Assistant Professor Of Finance Research Articles

Strong Employers and Weak Employees

Efraim Benmelech⇑, Nittai K. Bergman and Hyunseob Kim Harold L. Stuart Professor of Finance at the Kellogg School of Management, Northwestern University. Professor of Economics at the Berglas School of Economics and Coller School of Management, Tel Aviv University. Assistant Professor of Finance at the Johnson Graduate School of Management, Cornell University. Corresponding author; Email: e-benmelech{at}kellogg.northwestern.edu.

Municipal Bond Trading, Information Relatedness, and Natural Disasters

1. Brittany Cole 1. is an assistant professor of finance at Tennessee Tech University in Cookeville, TN. (bcole{at}tntech.edu) 2. Bonnie Van Ness 1. is the Otho Smith Professor of Finance at the University of Mississippi in University, MS. (bvanness{at}bus.olemiss.edu) 3. Robert Van

Practical Applications of Risk Parity Optimality

The definition of risk parity is simple: It is a popular portfolio allocation strategy that weighs assets equally according to their risk. But the reason it works is a bit of a mystery, says Philip Z. Maymin, Assistant Professor of Finance and Risk Engineering at the NYU Polytechnic School of Engineering, who will soon be joining the University of Bridgeport Trefz School of Business as an Associate Professor of Finance and Analytics. “Risk parity works. Many funds offer it and many portfolio managers are talking about it. But no one really understands why it works!” Maymin and his co-authors (Gregg S. Fisher, Chief Investment Officer of Gerstein Fisher, and Philip’s father Zakhar G. Maymin, formerly head of research at Gerstein Fisher’s research center) present their theoretical framework, explain their reasoning and provide empirical support using the returns of stocks and bonds.

INVITED EDITORIAL

1. Nazli Sila Alan 1. is an assistant professor of finance at Fairfield University’s Dolan School of Business in Fairfield, CT . (nalan{at}fairfield.edu) 2. Timothy Mahoney 1. is the chief executive officer at BIDS Trading in New York, NY . (Tim.mahoney{at}bidstrading.com) 3.

INVITED EDITORIAL

1. Zura Kakushadze 1. is president and co-founder of Quantigic Solutions LLC and a professor in the schools of business and physics at the Free University of Tbilisi in Tbilisi, Georgia . (zura{at}quantigic.com) 2. Jim Kyung-Soo Liew 1. is an assistant professor of finance at the Johns

Practical Applications of Are Flows Costly to ETF Investors?

As ETFs evolve to include more exotic products, cash creation and redemption is becoming a more common strategy for investors to gain exposure to less-liquid, difficult-to-trade assets, particularly in emerging markets. In <b><i>Are Flows Costly to ETF Investors?</i></b>, <b>Gerald Buetow</b> and <b>Brian J. Henderson</b> examine whether or not cash creations and redemptions are costly to investors. Buetow is Chief Investment Officer at <b>Innealta Capital</b>, in Charlottesville, Virginia, and Henderson is an Assistant Professor of finance at the <b>George Washington University</b>, in Washington, DC. “The idea was that, if we are going to incorporate these exposures into our various strategies, then we should be able to understand the implicit cost of the exposures, ” <b>Buetow</b> explains. “This research attempts to better quantify those costs. ” <b>TOPICS:</b>Exchange-traded funds and applications, exchanges/markets/clearinghouses, in markets

Practical Applications of Performance and Persistence of Performance of Actively Managed U.S. Funds that Invest in International Equity

International mutual funds are ideal for US-domiciled investors who want exposure to foreign equities but don’t have the time or inclination to become experts in foreign markets. But do these actively managed funds outperform their passive benchmarks on a risk-adjusted basis? Abhay Kaushik, Assistant Professor of Finance at Radford University in Virginia, says in an interview that he was surprised few other researchers have dug into the broad international equities universe or could say whether active managers in the non-US stock universe outperformed their indices. This Practical Applications report details Kaushik’s findings in Performance and Persistence of Performance of Actively Managed U.S. Funds that Invest in International Equity, which was published in the Summer 2013 issue of The Journal of Investing He analyzes 20 years of data from a universe of 570 US-domiciled funds that invest in equities outside of the United States. Kaushik reveals whether or not active management pays off and provides readers with a major caveat.

