Past Stock Returns Research Articles

Order imbalance, market returns and volatility: evidence from Thailand during the Asian crisis

This article examines the interaction between order imbalance, stock returns, volatility and volume dynamics during Asian financial crisis using intraday data of 418 stocks traded on the Stock Exchange of Thailand (SET) from January 1996 to October 2003. The inverse relationship between the past 30-min interval order imbalance and current stock return in both pre- and post-devaluation of baht indicates that aggregate investors are contrarians. During the currency crisis, aggregate investors are less contrarian compared to the pre-devaluation period. Moreover, excess sell orders have a stronger impact to future return than to the excess buy orders. During the financial crisis, future stock returns are sensitive to an increase in current excess sell orders, but are insensitive to the current excess buy orders. In addition to the positive volume–volatility relation, the influence of order imbalance to volatility is much weaker after controlling for the level of stock returns.

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.

Can real options explain financing behavior?

Trade-off models commonly invoke financial transaction costs in order to explain observed leverage fluctuations. This paper offers an alternative explanation based on real options. The model is frictionless on the financing side but incorporates irreversibility and fixed costs of investment. Results obtained from simulating the model are broadly consistent with observed financing patterns. Market leverage ratios are negatively related to profitability, mean-reverting, and depend on past stock returns. The gradual and lumpy leverage adjustments can occur in the absence of financial transaction costs. This evidence shows that incorporating real frictions into structural models increases their explanatory power.

Which past returns affect trading volume?

Anecdotal evidence suggests and recent theoretical models argue that past stock returns affect subsequent stock trading volume. We study 3,000 individual investors over a 51 month period to test this apparent link between past returns and volume using several different panel regression models (linear panel regressions, negative binomial panel regressions, Tobit panel regressions). We find that both past market returns as well as past portfolio returns affect trading activity of individual investors (as measured by stock portfolio turnover, the number of stock transactions, and the propensity to trade stocks in a given month). After high portfolio returns, investors buy high risk stocks and reduce the number of stocks in their portfolio. High past market returns do not lead to higher risk taking or underdiversification. We argue that the only explanations for our findings are overconfidence theories based on biased self-attribution and differences of opinion explanations for high levels of trading activity.

Why is Stock Turnover Related to Past Returns? New Evidence

Statman, Thorley, and Vorkink (2006), Chordia, Huh, and Subrahmanyam (2006) and Griffn, Nardari, and Stulz (2007) show that trading activity is related to past stock returns in the U.S. and internationally, and offer several conjectures about causes of this relation. Using nine years of account-level trading data for an entire country (Finland), I ¯nd that two separate effects are driving this result. The first is increased trading after higher individual stock returns, and the second is increased trading after larger account-level losses and gains. The first effect is consistent with momentum trading and with the disposition effect, and that the second is consistent with overconfidence and loss aversion. Since the two effects compete when markets are down, my findings offer an explanation of why some studies find that turnover is positively related to past returns and others find that it is related to the absolute value of past returns.

Managerial Ownership Dynamics and Firm Value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.

Holding periods, illiquidity and disposition effect in the Chinese stock markets

This article examines the relation between average holding periods, stock illiquidity and investors’ disposition effects in the Chinese stock markets between 1996 and 2003. The results show that Chinese investors’ holding periods are longer for illiquid stocks and are inversely associated with past stock returns. Both relations are prevalent in the Shanghai and the Shenzhen A-share stock markets, which are dominated by individual investors. Nonetheless, relatively weak evidence is found in regards to the disposition effect in the B-shares markets, which are dominated by institutional investors.

An Experimental Study of Trend-Chasing Behavior

This paper reports the results of an experimental study of the effect that past realized stock returns have on investors’ decisions to buy or sell different stocks. The existing evidence on investors’ attitude toward historical stock performance is mixed. While some researchers find that investors, in general, are trend-chasers and prefer to invest in past winners (see, e.g., Kumar, 2005, “Style Switching and Stock Returns,” Working Paper, University of Notre Dame; Bange, 2000, Journal of Financial and Quantitative Analysis, 35, 239–55), other researchers (see, e.g., Shefrin and Statman, 1985, Journal of Finance, 40, pp. 777–92; Odean, 1998, Journal of Finance, 53, pp. 1775–98) document that investors do not want to sell shares that performed poorly in the past. To investigate how the past realized stock returns affect investors’ behavior, we conducted an experimental study where subjects were given information about past stock returns and were asked to make their investment decisions. The experiment consisted of two rounds and involved 72 undergraduate students as subjects. In the first round of experiments, subjects were offered two pairs of stock (each subject was given his/her own pair of stocks randomly drawn from the stocks included into the Dow Jones Industrial Average index). Subjects were provided with stock names and information about these stock returns over the last 2 weeks, and were asked to invest an equal amount of fictional currency in one of the stocks from each pair. Two weeks later, during the second round of the experiment, subjects were asked to sell one of the stocks that they owned and invest the proceedings into the other stock. Two weeks after subjects made their second round decisions, all subjects’ portfolios were closed and subjects were paid based on the relative performance of their Atl Econ J (2007) 35:255–256 DOI 10.1007/s11293-007-9069-7

