Classes Of Investors Research Articles

Nonfinancial Information Preferences of Professional Investors

ABSTRACT Academics, regulators, and the general business community have called for the assessment of the decision-usefulness of three key categories of nonfinancial information: economic, governance, and corporate social responsibility (CSR). This study builds on prior research by examining the nonfinancial information preferences of professional investors, how their demand for the nonfinancial information categories compares to those of nonprofessional investors, and whether these demands vary across subgroups of professional investors. Based on survey responses from 228 professional investors, the results show that this investor class prefers nonfinancial information that is concise, comprehensive, comparable, and credible. Similar to prior research, the results indicate that professional and nonprofessional investors have similar demand orderings: they are most interested in economic information, then governance information, and then CSR information. However, professional investors demand greater detail than do nonprofessional investors for subcategories of economic and governance information. Further, while both professional and nonprofessional investors' demand is increasing for all subcategories of governance and CSR information, the change in demand is more pronounced for nonprofessional relative to professional investors, and particularly for CSR information subcategories. These variations in preferences suggest potential differences in perspectives between professional and nonprofessional investors. Finally, the findings indicate that institutional investors have recently used less economic information. For the subgroups whose investment research consists of at least a quarter of socially responsible investments (SRI), the higher the SRI investor level, the higher the recent usage of more information categories; and the higher the SRI investor level, the higher the future demand for economic information, but the lower the SRI investor level, and the higher the demand for CSR information. These findings suggest potential differences in investment approaches among subgroups of professional investors. Together, these results provide support for more integrated reporting of nonfinancial information to meet professional investors' multidimensional preferences and differences in demand relative to those of nonprofessional investors.

Capitalizing on the Urban Fiscal Crisis: Predatory Tax Buyers in 1970s Chicago

Local governments across the United States annually hold tax auctions, in which unpaid property tax bills are sold to investors, who in turn obtain the right to charge interest on those debts or acquire title to tax delinquent property. In Chicago, reforms to Illinois’s tax sales law in 1951 gave rise to a class of investors who reaped millions through fees, interest payments, and, in some cases, acquisition of real estate for the price of a single property tax bill. Tax buying thrived as rates of property tax delinquency rose sharply in the 1970s, especially in the city’s African American neighborhoods, which suffered from discriminatory overassessment. As the city’s fiscal situation worsened, tax buyers wielded greater influence over tax policy and administration. Tax sales shed new light on the making of contemporary municipal fiscal policies and administrative practices, and highlight broader features of capitalism and the state in modern America.

Managers’ Moral Obligation of Fairness to (All) Shareholders: Does Information Asymmetry Benefit Privileged Investors at Other Shareholders’ Expense?

Drawing on ethical principles of fairness and integrative social contracts theory, moral obligations of fair dealing exist between the firm and all shareholders. This study investigates empirically whether privileged investors of publicly traded firms engage in legal, but morally questionable, trading that at the expense of non-privileged institutional or atomistic investors. In this context, we define privilege as the access to material, nonpublic earnings surprise information. Our results show that the opportunity for procedural unfairness (e.g., the likelihood of an earnings surprise and information asymmetry) increases with the presence of privileged investors. However, this procedural unfairness does not appear to lead to distributive unfairness even though the level of abnormal trading also increases with the presence of privileged investors. That is, our findings suggest that other shareholders are in fact better off from an outcome perspective given that the abnormal stock price returns upon the announcement of an earnings surprise are either more positive (in response to a favorable surprise) or less negative (in the case of an unfavorable surprise) when the firm has a high proportion of privileged investors. We extract the important implications of our study for future research on the fairness of capital markets and information asymmetry amongst classes of investors, as well as for public policy.

Virtual Privatization: Governance Reforms for Government-Owned Firms

This article explores three different kinds of reforms that could be used to help governmental corporations achieve some of the benefits of privatized, market-based governance without giving up governmental control. The first, and simplest, proposal is to use an annual contract between GOC managers and their ministerial shareholders to reduce managerial agency costs. In addition to providing a benchmark for managerial performance, the contract also could be used to segment the GOC's different goals in order to minimize the downside effects of having multiple principals (with multiple objectives) monitoring the manager-agents. Second, I suggest that requiring at least some GOC's to issue subordinated debt would create a class of private investors who could provide additional monitoring as well as market signals about the prospects of the firm. Finally, I focus on various boundary problems with GOC's, as compared to private firms. I argue that GOC's should be required to set up separate subsidiaries when they expand into new product areas. Requiring the GOC to set up a separate subsidiary would make it much easier to police inappropriate cross subsidization.

