Industry-adjusted Return Research Articles

Rating on a behavioral curve

Sell-side analysts rate on a particular type of behavioral curve: recency. Although they claim to use objective criteria (like expected raw, market-adjusted, or industry-adjusted returns), we find that, even after controlling for these claims, their recommendations on a particular stock are negatively influenced by their assessment of the quality of the few other stocks they have rated that month. This recency bias has price implications. The next day's alpha of a sophisticated trading strategy that incorporates this bias is about 40 % higher compared to the alpha of an unsophisticated strategy that uses rating information only.

CEO performance impact on medical leave outcomes

Using a comprehensive CEO medical leave dataset, we find that prior firm performance is an important determinant of CEOs’ return to their position at the firm. Firms continue to experience superior performance measured by raw returns, market-adjusted returns, and industry-adjusted returns after the return of outperforming CEOs, reaffirming the performance-driven career outcome for medical leave CEOs. We also find that shareholders generally respond negatively to medical leave news while CEO age and prior performance significantly affect stock price reactions to the news. Shareholders respond more negatively to the return of older CEOs and CEOs with extended medical leave. Shareholders react more positively to the return of outperforming CEOs. Investors respond more negatively to CEO exit news if preceding medical leave news indicated an expected CEO return. We also find that the return of CEOs and duration of medical leave are negatively associated with ex-post abnormal returns or alphas using the CAPM model.

The information content of real operating performance measures from the airline industry

I use daily passenger flight delay data for all publicly held domestic US airlines from 1996 to 2016 to answer fundamental questions about the efficiency of market participants, accounting measures, and analysts in assessing the firm's real operating performance. Airline performance is priced in the cross-section of cumulative market- and industry-adjusted returns, with significant drift. Quarterly aggregates of performance predict post-earnings announcement drift. The sensitivity of individual airline operations to those of the entire industry, measured using a beta approach, carries a negative premium consistent with systemic operating risk being a liability rather than a positively priced risk factor with implications for the accounting beta literature. Return on sales reflects the quarter's real operating performance better than other common ROA measures, contributing to the measure selection literature.

The Information Content of Real Operating Performance Measures

I use daily passenger flight delay data for all publicly held domestic US airlines from 1996 to 2016 to answer fundamental questions about the efficiency of market participants, accounting measures, and analysts in assessing the firm’s real operating performance. Airline performance is priced in the cross-section of cumulative market- and industry-adjusted returns, with significant drift. Quarterly aggregates of performance predict post-earnings announcement drift. The sensitivity of individual airline operations to those of the entire industry, measured using a beta approach, carries a negative premium consistent with systemic operating risk being a liability rather than a positively priced risk factor with implications for the accounting beta literature. Return on sales reflects the quarter’s real operating performance better than other common ROA measures, contributing to the measure selection literature.

Asymmetric Variance Premium, Skewness Premium, and the Cross-Section of Stock Returns

We find a negative relationship between the individual stocks' semivariance premia, defined as the difference between the risk-neutral and physical expected downside semivariances, and future stock returns. The high-minus-low hedge portfolio earns the excess return of -64 (-46) basis points per month, the characteristic-adjusted return of -58 (-28) basis points per month, and the industry-adjusted return of -73 (-27) basis points per month in equal (value)-weighted returns. They are all economically substantial and statistically significant. Such a negative relationship can not be explained by risk-based asset pricing models. We find that the predictive power of semivariance premium is information-driven and reflects trading activity of informed investors who place large transactions on options.

Family firms and industrial districts:: Evidence from the Italian manufacturing industry

Family firms and industrial districts represent the pillars of the Italian manufacturing industry. Yet, the interplay between corporate ownership and the districtual organization of the industry has been basically overlooked. This paper reports preliminary evidence on the joint contribution of family firms and industrial districts to the competitive performance of Italian manufacturing firms. Descriptive and econometric analysis shows a positive effect of family ownership on firm profitability, as measured by the industry-adjusted Return on Sale (ROS), whereas the advantage of being located in an industrial district is less evident. Empirical evidence shows that the comparative advantages of family ownership change along the firm size distribution and according to the nature and relevance of the external (districtual) economies. Specifically, the performance impact of the interaction between the “district effect” and the “family effect” changes significantly across firm size classes: while these two effects operate as a substitute in smaller sized classes, they are complements in medium-sized firms. In particular, medium-sized firms (100–250 employees) are the best at leveraging the benefits of districtual organization, but only in the case of family ownership.

Are big city businesses more profitable than other firms?

