Proxy For Investors Research Articles

The relationship between returns and unexpected earnings: A global analysis by accounting regimes

Numerous studies have documented a long-term association between earnings and returns. Surprisingly, few attempts have been made to internationally examine market reactions to earnings releases over return windows less than 12 months. This paper globally explores the market reaction to unexpected earnings defined by both the change in earnings per share (EPS) and analyst forecast errors (AFE) using a 1-month return window. First, the existence of the earnings–returns relationship is examined using a sample of firms from 32 countries grouped into accounting regimes. Accounting regimes represent groups of countries that exhibit similarities in accounting standards, stock market characteristics, corporate governance mechanisms, and economic conditions. Thus, similar reactions to earnings are expected within regimes. Next, the incremental information content of analyst forecasts, a proxy for investors’ earnings expectations, is examined. Finally, changes in the structure of the earnings–returns relationship over time are investigated. Results support the existence of a relationship between earnings and returns in all accounting regimes. In addition, analyst forecast errors appear to be incorporated into earnings expectations in most developed countries. Finally, evidence suggests that the significance and explanatory power in the earnings–returns relationship has increased in recent years.

Who Makes On-The-Run Treasuries Special?

In this paper, we identify and empirically evaluate an alternative explanation for the liquidity premiums observed for on-the-run Treasuries. Existing theoretical and empirical analyses argue these premiums are driven by buy-and-hold investors who directly value the additional liquidity that these extremely liquid securities provide. We contrast this cash market explanation with a somewhat counter-intuitive alternative, rooted in the repo markets. According to the alternative explanation we propose, short-sellers rather than buy-and-hold investors value the superior liquidity of on-the-run Treasuries. In constructing their positions, they drive up repo market specials and indirectly generate the cash market premiums we observe. To evaluate these alternative hypotheses, we run a series of regressions with the overnight repo special for on-the-run Treasuries as the dependent variable. For demand from buy-and-hold investors to own liquid securities, we include two basic proxies in our panel regressions: the CP/Tbill spread that Krishnamurthy (2002) investigates and the REFCORP/Treasury examined by Longstaff (2004). We also include two proxies to capture intermediaries' need to hedge the interest rate risk of their inventories of securities. We assume hedging activity increases with their issuance of underwritten fixed-rate debt, and with overall interest rate volatility. We find strong and consistent evidence that these proxies for hedging activity are both economically and statistically significant determinants of overnight repo specials. However, we find much weaker evidence that that our proxies for investors' demand to own liquid securities explains the observed premiums. These results cast into doubt previous assertions that simple investor-driven liquidity premiums explain the higher repo specials and lower yields observed for on-the-run Treasuries. The yield spread between on-the-run and off-the-run Treasuries is often believed to reflect investors' demand to own these liquid securities. However, our results suggest that one must exercise caution when interpeting changes in the on-/off-the-run yield spread since we find that they are often driven by an increase in demand to short-sell the on-the-run Treasury, rather than demand to own it.

Heterogeneous Valuation of Accruals and Trading Volume

This paper investigates the relation between trading volume and the magnitudes (i.e., the absolute values) of accruals and operating cash flows around quarterly earnings announcement dates. We hypothesize and find that trading volume at earnings announcements is positively related to the magnitude of accruals and is more positively related to the magnitude of accruals than to the magnitude of operating cash flows. In addition, we find a positive relation between belief jumbling, a measure used in prior literature to proxy for investors' differential interpretations of earnings announcements, and the magnitude of accruals but not between belief jumbling and the magnitude of cash flows. Our findings are consistent with the notion that accruals are an underlying source that contributes to investors' differential interpretations of earnings announcements, which, according to theory, stimulate trading volume.

The Return-Earnings Relation When Analyst Forecasts Are Used as a Proxy for Investor Expectations

In this paper we model return-earnings regressions in a setting in which analysts' forecasts are used to proxy for investors' expectations. We show how disparites between investors' and analysts' information sets could affect the regression coefficients and the R2. Our findings provide new and untested implications and yield insights into recent return-earnings evidence in the empirical literature.

