Financial Analyst Journal

Sullivan, Rodney N.

doi: 10.2469/faj.v65.n4.1pmid: N/A

Chordia, Tarun; Goyal, Amit; Sadka, Gil; Sadka, Ronnie; Shivakumar, Lakshmanan

doi: 10.2469/faj.v65.n4.3pmid: N/A

The post-earnings-announcement drift is a longstanding anomaly that conflicts with market efficiency. This study documents that the post-earnings-announcement drift occurs mainly in highly illiquid stocks. A trading strategy that goes long high-earnings-surprise stocks and short low-earnings-surprise stocks provides a monthly value-weighted return of 0.04 percent in the most liquid stocks and 2.43 percent in the most illiquid stocks. The illiquid stocks have high trading costs and high market impact costs. By using a multitude of estimates, the study finds that transaction costs account for 70–100 percent of the paper profits from a long–short strategy designed to exploit the earnings momentum anomaly.

Statman, Meir; Glushkov, Denys

doi: 10.2469/faj.v65.n4.5pmid: N/A

Typical socially responsible investors tilt their portfolios toward stocks of companies with high scores on social responsibility characteristics and shun stocks of companies associated with tobacco, alcohol, gambling, firearms, and military or nuclear operations. Analyzing 1992–2007 returns of stocks rated on social responsibility, this study found that this tilt gave such investors an advantage over conventional investors. The study also found that shunning resulted in a disadvantage for such investors relative to conventional investors. The advantage from tilting toward stocks of companies with high social responsibility scores is largely offset by the disadvantage from the exclusion of stocks of shunned companies. Socially responsible investors can thus do both well and good by adopting the best-in-class method in constructing their portfolios: tilting toward stocks of companies with high scores on social responsibility characteristics but refraining from shunning stocks of any company.

McFarland, Brendan; Pang, Gaobo; Warshawsky, Mark

doi: 10.2469/faj.v65.n4.2pmid: N/A

This study empirically tests whether freezing or closing a defined-benefit (DB) pension plan increases the sponsoring company’s market value. The database used for this study consists of 82 publicly traded U.S. companies that announced freezes/closes in 2003–2007. On the basis of this extensive sample and through a set of parametric and nonparametric tests under the event study methodology, the study finds generally negative or insignificant abnormal returns in stock prices that can be associated with the freeze/close events. Little evidence supports the hypothesis that freezing or closing a DB plan increases company value.

Adams, James; Smith, Donald J.

doi: 10.2469/faj.v65.n4.4pmid: N/A

Recent legislation and accounting rule changes motivate defined-benefit pension plans to manage the interest rate risk arising from volatility in their liabilities, as measured by either the accumulated benefit obligation (ABO) or the projected benefit obligation (PBO). For either measure, asset portfolios comprising equity and fixed-income bonds usually have much lower average durations than do liabilities. This article discusses how interest rate derivatives overlay strategies can be used to reduce or eliminate the negative duration gap. A theoretical model is developed to show how to calculate the ABO and PBO measures and their duration statistics.

Kan, Raymond; Zhou, Guofu

doi: 10.2469/faj.v65.n4.6pmid: N/A

The median is often a better measure than the mean in evaluating a portfolio’s long-term value. The standard plug-in estimate of the median, however, is too optimistic. It has a substantial upward bias that can easily exceed a factor of 2. This article provides an unbiased forecast of the median of a portfolio’s long-term value. It also provides an unbiased forecast of an arbitrary percentile of a portfolio’s long-term value distribution, which enables the construction of the likely range of a portfolio’s long-term value for any given confidence level. The article offers an unbiased forecast of the probability of a portfolio’s long-term value falling within a given interval. The article’s unbiased estimators give a more accurate assessment of a portfolio’s long-term value than do traditional estimators and are useful for long-term planning and investment.

Sullivan, Rodney N.

doi: 10.2469/faj.v65.n4.10pmid: N/A

The associate editor highlights upcoming FAJ articles.