Purpose– The purpose of this paper is to focus upon the financial performance of firms that maintain headquarters in the largest cities and firms based in smaller metropolitan areas. Big city locations offer numerous opportunities. On the other hand, maintaining headquarters in big cities is more costly than in less congested locations and the opportunities for distractions tend to be higher. A third alternative is that location does not matter.Design/methodology/approach– The study, the first of its type, applies a multivariate analysis to a large sample of Compustat firms. The analysis tests for the industry-adjusted return on investment as a function of population density.Findings– The results, which are both statistically and economically significant, show that firms headquartered in smaller cities tend to outperform those located in major business centers.Practical implications– These results suggest at least two implications for financial managers. One is that headquarters location should be considered as a key element of financial management strategy. The second is that businesses should very carefully consider decisions to move headquarters to the very largest cities.Originality/value– Theory suggests that business success should increase with the size of the city. This paper, the first large-sample examination of major US firms, shows that businesses with headquarters in smaller locations tend to enjoy greater financial success.

Local Risk, Local Factors, and Asset Prices

Firm location affects firm risk through local factor prices. We find more procyclical factor prices such as wages and real estate prices in areas with more cyclical economies, namely high “local beta” areas. While procyclical wages provide a natural hedge against aggregate shocks and reduce firm risk, procyclical prices of real estate, which is part of firm's assets, increase firm risk. We confirm that firms located in higher local beta areas have lower industry-adjusted returns and conditional betas, and show that the effect is stronger among firms with low real estate holdings. A production-based equilibrium model explains these empirical findings.

Risk factor and industry effects in the cross-country comovement of momentum returns

This paper examines the sources of cross-country comovement of momentum returns over the 1975–2004 period. Using data on more than 17,000 individual firms across 100 industries from 40 countries, we document the profitability of country-neutral individual firm, industry, and industry-adjusted return momentum. We show that country-neutral momentum returns are significantly correlated across countries, the correlation is time-varying, and that comovement among industries cannot explain the comovement of country-neutral momentum returns. However, we find that standard risk factor models do explain a significant portion of the cross-country comovement of momentum returns, even though they do not explain average momentum returns.

The value relevance of corporate restructuring charges

We document in this study that investors react positively to restructuring that is expected to be successful in improving firm performance. Investors’ reaction is significantly negative to unsuccessful firms when the magnitude of restructuring charges is high. Our results also show that investors’ reaction is significantly positive to restructuring that is intended to save costs through “workforce reduction” and “facility closings/consolidations”, but it is insignificant when restructuring is undertaken to recognize decline in asset values by asset write-offs and/or write-downs. Investor reaction is measured by 12-month buy-and-hold abnormal returns, whereas successful restructuring to improve the firm performance is based on the change in operating performance, measured by the industry-adjusted return on equity (ROE), over two subsequent years after restructuring.

The Impact of CEO and Director Turnover on Financial Performance in Venezuela

ABSTRACT We test whether CEO and director turnover has any impact on firms' financial performance. The results derived from our sample indicate that, as measured by the subsequent three-year industry-adjusted return on assets, financial performance after CEO and/or director turnover worsens, on average. In the case of CEOs, the coefficients obtained in our panel data regression show that firm performance decreased around 1.4 percent on average after the former CEO left the firm. In the case of directors, we obtained a significant and negative coefficient, but this was of little economic significance, leading us to conclude that removing directors has little subsequent economic impact on firms' performance. RESUMEN. Durante nuestro estudio, examinamos si la rotación de CEOs y directores ejerce algún tipo de impacto sobre el desempeño de las empresas financieras. Los resultados obtenidos con la muestra analizada indican que, de acuerdo con la medición del retorno sobre los activos ajustados por la industria a lo largo de los últimos tres años, el promedio del desempeño financiero empeoró considerablemente, debido a la rotación de los CEOs y/o directores. En el caso de los CEOs, los coeficientes obtenidos en nuestra regresión de la base de datos, muestra que el pro-medio de la merma observada en el desempeño ronda el 1.4% en el caso de los CEOs, después que el antiguo CEO dejó la empresa. En el caso de los directores, obtuvimos un coeficiente negativo bastante significativo pero con poco valor económico. Esto nos llevó a concluir que la retirada de los directores ejerce un impacto económico muy pequeño sobre el desempeño de las empresas. RESUMO. Testamos se a troca de CEO e diretores tem algum impacto sobre o desempenho financeiro das empresas. Os resultados derivados de nossa amostra indicam que o desempenho financeiro, medido pelo re-torno do ativo ajustado para o setor dos três anos subseqüentes, após a troca do CEO e/ou diretor piora, na média. No caso de CEOs, os coeficientes obtidos em nossa regressão dos dados do painel mostram que o desempenho da empresa caiu cerca de 1,4 por cento em média após o antigo CEO deixar a empresa. No caso de diretores, obtivemos um co-eficiente significativo e negativo, mas de pouca importância econômica, levando-nos à conclusão de que remover diretores tem pouco impacto econômico subseqüente sobre o desempenho das empresas.

