Evidence Of Underperformance Research Articles

IMPACT OF INVESTORS SENTIMENT ON IPO PERFORMANCE: EVIDENCE FROM NASDAQ AND NYSE

Purpose- The paper explores the correlation between investors’ sentiment, underpricing and performance over a period of 36 months of newly issued American stocks with a sample of 199 newly listed firms on NASDAQ and NYSE within the period of January 2015 to April 2021. IPOs listed on US stock exchanges have received little attention even though anomalies related to new stock issues are well documented. We aim to fill the existing academic gap. Methodology- We have hypothesized investor sentiment as the potential explaining variable inducing the anomalies observed and we extract this variable from the American Association of Individual Investors survey results per the nearest date of each IPO issue. We compute the returns in two separate timeframes. The Market Adjusted Initial Returns (MAIRs) are computed as the price change observed during the offer day, adjusted to the S&P500 index. We investigate long-term performance by calculating the Buy-and-Hold Abnormal Return (BHARs) of each IPO for a period of 36months. The company characteristics, which are age, proceeds, number of issued shares, venture capital backing status and economic sector, are retrieved from Thomson Reuter’s screens to control on IPO pricing. Then we use a regression model to see whether the predictor variable has an effect on the outcome variable. Findings- We found that the correlation between the bullish ratio and the MAIRs confirms results found in previous literature and no relationship between investor sentiment and long run performance have been observed. Conclusion- We conclude that on American stock markets, the existing underpricing can be explained by investors overreacting to new issues while findings relative to the long run performance contradict earlier research, as there is no evidence of underperformance among companies that went public between January 2015 and April 2021. Further research can be oriented toward understand why the documented poor performance related to IPOs no longer exists, as well as the particular characteristics of US markets which are favorable to the profitability of the new issues in the long-term. Keywords: Investor sentiment, behavioral finance, long-term performance, underpricing, initial public offering, IPO. JEL Codes: D91, G10, G41

The Costs and Benefits of Performance Fees in Mutual Funds

Funds with performance fees have annual net risk-adjusted returns of 0.50% below other funds, a result mostly due to funds without a stochastic benchmark against which performance is measured and funds with a benchmark that is easy to beat. For other funds, there is no evidence of underperformance. Performance fee funds charge total expenses, including the performance fee, that are substantially higher than those of other funds. Investors are more likely to punish poor performance in funds with performance fees than in other funds. Our results indicate that even when fees are less regulated, investors can generally be relied upon to make the right choices, but that there are a subset of funds where performance fees are employed to extract additional fees from investors.

Financial distress, corporate takeovers and the distress anomaly

PurposeThis paper examines the relation between takeover likelihood and the documented underperformance of distressed company stocks while exploring two competing hypotheses. The failure risk explanation predicts lower returns to distressed firms with high probability of being acquired because the acquisition reduces risk and investors' required return. Conversely, the agency conflicts explanation predicts lower returns when acquisition is unlikely.Design/methodology/approachThe likelihood of receiving a takeover bid is estimated, and portfolio tests explore the underperformance of distressed company stocks relative to non-distressed stocks across varying levels of takeover likelihood. Predictive regressions subsequently examine the relation between distress, takeover exposure and future firm operating performance including how the relation is affected by state anti-takeover laws.FindingsDistressed stocks underperform non-distressed company stocks by economically and statistically significant margins when takeover likelihood is low, yet there is no evidence of underperformance among distressed stocks with moderate or high takeover exposure. Consistent with agency conflicts playing a key role, distressed firms that are disciplined by takeover threats invest more, use more leverage and experience higher future profitability. State-level anti-takeover legislation limits this disciplinary effect, however.Originality/valueThe results show that the well-documented distress anomaly is driven by a subset of distressed firms whose managers face limited pressure from the external takeover market. The evidence casts doubt on the failure risk explanation and suggests that agency conflicts play a key role.

Divergent ESG Ratings

Responsible investors require data to underpin their stock and sector selections. Regardless of the rating agency, bond ratings for a particular issuer are broadly similar. This is not the case for ESG ratings. Companies with a high score from one rater often receive a middling or low score from another rater. This article examines the extent of, and reasons for, disagreement among the leading suppliers of ESG ratings. The weightings given to each pillar of an ESG rating also vary across agencies. Many asset managers contend that ESG ratings can help investors to select assets with superior financial prospects, and the authors therefore review the investment performance of portfolios and of indexes screened for their ESG credentials. In the authors’ opinion, ESG ratings, used in isolation, are unlikely to make a material contribution to portfolio returns. <b>TOPIC:</b>ESG investing <b>Key Findings</b> • Data are essential for making investment decisions, and most institutions rely wholly or partly on external providers of ESG data. However, there is minimal correlation between ESG ratings from alternative agencies. • This article explains why different raters’ appraisals diverge. The article also examines whether ESG is associated with subsequent fund or index outperformance. • Over the longest available period, ESG indexes did not outperform the “parent” index from which they are derived. Equally, however, for the two indexes that most closely represent what ESG investors actually do (FTSE4GOOD and MSCI-ESG) there is no evidence of underperformance.