Practical Applications of Analyzing Valuation Measures: A Performance Horse Race over the Past 40 Years

Choosing a valuation metric is critical and controversial. Those chosen by the academic research community have typically differed from the choices preferred by practitioners. It is unclear from an empirical viewpoint why investors favor different metrics, according to <b>Wesley R. Gray</b>, an Assistant Professor of Finance at Drexel University’s LeBow College of Business and co-author of <i><b>Analyzing Valuation Measures: A Performance Horse Race over the Past 40 Years</b></i>, which was published in the Fall 2012 issue of <i><b>The Journal of Portfolio Management</b></i>. The article, co-authored with <b>Jack Vogel</b>, explores a wide range of pricing metrics, all expressed in yield format. Vogel is a fourth-year PhD student in the Finance Department at Drexel. This Practical Applications report highlights the most popular pricing metrics and identifies the best-performing valuation metric revealed in the article. And the winner is…

An Empirical Assessment of A-Share IPO Under-Pricing in China

This paper investigates the under-pricing and long-run performance of 230 A-share IPOs issued in the Chinese markets using comparable firm * The authors wish to thank the journal Editor-in-Chief, Professor Kyung Mook Lee, and three anonymous referees for extremely valuable comments. The last author wishes to acknowledge the financial support of a Strategic Research Grant from ECU. ** Professor, Department of International Trade and Business, Kangwon National University, Korea (chsohn@kangwon.ac.kr). *** Associate Professor, Department of Economics, National University of Singapore, Singapore (ecsatsui@nus.edu.sg). **** Assistant Professor of Finance, David Eccles School of Business, University of Utah, USA (feng.zhang@business.utah.edu). ***** (Corresponding author) Associate Professor of Economics, School of Accounting, Finance and Economics, Edith Cowan University, 270 Joondalup Drive, Joondalup, WA 6027, Australia. Tel: +61 8 6304 5266; Fax: +61 8 6304 5271 (zhaoyong. zhang@ecu.edu.au) 26 Seoul Journal of Business multiples. We find that A-share IPOs are severely under-valued by issuers and underwriters at the offer, but over-valued by investors on the listing day. Both contribute to the severe under-pricing of IPOs in China. Our findings are robust across stock exchanges, classification of firms, criteria for choosing matching firms; absence of CSRC regulation and B-share market prices, respectively. The results also show that those over-valued IPOs by investors on the listing day under-perform those under-valued IPOs in the long-run.

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On Understanding Bear Market Funds

1. Nelson Lacey 1. is a professor of finance at the Isenberg School of Management at the University of Massachusetts-Amherst in Amherst, MA. (nlacey{at}som.umass.edu) 2. Qiang Bu 1. is an assistant professor of finance at the School of Business Administration at Pennsylvania State University-Harrisburg in Middletown, PA. (qxb1{at}psu.edu) <!-- --> 1. To order reprints of this article, please contact Dewey Palmieri at dpalmieri{at}iijournals.com or 212-224-3675. Despite poor performance, bear market funds have been growing rapidly in recent years. The authors find that while bear funds exhibit timing ability, this surprisingly does not translate into enhanced return performance. They also find that bear funds tend to be risk-seeking at a time when market volatility is high. The results are consistent with viewing these funds not in the more traditional context of return maximization, but instead in the context of risk management. In other words, bear market funds decrease return volatility of the fund family at the cost of a slightly lower fund-family return. TOPICS: [Real assets/alternative investments/private equity][1], [risk management][2], [performance measurement][3], [financial crises and financial market history][4] [1]: https://www.pm-research.com/topic/real-assetsalternative-investmentsprivate-equity-0 [2]: https://www.pm-research.com/topic/risk-management-0 [3]: https://www.pm-research.com/topic/performance-measurement-0 [4]: https://www.pm-research.com/topic/financial-crises-and-financial-market-history