Chief Executive Officer Turnovers and the Performance of China's Listed Enterprises

This study examines the relation between chief executive officer (CEO) turnovers and performance in China's listed enterprises where controlling shareholders are state-owned entities. We obtain three results. First, we offer evidence that the likelihood of forced CEO turnover is related to the incidence of negative earnings but not to industry-adjusted return on asset. Second, we document some improvement in accounting performance following CEO turnover, but the extent of the improvement is smaller and less significant than what has been documented for U.S. and Japanese enterprises. Third, we show that there is no significant relation between CEO turnovers and stock price performance.

Related Party Transactions: Associations with Corporate Governance and Firm Value

Recent corporate scandals have raised considerable concern among regulators and stock market participants about related party transactions (RPTs), prompting Sarbanes-Oxley (SOX) to prohibit personal loans to executives and non-executive board members. In a representative sample of companies for a period that predates SOX, we find RPTs are wide spread and involve equally executives and non-executive board members; additionally, the proportion of related party loans is smaller than other non-loan related party transactions such as purchases or direct services. When we examine the relationship between RPTs and the extant literature's corporate governance mechanisms (such as board characteristics, CEO pay-performance sensitivity, and outside monitors), we generally find weaker corporate governance mechanisms associated with more and higher dollar amounts of RPTs. We also find that industry-adjusted returns are negatively associated with RPTs. On further examination of loans versus other types of RPTs not considered in SOX, we find a negative relationship between industry-adjusted returns and the number and dollar amount of loans to executives and non-executive directors, and a similar relationship between the number of other types of RPTs with non-executive directors. In summary, our results provide support for the view of RPTs as conflicts of interest between managers/board members and their shareholders, in contrast with the view of RPTs as efficient transactions.

Cross-Country Comovement of Momentum Returns

This paper examines the sources of cross-country comovement of momentum returns over the 1975-2002 period. Using data on more than 16,000 individual firms across 100 industries from 38 countries, we document the profitability of momentum trading strategies using individual firm returns, industry returns, and industry-adjusted returns. We show that country-neutral momentum returns are significantly correlated across countries and are time-varying. We find that although both across-industry and within-industry momentum is profitable in a large number of countries, comovement among industries cannot explain the comovement of country-neutral momentum returns. However, we find that standard risk factor models do explain a significant portion of the cross-country comovement of momentum returns, even though they do not explain average momentum returns.

Internet Message Board Activity and Market Efficiency: A Case Study of the Internet Service Sector using RagingBull.Com

This paper examines the relationships between Internet message-board activity and abnormal stock returns and between Internet message-board activity and abnormal trading volume. This study focuses on RagingBull.com and Internet service sector stocks. I choose RagingBull.com because its format enables me to measure investor opinion objectively. I find that on days with abnormally high message activity changes in investor opinion correlate with abnormal industry-adjusted returns. Additionally, days with abnormally high message activity coincide with abnormally high trading volume both that day and the following day. However, I find that, in general, message-board activity does not predict industry-adjusted returns or abnormal trading volume.

News or Noise? Internet Postings and Stock Prices

The anecdotal evidence is growing that postings in Internet financial forums affect stock prices, either because the postings contain new information or because they represent successful attempts to manipulate stock prices. From an investment perspective, knowing whether this phenomenon is pervasive is important. We examined the relationship between Internet message board activity and abnormal stock returns and trading volume in the period from mid-April 1999 to mid-February 2000. Our study focused on the RagingBull.com discussion forum, an extremely popular site whose format permits the construction of an objective measure of investor opinions. For stocks in the Internet service sector, we found that on days with abnormally high message activity, changes in investor opinion correlated with abnormal industry-adjusted returns. These event days also coincided with abnormally high trading volume, which persisted for a second day. However, we found that message board activity did not predict industry-adjusted returns or abnormal trading volume, which is consistent with market efficiency.

Firm performance, corporate governance, and top executive turnover in Japan

We examine the role of corporate governance mechanisms during top executive turnover in Japanese corporations. Consistent with evidence from U.S. data, the likelihood of nonroutine turnover is significantly related to industry-adjusted return on assets, excess stock returns, and negative operating income, but is not related to industry performance. The sensitivity of nonroutine turnover to earnings performance is higher for firms with ties to a main bank than for firms without such ties. Outside succession in Japan is more likely for firms with large shareholders and a main bank relationship. We document performance improvements subsequent to nonroutine turnover and outside succession.