2015 - Working Papers: Finance, Accounting and Insurance
Execution costs of small retail stock investors, 48 pp.
M. Abudy and A. Wohl
(Working Paper No. 9/2015)
Reseach no.: 03650100
A common assumption is that liquidity traders are not only informationless, but also impatient and naive in their trading. We focus on small retail stock investors (SRI) as a proxy for liquidity traders. We find that SRI are indeed informationless but not so impatient or naive. In half of the cases SRI use limit orders and more so for high-spread stocks. They also tend to act as "takers" when spreads are narrower than their average over time. Therefore, their execution costs (0.099%) are less than the half quoted spread (0.233%). Execution costs of sellers are larger than those of buyers.
Cross-firm real earnings management, 43 pp.
E. Einhorn, N. Langberg and T. Versano
(Working Paper No. 10/2015)
Research no.: 01450100
There is ample empirical evidence documenting that stockholders can learn about the fundamental value of any particular firm from observing the earnings announcements of other firms that operate in the same industry. We argue that such intra-industry information transfers may motivate managers to mislead stockholders about the value of their firm not only by manipulating their own earnings report but also by influencing the earnings reports of rival firms. Managers obviously do not have access to the accounting system of peer firms, but they can nevertheless influence the earnings reports of rival firms by distorting real transactions that relate to the product market competition. We demonstrate such managerial behavior, which we refer to as cross-firm real earnings management, and explore its potential consequences within an industry setting with imperfect (non-proprietary) accounting information. Our analysis interestingly suggests that the practice of cross-firm real earnings management, although involving the distortion of real production decisions in the direction that promotes stock prices at the expense of economic profits, may nevertheless increase the firms’ fundamental value in equilibrium.
The precision of information in stock prices, and its relation to disclosure and cost of equity, 47 pp.
E. Amir and S. Levi
(Working Paper No. 11/2015)
Research no.: 08150100
We estimate the precision of information that prices communicate about firm value, and examine its relation to public disclosure and the cost of equity. We find public disclosure increases the precision of information in prices. For example, stock returns on earnings announcement days reflect the change in the long-term value of the firm more precisely than returns on other days. Similarly, precision of information in prices is higher for firms that voluntarily disclose earnings guidance, and precision has increased for firms that disclose more information following the Sarbanes-Oxley Act. Testing the consequences of higher precision of information in prices, we find it to be associated with a lower cost of equity capital. Our evidence supports the theory that increasing the precision of investor information on the value of the firm will lower its cost of capital.
Synchronized arbitrage and the value of public announcements, 57 pp.
R. Zuckerman
(Working Paper No. 12/2015)
Research no.: 07150100
This paper tests the idea that arbitrageurs use public announcements as a synchronizing signal. I find that firms publicly identified by hedge fund managers as being overvalued underperform their respective benchmarks by 324 to 376 basis points per month, during the 24 months subsequent to the public announcement. In contrast, firms identified by managers as being undervalued do not overperform their benchmarks. I find evidence of coordination among arbitrageurs through an increase in post-event short selling and changes in funds’ derivative positions. Finally, I find that the long-short return disparity cannot be resolved by common explanations, such as varying manager skill, short sales constraints, analyst downgrades or slow information diffusion, but is rather derived from managers’ idiosyncratic ability to predict future accounting deficiencies and negative earnings news.
Trust and investment management: The effects of manager trustworthiness on hedge fund investments, 36 pp.
A. Pareek and R. Zuckerman
(Working Paper No. 13/2015)
Research no.: 07140100
This paper studies the effect of perceived manager trustworthiness on hedge fund investment. Controlling for past-performance, we find that hedge fund managers whose photographs are rated as more trustworthy are able to attract greater fund flows, in the medium performance range, and have a less convex flow-performance relationship compared to the managers rated as less trustworthy. We also find that "trustworthy" managers are more likely to survive given poor past-performance and generate lower risk-adjusted returns when compared to managers who are perceived as less trustworthy. We attribute this phenomenon to over-investment with "trustworthy" managers caused by an investor bias.
