michael A. Greiner, Kevin J. Dooley, Dan L. Shunk, Ross T. Mcnutt

Faculty Publications

Selecting and managing development project portfolios is a critical function within the Air Force’s weapon systems development process. Decision makers must weigh benefits, costs, and mission needs for a variety of proposed new initiatives and current weapon systems programs in order to develop an effective portfolio that provides the best value to the User. This research examines current Air Force development portfolio management practices as perceived by those involved with the decision making process. Research findings indicate several gaps between Air Force practices and those commercial best practices as found in the literature. A general approach for bridging the differences …

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Firm Transparency And The Costs Of Going Public, James S. Ang, James C. Brau Jan 2002

Firm Transparency And The Costs Of Going Public, James S. Ang, James C. Brau

Faculty Publications

We demonstrate that firms that are more transparent pay less, in all components of issuance costs, to go public.We employ a sample of 334 previous leveraged buyouts and a characteristic-matched control sample to test the hypothesis that greater firm transparency before the issue decreases the flotation costs of the initial public offering. These flotation costs are divided into initial underpricing, underwriter discount, administrative expenses, and the overallotment option required to take the firm public. Our results provide further evidence of the asymmetric information hypothesis as it applies to initial public offerings.

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Do Tax-Deferred Exchanges Impact Purchase Price? Evidence From The Phoenix Apartment Market, Andrew Holmes, Barrett A. Slade Jan 2002

Do Tax-Deferred Exchanges Impact Purchase Price? Evidence From The Phoenix Apartment Market, Andrew Holmes, Barrett A. Slade

Faculty Publications

Many authors have commented on the compliance risk associated with taxdeferred exchanges. However, no published studies explicitly address whether the risks associated with the exchange process impact the price at which exchanged assets trade. Using a unique data set that documents transactions for nondirect exchanges, this study examines the price impact of tax-deferred exchanges on apartment transactions in the Phoenix, Arizona, market. Consistent with the price pressure hypothesis originally developed by Scholes (1972) and Kraus and Stoll (1972) and the tax capitalization hypothesis proposed by Oates (1969), the data show that exchange participants pay an economically significant premium to acquire …

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A Metropolitan Transaction-Based Commercial Price Index: A Time-Varying Parameter Approach, Henry J. Munneke, Barrett A. Slade Jan 2002

A Metropolitan Transaction-Based Commercial Price Index: A Time-Varying Parameter Approach, Henry J. Munneke, Barrett A. Slade

Faculty Publications

This study examines the usefulness of time-varying parameter techniques for constructing reliable transaction-based commercial price indices for metropolitan areas. Time-varying parameter techniques allow the implicit prices of differing quality characteristics to vary intertemporally, overcoming the potential bias imposed by holding implicit prices fixed and simply interpreting time dummy variables as in a conventional hedonic approach. This paper empirically investigates three time-varying parameter methods (Chained, Laspeyres, and Paasche) and considers the potential for sample selection bias. Precision measures are constructed to examine the reliability of the respective indices.

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Differences Of Opinion And The Cross Section Of Stock Returns, Karl B. Diether, Christopher J. Malloy, Anna Scherbina Jan 2002

Differences Of Opinion And The Cross Section Of Stock Returns, Karl B. Diether, Christopher J. Malloy, Anna Scherbina

Faculty Publications

We provide evidence that stocks with higher dispersion in analysts' earnings forecasts earn lower future returns than otherwise similar stocks. This effect is most pronounced in small stocks and stocks that have performed poorly over the past year. Interpreting dispersion in analysts' forecasts as a proxy for differences in opinion about a stock, we show that this evidence is consistent with the hypothesis that prices will reflect the optimistic view whenever investors with the lowest valuations do not trade. By contrast, our evidence is inconsistent with a view that dispersion in analysts' forecasts proxies for risk.