Optimizing Marginal Conditional Stochastic Dominance Portfolios

Marginal Conditional Stochastic Dominance (MCSD) states the probabilistic conditions under which, given a specific portfolio, one risky asset is marginally preferred to another by all risk-averse investors. Furthermore, by increasing the share of dominating assets and reducing the share of dominated assets one can improve the portfolio performance for all these investors. We use this standard MCSD model sequentially to build optimal portfolios that are then compared to the optimal portfolios obtained from Chow’s MCSD statistical test model. These portfolios are furthermore compared to the portfolios obtained from the recently developed Almost Marginal Conditional Stochastic Dominance (AMCSD) model. The AMCSD model restricts the class of risk-averse investors by not including extreme case utility functions and reducing the incidence of unrealistic behavior under uncertainty. For each model, an algorithm is developed to manage the various dynamic portfolios traded on the New York, Frankfurt, London, and Tel Aviv stock exchanges during the years 2000-2012. The results show how the various MCSD optimal portfolios provide valid investment alternatives to stochastic dominance optimization. MCSD and AMCSD investment models dramatically improve the initial portfolios and accumulate higher returns while the strategy derived from Chow’s statistical test performed poorly and did not yield any positive return.

Are Sovereign Wealth Funds Contrarian Investors?

This paper investigates the determinants of the investment activity of Sovereign Wealth Funds (SWFs) at a macro level, with special emphasis on the possible reaction to a financial crisis in a potential target economy. The analysis relies upon a specially built proprietary database, which encompasses 1,903 acquisition deals spanning the period 1995-2010 and involving 29 out of the 69 existing SWFs. According to a three-step modelling approach, we find that this class of investors prefers to invest in countries with a higher degree of economic development, larger and more liquid financial markets, institutions that offer better protection of legal rights, and a more stable macroeconomic environment. Most importantly, and in stark contrast with the existing empirical literature on other major institutional investors, SWFs seem to engage in ‘contrarian’ investment behaviour, i.e. increasing their acquisitions in countries where crises hit. The results are shown to be valid if we consider both the likelihood of a country being the target of SWFs’ investments and the amount SWFs choose to invest in each country. Capital flows stemming from SWFs’ acquisition activity worldwide may therefore eventually have a stabilizing effect on local markets during periods of financial turmoil, protecting the targeted countries from foreign shocks instead of propagating them globally.

Groupon: let's make a deal?

Synopsis Groupon, an online coupon company, was one of many companies that considered an initial public offering (IPO) during what might be a second technology/internet/social media IPO boom in 2011. Some companies chose to postpone their IPOs, while others took advantage of the media attention focussed on technology companies, and in particular, social media firms. Should investors hop on the tech IPO bandwagon, or hold off to better evaluate the long-term prospects of tech companies, and in particular social media companies? Would the valuation of Groupon justify an investment in IPO shares? Research methodology The case was researched from secondary sources, using Groupon's IPO filing information, news articles about the IPO and industry research sources, such as IBIS World. Relevant courses and levels This case is appropriate for an advanced undergraduate or MBA corporate finance or investment elective. Most introductory finance classes do not have the time to cover later chapters in a finance textbook, where information about IPOs is generally found. It could also be used at the end of a core finance course, where the instructor wanted to introduce this topic through a case study of a hard-to-value internet-based company to illustrate the difficulties in setting IPO prices. The case could also be used in an equity analysis class, an entrepreneurial finance class or an investment class, to spur discussion about valuing an internet company and choosing appropriate investments for pension fund investing. This case could also be used in a strategy class, focussing on the five forces question, and eliminating the valuation question. Theoretical basis There is a great deal of literature about IPOs and their long-term performance. An excellent source is Jay R. Ritter's research, http://bear.warrington.ufl.edu/ritter, which has a longer time period and more data than could be contained in this case. IPO puzzles include persistent undervaluing of IPOs; in other words, the offer price is lower than, and sometimes substantially lower than, the first day close price. A second issue is the generally poorer long-run performance of companies after their IPO when compared to similar firms that did not do an IPO.

