Browsing by Subject "Stocks--Prices"
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Item Evidence on the fundamental determinants of investors' expectations of risk(2003-05) Lawson, Andreas Uwe; Magee, Stephen P.; Tse, Senyo YawoPrevious research shows that a number of firm characteristics explain the crosssection of common stock returns. These characteristics either (i) are functions of stock prices, or (ii) are not functions of stock prices and hence depend only on accounting disclosures. Characteristics in the first class reflect and summarize investors’ risk opinions while characteristics in the second class contribute to the determination of investors’ risk opinions. This study draws a distinction between these two classes in order to parsimoniously characterize the accounting disclosures that determine investors’ opinions of risk and to evaluate the importance of accounting disclosures for determining investors’ opinions relative to non-accounting information. The results show that: (1) Investors’ opinions about systematic risk are determined by profitability, firm size and the growth of firm size. (2) There are strong seasonal patterns in the expected return premia of the accounting determinants of opinions. Specifically, between January and September, the premia for profitability, size and size growth are negative. Between October and December, the premia for profitability and size are positive and the premium for growth continues to be negative. (3) Between January and September, accounting determinants explain 81% to 91% of the variation in the cross-section of average returns. Between October and December, accounting determinants explain 77% to 88% of the variation in returns. This suggests that, although investors’ opinions depend on nonaccounting information, investors’ opinions are determined primarily by accounting disclosures. (4) The cross-sectional variation that accounting determinants do not explain has implications for risk measurement; its magnitude indicates that accounting disclosures do not contain sufficient information about investors’ opinions to effectively measure the risk of equities with extreme exposure to non-accounting determinants.Item Executive equity incentives, earnings management and corporate governance(2004) Weber, Margaret Liebenow; Freeman, Robert Noel, 1946-This paper investigates whether executive wealth sensitivity to stock price fluctuations or executive equity transactions serve as incentives for earnings management. I find that increasing wealth sensitivity, most notably the sensitivity arising from stock holdings, is associated with CEO abnormal accrual usage. Further, the relation between abnormal accruals and stock-based wealth sensitivity is consistent with incomesmoothing earnings management. Since smooth earnings are associated with higher stock valuations my findings suggest that wealth exposure arising from stock ownership is effective in aligning the interests of CEOs and shareholders. I also analyze whether governance quality influences the wealth sensitivityabnormal accrual relation. While strong governance is associated with lower overall levels of abnormal accruals, governance does not significantly influence the association between CEO stock-based wealth sensitivity and earnings smoothing. The failure of governance to curb earnings management supports the proposition that income smoothing is an expected outcome of efficient contracting consistent with incentive alignment. I also examine whether executives opportunistically manage earnings in order to maximize the value of their stock transactions. My findings suggest managers behave opportunistically. Specifically, I find an increase in income-decreasing accruals preceding large stock purchases by CEOs as well as an increase in income-increasing accruals following, but not preceding, large stock sales by CEOs; both suggest trading on private information. I also document that governance does not materially affect CEO use of abnormal accruals around transactions.Item Institutional trading and stock price efficiency(2007) Shu, Tao, 1975-; Titman, SheridanMy dissertation finds that the effects of institutional trading on stock price efficiency are significant and complicated. On one hand, I present evidence that institutional trading in general improves price efficiency. In particular, major stock market anomalies such as stock return momentum, post earnings announcement drift, and the book-to-market effect are much stronger in stocks with lower institutional trading volume. On the other, some institutional trading behaviors could hamper stock price efficiency even though institutions are generally rational arbitrageurs. Specifically, I show that when institutions act as positive-feedback traders, their trading contributes to stock return momentum and hampers prices efficiency.Item Two essays on capital structure(2004) Kayhan, Ayla; Titman, SheridanThis dissertation consists of two essays on capital structure. Essay one, joint with Sheridan Titman, examines how cash flows, investment expenditures and stock price histories affect corporate debt ratios. Consistent with earlier work, we find that these variables have a substantial influence on changes in capital structure. Specifically, stock price changes and financial deficits (i.e., the amount of external capital raised) have strong influences on capital structure changes, but in contrast to previous conclusions, we find that their effects are subsequently at least partially reversed. These results indicate that although a firm’s history strongly influence their capital structures, that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure. Essay two examines how managerial entrenchment, defined here as the extent to which managers can act in their self-interest, influences the levels of and changes in debt ratios. Consistent with prior research, I find that entrenched managers prefer lower leverage. Analyses of financing decisions indicate that they achieve lower debt ratios by issuing more equity and retaining more profits. Debt issuance, however, does not appear to be influenced by entrenchment. Examination of leverage changes suggests that increases in debt ratios in response to external financing needs are similar for all types of managers. Finally, building on the documented market timing effect on capital structure, I find that decreases in leverage due to equity issuance following increases in stock prices are greater when managers are entrenched.Item Two essays on market behavior(2006) Glushkov, Denys Vitalievich; Titman, Sheridan; Wessels, RobertoMy dissertation consists of two essays which investigate how the reaction of market participants to aggregate and firm-specific information affects asset prices and firms’ corporate choices. The first essay studies the implications of investor sentiment for asset prices. It develops a novel stock-by-stock measure of investor sentiment which I call sentiment beta. Using this measure I test several hypotheses. First hypothesis postulates that sentiment affects stocks of some firms more than others due to differences in firm characteristics. Second hypothesis predicts that more sentiment sensitive stocks are more likely to be held by individual investors. Consistent with the first hypothesis, I find that more sentiment-sensitive stocks are smaller, younger, have greater short-sales constraints, idiosyncratic volatility and lower dividend yields. Given size and volatility, high sentiment beta stocks have greater analyst coverage and institutional ownership, higher likelihood of S&P500 membership, higher turnover and lower book-to-market ratios. Stocks that are more exposed to sentiment changes deliver lower future returns, which is inconsistent with the risk factor interpretation of investor sentiment. Institutional analysis reveals that institutions stayed away from sentiment-sensitive stocks in the 1980’s, but held more of these stocks since the early 1990’s. The second essay tests a catering hypothesis which predicts that firm managers concerned about the current stock price will deviate from the optimal policy in setting profitability and revenue growth targets due to the incentives to cater to the time-varying relative investor demand for firms with different composition between revenue growth and profit margins. I develop a measure which I call a revenue growth premium and document three results consistent with catering interpretation: 1) time periods when the premium is high tend to be followed by “higher-than-expected” sales and investment growth, advertising, acquisitions and R&D; 2) catering to the premium is more pronounced among firms where managers care more about the short-term stock price; 3) consistent with “bounded rationality” version of catering story, trading strategy based on longing stocks of firms with high margin surprises and shorting firms with low margin surprises when the premium is high yields 40/bp per month after adjusting for risk and post-earnings announcement drift.