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Do Banks Price Owner–Manager Agency Costs? An Examination Of Small Business Borrowing, James C. Brau Jan 2002

Do Banks Price Owner–Manager Agency Costs? An Examination Of Small Business Borrowing, James C. Brau

Faculty Publications

Ang, Cole, and Lin (2000) provide evidence that supports the theoreticalwork of Jensen and Meckling (1976) on agency costs. As a further examination, I conduct a test to determine the economic significance of owner–manager agency conflicts. Using the same data source and empirical framework as Ang, Cole, and Lin (2000), I test to determine if banks chargeapremiumwhenextendingloans tofirmswith variousownership structures. In empirical tests, I find that banks do not require an owner–manager agency premium either through increased interest rates or through the requirement of collateral. Instead, I find that the interest rate is significantly affected by the length of the …

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Defined Contribution Pensions: Plan Rules, Participant Choices, And The Path Of Least Resistance, James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick Jan 2002

Defined Contribution Pensions: Plan Rules, Participant Choices, And The Path Of Least Resistance, James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick

Faculty Publications

We assess the effect on savings behavior of several different 401(k) plan features, including automatic enrollment, automatic cash distributions, employer matching provisions, eligibility requirements, investment options, and financial education. We also present new survey evidence on individual savings adequacy. Many of our conclusions are based on an analysis of micro-level administrative data on the 401(k) savings behavior of employees in several large corporations that implemented changes in their 401(k) plan design. Our analysis identifies a key behavioral principle that should partially guide the design of 401(k) plans: employees often follow the path of least resistance. For better or for worse, …

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Testing The Capital Asset Pricing Model Efficiently Under Elliptical Symmetry: A Semiparametric Approach, Douglas J. Hodgson, Oliver Linton, Keith Vorkink Jan 2002

Testing The Capital Asset Pricing Model Efficiently Under Elliptical Symmetry: A Semiparametric Approach, Douglas J. Hodgson, Oliver Linton, Keith Vorkink

Faculty Publications

We develop new tests of the capital asset pricing model that take account of and are valid under the assumption that the distribution generating returns is elliptically symmetric; this assumption is necessary and sufficient for the validity of the CAPM. Our test is based on semiparametric efficient estimation procedures for a seemingly unrelated regression model where the multivariate error density is elliptically symmetric, but otherwise unrestricted. The elliptical symmetry assumption allows us to avoid the curse of dimensionality problem that typically arises in multivariate semiparametric estimation procedures, because the multivariate elliptically symmetric density function can be written as a function …

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A Cross-Firm Analysis Of The Impact Of Corporate Governance On The East Asian Financial Crisis, Todd Mitton Jan 2002

A Cross-Firm Analysis Of The Impact Of Corporate Governance On The East Asian Financial Crisis, Todd Mitton

Faculty Publications

In a sample of 398 firms from Indonesia, Korea, Malaysia, the Philippines, and Thailand, firm-level differences in variables related to corporate governance had a strong impact on firm performance duringthe East Asian financial crisis of 1997–1998. Significantly better stock price performance is associated with firms that had indicators of higher disclosure quality (ADRs and auditors from Big Six accounting firms), with firms that had higher outside ownership concentration, and with firms that were focused rather than diversified. The results suggest that individual firms have some power to preclude expropriation of minority shareholders if legal protection is inadequate.

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Do Behavioral Biases Affect Prices?, Joshua D. Coval, Tyler Shumway Jan 2001

Do Behavioral Biases Affect Prices?, Joshua D. Coval, Tyler Shumway

Faculty Publications

This paper documents strong evidence of behavioral biases among Chicago Board of Trade proprietary traders and investigates the effect these biases have on prices. Our traders appear highly loss-averse. Traders who experience morning losses are about 16 percent more likely to assume above-average afternoon risk than traders with morning gains. This behavior has important short-term consequences for afternoon prices, as losing traders are prepared to purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, during the ten minutes that follow these trades, prices revert strongly to their earlier levels. Consistent with these …

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The Power Of Suggestion: Inertia In 401k Participation And Savings Behavior, Brigitte C. Madrian, Dennis F. Shea Jan 2001

The Power Of Suggestion: Inertia In 401k Participation And Savings Behavior, Brigitte C. Madrian, Dennis F. Shea

Faculty Publications

In this paper, we analyze the 401(k) savings behavior of employees in a large U.S. corporation before and after an interesting change in the company 401(k) plan. Before the plan change, employees were required to affirmatively elect participation in the 401(k) plan. After the plan change, employees were automatically and immediately enrolled in the 401(k) plan unless they made a negative election to opt out of the plan. Although none of the economic features of the plan changed, this switch to automatic enrollment dramatically changed the savings behavior of employees. We have two key findings. First, 401(k) participation is significantly …

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The Determinants Of Successful Micro-Ipos: An Analysis Of Issues Made Under The Small Corporate Offering Registration (Scor) Procedure, James C. Brau, Jerome S. Osteryoung Jan 2001

The Determinants Of Successful Micro-Ipos: An Analysis Of Issues Made Under The Small Corporate Offering Registration (Scor) Procedure, James C. Brau, Jerome S. Osteryoung

Faculty Publications

In this article we extend the existing IPO literature to the case of micro-IPOs by analyzing a sample of Small Corporate Offering Registration (SCOR) documents from the U.S. state ofWashington. Through theory, we identified variables that should impact the probability of success or failure in a SCOR offering and then empirically tested them. Empirical support was found for the relevance of (1) marketing mechanisms and expenses; (2) ownership and governance factors; (3) business life cycle stages; and (4) signaling factors consistent with our theoretical predictions.

