Investing Research Articles

Why do small capitalization stocks as a group tend to outperform the broad market? Do small firms represent relatively high risk of financial distress (with attendant reward), or are they victims of systematic investor overreaction to past poor performance? In the 2006 update of their paper entitled “Can Overreaction Explain Part of the Size Premium?” Ozgur Demirtas and Burak Güner investigate irregularities in the historical returns of small capitalization stocks to identify the source of the size effect. Using returns and financial data for NYSE/Amex/Nasdaq stocks over the period July 1971 through June 2001, they conclude that: Keep Reading

Are investor actions well-calibrated when they punish or reward the stocks of all the companies in an industry based on the earliest earnings announcements among peer companies? In the December 2006 version of their paper entitled “Overreaction to Intra-Industry Information Transfers?”, Jacob Thomas and Frank Zhang test the efficiency of intra-industry information transfers by measuring whether the price responses of non-announcing firms to earlier peer group earnings announcements systematically relate to subsequent price responses when these same companies announce their own earnings a few days later. Using a sample of earnings announcement dates, stock returns and firm financial variables spanning 132 quarters over 1973-2005 (245,742 firm-quarter observations), they conclude that: Keep Reading

In his 2007 book Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals, David Aronson opens with two contentions: (1) “much of the wisdom comprising the popular version of TA does not qualify as legitimate knowledge;” and, (2) “TA must evolve into a rigorous observational science if it is to deliver on its claims and remain relevant.” Taken in parts, this book offers sound methods for analysis. Taken as an integrating whole, it offers insightful context for evaluating a broad range of financial analyses/claims presented by others. Here is a chapter-by-chapter review of some of the insights in this book: Keep Reading

When investors shop for mutual funds internationally, what variables should they consider as indicators of potential outperformance? In their November 2006 paper entitled “The Determinants of Mutual Fund Performance: A Cross-Country Study”, Miguel Ferreira, Antonio Miguel and Sofia Ramos relate risk-adjusted performance for mutual funds around the world to: (1) fund characteristics such as size, age, fees (initial charges, annual charges, and redemption charges), management structure and management tenure; (2) country variables, such as economic development, financial development and investor protection; and, (3) management geographic familiarity via segmentation into domestic, foreign and global funds. Using a sample of 10,568 open-end actively managed equity funds from 19 countries for the period 1999-2005, they conclude that: Keep Reading

Do mutual fund investors pay for performance, or for something else? Are some of them oblivious to fund performance? In their November 2006 paper entitled “Yet Another Puzzle? The Relation between Price and Performance in the Mutual Fund Industry”, Javier Gil-Bazo and Pablo Ruiz-Verdu explore the relationship between mutual fund fees and before-fee performance. Using monthly data for diversified and seasoned U.S. domestic equity mutual funds during 1961-2003 (538,813 fund-month observations), they find that: Keep Reading

Is naked short selling a problem? The incentives for it seem direct and strong, while both regulation and enforcement against it seem weak. Just getting the facts about its extent is problematic. Here are three relevant questions: Keep Reading

Do firms issue more stock when their officers see compelling uses for new funds, or when these executives think company stock is overvalued? In the November 2006 draft of their paper entitled “Behavioral and Rational Explanations of Stock Price Performance around SEO’s: Evidence from a Decomposition of Market-to-Book Ratios”, Michael Hertzel and Zhi Li first use firm accounting data to decompose market-to-book ratios into misvaluation and growth opportunity components, and then examine how these components relate to company stock returns after secondary offerings. Using financial and stock return data for a sample of 4,325 seasoned equity offerings during 1970-2004, they conclude that: Keep Reading

Do investors really sell winners and hold losers, thereby helping the market beat them? In other words, are they reluctant to admit mistakes? In their November 2006 paper entitled “Is the Aggregate Investor Reluctant to Realize Losses? Evidence from Taiwan”, Brad Barber, Yi-Tsung Lee, Yu-Jane Liu and Terrance Odean investigate whether the average investor exhibits the disposition effect, the tendency to sell winning investments at a faster rate than losing investments. Using data for all trades on the Taiwan Stock Exchange during 1995-1999 (over one billion trades by nearly four million traders), they conclude that: Keep Reading

Investors might suppose that a company repurchases shares when firm officers believe that the market is undervaluing its stock. Since these officers are highly informed, the stock is subsequently likely to outperform the market. How could executives be sure that their company’s stock is undervalued? In their November 2006 paper entitled “Earnings Management and Firm Performance Following Open-market Repurchases”, Guojin Gong, Henock Louis and Amy Sun investigate whether company management orchestrates stock undervaluation through earnings management (abnormal accruals) prior to executing share repurchases. Using financial and stock price data over the period 1984-2002 (1,720 open-market repurchase announcements that are followed by actual repurchases), they conclude that: Keep Reading

Jim Cramer sent comments on our evaluations of his advice (“Jim Cramer Deconstructed” and “Cramer Offers You His Protection”). Because of the nature of Mr. Cramer’s initial message, we retain the personal nature of the subsequent exchange with slight editing (spacing and punctuation) for readability, and substitution of descriptive links for long URLs. The correspondence follows: Keep Reading