Finance Department Faculty Publications Copyright (c) 2013 University of Nebraska - Lincoln All rights reserved. http://digitalcommons.unl.edu/financefacpub Recent documents in Finance Department Faculty Publications en-us Mon, 29 Apr 2013 13:05:44 PDT 3600 Shareholder Returns from Supplying Trade Credit http://digitalcommons.unl.edu/financefacpub/27 http://digitalcommons.unl.edu/financefacpub/27 Tue, 29 Jan 2013 19:10:28 PST We examine shareholder wealth implications of supplying financing to customers. Robust results demonstrate that excess returns and trade receivables are directly and significantly related. Further evidence indicates the value of receivables is higher for suppliers with stronger motives relating to operating and contracting costs. The results also suggest a discounted value of receivables for financially unconstrained firms. Overall, we conclude that investors recognize trade credit as an effective instrument in mitigating frictions hindering sales growth. Thus, certain suppliers are positioned to derive increased strategic benefits from credit policy.

]]> Matthew D. Hill et al. Building a Better Mousetrap: Enhanced Dollar Cost Averaging http://digitalcommons.unl.edu/financefacpub/26 http://digitalcommons.unl.edu/financefacpub/26 Tue, 21 Feb 2012 12:03:45 PST This paper presents a simple, intuitive investment strategy that improves upon the popular dollarcost- averaging (DCA) approach. The investment strategy, which we call enhanced dollar-costaveraging (EDCA), is a simple, rule-based strategy that retains most of the attributes of traditional DCA that are appealing to most investors but yet adjusts to new information, which traditional DCA does not. Simulation results show that the EDCA strategy reliably outperforms the DCA strategy in terms of higher dollar-weighted returns about 90% of the time and nearly always delivers greater terminal wealth for reasonable values of the risk premium. EDCA is most effective when applied to high volatility assets, when cash flows are highly sensitive to past returns, and during secular bear markets. Historical back-testing on equity indexes and mutual funds indicates that investor dollar-weighted returns can be enhanced by between 30 and 70 basis points per year simply by switching from DCA to EDCA.

]]> Lee Dunham et al. The Predictive Content of Aggregate Analyst Recommendations http://digitalcommons.unl.edu/financefacpub/25 http://digitalcommons.unl.edu/financefacpub/25 Tue, 15 Nov 2011 10:06:38 PST Using more than 350,000 sell-side analyst recommendations from January 1994 to August 2006, this paper examines the predictive content of aggregate analyst recommendations. We find that changes in aggregate analyst recommendations forecast future market excess returns after controlling for macroeconomic variables that have been shown to influence market returns. Similarly, changes in industry-aggregated analyst recommendations predict future industry returns. Changes in aggregate analyst recommendations also predict one-quarter-ahead aggregate earnings growth. Overall, our results suggest that analyst recommendations contain market- and industry-level information about future returns and earnings.

]]> John S. Howe et al. Heterogeneous Beliefs and Risk Neutral Skewness http://digitalcommons.unl.edu/financefacpub/24 http://digitalcommons.unl.edu/financefacpub/24 Tue, 20 Sep 2011 10:57:43 PDT This study tests whether investor belief differences affect the cross-sectional variation of risk-neutral skewness, using data on firm-level stock options traded on the CBOE from 2003 to 2006. Using well known proxies for heterogeneous beliefs, we find that stocks with greater belief differences have more negative skews, even after controlling for systematic risk and other firm-level variables known to affect skewness. This result also goes beyond the net price pressure hypothesis suggested by Bollen and Whaley (2004). Factor analysis identifies latent variables linked to systematic risk and belief differences. The belief factor explains more variation in the risk-neutral density than the risk-based factor. Our results suggest that belief differences may be one of the unexplained firm-specific components affecting skewness described in Dennis and Mayhew (2002).

]]> Geoffrey C. Friesen et al. Quantifying Cognitive Biases in Analyst Earnings Forecasts http://digitalcommons.unl.edu/financefacpub/23 http://digitalcommons.unl.edu/financefacpub/23 Thu, 09 Dec 2010 07:12:43 PST This paper develops a formal model of analyst earnings forecasts that discriminates between rational behavior and that induced by cognitive biases. In the model, analysts are Bayesians who issue sequential forecasts that combine new information with the information contained in past forecasts. The model enables us to test for cognitive biases, and to quantify their magnitude. We estimate the model and find strong evidence that analysts are overconfident about the precision of their own information and also subject to cognitive dissonance bias. But they are able to make corrections for bias in the forecasts of others. We show that our measure of overconfidence varies with book-to-market ratio in a way consistent with the findings of Daniel and Titman (1999). We also demonstrate the existence of these biases in international data.

