Journal of Business Finance & Accounting

Adaoglu, Cahit; Lasfer, Meziane

doi: 10.1111/j.1468-5957.2011.02233.xpmid: N/A

Abstract: We assess the market valuation of an unusual form of stock dividends, referred to as bonus distributions, which are carried out by transferring the accumulated equity reserves, mainly the inflation revaluation equity reserves, to paid‐in capital leaving the total equity unchanged. In the absence of cash substitution and transaction cost effects, we find positive excess returns on the announcement dates, particularly for the financially weak firms, such as the non‐cash‐dividend‐paying firms. We relate our results to the ‘paid‐in capital hypothesis’ under which firms opt for bonus distributions to mitigate the impact of inflation on their eroding paid‐in capital, to reduce their leverage defined as debt‐to‐paid‐in‐capital ratio, and to increase their credibility and borrowing capacity in a market of limited access to external equity financing. Although our results are also consistent with the retained earnings and signaling hypotheses, we find no support for the attention‐getting, and a weak support for the liquidity enhancement hypotheses observed in other markets.

Grasselli, M. R.

doi: 10.1111/j.1468-5957.2010.02232.xpmid: N/A

Abstract: We apply a utility–based method to obtain the value of a finite–time investment opportunity when the underlying real asset is not perfectly correlated to a traded financial asset. Using the comparison principle for the associated variational inequality, we establish several qualitative properties of the optimal investment boundary, in particular its dependence on correlation and risk aversion. We then use a discrete–time algorithm to calculate the indifference value for this type of real option and present numerical examples for the corresponding investment thresholds. We verify that even in the zero correlation case, whereby none of the risk in the project can be hedged in a financial market, the paradigm of real options can still be applied to value an investment decision, since the opportunity to invest still carries an option value above its net present value. In other words, it is time flexibility itself, more than the possibility of replication, that is the source of the extra value of an investment opportunity. This value, however, quickly erodes at higher levels of risk aversion, and even more so when the project is weakly correlated to financial markets.

Dargenidou, Christina; McLeay, Stuart; Raonic, Ivana

doi: 10.1111/j.1468-5957.2011.02245.xpmid: N/A

Abstract: This paper examines the role of disclosure in assisting market participants to form expectations of future earnings from the accrual content of reported earnings. Using the Transparency and Disclosure ratings prepared by Standard and Poor’s, we show how disclosure and accruals jointly affect the earnings expectations that are incorporated in current stock returns, depending on the magnitude and sign of the changes in net current and net non‐current operating assets.

Wieland, Matthew M.

doi: 10.1111/j.1468-5957.2011.02236.xpmid: N/A

Abstract: This study observes that consensus analysts’ forecasts incorrectly predict an increase in one‐year‐ahead earnings in 28.9% of the firm‐year observations, and that correct (incorrect) firms generate 14.8% (−25.7%) abnormal returns over the next year, on average. The ability to anticipate when analysts’ predicted earnings increases will or will not materialize is therefore potentially important to investors and investment fund managers. This paper develops an empirical model that predicts when analysts’ forecasts will correctly (versus incorrectly) anticipate the direction of the change in upcoming earnings, by exploiting information in (a) the nature of analysts’ characteristics and firms’ earnings predictability, and (b) fundamental analysis of firms’ earnings growth. The model successfully distinguishes between forecasted earnings increases that do (versus do not) materialize and a trading strategy that takes long (short) positions in the portfolio the model identifies as more (less) likely correct generates an average annual abnormal return of 14.1%.

Britten‐Jones, Mark; Neuberger, Anthony; Nolte, Ingmar

doi: 10.1111/j.1468-5957.2011.02244.xpmid: N/A

Abstract: We present an improved method for inference in linear regressions with overlapping observations. By aggregating the matrix of explanatory variables in a simple way, our method transforms the original regression into an equivalent representation in which the dependent variables are non‐overlapping. This transformation removes that part of the autocorrelation in the error terms which is induced by the overlapping scheme. Our method can easily be applied within standard software packages since conventional inference procedures (OLS‐, White‐, Newey‐West‐ standard errors) are asymptotically valid when applied to the transformed regression. Through Monte Carlo analysis we show that it performs better in finite samples than the methods applied to the original regression that are in common usage. We illustrate the significance of our method with three empirical applications.

Puetz, Alexander; Ruenzi, Stefan

doi: 10.1111/j.1468-5957.2010.02237.xpmid: N/A

Abstract: We examine overconfidence among equity mutual fund managers. While overconfidence has been extensively documented among retail investors, evidence from professional investors is scarce. Consistent with theories of overconfidence, we find that fund managers trade more after good past performance. The higher trading activity after good performance is driven by individual portfolio performance, while the market performance has no significant impact. We rule out some alternative explanations for our results like increased trading as a response to tournament incentives, as a response to inflows, or as a rational reaction due to managerial learning about abilities.

Kassimatis, Konstantinos

doi: 10.1111/j.1468-5957.2011.02243.xpmid: N/A

Abstract: Post and Levy (2005) find that investors are risk averse for losses and risk seekers for gains and that stocks which exhibit low risk in bear markets and high potential for gains in bull markets may demand a premium. The present study examines if this type of risk preference creates a premium in UK stock prices using a third‐degree stochastic dominance test. We find that an arbitrage portfolio long on stocks with low past downside risk in bear markets and high past upside potential in bull markets and short on stocks with high past downside risk in bear markets and low past upside potential in bull markets generates a premium of 2.89% per month. This premium cannot be explained by the CAPM or the Fama and French 4‐factor model, but it exhibits significant similarities to the momentum premium.

Jennergren, L. Peter; Skogsvik, Kenth

doi: 10.1111/j.1468-5957.2010.02227.xpmid: N/A

Abstract: In the abnormal earnings growth (AEG) valuation model of Ohlson and Juettner‐Nauroth (2005), there is one (constant) discount rate and no company or personal taxes. The parsimonious model specification focuses on bottom‐line earnings and growth in abnormal bottom‐line earnings and can hence be viewed as an equity‐level model. Disregarding taxes, we first extend this model to a firm‐level model based on operating earnings and growth in abnormal operating earnings, allowing for two exogenous discount rates: the required rate of return under all‐equity financing and the borrowing rate. Dividend policy irrelevance holds for this model. Using the firm‐level model as a stepping stone, a new equity‐level model is developed where dividends are discounted at a leverage‐dependent varying cost of equity capital. Dividend policy irrelevance holds for this model, too. Finally, the firm‐level and equity‐level models are extended to a situation with company and personal taxes. Dividend policy irrelevance then no longer holds, except in the tax‐neutrality case in Miller (1977).