Internet finance: Digital currencies and alternative finance liberating the capital markets

This article discusses how the sudden shift in policy reform and innovation has the potential to liberate the financial markets. The economic potential of internet finance is beginning to take hold across the capital markets as industries like Peer – to – Peer Lending, Equity and Debt based Crowdfunding and virtual currencies and cryptocurrencies which are types of digital currency are quickly transforming the way businesses are being financed. From borrowing and lending, buying and selling securities, to conducting wire transfers internationally, these innovations are creating a new class and generation of investors will source investments opportunities. Helping institutions and governments assess risks and manage performance in order to determine where to deploy capital; and showing signs of lessening the inequality gap. Following the neolithic agricultural revolution and the industrial revolution, this new revolution will enable more people to access financial services in less traditional ways, especially the unbanked world with its huge potential. These new financial opportunities, such as peer – to - peer (P2P) lending, will be discussed and examined, and we will stress how they can allow people to bypass current barriers in the global economy. We conclude by arguing that all these developments, energized by the efforts of innovators and entrepreneurs, have the potential to radically transform the world in which we live, while promoting the core values of industrialized societies including democracy, capital formation, sustainability, and equality without solely relying on tax increases.

The current decline in oil: Investment and macroeconomic considerations.

Over the past several months, the price of oil has declined precipitously. From a high of $145 per barrel in July of 2008, the price of oil has now declined to below $50 per barrel at the time of this writing. The correlation with the performance of the Canadian market has been striking. Current news reports focus on the decline in Canadian securities performance as a reflection of weakness in the oil market. Given the cyclical nature of the securities market and the commodities market, questions arise as to whether the price of oil has reached its nadir and whether the current environment represents an opportunity to purchase oil-based products as part of a value-accretion strategy. How is oil traded Oil is is regulated by the Commodity Futures Trading Commission and is usually bought as a derivative product. In most cases, oil is purchased as a future contract. This contract entitles the purchaser to buy the security at a future date at a specified price. It is typically traded by two broad classes of investors. The largest class has interests in the oil industry. They are trading as a hedge against price fluctuations. Airlines, manufacturers and others who use oil as a factor of production use such contracts as a means of providing predictable supply at predictable prices. The second class of individuals who purchase such contracts are speculators who seek to profit from fluctuations in market price. In most cases, such speculation is confined to the contracts themselves and no delivery is taken of the commodity. How is the price of oil determined? There are three primary factors that influence the price of oil. The first is market demand. Energy demand is often conceived as a proxy for economic and manufacturing activity within the economies of various countries. Aggregate output has begun to slow worldwide. While gross domestic products continue to rise slowly, the rapid growth witnessed in some countries has slowed. This has been especially true in China, where demand for oil has plateaued. As economic growth has been curtailed, the effect is a reduction in demand for energy and for oil. In more developed countries, there has been a shift toward alternative energy production, thus decreasing demand for carbon-based energy. Such reduction in demand has a negative effect on price. Supply is the second determining factor. Supply is often determined by the cost of production in the short and long term. The cost of production varies depending on the cost of extraction and processing. The cheapest cost of production is in Saudi Arabia and Libya, where production can be as low as $5 per barrel. However, production costs reach a zenith of $90 per barrel in some oil sands developments. In the short term, supply can be adjusted to reflect immediate demand. However, this becomes more complicated in the long term. Decisions regarding infrastructure are made in anticipation of future prices. Once committed, much of this infrastructure is built regardless of the current price. Decisions regarding operations occur at the margins, thus promoting production once large capital costs have been incurred. The overall effect has been a significant increase in supply. Large investments in infrastructure have been made by ‘fracking’ firms. Fracking in the United States has significantly increased the supply of domestic oil. While the United States does not export oil to any significant degree, it has curtailed its import as the result of domestic production. Supply has also expanded as the result of geopolitical factors. The current conflicts in Iraq and Libya have not curtailed production to the extent expected, thus increasing global supply. Finally, there has been no move by the Organization of the Petroleum Exporting Countries to reduce production by its members to stabilize price. They are continuing to produce in an effort to maintain market share. The cumulative effect has been a highly significant increase in supply. The third ingredient is deemed by most experts to be market sentiment. As the name implies, there is very little certainty associated with these fluctuations. While market fundamentals may be held constant, in some circumstances, volatility may result from increased speculation and macroeconomic predictions. The source and result of these sentimental shifts remains elusive and exceedingly difficult to predict.