Efficiency Analysis of Microfinance Institutions in Developing Countries

This paper investigates technical and scales efficiencies of microfinance institutions (MFI) in three regions: Latin America countries, Middle East and North Africa (MENA) countries, and South Asia countries, and compares efficiencies across regions and across type of MFIs. We find that technical efficiency is higher for formal MFIs (banks and credit unions) than non-formal MFIs (nonprofit organizations and non-financial institutions). Furthermore, South Asian MFIs have higher technical efficiency than Latin American and MENA MFIs. The source of inefficiency is pure technical rather than scale, suggesting that MFIs are either wasting resources or are not producing enough outputs (making enough loans, raising funds, and getting more borrowers). About the Authors: Dr. Kabir Hassan is a tenured professor at the University of New Orleans and also holds a visiting research professorship at Drexel University, Philadelphia. He is a financial economist with consulting, research and teaching experiences in development finance, money and capital markets, corporate finance, investments, monetary economics, macroeconomics and international trade and finance. He has published five books, over 70 articles in refereed academic journals and has presented over 100 research papers at professional conferences globally. Dr. Benito Sanchez is an assistant professor of finance at Kean University (Union, NJ), teaching corporate finance, investment and financial institutions and markets. He has taught finance courses at University of New Orleans and at Loyola University, New Orleans. Dr. Sanchez's research focuses on asset pricing and banking efficiencies.

Measuring the Efficiency of Financial Inputs for Entrepreneurship

This study employs data on small businesses from the Office of Advocacy for the U.S. Small Business Administ ration along with the FDIC Call Report data for U.S. commercial banks. We examine the efficiency of the impact of the financial inputs on small business entrepreneurial output. Our study provides a metric to capture financial input efficiency to the entrepreneurial process. The metric obtained from this analysis is useful for identification and adoption of best practices to enhance the efficiency of the entrepreneurial process. About the Author: Lakshmi Balasubramanyan is an Assistant Professor of Finance at Indiana State University. She received her Ph.D. in Agricultural, Environmental & Regional Economics with her major fields being Finance and Production Economics from The Pennsylvania State University. Her research interests include international financial markets and institutions, production analysis, risk management, credit analysis in commercial banking and the efficiency of financial inputs to entrepreneurship. Her present research focuses on commercial bank size, risk variability and how cost inefficiency can be a signal of bank vulnerability.

On the Use (and Abuse) of Stock Option Grants

E xecutive compensation has long been a topic of significant debate. In recent years, the component of executive compensation packages generating the most controversy has been stock options. Companies use stock options to attract and retain executive talent while strengthening the relationship between executive compensation and performance of the company's stock price. In addition to providing incentives for grant recipients to increase shareholder value, stock options have also been used to reduce corporate taxes and to provide employees with compensation that does not require the company to make an immediate cash outflow. Critics of stock options, however, argue that the true expense of option compensation has historically been concealed in financial reports and that the accounting treatment of stock options, coupled with tax advantages for stock options relative to cash-based compensation, has contributed to an excessive use of option-based compensation. The battle that has taken place throughout the past decade over how to account for the use of options for financial reporting purposes has recently been settled; companies are now required under Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), to expense stock options granted to employees by using option-pricing methodologies designed to capture the underlying economic, or "fair," value of the option grant.1 A realistic (i.e., nonzero) estimate of the economic cost to the company of stock option grants must now be recorded as an expense in financial statements. Thus, one might expect that the controversy over the use of stock option grants would settle down. Opponents of stock option expensing argue, however, that companies are now more likely to manipulate other inputs that determine the reported value of option grants. In fact, as of 14 November 2006, at least 173 publicly traded companies have been identified as likely to have backdated stock option grants ("Digging Up Dinosaur Bones II" 2006). Backdating, described by some as the broadest corporate scandal in decades and the largest since the implosion of Enron Corporation, is the practice of selecting option grant dates on a retroactive basis to reflect a lower stock price than the stock price on the date the actual granting decision occurred. Because the number of options that may be granted to executives is often limited or fixed, backdating magnifies the financial gain to the grant recipient by lowering the strike price.2 With the benefit of hindsight, one can see that companies that backdate options are effectively granting in-the-money options. Some legal scholars contend that backdating option grants is simply a choice made by the compensation committee to grant in-the-money options. Although granting in-the-money options is not illegal, companies entangled in the scandal were typically not accounting for the backdated option grants as in-the-money options. As a result, compensation expense was underreported and net income was overreported for financial reporting purposes. Moreover, this practice of granting inthe-money options was usually concealed from shareholders. In addition, executive option plans approved by shareholders frequently specify that the exercise price of the options must not be lower than the fair market value of the stock on the date the grant occurred. The U.S. SEC and U.S. Department of Justice have taken the stance that the concealment of this practice from shareholders and the associated misrepresentation of financial statements constitute financial fraud. Ironically, for tax purposes, the improper accounting often results in an increase in corporate tax deductions, at least for nonqualified option grants. For nonqualified options, the spread between the exercise price and the market price of Randall A. Heron is an associate professor offinance and Tod Perry is an assistant professor of finance in the Kelley School of Business at Indiana University, Indianapolis. Erik Lie is an associate professor and Henry B. Tippie Research Fellow in the Henry B. Tippie College of Business at the University of Iowa, Iowa City.

