Findings

Market Makers

Kevin Lewis

September 14, 2009

Confidence, opinions of market efficiency, and investment behavior of finance professors

James Doran, David Peterson & Colby Wright
Journal of Financial Markets, forthcoming

Abstract:
We identify finance professors' opinions on the efficiency of the stock markets in the United States and assess whether their views on efficiency influence their investing behavior. Employing a survey distributed to over 4,000 professors, we obtain four main results. First, most professors believe the market is weak to semi-strong efficient. Second, twice as many professors passively invest than actively invest. Third, our respondents' perceptions regarding market efficiency are almost entirely unrelated to their trading behavior. Fourth, the investment objectives of professors are, instead, largely driven by the same behavioral factor as for amateur investors — one's confidence in his own abilities to beat the market, independent of his opinion of market efficiency.

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Poker Player Behavior After Big Wins and Big Losses

Gary Smith, Michael Levere & Robert Kurtzman
Management Science, September 2009, Pages 1547-1555

Abstract:
We find that experienced poker players typically change their style of play after winning or losing a big pot — most notably, playing less cautiously after a big loss, evidently hoping for lucky cards that will erase their loss. This finding is consistent with Kahneman and Tversky's (Kahneman, D., A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47(2) 263-292) break-even hypothesis and suggests that when investors incur a large loss, it might be time to take a vacation or be monitored closely.

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Insider Trading Preceding Goodwill Impairments

Karl Muller, Monica Neamtiu & Edward Riedl
Harvard Working Paper, July 2009

Abstract:
We investigate whether insiders strategically sell shares prior to the disclosure of goodwill impairment losses. We provide evidence that insiders of goodwill impairment firms engage in abnormal selling of their shares quarters prior to the announcement of such losses. In addition, of firms recording goodwill impairments, we provide evidence that those firms with insiders selling prior to the announcement of the loss face significantly more negative abnormal returns. Our findings are robust to subsample analysis examining firms reporting goodwill impairments and having low quality information environments (i.e., delayed price discovery). This isolates a setting wherein observed strategic trading behavior more likely reflects insiders' private information regarding goodwill, as opposed to other (non-goodwill related) economic performance. Overall, the results are consistent with corporate insiders being able to profit from their private information relating to a specific financial reporting element, goodwill impairments, prior to its incorporation by the equity market or recognition by the firm's accounting system.
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Why are CEOs Rarely Fired? Evidence from Structural Estimation

Lucian Taylor
University of Pennsylvania Working Paper, June 2009

Abstract:
I evaluate the forced CEO turnover rate and quantify effects on shareholder value by estimating a dynamic model. The model features costly turnover and learning about CEO ability. To fit the observed forced turnover rate, the model needs the average board of directors to behave as if replacing the CEO costs shareholders at least $200 million. This cost mainly reflects CEO entrenchment rather than a real cost to shareholders. The model predicts shareholder value would rise 3% if we eliminated this perceived turnover cost, all else equal. In addition, the model helps explain the relation between CEO firings, tenure, and profitability.

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Networking as a Barrier to Entry and the Competitive Supply of Venture Capital

Yael Hochberg, Alexander Ljungqvist & Yang Lu
Journal of Finance, forthcoming

Abstract:
We examine whether strong networks among incumbent venture capitalists in local markets help restrict entry by outside VCs, thus improving incumbents' bargaining power over entrepreneurs. More densely networked markets experience less entry, with a one-standard deviation increase in network ties among incumbents reducing entry by approximately one third. Entrants with established ties to target-market incumbents appear able to overcome this barrier to entry; in turn, incumbents react strategically to an increased threat of entry by freezing out any incumbents who facilitate entry into their market. Incumbents appear to benefit from reduced entry by paying lower prices for their deals.

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Identifying the best companies for leaders: Does it lead to higher returns?

Greg Filbeck, Raymond Gorman & Xin Zhao
Managerial and Decision Economics, forthcoming

Abstract:
Since 2002, Chief Executive magazine, in conjunction with the Hay Group, has published a list of the Top 20 Companies for Leaders. In this paper, we examine the performance of those companies listed as being the best for leaders. We examine the announcement impact on share price associated with the press releases for firms included in the list and holding period returns between subsequent survey releases. While we generally do not find a significant difference in the performance of the Best Leader sample compared with either the market or the matched sample, we do find that the Best Leader sample outperforms other benchmarks on a raw and risk-adjusted basis during times of high market volatility.

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Do managers value stock options and restricted stock consistent with economic theory?