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An Empirical Examination Of Sba Guaranteed Loans: Rates, Collateral, Agency Costs, And The Time To Obtain The Loan, James C. Brau, Jerome S. Osteryoung Jan 2001

An Empirical Examination Of Sba Guaranteed Loans: Rates, Collateral, Agency Costs, And The Time To Obtain The Loan, James C. Brau, Jerome S. Osteryoung

Faculty Publications

We empirically examine a sample of over 350 entrepreneurial firms that successfully receive an SBA guaranteed loan. The first portion of the paper contains descriptive statistics that lend anecdotal evidence concerning the organization type of borrowers, the incidence of collateral, the reasons for choosing the financial institution in which the SBA loan is secured, the main purpose for the SBA loan, and alternative actions that would have been undertaken had the SBA guaranteed loan not been obtained. The second portion of the paper poses theoretical predictions and tests them via multivariate models. Issues that are considered include the number of …

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Good Day Sunshine: Stock Returns And The Weather, David Hirshleifer, Tyler Shumway Jan 2001

Good Day Sunshine: Stock Returns And The Weather, David Hirshleifer, Tyler Shumway

Faculty Publications

Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relationship between morning sunshine in the city of a country's leading stock exchange and daily market index returns across 26 countries from 1982 to 1997. Sunshine is strongly significantly correlated with stock returns. After controlling for sunshine, rain and snow are unrelated to returns. Substantial use of weatherbased strategies was optimal for a trader with very low transactions costs. However, because these strategies involve frequent trades, fairly modest costs eliminate the gains. These findings are difficult to reconcile with fully rational price …

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The Bullet Gic As An Example, David F. Babbel, Jeremy Gold, Craig B. Merrill Jan 2001

The Bullet Gic As An Example, David F. Babbel, Jeremy Gold, Craig B. Merrill

Faculty Publications

There has been considerable discussion of a variety of issues related to fair value in the actuarial literature, in conferences, and among individuals interested in this topic. Unfortunately, we seem to be failing to communicate due, in part, to inconsistent use of terminology. The goal of this discussion paper is to present a few concepts that we hope will be of use in the broader discussion of fair value of liabilities.

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Office Rent Determinants During Market Decline And Recovery, Barrett A. Slade Jan 2000

Office Rent Determinants During Market Decline And Recovery, Barrett A. Slade

Faculty Publications

This article empirically examines office rent determinants in distinct periods of a market cycle. The study uses a dataset of office properties located in a large metropolitan area and spanning a six-year period. During this period, office rents experienced a significant decline and recovery. A time-varying parameter rent index identifies three distinct periods of the cycle: decline, trough and recovery. Tests of structural change conclude that market participants value the determinants of office rents differently during the periods. A microexamination of each rent determinant over the periods of the market cycle provides a greater understanding of how rents vary over …

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Expected Option Returns, Joshua D. Coval, Tyler Shumway Jan 2000

Expected Option Returns, Joshua D. Coval, Tyler Shumway

Faculty Publications

This paper examines expected option returns in the context of mainstream asset pricing theory. Under mild assumptions, expected call returns exceed those of the underlying security and increase with the strike price. Likewise, expected put returns are below the risk-free rate and increase with the strike price. S&P index option returns consistently exhibit these characteristics. Under stronger assumptions, expected option returns vary linearly with option betas. However, zero-beta, at-the-money straddle positions produce average losses of approximately three percent per week. This suggests that some additional factor, such as systematic stochastic volatility, is priced in option returns.