Labor Laws and Firm Performance

U.S. labor laws impose higher costs on unionized firms in states without right-to-work (RTW) laws. I find that these firms experience poor stock performance. The difference-in-differences analysis comparing the effect of RTW laws on unionized and nonunionized firms shows that unionized firms in states without RTW laws underperform by about seven percentage points per year. I find further evidence of underperformance using alternative methodologies to estimate abnormal stock performance, examining a natural experiment, showing expected cross-sectional patterns, as well as examining profitability and the market reaction to earnings announcements.

LABOR LAWS AND FIRM PERFORMANCE

AbstractU.S. labor laws impose higher costs on unionized firms in states without right‐to‐work (RTW) laws. I find that these firms experience poor stock performance. The difference‐in‐differences analysis comparing the effect of RTW laws on unionized and nonunionized firms shows that unionized firms in states without RTW laws underperform by about 7 percentage points per year. I find further evidence of underperformance using alternative methods to estimate abnormal stock performance, examining a natural experiment, showing expected cross‐sectional patterns, and assessing profitability and the market reaction to earnings announcements.

Revisiting the Performance of Broker-Sold Mutual Funds

Del Guercio and Reuter (2014) find that broker-sold actively managed funds underperform both broker-sold index funds and direct-sold actively managed funds by 1.10% per year on a risk-adjusted basis. They argue that broker clients would be better off investing in broker-sold index funds, and puzzle over the fact that index funds manage less than 2% of broker-sold assets at the end of their sample period. Their estimates are based on distribution channel data that cover 1992-2004, and they give equal weight to each fund. In this paper, I revisit the performance of broker-sold funds using distribution channel data that cover 2003-2012, and I give greater weight to funds with more assets under management. Within the sample of broker-sold domestic equity funds, I find that actively managed funds underperform index funds by 0.64% per year (on a comparable risk-adjusted basis), and that the market share of broker-sold index funds remains below 3%. I also estimate return differences between broker-sold and direct-sold funds for the sample of actively managed non-specialized domestic equity funds, the sample of target date funds (TDFs), and a broad sample of actively managed funds. It is worth noting that the evidence of underperformance by broker-sold funds is much stronger among domestic equity funds and TDFs than it is within the broad sample of actively managed funds.

A Bayesian Method for Identifying Transplant Programs for Further Peer Review.

SRTR is charged with assessing transplant program performance relative to expectation, and OPTN's Membership and Professional Standards Committee (MPSC) with deciding which programs warrant further peer review due to substandard outcomes. Following a recommendation of the Consensus Conference on Transplant Program Quality and Surveillance, SRTR will begin using a Bayesian statistical method to assess program performance. The Bayesian method gives a posterior probability distribution of a program's hazard ratio. Screening criteria can then be developed to identify programs for peer review if evidence of underperformance is sufficient. As MPSC's current screening methodology has high false-flagging rates for small-volume programs and low power for mid-volume programs, SRTR performed a simulation study to identify optimal thresholds to best achieve these goals: 1) increase statistical power to identify underperforming programs, particularly mid-sized, and 2) hold the probability of false flagging to approximately 5% regardless of program volume. We simulated outcomes 2500 times for all kidney, heart, liver, and lung programs included in the July 2012 program-specific reports assuming, for all programs, 1) performance was consistent with the national average, and 2) mortality rates were twice the expected rate of failure. In each simulation, we examined 57,915 screening criteria to find the optimal criteria that maximize true positives while holding false positive rates to approximately 5%. The optimal criteria were: 1) Greater than 75% probability that the program's hazard ratio is greater than 1.2, or 2) Greater than 10% probability that the program's hazard ratio is greater than 2.5. Figure 1 compares the current and the optimal Bayesian flagging systems for false-positive and true-positive rates. The optimal Bayesian-based criteria achieve the goal of holding the false positive rate relatively low regardless of program volume while maximizing the ability to identify true underperformance. MPSC will continue to consider these criteria for potential recommendation to the OPTN/UNOS board of directors.Figure: No Caption available.

Stock Market Liquidity and the Long-Run Stock Performance of Debt Issuers

Previous studies document that the stock returns of bond issuing firms significantly underperform matched peers over the three to five years following issuance. We revisit this phenomenon and show that the underperformance is the result of an omitted return factor (a bad model problem). Debt issuers have significantly higher stock market liquidity than size and book-to-market matched counterparts, and differences in liquidity are largest for the worst performing groups of issuers. When we additionally match on liquidity or when we include a liquidity factor in the model for expected returns, the evidence of underperformance disappears.