Frank Hodge, Shiva Rajgopal and Terry Shevlin
Contemporary Accounting Research, forthcoming

Abstract:
We conduct a field survey to investigate whether current mid-level and future entry-level managers (collectively "managers") subjectively value stock options and restricted stock consistent with economic theory. We find that managers, on average, subjectively value stock options at greater than their Black-Scholes value and greater than fair-value equivalent restricted stock. This result contrasts to conventional economic wisdom that risk-averse employees discount the Black-Scholes value of an option. With respect to stock options, our results also reveal that managers, on average, have a lottery ticket mentality when subjectively valuing options, they value shorter vesting periods, and they value longer terms to maturity. With respect to stock options and restricted stock, we find that managers tend to extrapolate recently rising stock price trends to arrive at their subjective values. Overall, our results suggest that in some cases, standard economic theory does not accurately reflect how managers appear to subjectively value stock options and restricted stock.

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Consumer and Market Responses to Mad Cow Disease

Wolfram Schlenker & Sofia Villas-Boas
American Journal of Agricultural Economics, November 2009, Pages 1140-1152

Abstract:
We examine how consumers and financial markets in the United States reacted to two health warnings about mad cow disease: the first discovery of an infected cow in December 2003 and an Oprah Winfrey show that aired seven years earlier on the potentially harmful effects of mad cow disease. We find a pronounced and significant reduction in beef sales following the first discovery of an infected cow in a product-level scanner data set of a national grocery chain. Cattle futures show a pattern of abnormal price drops comparable to the scanner data. Contracts with longer maturity show smaller drops, suggesting that the market anticipated the impact to be transitory. Cattle futures show abnormal price drops after the Oprah Winfrey show that are more than 50% of the drop following the 2003 discovery of an infected cow.
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Financialization takes off at Boeing

Christopher Muellerleile
Journal of Economic Geography, September 2009, Pages 663-677

Abstract:
This article examines the 2001 dislocation of the headquarters of the iconic US aerospace company, Boeing, out of the Puget Sound region of the State of Washington, its ancestral manufacturing base. It argues the rationale for the exit was the desire on the part of Boeing's increasingly finance-focused executives to detach and disembed the 'brains' of the company from the product-focused, engineering-based corporate culture embedded in Puget Sound. The article attempts to ground the logic of financialization by examining how it emerged at, and was shaped by one particular company. I employ economic geographers' conceptions of place-based corporate culture, and societal, territorial and network embeddedness (Hess, 2004, Progress in Human Geography, 28: 165-186) to explain how financialization and corporate dislocation can enable each other. The article also briefly discusses Boeing's eventual decision to re-embed its headquarters in downtown Chicago, Illinois.
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False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas

Laurent Barras, Olivier Scaillet & Russ Wermers
Journal of Finance, forthcoming

Abstract:
This paper develops a simple technique that controls for "false discoveries," or mutual funds that exhibit significant alphas by luck alone. Our approach precisely separates funds into (1) unskilled, (2) zero-alpha, and (3) skilled funds, even with dependencies in cross-fund estimated alphas. We find that 75% of funds exhibit a zero alpha (net of expenses), consistent with the Berk and Green (2004) equilibrium. Further, we find a significant proportion of skilled (positive alpha) funds prior to 1996, but almost none by 2006. We also show that controlling for false discoveries substantially improves the ability to find funds with persistent performance.

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Are multi-resort ski conglomerates more efficient?

Martin Falk
Managerial and Decision Economics, forthcoming

Abstract:
This paper compares the efficiency of large ski resort conglomerates with independent ski resorts using data on four countries (Canada, France, United States, Switzerland). Using the stochastic frontier production approach, I find that ski resorts that are owned and managed by the Intrawest group are significantly more efficient than independent ski resorts. The efficiency gap is about nine percentage points on average. The remaining ski resort conglomerates (American Skiing, Vail Resorts Inc., and Compagnie des Alpes SA) do not operate more efficiently than independent ski resorts.

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How Active Is Your Fund Manager? A New Measure That Predicts Performance

K. J. Martijn Cremers & Antti Petajisto
Review of Financial Studies, September 2009, Pages 3329-3365

Abstract:
We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings. We compute Active Share for domestic equity mutual funds from 1980 to 2003. We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Nonindex funds with the lowest Active Share underperform their benchmarks.

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Opaque financial reports, R2, and crash risk

Amy Hutton, Alan Marcus & Hassan Tehranian
Journal of Financial Economics, October 2009, Pages 67-86

Abstract:
We investigate the relation between the transparency of financial statements and the distribution of stock returns. Using earnings management as a measure of opacity, we find that opacity is associated with higher R2s, indicating less revelation of firm-specific information. Moreover, opaque firms are more prone to stock price crashes, consistent with the prediction of the Jin and Myers [2006. R2 around the world: new theory and new tests. Journal of Financial Economics 79, 257-292] model. However, these relations seem to have dissipated since the passage of the Sarbanes-Oxley Act, suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment.


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