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An Empirical Study Of Sample-Selection Bias In Indices Of Commercial Real Estate, Henry J. Munneke, Barrett A. Slade Jan 2000

An Empirical Study Of Sample-Selection Bias In Indices Of Commercial Real Estate, Henry J. Munneke, Barrett A. Slade

Faculty Publications

Real estate price indices based solely on samples of sold properties may not accurately represent the population of properties due to potential sample-selection bias. This study addresses this potential for sample-selection bias in the construction of commercial price indices within the context of the Phoenix area of®ce market. The empirical analysis con®rms the presence of sample-selection bias in the estimation of the total price equation. However, within this sample, the price indices generated after correcting for sample-selection bias do not appear signi®cantly different from those that do not consider selectivity bias.

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The Impact Of The Packard Commission's Recommendations On Reducing Cost Overruns On Defense Acquisition Contracts, David S. Christensen, David A. Searle, Caisse Vickery Jul 1999

The Impact Of The Packard Commission's Recommendations On Reducing Cost Overruns On Defense Acquisition Contracts, David S. Christensen, David A. Searle, Caisse Vickery

Faculty Publications

Using data from selected acquisition reports, Drezner et al. (1993) show that reform initiatives from 1960 to 1990 did not reduce cost growth on 197 defense programs. The average cost growth on these programs was 20 percent and did not change significantly for 30 years. Using data from the Defense Acquisition Executive Summary data base, we show a similar result. Initiatives based on the recommendations of the Packard Commission did not reduce the average cost overrun percent experienced on 269 completed defense acquisition contracts evaluated over an 8-year period (1988 through 1995). In fact, the cost performance experienced on development …

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The Value Of Open Market Repurchases Of Closed-End Fund Shares, Gary E. Porter, Rodney L. Roenfeldt, Neil W. Sicherman Apr 1999

The Value Of Open Market Repurchases Of Closed-End Fund Shares, Gary E. Porter, Rodney L. Roenfeldt, Neil W. Sicherman

Faculty Publications

The authors illustrate the value to shareholders when closed-end funds repurchase shares at a discount from net asset value. Repurchases increase share price even when there is no asymmetric information concerning the value of the underlying assets and the percentage discount remains unchanged following the repurchase. Expected gains to shareholders are derived from capturing the discount on the assets associated with the shares repurchased. In an analysis of 27 open market repurchase announcements by closed-end funds, the regression coefficient estimate that measures the association between the actual excess return and the expected increase in share price is essentially 1.0.

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Revisiting The Stock Price Impact Of Quality Awards, Gregory L. Adams, Grant Mcqueen, Kristie Seawright Jan 1999

Revisiting The Stock Price Impact Of Quality Awards, Gregory L. Adams, Grant Mcqueen, Kristie Seawright

Faculty Publications

In an event study, Hendricks and Singhal [Hendricks KB, Singhal VR. Quality awards and the market value of the firm: an empirical investigation. Management Sci 1996;42:415±36.] find evidence that firms that win quality awards are further rewarded with a stock price increase on the day of the award announcement. We revisit Hendricks and Singhal (1996), extend their research and find four reasons why management, owners and analysts should be cautious about expecting an abnormal return when a firm wins a quality award. First, in our sample of Baldrige Award winners, the evidence of a stock price response on the announcement …

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The Delisting Bias In Crsp’S Nasdaq Data And Its Implications For The Size Effect, Tyler Shumway, Vincent A. Warther Jan 1999

The Delisting Bias In Crsp’S Nasdaq Data And Its Implications For The Size Effect, Tyler Shumway, Vincent A. Warther

Faculty Publications

We investigate the bias in CRSP's Nasdaq data due to missing returns for delisted stocks. We find that the missing returns are large and negative on average, and that delisted stocks experience a substantial decrease in liquidity. We estimate that using a corrected return of −55 percent for missing performance-related delisting returns corrects the bias. We revisit previous work which finds a size effect among Nasdaq stocks. After correcting for the delisting bias, there is no evidence that there ever was a size effect on Nasdaq. Our results are inconsistent with most risk-based explanations of the size effect.

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Health, Health Insurance And The Labor Market, Janet Currie, Brigitte C. Madrian Jan 1999

Health, Health Insurance And The Labor Market, Janet Currie, Brigitte C. Madrian

Faculty Publications

This chapter provides an overview of the literature linking health, health insurance and labor market outcomes such as wages, earnings, employment, hours, occupational choice, job turnover, retirement, and the structure of employment. The ®rst part of the paper focuses on the relationship between health and labor market outcomes. The empirical literature surveyed suggests that poor health reduces the capacity to work and has substantive effects on wages, labor force participation and job choice. The exact magnitudes, however, are sensitive to both the choice of health measures and to identi®cation assumptions. The second part of the paper considers the link between …

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