Financial Analysts' Role in the 1996-2000 Internet Bubble

We investigate financial analysts' role during the 1996-2000 Bubble period, comparing their recommendations in this sector to those for other new companies over the same time period. Our research addresses the following two questions: (1) were financial analysts relatively more optimistic about Internet stocks than about other new issues during the 1996-2000 period? and (2) did their relative optimism for Internet stocks (if it existed) inflate the prices of these stocks, creating or fueling the Internet Bubble? By using other new issues in this time period as our comparison group, we control for analysts' documented optimism when initiating coverage and around equity issues. We find evidence that analysts made higher recommendations for Internet stocks than for other new issues, beginning in 1998, and that their recommendations were influenced by past stock returns. We also find a positive relation between analyst optimism and subsequent market-adjusted stock returns, particularly in the Internet sector within the stocks' IPO year; this relation persists even after we control for Fama-French (1993) risk factors. Based on these results, we conclude that analysts are relatively more optimistic about Internet IPOs than IPOs in other sectors and their relative optimism contributes to the formation of the 1996-2000 Bubble.

Managerial Ownership Dynamics and Firm Value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well, but not more likely to increase their ownership when their firms have poor performance. Because investors learn about the total change in managerial ownership with a lag, changes in Tobin's q in a period can be affected by changes in managerial ownership in the previous period. In an efficient market, it is unlikely that changes in managerial ownership in one period are caused by future changes in q. When controlling for past stock returns, we find that large increases in managerial ownership increase q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We argue that our evidence cannot be wholly explained by existing theories and propose a managerial discretion theory of ownership consistent with our evidence.

Can Real Options Explain Financing Behavior?

Dynamic structural trade-off models commonly invoke financial transactions costs in order to explain observed leverage fluctuations. This paper offers an alternative explanation for this pattern: real options. In the model, the only financial friction is a tax advantage to debt. However, the model incorporates two investment frictions: irreversibility and fixed costs of investment. Despite its parsimony, the model is broadly consistent with observed financing patterns. First, market leverage ratios are negatively related to profitability in the cross section. Second, leverage ratios in the simulated firms are mean-reverting and depend on past stock returns. Third, gradual and lumpy leverage adjustments occur in the absence of financial transactions costs. Fourth, debt tends to be the primary source of external financing for new investment. The predictive power of the model highlights the necessity of incorporating real frictions into structural models of corporate financing decisions.

SELEKSI KINERJA SAHAM TERCATAT DI BURSA EFEK JAKARTA MENGGUNAKAN MODEL JENSEN PADA MASA TRANSISI SIKLUS EKONOMI

The purpose of this research is to select the undervalued stock based on the Jensen's model approach. Data used is monthly stock return for 24 months during period of the year 2004 to 2005. Population used is 314 kind of stocks. The result of stock selection shows average undervalued stock of 53 or 17% of stock available for the year 2005. By experiment of 6 kind of initial set, 1 month lead time and 12 time training set, the result shows that the Jensen's model is not enough accurate to estimate the return for the next one month. The average monthly expected return of 13,7% and actual return of 2,9% shows the difference statistically significant. Eventhough, the actual return 2,9% still higher than market return IHSG BEJ of 1,6% on the monthly average. The correlation between the past stock performance and the future stock return is negative and not significant. The difference between return of high past stock performance and low past stock performance is not significant. The correlation between past beta and stock return is not significant. The difference between return of high past beta and low past beta is not significant.

