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Investing Research Articles

Net Flow of Cash from Company to Investors as a Return Indicator

Are company stock buybacks equivalent to cash dividends for stockholders? Conversely, are company sales of stock “undividends” for stockholders? A forthcoming article in the April 2007 Journal of Finance addresses these questions. In the underlying September 2005 paper entitled “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing”, Jacob Boudoukh, Roni Michaely, Matthew Richardson and Michael Roberts compare the predictive powers of several alternative measures of company payout encompassing dividends, stock repurchases and stock issuances. Using a maximum sample period of 1926-2003 (with stock repurchase data available only since 1971), they find that: Keep Reading

What Puts Brits in the Mood (for Buying or Selling Stocks)?

Do macroenvironmental variables affect stock returns by influencing aggregate investor mood? In their February 2007 paper entitled “Mood and Uk Equity Pricing”, Michael Dowling and Brian Lucey investigate the relationship between between a variety of mood variables (temperature, precipitation, wind speed, geomagnetic storms, Seasonal Affective Disorder, Daylight Savings Time Changes and lunar phases) and returns for a broad UK stock index and a small-capitalization UK stock index. Using daily data for the period 12/12/04-11/10/04, they conclude that: Keep Reading

Fear Factor?

In one of the financial markets alternate universes, anchored on the Fama-French three-factor model, the central explanatory theme is reward-for-risk derived from market (equity) premium , the value premium and the size effect. Within this model, each factor presents to investors an opportunity to boost mean return in exchange for bearing more violent variation of return. The Carhart four-factor model adds a momentum effect as an additional risk factor. Should implied market volatility (the “investor fear gauge”), as measured by such variables as the CBOE Volatility Index (VIX) be a fifth risk factor? In their February 2007 paper entitled “Fear and the Fama-French Factors”, Robert Durand, Dominic Lim and Kenton Zumwalt examine the case for adding investor expectations for overall market volatility (a “fear factor”) to establish a five-factor model of equity market behavior. Using daily data for the period 2/93-12/03, they find that: Keep Reading

Rise of the Machines? Attack of the Clones?

Do real live hedge funds beat mechanical trading systems designed to replicate their statistical return distribution and diversification properties? In their February 2007 paper entitled “Replication-Based Evaluation of Hedge Fund Performance”, Harry Kat and Helder Palaro update their comparison of the after-fee performances of a wide range of hedge funds to the performances of mechanical replicants. In short, they attempt to isolate true hedge fund outperformance by pitting each actual fund against a replicant that mechanically trades a basket of Eurodollar, 5-year note, 10-year note, S&P 500, Russell 2000 and GSCI futures. Their replication process assumes an existing investor portfolio (to be hedged) that is 50% S&P 500 index and 50% long-term T-bonds. Using return data for 2073 individual hedge funds and 875 funds of hedge funds through November 2006, they find that: Keep Reading

Bear Claus

As the esteemed, erudite chorus of the downside constantly reminds us, Bear Claus: Keep Reading

The Quarterly Earnings Forecast Walk-Down

How do analyst earnings forecasts vary across financial reporting periods? Does the desire of analysts to maintain a good relationship with firm management affect earnings forecasts? In their February 2007 paper entitled “Relationship Incentives and the Optimistic/Pessimistic Pattern in Analysts’ Forecasts”, Robert Libby, James Hunton, Hun-Tong Tan and Nicholas Seybert report the results of controlled blind experiments involving experienced sell-side financial analysts that address these questions. Using information gained from “training sessions” for a group of 47 analysts from a single large investment banking/brokerage firm and 34 analysts from a medium-sized regional brokerage firm, they conclude that: Keep Reading

The Diversity and Persistence of Quacks

Suppose quack financial advisors offered their services to naive investors. What would happen? In the December 2005 version of his paper entitled “The Market for Quacks”, Ran Spiegler applies game theory to a scenario that fits by analogy. He imagines a group of “quacks” in a price competition to attract and retain “patients” who recover with some probability, regardless of whether they pay a quack for “treatment.” If the patients were rational, they would induce that the quack services are worthless and would acquire none. However, if the patients succumb to anecdotal evidence (random, casual stories rather than statistically reliable analyses), he deduces that: Keep Reading

Buy Stocks of Companies Experts Hate?

Are the most admired companies the best investments? Or, is current state of admiration a contrarian indicator for future returns? In their February 2007 paper entitled “Stocks of Admired Companies and Despised Ones”, Deniz Anginer, Kenneth Fisher and Meir Statman test these hypotheses. The authors define state of admiration using Fortune magazine’s annual survey-based lists of “America’s Most Admired Companies.” Survey respondents are senior executives, directors and securities analysts, and the questions asked seemingly relate indirectly or directly to the investment value of the companies named. Using these lists for April 1983 (survey inception) through March 2006, associated stock return data and a separate survey of high-net worth investors, they conclude that: Keep Reading

Hedge Funds Versus Mutual Funds

How are hedge funds like, and not like, mutual funds? How is the hedge fund industry likely to evolve? In his February 2007 paper entitled “Hedge Funds: Past, Present and Future”, Rene Stulz compares the performance and risks of hedge funds to those of mutual funds and examines the likelihood that hedge funds will become more like mutual funds in the future. Based on a review of relevant research, he concludes that: Keep Reading

Aggregate Investor Sentiment and Stock Returns

Is aggregate investor sentiment a useful trading indicator? For what kinds of stocks is sentiment trading most likely to work? In their December 2006 paper entitled “Investor Sentiment in the Stock Market”, Malcolm Baker and Jeffrey Wurgler summarize a top down approach to addressing these questions, focusing on the measurement of aggregate sentiment and its relationship to stock returns. They devise a long-run aggregate sentiment index derived from principal component analysis of six indicators: trading volume as measured by NYSE turnover; the dividend premium; the closed-end fund discount; the number of and first-day returns on Initial Public Offerings; and, the equity share in new issues. Using this index and stock return data for 1966-2005, they conclude that: Keep Reading

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