Private Equity Market in Recovery

Abstract In the past three decades there has been an increasing role of Private Equity (PE) industry in the financing of enterprises especially in case of firms that have great growth potential but are in need of external financing. Via providing financing for these enterprises PE can boost economic growth. On the other hand the different subsets of PE like Venture Capital (VC) and Buyout (BO) funds appear as an important investment class and the return characteristics of these asset classes is an indicator of the performance of the whole PE industry. The authors in their earlier works focused on the history of the return characteristics of the funds in the US and in Europe found different trends and features in the two regions with regards to the different asset classes. In this paper the authors focus on the current progress of PE industry in Europe and in the US and examine the recovery of the industry from the recession of 2008. The current trends are consistent with our former findings. In average the returns of BO funds exceeded the returns of VC funds in the US as well as in Europe. Not just according to the absolute value of the returns, but also according to its risk-return tradeoff BO seemed to be a preferable investment. The gap between the performances of BO funds was not as significant as the difference of VC funds. While the recession of 2008 affected negatively the returns of PE, the ‘dotcom’ boom of the millennia had much higher impact on the industry, and our finding is that PE returns are on a recovery course.

Appraising Relevance of IPO Grading in Investment Decision of Equity Investors

SEBI introduced a very unique and innovative concept of mandatory IPO grading in India in 2007 for the protection of interest of retail investors. But, surprisingly in 2013, SEBI took this decision back and scrapped the mandatory IPO grading saying that it is not serving the purpose for which it was introduced. The present research paper is an attempt to analyse the relevance of IPO grading in the investment decisions of retail investors and qualified institutional buyers. For this, researchers studied the opinion of equity experts and equity investors regarding relevance of grading in their investment decisions and their importance to grading through demand to an IPO during book-building process. Researchers found, while grading was meant for retail investors, but it has been used mainly by QIB’s (qualified institutional buyers), awareness of the concept amongst the investor class is very low and there are no significant differences in the opinion of equity experts and equity investors towards IPO grading which is not highly positive towards grading.

Home equity release for long-term care financing: an improved market structure and pricing approach

AbstractHome equity release products have been promoted as a potential solution to residential long-term care costs for the elderly. Lower than expected utilisation of home equity release loans has prompted efforts to better model and price the no-negative-equity-guarantee (NNEG) built into the contracts, but loan rates are still widely perceived by homeowners as being unattractive. We propose the introduction of a new adjustable rate loan based on a regional house price index, with the NNEG being borne by a specially created intermediary. The proposed approach allows us to directly address and separately price the basis risk between individual house price returns and index returns. In addition, it offers the opportunity to create securities based on residential real estate that would be attractive to a wider class of investors. The alternative risk-sharing mechanism creates a more transparent and simple pricing structure for the loans. We then use house sales data to demonstrate the approach. We find in our sample that it would be possible to make higher loans than seen in previous literature using standard roll-up contracts. In the most favourable scenario for our simulations, the maximum loan is 89% of the appraised home value if the loan is advanced as a lump sum and 95% if the loan is advanced in instalments.

United States, Inc.: Citizens United and the Shareholder Citizen

In a controversial decision that has continued to make national headlines in subsequent election cycles, the US Supreme Court’s ruling in the case of Citizens United v. Federal Election Commission struck down restrictions on contributions from the general treasury funds of corporations to political action committees (PACs) and other significant campaign finance reforms. This article examines the language of the majority opinion, concurrences, and dissents in the Citizens United decision in order to dissect the competing models of democratic participation, equality, and fairness. Through the co-optation of the language of Civil Rights and even radical feminism in terms of equality and recognition, the conservative justices in the majority dwell on the abstract rights of the person, even going as far as to suggest that there is no difference between corporate and human speech or between corporate and human speakers. Under the continuing ravages of global neoliberalism—what critics in the United States identify as the “Great Risk Shift,” the “consumerization of the republic,” and the financialization of the economy since the 1970s—this study posits the shareholder citizen, a new conception of citizenship that more accurately identifies the state’s obligations to and expectations of its subjects. The shareholder citizen incorporates significant yet unacknowledged changes in the way we currently think about our democratic society. The shareholder citizen realigns priorities with the interests of the corporate elites and investor classes, naturalizes corporate democracy as the model for political participation, and ultimately condones the vast restrictions on the agency of individual citizen shareholders, leaving them largely powerless in the political process. The conflation of the people with the market finds its utmost expression in the Citizens United ruling. This article examines how the popular conception of the shareholder reconstitutes citizenship, pushing aside political equality as a goal and privileging shareholder citizens instead.