Archived here is the preprint version, also found on SSRN.

]]> Geoffrey C. Friesen et al. The Effect of CEO Tenure on the Relation between Firm Performance and Turnover http://digitalcommons.unl.edu/financefacpub/22 http://digitalcommons.unl.edu/financefacpub/22 Thu, 12 Aug 2010 10:54:55 PDT We analyze the effect of CEO tenure on the relation between firm performance and forced turnover. We find that the performance-forced turnover relation is conditional on CEO tenure. Our results suggest a constant negative relation between firm performance and forced turnover throughout an inside CEO’s tenure. Founders are entrenched early in their careers but held accountable for firm performance later in their careers. We find evidence that outside hires experience a probationary period, followed by a period of apparent entrenchment during their intermediate years that weakens later in their tenure.

]]> Sam Allgood et al. Executive Compensation and the Maturity Structure of Corporate Debt http://digitalcommons.unl.edu/financefacpub/21 http://digitalcommons.unl.edu/financefacpub/21 Tue, 01 Jun 2010 13:58:55 PDT Executive compensation influences managerial risk preferences through executives’ portfolio sensitivities to changes in stock prices (delta) and stock return volatility (vega). Large deltas discourage managerial risk-taking, while large vegas encourage risk-taking. Theory suggests that short-maturity debt mitigates agency costs of debt by constraining managerial risk preferences. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and short-maturity debt. We also find that shortmaturity debt mitigates the influence of vega- and delta-related incentives on bond yields. Overall, our empirical evidence shows that short-term debt mitigates agency costs of debt arising from compensation risk.

]]> Paul Brockman et al. Monitoring by the Financial Press and Forced CEO Turnover http://digitalcommons.unl.edu/financefacpub/20 http://digitalcommons.unl.edu/financefacpub/20 Thu, 08 Apr 2010 10:03:25 PDT This paper examines Wall Street Journal news stories about 79 firms that forced CEO turnover and a matched sample of firms that did not force CEO turnover. In the two years prior to turnover, firms in the forced-turnover sample were the subjects of 76% more news stories about poor firm performance despite being from the same industry, of similar size, and similar performance as a sample of matched firms. Overall, the evidence suggests that scrutiny of poor firm performance by the financial press increases the likelihood of forced CEO turnover.

]]> Kathleen A. Farrell et al. P/E Changes: Some New Results http://digitalcommons.unl.edu/financefacpub/19 http://digitalcommons.unl.edu/financefacpub/19 Fri, 02 Apr 2010 10:59:06 PDT The P/E ratio is often used as a metric to compare individual stocks and the market as a whole relative to historical valuations. We examine the factors that affect changes in the inverse of the P/E ratio (E/P) over time in the broad market (S&P 500 Index). Our model includes variables that measure investor beliefs and changes in tax rates and shows that these variables are important factors affecting the P/E ratio. We extend prior work by correcting for the presence of a long-run relation between variables included in the model. As frequently conjectured, changes in the P/E ratio have predictive power. Our model explains a large portion of the variation in E/P and accurately predicts the future direction of E/P, particularly when predicted changes in E/P are large or provide a consistent signal over more than one quarter.

]]> Thomas S. Zorn et al. Additions to corporate boards: The effect of gender http://digitalcommons.unl.edu/financefacpub/18 http://digitalcommons.unl.edu/financefacpub/18 Fri, 19 Feb 2010 09:33:39 PST During the decade of the 1990s the number of women serving on corporate boards increased substantially. Over this decade, we show that the likelihood of a firm adding a woman to its board in a given year is negatively affected by the number of woman already on the board. The probability of adding a woman is materially increased when a female director departs the board. Adding a director, therefore, is clearly not gender neutral. Although we find that women tend to serve on better performing firms, we also document insignificant abnormal returns on the announcement of a woman added to the board. Rather than the demand for women directors being performance based, our results suggest corporations responding to either internal or external calls for diversity.