UK IPOs: Long Run Returns, Behavioural Timing and Pseudo Timing

In this paper we examine a comprehensive set of 2,567 UK IPOs launched between mid-1975 and the end of 2004. We find compelling evidence of long run under-performance that persists for between 36 and 60 months post-flotation, depending on the precise method chosen to measure abnormal returns. Following Schultz (2003), we ask whether our results are consistent with pseudo-timing. Equally-weighted returns in calendar time provide further evidence of under-performance, a result that favours the Loughran and Ritter (2000) behavioural timing hypothesis rather than the Schultz (2003) pseudo-timing hypothesis. However, when we measure value-weighted returns in calendar time we find that abnormal returns are not significantly different from zero. To some degree, this result is consistent with the findings of other studies which show that IPO under-performance is concentrated in smaller firms. However, we also show that these value-weighted returns are heavily influenced by the high abnormal returns associated with UK privatisations.

Brokerage firms' revenue and profitability of their recommendations: before and after 1999-2002

We examine how the research departments of brokerage firms may issue biased recommendations in order to boost the revenue of the investment banking departments of the brokerage firms during 1993-2006. We find that during 1993-2006, sanctioned brokerage firms' upgrades not only underperformed the upgrades of non-sanctioned brokerage firms, but they also earned negative abnormal returns. The degree of underperformance for sanctioned brokerage firms' upgrades was at the highest during 1999-2002. More surprisingly, the underperformance of upgrades continues in 2003-2006. We also find weak evidence of underperformance of upgrades in the period of 1993-1998.

The UK nephrostomy audit. Can a voluntary registry produce robust performance data?

To investigate the effectiveness of the Royal College of Radiologists Audit Sub-Committee's national prospective registry of percutaneous nephrostomy, which enables participants to audit their practice and compare performance with predetermined standards. Following a limited retrospective audit, which permitted setting of achievable targets, a dataset was developed and all UK NHS acute hospitals were invited to participate in web-based prospective data collection. Eighty-five out of 285 (29.8%) hospitals contributed 3262 cases over a 29 month period. A satisfactory level of performance was achieved with an overall technical success rate of 98% and a complication rate of 6.3%. Significant risk factors for complications included rigors, anaemia, and impaired renal function. Low frequency operators were shown to have a lower technical success rate and a higher complication rate than high frequency operators; however, target thresholds were exceeded in all groups. Sepsis was identified as a risk factor in the majority of serious complications and all deaths. Some anomalous results were found due to unusual interpretation of the data entry form in two centres, but no evidence of under-performance was identified at any centre. Some weaknesses of the registry are discussed. In view of the low response rate, the possibility of significant bias cannot be excluded. In addition, there is no objective verification of the data; therefore, the results have limited credibility. However, individual centres that accurately completed a representative sample of cases can have confidence that their performance achieves an acceptable standard.

Earnings Management and Long-Run Stock Performance Following Private Equity Placements

Previous studies suggest that investor optimism, fueled by earnings management, contributes to long-run underperformance following IPOs and SEOs. We investigate whether, like public issues of equity, managers of firms issuing equity privately manage earnings upward and whether the earnings management explanation for long-run stock performance of public issues also holds for private issues. Our main findings are: (1) little evidence of earnings being managed upward around the issue of private equity, and (2) little predictive power of abnormal accruals for long-run stock performance following private equity issues. These results suggest that earnings management is not responsible for investor optimism, if any, for firms issuing equity privately. Our results are robust to two alternative measures of earnings management and three measures of abnormal returns estimated over two sample periods. Unlike previous research, we find little evidence of underperformance following private issues of equity, when more recent years are included.

Performance of Initial Public Offerings: The Evidence for Switzerland

We examine the underpricing and long-term performance of a broad set of Swiss IPOs from 1983 to 2000. The average market adjusted initial return is 34.97%. Our results support the ex ante uncertainty hypothesis, the signalling hypothesis and, to some extent, the market cyclicality hypothesis as possible explanations for the underpricing phenomenon on the Swiss IPO market. We also find evidence for lower initial returns under increased competition among investment banks, and more accurate pricing when book-building is used. To accurately measure the long-term performance of Swiss IPOs, we use a variety of different methods and adjust for possible biases. In contrast to previous findings for the U.S., we do not find a significant drop or strong continuous underperformance of Swiss IPO stock prices in the aftermarket. If there was any evidence for underperformance at all, Swiss IPOs show poor returns only in the very long-run after 48 months of trading.

The Long Run Performance of Shipping Initial Public Offerings

This paper examines for the first time the performance of Initial Public Offerings (IPOs) in the shipping industry for the initial twenty four months of trading in the secondary market. In the analysis, a sample of 27 shipping IPOs issued in the stock exchanges of seven different countries in the period 1987–1995 is used. Aftermarket performance is measured against the local stock market indices of each IPO and against the Morgan Stanley Capital International (MSCI) index for the shipping equity market. The portfolio of shipping IPOs in the sample underperforms the local stock market indices by as much as 36.79% by the end of the second anniversary of public listing, but there is no evidence of underperformance in relation to the MSCI Shipping index. Furthermore, the two year holding period returns of the dataset are found to be positively related to the initial level of gearing and negatively related to the fleet age of the companies at the time of the offering.