Attracting private sector participation in infrastructure investment: the UK case

Infrastructure investments are often considered by governments that are looking for private sector investment in infrastructure. However, private investors tend to have a cautious attitude towards this class of investments. This paper focuses on the UK's financial and regulatory drawbacks to infrastructure investment. The authors conclude that regulatory conditions are key levers for the UK government to attract increased private sector participation.

Privileged Access to Financial Innovation

Access to private funds is limited to an elite class of investors -- wealthy individuals and large institutions. Individuals of more modest means -- “retail investors” -- face more limited investment choices; generally they can only invest in mutual funds. In spite of this inequitable division, the current regulatory climate will lead to an even further expansion of the private fund industry. This article argues that this loosening regulatory climate could lead to a talent drain amongst registered funds, could narrow the investment choices available to retail investors, and could deepen the already troubling income gap between wealthy and average earners. With respect to a possible talent drain, as it becomes easier for issuers to avoid the arduous registration requirements of the federal securities laws, many investment advisers will simply “go private” by instead offering hedge funds or other private investments. In assessing privileged access to strategies, since private funds are permitted to engage in more flexible trading strategies through the use of derivatives and other exotic instruments, elite investors have better opportunities for wealth maximization and diversification. A large body of empirical research has also found that private fund advisers often have privileged access to valuable information regarding upcoming investments. To the extent that this privileged access continues to grow, the options available to retail investors will continue to decline. From a broader perspective, this could magnify the financial challenges facing retail investors, some of which include dwindling retirement savings and declining property values, as well as deepen the already troubling income gap in this country. Alternative frameworks could entail; (1) loosening the capital restrictions that apply to mutual funds so that retail investors can access a greater degree of financial innovation, or (2) tightening the existing freedoms that apply to private funds, so as to level the playing field between retail and elite investors. However, the long-term and short-term effects to systemic risk, investor protection, and capital formation, would have to be thoroughly investigated before adopting any proposed solution along this spectrum. This would necessarily require enhanced coordination between the SEC and CFTC, and improved collaboration with related industries (e.g., economic, financial, banking, quantitative analysis, etc.).

Inconsistent Investment and Consumption Problems

In a traditional Black---Scholes market we develop a verification theorem for a general class of investment and consumption problems where the standard dynamic programming principle does not hold. The theorem is an extension of the standard Hamilton---Jacobi---Bellman equation in the form of a system of non-linear differential equations. We derive the optimal investment and consumption strategy for a mean-variance investor without pre-commitment endowed with labor income. In the case of constant risk aversion it turns out that the optimal amount of money to invest in stocks is independent of wealth. The optimal consumption strategy is given as a deterministic bang-bang strategy. In order to have a more realistic model we allow the risk aversion to be time and state dependent. Of special interest is the case were the risk aversion is inversely proportional to present wealth plus the financial value of future labor income net of consumption. Using the verification theorem we give a detailed analysis of this problem. It turns out that the optimal amount of money to invest in stocks is given by a linear function of wealth plus the financial value of future labor income net of consumption. The optimal consumption strategy is again given as a deterministic bang-bang strategy. We also calculate, for a general time and state dependent risk aversion function, the optimal investment and consumption strategy for a mean-standard deviation investor without pre-commitment. In that case, it turns out that it is optimal to take no risk at all.

Some limit theorems for the log-optimal portfolio

Abstract In this paper, we mainly study the strong limit theorems for the log-optimal portfolio of the ∗-mixing stock market. First, we establish a strong limit theorem for the log-optimal portfolio of any sequence investment, then we obtain the result that the average return of the long term behavior of a sequence investment converges to the average of the expectation return in every period with probability 1 under some conditions. We also obtain another strong limit theorem for the log-optimal portfolio for a class of sequence investments. MSC:60F15, 91B28.