]]> Kathleen A. Farrell et al. Impact of firm performance expectations on CEO turnover and replacement decisions http://digitalcommons.unl.edu/financefacpub/17 http://digitalcommons.unl.edu/financefacpub/17 Thu, 11 Feb 2010 14:27:41 PST Our analysis suggests that boards focus on deviation from expected performance, rather than performance alone, in making the CEO turnover decision, especially when there is agreement (less dispersion) among analysts about the firm’s earnings forecast or there are a large number of analysts following the firm. In addition, our results suggest that boards are more likely to appoint a CEO that will change firm policies and strategies (i.e., an outsider) when forecasted 5-year EPS growth is low and there is greater uncertainty (more dispersion) among analysts about the firm’s long-term forecasts.

]]> Kathleen A. Farrell et al. How do firms adjust director compensation? http://digitalcommons.unl.edu/financefacpub/16 http://digitalcommons.unl.edu/financefacpub/16 Wed, 10 Feb 2010 15:00:17 PST This paper examines outside director compensation for a sample of 237 Fortune 500 firms over the 1998-2004 period. We document a trend towards fixed-value equity compensation and away from cash only and fixed-number equity compensation. Adjustments to director compensation are consistent with firms targeting a market level of compensation, and firms that deviate from their market wage symmetrically adjust compensation back toward the market level. We also document the relation between changes in compensation and changes in equity values, and find that upward adjustments begin sooner than downward adjustments. When equity values rise, we find virtually no immediate offset to director compensation. However, when equity values fall, fixed-number equity compensation is adjusted in the same period (by awarding more shares or options) to offset the loss of income by almost one-third. Thus, the magnitude of adjustments towards the market wage level is symmetric, but the timing is not.

]]> Kathleen A. Farrell et al. Ex–Dividend Day Price and Volume: The Case of 2003 Dividend Tax Cut http://digitalcommons.unl.edu/financefacpub/15 http://digitalcommons.unl.edu/financefacpub/15 Fri, 05 Feb 2010 09:13:43 PST We examine the impact of the 2003 dividend tax cut, which removes the differential taxation between dividends and capital gains for individual investors, on the ex–dividend day price and trading volume. We find the ex–dividend day price and volume are affected by taxes, risk, and transaction costs. The ex–dividend day price drop ratio (excess return) increases (decreases) and dividend clienteles weaken after the tax cut. Ex–dividend day abnormal volume among high dividend yield stocks decreases after the tax cut consistent with a diminished motivation for tax–induced trading. Our results suggest that individual investors have a measurable effect on the ex–dividend day price and trading volume.

]]> Yi Zhang et al. Changes in CEO compensation structure and the impact on firm performance following CEO turnover http://digitalcommons.unl.edu/financefacpub/14 http://digitalcommons.unl.edu/financefacpub/14 Fri, 05 Feb 2010 09:10:16 PST We document changes in compensation structure following CEO turnover and relate them to future performance. Compared to outgoing CEOs, incoming CEOs derive a significantly greater percentage of their compensation from option grants and new stock grants. The voluntary turnover sample shows similar changes in compensation structure while the forced turnover sample results suggest that new stock grants drive the significant increase in incentive compensation following turnover. Post-turnover performance is positively associated with new stock grants as a percentage of total compensation in the full sample and when analyzing forced and voluntary turnovers separately. We find limited evidence that future operating income is positively associated with option grants following forced turnover. Post-turnover improvement in operating income is positively associated with an increase in new stock grants for the incoming relative to the outgoing CEO.

]]> David W. Blackwell et al. Dividend Policy, Creditor Rights, and the Agency Costs of Debt http://digitalcommons.unl.edu/financefacpub/13 http://digitalcommons.unl.edu/financefacpub/13 Tue, 29 Sep 2009 10:38:25 PDT We show that country-level creditor rights influence dividend policies around the world by establishing the balance of power between debt and equity claimants. Creditors demand and managers consent to a more restrictive payout policy as a substitute for weak creditor rights in an effort to minimize the firm’s agency costs of debt. Using a sample of 120,507 firm-years from 52 countries, we find that both the probability and amount of dividend payouts are significantly lower in countries with poor creditor rights. A reduction in the creditor rights index from its highest value to its lowest value implies a 41% reduction in the probability of paying a dividend, and a 60% reduction in dividend payout ratios. These results are robust to numerous control variables, sample variations, model specifications, and alternative hypotheses. We also show that the agency costs of debt play a more decisive role in determining dividend policies than the previously documented agency costs of equity. Overall, our findings contribute to the growing literature arguing that creditors exert significant influence over corporate decision-making outside of bankruptcy.