Up Close and Personal: An Individual Level Analysis of the Disposition Effect

In this paper, we analyze the trading records of a major discount brokerage house to investigate the disposition effect, the tendency to sell winners too quickly than losers. In contrast to previous research that has demonstrated the disposition effect by aggregating across investors (Odean, 1998), our main objective is to identify individual differences in the disposition bias and explain this in terms of underlying investor characteristics. Building on the findings in experimental economics and self-correction in psychology, we hypothesize that investors' sophistication about financial markets and trading experience is responsible in part for the variation in individual disposition effect. Using demographic and socio-economic data as proxies for investors' sophistication, we find empirical evidence that wealthier and individual investors in professional occupations exhibit less disposition effect. Consistent with experimental economics, trading experience also tends to reduce the disposition effect. We provide guidelines for investment advisors, regulators and investment communities to utilize our findings and help investors make better decisions.

Fundamental Analysis and Human Capital: Empirical Evidence on the Relationship between the Quality of Human Resources and Fundamental Accounting Variables

Fundamental analysis is aimed at assessing the intrinsic value of companies based on publicly available accounting information. Thus, the main purpose of fundamental analysis research should be identifying the main determinants of value, establishing empirical relations between them and fundamental accounting variables, and finally, predicting the future behavior of such variables to estimate the value of the firm. Traditional fundamental analysis ignores the existence of some intangible assets, such as intellectual capital, that are currently considered as the main determinants of value. Human capital is an essential component of intellectual capital. This paper provides evidence on the extent to which the quality of human resources is related to the value of accounting variables that are used in fundamental analysis due to their perceived usefulness as proxies for investors' expectations on the firm's future profitability and growth in both, earnings and shareholders' equity.

Analyst Forecasts and Herding Behavior:

The use of analyst forecasts as proxies for investors' earnings expectations is commonplace in empirical research. An implicit assumption behind their use is that they reflect analysts' private information in an unbiased manner. As demonstrated here, this assumption is not necessarily valid. There is shown to be a tendency for analysts to release forecasts closer to prior earnings expectations than is appropriate, given their information. Further, analysts exhibit herding behavior, whereby they release forecasts similar to those previously announced by other analysts, even when this is not justified by their information. These results are shown to have interesting empirical implications. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Predictive Ability and Descriptive Validity of Earnings Forecasting Models

VALIDATION OF SECURITY VALUATION models critically depends on obtaining reliable proxies for investors' expectations of future earnings. It is obvious that different values of these proxies in a given case are likely to lead to different, if not conflicting, results. In spite of significance of properly formulated proxies, they have not been paid requisite attention in the valuation studies. Nor, for that matter, have financial theories offered proper guidelines for selecting and processing relevant information for devising proxies for future earnings. This situation is not due to any oversight or neglect, but has arisen because of substantial problems involved, for instance, in identifying and measuring relevant factors for developing forecasts. Even when these forecasts are strictly based on earnings history, selection of an appropriate extrapolation method still remains a controversial and somewhat uncomfortable issue, as evidenced by inconsistent conclusions from studies conducted by Ball and Watts [3], Brooks and Buckmaster [6], and Foster [9]. The purpose of this study is to examine effectiveness of different extrapolation methods previously advanced in the literature. In Section II, extrapolation models previously advanced in the literature are classified into four major hypotheses on earnings time-series. Section III deals with relevant data and specification of forecasting horizons for conducting empirical investigation. Section IV develops the criteria for the selection process. In Section V, empirical evidence on the performance of alternative processes is presented, and different evaluation measures are employed in order to establish whether a clearcut dominance of a specific process emerges. The final section concludes with major findings of this study.

Public Disclosure Rules, Private Information-Production Decisions, and Capital Market Equilibrium

The effects of prevailing and proposed disclosure rules on capital market equilibrium have been assessed in many ways.' One approach involves testing for changes in assessed distributions of future values of, or rates of return on, securities (primarily common stocks). This is the approach used by, for example, Gonedes, Dopuch, and Penman [1976], Benston [1973], Friend and Herman [1964], and Stigler [1964]. Given an explicit or implicit characterization of market equilibrium in terms of probability distributions of securities' future values, this approach essentially assumes that the direct (or own) effects (if any) of changes in disclosure rules will be reflected in investors' assessed values for these distributions' parameters. (Estimates based on observed security prices are used as proxies for investors' assessments.) In some studies, the parameters' values and investors' inferential behavior are pictured as