New Insights Into Mutual Funds: Performance and Family Strategies

textabstractJoop Huij was born in Amsterdam on August 11, 1979. He attended the Marnix Gymnasium in Rotterdam, at which he obtained a Gymnasium diploma (Dutch classical pre-university education) in 1997. From 1997 to 2002 Joop studied at Erasmus University Rotterdam. In 2002 he received his Master's degree in Informatics & Economics with appellation cum laude. In November 2002 he joined the Department of Financial Management of RSM Erasmus University as a PhD Candidate. His PhD trajectory was supported by the Erasmus Research Institute of Management (ERIM). He presented his research at several international conferences and seminars, including the 2003 OxMetrics Conference in London, the 2005 Eastern Finance Association meeting in Norfolk, the 2005 Financial Management Association meeting in Chicago, and the 2006 European Finance Association meeting in Zurich. The article version of the Chapter Cross-sectional Learning and Shortrun Persistence in Mutual Fund Performance of his dissertation is accepted for publication in the Journal of Banking & Finance. During his PhD trajectory Joop visited London Business School and Vanderbilt University's Owen Graduate School of Management. Joop's teaching experience include Bachelor and Master courses in the (International) Business Administration programme as well as supervision of Bachelor and Master theses at RSM Erasmus University. Currently, Joop holds a position as Assistant Professor of Finance at RSM Erasmus university. His research interests include mutual funds, alternative investments, and empirical asset pricing.

Is Penny Trading Optimal for Closed-end Funds in China

The research is conducted when the first author was an Assistant Professor of Finance at Iowa State University and a Senior Visiting Financial Economist at the Shanghai Stock Exchange. The first author is grateful to the support and the generous funding from the Shanghai Stock Exchange. In particular, the authors thank Xinghai Fang, Ruyin Hu, Di Liu, Hao Fu, Zhanfeng Chen, Danian Sidu, and Xiaonan Lu for their helpful comments and research support. The comments and point of views expressed in the paper, however, are the authors own, and do not necessarily reflect the opinions of the New York Stock Exchange and the Shanghai Stock Exchange. Therefore, the authors are responsible for all remaining errors.

The contribution of asset allocation policy to portfolio performance

It is well known that asset allocation policy is the major determinant of fund performance. However, there is substantial disagreement about the exact magnitude of the contribution of asset allocation. Following the approach in Ibbotson and Kaplan (2000), we use German and Swiss balanced mutual fund data to show that the correct answer depends on the specific question being asked. We find that more than 80 percent of the variability in returns of a typical fund over time is explained by asset allocation policy, roughly 60 percent of the variation among funds is explained by policy, and more than 130 percent of the return level is expla ined, on average, by the policy return level. JEL classification codes: G11, G21 1 Wolfgang Drobetz is an assistant professor of finance at the University of Basel. Friederike Kohler is a master’s student at the University of St. Gallen (Switzerland). Corresponding author: Wolfgang Drobetz, Department of Finance, University of Basel, Holbeinstrasse 12, 4051 Basel, Switzerland, phone: +41-79-2611982, mail: wolfgang.drobetz@unibas.ch We thank Heinz Zimmermann for valuable comments.