]]> Paul Brockman et al. Securitization of Catastrophe Mortality Risks http://digitalcommons.unl.edu/financefacpub/12 http://digitalcommons.unl.edu/financefacpub/12 Tue, 16 Jun 2009 08:52:41 PDT Securitization with payments linked to explicit mortality events provides a new investment opportunity to investors and financial institutions. Moreover, mortality-linked securities provide an alternative risk management tool for insurers. As a step toward un¬derstanding these securities, we develop an asset pricing model for mortality-based securities in an incomplete market framework with jump processes. Our model nicely explains opposite market outcomes of two existing pure mortality securities.

]]> Yijia Lin et al. Price Trends and Patterns in Technical Analysis: A Theoretical and Empirical Examination http://digitalcommons.unl.edu/financefacpub/11 http://digitalcommons.unl.edu/financefacpub/11 Wed, 27 May 2009 09:24:48 PDT While many technical trading rules are based upon patterns in asset prices, we lack convincing explanations of how and why these patterns arise, and why trading rules based on technical analysis are profitable. This paper provides a model that explains the success of certain trading rules that are based on patterns in past prices. We point to the importance of confirmation bias, which has been shown to play a key role in other types of decision making. Traders who acquire information and trade on the basis of that information tend to bias their interpretation of subsequent information in the direction of their original view. This produces autocorrelations and patterns of price movement that can predict future prices, such as the “head-and-shoulders” and “double-top” patterns. The model also predicts that sequential price jumps for a particular stock will be positively autocorrelated. We test this prediction and find that jumps exhibit statistically and economically significant positive autocorrelations.

]]> Geoffrey C. Friesen et al. Financial Disclosure and Speculative Bubbles: An International Test of Asymmetry http://digitalcommons.unl.edu/financefacpub/10 http://digitalcommons.unl.edu/financefacpub/10 Wed, 06 May 2009 08:29:24 PDT This paper applies two tests of asymmetry to examine if the quality of a country’s financial disclosure system affects the likelihood of speculative bubbles. We examine the hypothesis that stock prices of firms in countries with a low level of financial disclosure are more likely to experience bubbles. The countries, ranked in order of disclosure levels, are the United States, Canada, the United Kingdom, the Netherlands, France, Japan, Germany, and Switzerland (Saudagaran and Biddle (1992)). The findings based on the third-order Markov chain test suggest the presence of asymmetry in dollar-denominated quarterly real returns of Japan, a country with a relatively low level of disclosure. The asymmetric pattern indicates the non-random walk return pattern of Japan. The results based on the time reversibility test indicate that monthly real returns in both dollar-denominated and local currencies of Germany increase slower than they decrease. Such “slow-up and fast-down” dynamic is consistent with the presence of a bubble.

]]> Benjamas Jirasakuldech et al. Financial Disclosure and Speculative Bubbles: An International Comparison http://digitalcommons.unl.edu/financefacpub/9 http://digitalcommons.unl.edu/financefacpub/9 Wed, 06 May 2009 08:29:23 PDT This paper examines if a country’s financial disclosure system affects the likelihood of speculative bubbles. We compare stock returns of eight countries that differ in the quality of their disclosure systems as ranked by Saudagaran and Biddle (1992). We examine the hypothesis that stock prices of firms in countries with a low level of financial disclosure are more prone to speculative bubbles. We employ the duration dependence model developed by McQueen and Thorley (1994) to test for the presence of bubbles. We found that the returns in Japan, a country with a relatively low level of disclosure, shows evidence of a bubble.

]]> Benjamas Jirasakuldech et al. The Effects of Airline Strikes on Struck and Nonstruck Carriers http://digitalcommons.unl.edu/financefacpub/8 http://digitalcommons.unl.edu/financefacpub/8 Tue, 05 May 2009 10:14:20 PDT This study provides new evidence on the industry-wide impact of strikes by investigating how strikes have affected the values of struck and nonstruck airlines. Using stock market data for the years 1963-86, the authors show that most strikes adversely affected the value of struck airlines' stock but enhanced the stock value of nonstruck carriers. The results also show that strikes before October 1978, which marked the end of strict regulation of the industry and of the employers' mutual aid pact, had some effects different from those of strikes after that date.

]]> Richard De Fusco et al.