The Value-Relevance and Timeliness of Goodwill and Goodwill Impairment Losses Following the Adoption of Section 3062

This paper investigates the relationship between 1) equity market values and goodwill and goodwill impairment losses; and 2) past and contemporaneous stock returns and transitional goodwill impairment losses recorded by Canadian firms following the adoption of Section 3062. Standard setters introduced SFAS 142/Section 3062 to increase the relevance and reliability of the goodwill figure by forcing firms to better reflect its fair value on their financial statements. However, in the debate that surrounded the adoption of SFAS 142/Section 3062, concerns were raised that the fair value of goodwill could not be measured reliably enough to produce a relevant goodwill figure and warrant an impairment-only approach. In addition, it was unclear whether TGILs could provide timely information to investors. We show that investors perceive goodwill as an asset, and goodwill impairment losses as sufficiently reliable measurements of a reduction in the value of goodwill to incorporate them in their valuation assessments. Lower valuation weights are put on transitional goodwill impairment losses reported by firms with an independent board of directors while a higher valuation weight is put on transitional goodwill impairment losses recorded by firms with market value of equity lower than book value. Finally, our results suggest that the adoption of SFAS 142/Section 3062 triggered the recognition of goodwill impairment losses already impounded in stock prices. Overall, the empirical evidence is consistent with SFAS 142/Section 3062 improving the quality of the financial information on goodwill provided in the financial statements.

In Search of Distress Risk

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

Index Option Prices and Stock Market Momentum

We test the prediction of standard option pricing models that there should be no relation between option prices and past stock market movements. Using the Standard and Poor's 100 index options (OEX options) prices from 1983–1995, we document that OEX calls are significantly overvalued relative to OEX puts after large stock price increases. The reverse is true after large stock price decreases. These valuation effects are both economically and statistically significant. Our results suggest that past stock returns exert an important influence on index option prices.

Properties of Implied Cost of Capital Using Analysts' Forecasts

We evaluate the influence of measurement error in analysts' forecasts on the accuracy of implied cost of capital estimates from various implementations of the 'implied cost of capital' approach, and develop corrections for the measurement error. The implied cost of capital approach relies on analysts' short- and long-term earnings forecasts as proxies for the market's expectation of future earnings, and solves for the implied discount rate that equates the present value of the expected future payoffs to the current stock price. We document predictable error in the implied cost of capital estimates resulting from analysts' forecasts that are sluggish with respect to information in past stock returns. We propose two methods to mitigate the influence of sluggish forecasts on the implied cost of capital estimates. These methods substantially improve the ability of the implied cost of capital estimates to explain cross-sectional variation in future stock returns, which is consistent with the corrections being effective in mitigating the error in the estimates due to analysts' sluggishness.

On the Association Between Analysts' Forecast Errors and Past Stock Returns: A Re-Examination

Prior studies (e.g., Lys and Sohn 1990; Ali, Klein and Rosenfeld 1992) have documented a positive association between analysts' forecast errors and past stock returns and suggested cognitive bias on the part of analysts as a possible explanation. In this paper, we separately analyze the association between forecast errors and past negative returns and that between forecast errors and past positive returns. We find that forecast errors are only positively associated with past negative returns and are not associated with past positive returns. These results are robust to a series of sensitivity tests. They are inconsistent with analysts being subject to cognitive bias; instead, they are consistent with several explanations related to accounting conservatism or analysts' incentives: analysts having difficulty in forecasting discretionary charges associated with past negative returns, analysts not exerting effort in forecasting earnings of firms with poor performance, or analysts ignoring bad news in order to please managers.

Forecasting Bankruptcy More Accurately: A Simple Hazard Model

I argue that hazard models are more appropriate than single-period models for forecasting bankruptcy. Single-period models are inconsistent, while hazard models produce consistent estimates. I describe a simple technique for estimating a discrete-time hazard model. I find that about half of the accounting ratios that have been used in previous models are not statistically significant. Moreover, market size, past stock returns, and idiosyncratic returns variability are all strongly related to bankruptcy. I propose a model that uses both accounting ratios and market-driven variables to produce out-of-sample forecasts that are more accurate than those of alternative models. Copyright 2001 by University of Chicago Press.

Forecasting Bankruptcy More Accurately: A Simple Hazard Model

I argue that hazard models are more appropriate for forecasting bankruptcy than the single-period models used previously. Single-period bankruptcy models give biased and inconsistent probability estimates while hazard models produce consistent estimates. I describe a simple technique for estimating a discrete-time hazard model with a logit model estimation program. Applying my technique, I find that about half of the accounting ratios that have been used in previous models are not statistically significant bankruptcy predictors. Moreover, several market-driven variables are strongly related to bankruptcy probability, including market size, past stock returns, and the idiosyncratic standard deviation of stock returns. I propose a model that uses a combination of accounting ratios and market-driven variables to produce more accurate out-of-sample forecasts than alternative models.