Mortality Swaps and Tax Arbitrage in the Canadian Insurance and Annuity Markets

The authors analyze a tax arbitrage opportunity that results from engaging in two seemingly counterintuitive transactions in the Canadian insurance market. Specifically, if an individual acquires a fixed immediate life annuity and then uses the periodic annuity income to fund a term-to-life insurance policy, these two transactions, which the authors refer to as a “mortality swap,” will generate a payoff pattern that is risk-free. In other words, a mortality swap replicates a risk-free security, albeit one with a stochastic liquidation date. The authors show theoretically that the rate of return on a mortality swap is equal to the risk-free rate on a before-tax basis, but exceeds it on an after-tax basis. This is confirmed by the results of the empirical test, which uses observed annuity and insurance quotes that already reflected adverse-selection and transaction costs. The authors also observe that the older an individual is and/or the higher his/her marginal tax rate is, the more he/she stands to gain from this tax arbitrage. This advantageous investment opportunity exists because of the arguably lenient method that Canadian authorities use to tax annuity income. The authors provide two major reasons that this method leads to an arbitrage opportunity. The authors then compare this method to that under the U.S. tax rules and show that the U.S. method renders tax arbitrage very unlikely. The demand for life insurance and annuities is usually attributed to risk aversion, consumption smoothing, and the desire for household protection. The authors’ findings provide an arbitrage-based reason for their demand. As a natural by-product, the authors’ research contains policy implications for the optimal taxation of annuities and insurance policies. Narat Charupat is assistant professor of finance at the DeGroote School of Business, McMaster University. Moshe Arye Milevsky is associate professor of finance at the Schulich School of Business, York University, and the Director of the Individual Finance and Insurance Decisions (IFID) Centre in Toronto, Canada. Financial support from the Life Underwriters Association of Canada (Charupat), the York University Research Authority, and the SSHRC (Milevsky) is gratefully acknowledged. The authors would like to thank Glenn Daily, Clarence Kwan, and the two anonymous referees for their helpful suggestions, as well as Lowell Aronoff (CANNEX), John Hitchcock (SunLife), Jon Archer (RBC), and Zale Newman (PanFinancial) for providing data on insurance and annuity quotes. Any errors are the authors’ responsibility.

Valuing Federal Disaster Loans for Investment

MARK POTTER is an assistant professor of finance at Babson College in Babson Park, Massachusetts. T he Small Business AdministraŽ . tion SBA makes loans to owners of businesses and residences damaged in formally declared disasters, such as floods or hurricanes. Although these loans are now held within the SBA, the President’s 1999 budget submission proposes that SBA loans be sold to private investors. Anticipating new markets for these types of loans, this article takes a fresh look at government loan valuation. Using data on over 130,000 flood and hurricane disaster loans disbursed between 1980 and 1990, we estimate loan write-offs and early repayments using a discrete proportional hazards model. Then, using a stochastic interest rate model, we simulate loan termination probabilities to calculate the expected present value of the loans’ cash flows. Our analysis indicates an implied subsidy rate in the neighborhood of 26% for the 1990 loan cohort. Adding administrative costs and transactions fees to this rate defines the ‘‘true’’ cost to the government and, therefore, to private investors, of this particular disaster loan program. In the following section, the SBA’s Disaster Loan Program and related research in mortgage loan valuation is discussed. The data and methodology, including details of the valuation of disaster loans, are then presented. Empirical results as well as loan valuation simulations follow. We conclude with a discussion of the implications of our results for potential investors to these and other similar U.S. government loan programs.