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This paper employs a unique dataset from the UK based on ten years of surveys of company directors and analysts conducted for Management Today to examine the relationship between a firm's reputation and the returns on its shares. It finds that investors who purchase stocks with reputation scores that have risen significantly can make abnormal returns. Also, firms whose scores have fallen substantially still exhibit positive abnormal returns in both the short and long run when the market index is employed as a benchmark. However, when a more appropriate comparator is used, evidence of out-performance entirely disappears.
To read the paper, click HERE.
This paper investigates a fund manager's risk-taking incentives induced by an increasing and convex fund-flows to relative-performance relationship. In a dynamic portfolio choice framework, it shows that the ensuing convexities in the manager's objective give rise to a finite risk-shifting range over which she gambles to finish ahead of her benchmark. Such gambling entails either an increase or a decrease in the volatility of the manager's portfolio, depending on her risk tolerance. In the latter case, the manager reduces her holdings of the risky asset despite its positive risk premium. This empirical analysis lends support to the novel predictions of the model. Under multiple sources of risk, with both systematic and idiosyncratic risks present, it shows that optimal managerial risk shifting may not necessarily involve taking on any idiosyncratic risk. Costs of misaligned incentives to investors resulting from the manager's policy are demonstrated to be economically significant.
To read the paper, click HERE.
A Fundamental role of financial markets is to gather information on firms' investment opportunities and so help guide investment decisions in the real sector. This paper argues that firms. Overinvestment is sometimes necessary to induce speculators in financial markets to produce information. If firms always cancel planned investments following poor stock market response, the value of their shares will become insensitive to information on investment opportunities, so that speculators will be deterred form producing information. Several commitment devices firms can use to facilitate information production are discussed and that the mechanism studied in the paper amplifies shocks to fundamentals across stages of the business cycle.
To read the paper, click HERE.
This paper proposes a new statistical procedure which aims at providing robust estimates of volatility around official liberalisation dates, by using data driven techniques to identify the number and timing of structural breaks in the variance dynamics of stock market returns. The paper illustrates the usefulness of the procedure by providing an empirical application that focuses on five East Asian emerging markets, all of which liberalised their financial markets in the late 1980s or early 1990s, namely (South) Korea, Malaysia, Philippines, Taiwan and Thailand. It is shown that (i) the detected breakdates in the volatility of stock market returns do not correspond to official liberalisation dates and (ii) the use of official liberalisation dates as breakdates is likely to result in inaccurate inference. By using data driven techniques to detect multiple structural changes a richer - and inevitably more accurate - pattern of volatility dynamics emerges in comparison to focussing on official liberalisation dates.
To read the paper, click HERE.
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Featured Research - Autumn 2007
Corporate Reputation and Stock Returns: Are Good Firms Good for Investors?
Stephen Brammer , Chris Brooks, Stephen PavelinAbstractThis paper employs a unique dataset from the UK based on ten years of surveys of company directors and analysts conducted for Management Today to examine the relationship between a firm's reputation and the returns on its shares. It finds that investors who purchase stocks with reputation scores that have risen significantly can make abnormal returns. Also, firms whose scores have fallen substantially still exhibit positive abnormal returns in both the short and long run when the market index is employed as a benchmark. However, when a more appropriate comparator is used, evidence of out-performance entirely disappears.
To read the paper, click HERE.
Optimal Asset Allocation and Risk Shifting in Money Management
Suleyman Basak, Anna Pavlova, Alex ShapiroThis paper investigates a fund manager's risk-taking incentives induced by an increasing and convex fund-flows to relative-performance relationship. In a dynamic portfolio choice framework, it shows that the ensuing convexities in the manager's objective give rise to a finite risk-shifting range over which she gambles to finish ahead of her benchmark. Such gambling entails either an increase or a decrease in the volatility of the manager's portfolio, depending on her risk tolerance. In the latter case, the manager reduces her holdings of the risky asset despite its positive risk premium. This empirical analysis lends support to the novel predictions of the model. Under multiple sources of risk, with both systematic and idiosyncratic risks present, it shows that optimal managerial risk shifting may not necessarily involve taking on any idiosyncratic risk. Costs of misaligned incentives to investors resulting from the manager's policy are demonstrated to be economically significant.
To read the paper, click HERE.
Commitment to overinvest and price informativeness
James Dow, Itay Goldstein, Alexander GuembelA Fundamental role of financial markets is to gather information on firms' investment opportunities and so help guide investment decisions in the real sector. This paper argues that firms. Overinvestment is sometimes necessary to induce speculators in financial markets to produce information. If firms always cancel planned investments following poor stock market response, the value of their shares will become insensitive to information on investment opportunities, so that speculators will be deterred form producing information. Several commitment devices firms can use to facilitate information production are discussed and that the mechanism studied in the paper amplifies shocks to fundamentals across stages of the business cycle.
To read the paper, click HERE.
Financial Liberalisation and Breaks in Stock Market Volatility
Panicos Demetriades, Michail Karoglou, Siong Hook LawThis paper proposes a new statistical procedure which aims at providing robust estimates of volatility around official liberalisation dates, by using data driven techniques to identify the number and timing of structural breaks in the variance dynamics of stock market returns. The paper illustrates the usefulness of the procedure by providing an empirical application that focuses on five East Asian emerging markets, all of which liberalised their financial markets in the late 1980s or early 1990s, namely (South) Korea, Malaysia, Philippines, Taiwan and Thailand. It is shown that (i) the detected breakdates in the volatility of stock market returns do not correspond to official liberalisation dates and (ii) the use of official liberalisation dates as breakdates is likely to result in inaccurate inference. By using data driven techniques to detect multiple structural changes a richer - and inevitably more accurate - pattern of volatility dynamics emerges in comparison to focussing on official liberalisation dates.
To read the paper, click HERE.
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