Ability, Market Volatility, and Heterogeneity in Risk Aversion

This paper examines whether a market structure within which lower ability agents exit (decrease equity positions), while higher ability agents enter the market in anticipation of an increase in market volatility can generate regime switches in risk aversion coefficients. Using a theoretically motivated proxy for the representative agent's ability, and a switching regression model within which regime switches in market returns, market volatility, and an ability proxy are endogenously generated, I find I am able to generate regime switches in risk aversion coefficients. This results in evidence of two classes of investors that differ with respect to risk aversion coefficients; a negative correlation between the prices of the two sources of risk; and risk aversion coefficients that are low enough to rationalize equity premiums.

Generalized Little's Law and an Asset Picking System to Model an Investment Portfolio: A Working Prototype

We are not aware of any meaningful application of Little's Law in the finance field. Our ambitious goal is to create an Asset Picking System (APS) structure that, combined with Little's Law (LL), Generalized Little's Law (GLL) and its corollaries, generates the GLL-APS model, a financial engineering tool bridging operations research and finance. In the process we extend Little's Law in certain ways and make its vocabulary specific to our application. Consider a financial adviser working with a customer to select and maintain a portfolio of investments over a time period. Individual investments are bought or sold and enter or leave the portfolio, which is thought of as a queue. The total value of the portfolio at a point in time is the sum of the values of each investment in the system. When an investment is sold, it departs, and its selling price becomes cash. Cash may be kept in a money market fund, waiting for re-investment, or accumulated in a savings account to be used for personal consumption. Little's Law (LL) in its basic form simply counts the number of investments and so deals with their rate of arrival, the average number in the system, and the average time an investment stays in the system. However, there is an advanced version of LL that we call Generalized Little's Law (GLL), in which each investment can be weighted, for example, by its dollar amount. Then we can calculate the average dollars of investments in the portfolio over a time interval and the average time that an investment remains in the portfolio with the duration of each investment weighted by its dollar size, as well as knowing the average arrival rate of investments. Our process uses decision rules to create the APS structure. which, through a four step process, selects assets and their numbers of shares to build a portfolio. Any change is accepted or rejected by the adviser and, ultimately, by the customer. Various environmental events, notably, recurrent global recessions, can negatively impact certain classes of investments and make them less appealing as choices for the customer. All clients are more concerned about the market opportunities and hold more reasonable expectations than before such crises. We take that into consideration. We concentrate on customizing and maintaining an investment portfolio for the person who owns it. The GLL-APS model does this. Currently it is a working prototype because it is operational but is evaluated by computer simulation with only one of the three customer profiles we have collected so far. Our investments test bed consists of a set of 14 asset classes, each with 10 blue chip securities. Later we intend to expand the number of customers and assets and plan an orderly rollout of our model in multiple phases.

Investor perceptions of the benefits of political connections

Purpose– The purpose of this paper is to investigate how foreign and domestic investors differ in their beliefs about the relative merits of a firm's political connections.Design/methodology/approach– These differences are employed to explain cross-sectional variation in the previously documented premium in A-share prices relative to otherwise equivalent foreign currency denominated B-shares for Chinese firms.Findings– Chinese domestic individual investors were excluded from owning B-shares of Chinese firms prior to February 20, 2001. The authors find that firms with more political connections have higher premiums and a smaller reduction in premiums associated with this event.Research limitations/implications– This is consistent with domestic block holders deriving additional benefits from politically connected firms.Practical implications– The findings also have important policy implications by showing that government can have a strong effect on the economy even without applying macro-policy tools.Social implications– Government ownership in listed companies can result in discrepancies among classes of investors with respect to their valuations. Furthermore, the prohibition of short sales prevents arbitrage from correcting this bias, and eventually the role of the market in allocating resources efficiently is undermined.Originality/value– The authors investigate the role of political connections as implied by the proportion of state ownership in explaining the A-share premium. Unlike previous studies that associate state ownership with political risk, the paper relates state ownership to political connections that are particularly beneficial to domestic large block shareholders. This interpretation is consistent with the findings and with previous literature on state ownership and political connections of Chinese firms.