The Financial Review
Abstracts and Full Text of Forthcoming Articles (Publication Date Not Yet Announced)
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Said Elfakhani, Mahmoud Arayssi and Hanin A. Smahta
Short Selling and the Weekend Effect in Nasdaq Stock Returns
Stephen E. Christophe, Michael G. Ferri and James J. Angel
Pedigree or Placement? An Analysis of Research Productivity in Finance
Kam C. Chan, Carl R. Chen and Hung-Gay Fung
The External Funding of Academic Finance Research
David R. Kuipers and Stephen W. Pruitt
U.S. Monetary Policy Surprises and Currency Futures Markets: A New Look
Tao Wang, Jian Yang and Marc W. Simpson
Signaling, Free Cash Flow and “Nonmonotonic” Dividends
Kathleen Fuller and Benjamin M. Blau
The Information Content of Multiple Stock Splits
Gow-Cheng Huang, Kartono Liano, Herman Manakyan and Ming-Shiun Pan
The Diversification Discount Puzzle: Evidence for a Transaction Cost Resolution
Raj Aggarwal and Shelly Zhao
The Correlation Structure of Unexpected Returns in U.S. Equities
R. Brian Balyeat and Jayaram Muthuswamy
Said Elfakhani, Mahmoud Arayssi and Hanin A. Smahta
Using a sample of Arab, U.S., and emerging stock markets from 1997-2002, this study is designed to determine if international diversification is still possible despite growing globalization and the consequent integration among various stock markets. Our results show that within Arab markets, Kuwait co-integrates individually with Jordan, Tunisia, and Saudi Arabia and between Tunisia and Jordan, thus offering investors possible continued diversification opportunities. On the other hand, only Jordan, Kuwait, and Morocco are co-integrated with the U.S. general market index, implying that these markets offer a probable substitute for those investing in the U.S. markets.
Keywords: Arab stock markets, emerging markets, cointegration, diversification, globalization
Short Selling and the Weekend Effect in Nasdaq Stock Returns
Stephen E. Christophe, Michael G. Ferri and James J. Angel
We examine daily short selling of Nasdaq stocks to explore whether speculative short selling causes a significant portion of the weekend effect in returns. We identify a weekend effect in speculative short selling whereby it constitutes a larger percentage of trading volume on Mondays versus Fridays. We find an opposite effect in dealer short selling, consistent with market makers adding liquidity and stability. Our main finding is that speculative short selling does not explain an economically meaningful portion of the weekend effect in returns, even among the firms most that are most actively shorted. This finding contradicts some prior studies.
Keywords: Short sale; speculative trading; weekend effect
Pedigree or Placement? An Analysis of Research Productivity in Finance
Kam C. Chan, Carl R. Chen and Hung-Gay Fung
We examine pedigree and placement effects of research productivity in finance and find a notable placement effect: authors who are currently affiliated with “elite” institutions tend to be more productive, especially among the top three finance journals. The placement effect, however, weakens in more recent years. We also observe a pedigree effect in the top three journals, where there is a higher concentration of publications by authors with degrees from “elite” institutions. We provide rankings of the institutions that are best at developing and training scholars.
Keywords: Research productivity, ranking, pedigree, placement, financial economists
The External Funding of Academic Finance Research
David R. Kuipers and Stephen W. Pruitt
We analyze the external funding of academic finance research. We show that
funding is
uncommon, particularly for U.S.-based faculty, and is related to predictable
attributes of an
author’s reputational capital. Further, when research is funded we find it is
associated with better articles, as measured by publication in the most
prestigious journals and the receipt of increased citations over time. Our study
has relevance for every stakeholder in the university’s research mission in
finance.
Keywords: Research productivity, signaling, funding, reputational capital, citations, grants
U.S. Monetary Policy Surprises and Currency Futures Markets: A New Look
Tao Wang, Jian Yang and Marc W. Simpson
Intraday currency futures prices react to both surprises in the federal funds target rate (the target factor) and surprises in the anticipated future direction of Federal Reserve monetary policy (the path factor) in similar magnitude, and the reaction is short-lived. Dollar-denominated currency futures prices drop significantly in response to positive surprises (i.e., unexpected increases) in the target and path factors, but have generally little response to negative surprises. A monetary policy tightening during expansionary periods leads to an appreciation of the domestic currency, while a monetary policy loosening during recessionary periods tends to have no significant impact.
Keywords: monetary policy, FOMC statements, asymmetry, currency futures
Signaling, Free Cash Flow and “Nonmonotonic” Dividends
Kathleen Fuller and Benjamin M. Blau
Many argue that dividends signal future earnings or dispose of excess cash. Empirical support is inconclusive, potentially because no model combines both rationales. This paper does. Higher quality firms pay dividends to eliminate the free cash-flow problem, while firms that outsiders perceive as lower quality pay dividends to signal future earnings and reduce the free cash-flow problem. In equilibrium, dividends are nonmonotonic with respect to the signal observed by outsiders; the highest quality firms pay smaller dividends than lower perceived quality firms. The model reconciles the existing literature and generates new empirical predictions that are tested and supported.
Keywords: Dividend signaling models, agency conflicts, monotonicity condition; payout policy; cashflow uncertainty
The Information Content of Multiple Stock Splits
Gow-Cheng Huang, Kartono Liano, Herman Manakyan and Ming-Shiun Pan
We examine the relationship between the frequency of stock splits and firms’ motives for splitting their stock. Compared to their peers, infrequent splitters show higher post-split operating performance, but not so for frequent splitters. We find that split ratio and liquidity change explain the stock split announcement effect for the frequent splitters. In contrast, the change in operating performance in split year explains the announcement effect for the infrequent splitters. Our results suggest that frequent splits are more consistent with the trading range/improved liquidity hypothesis and infrequent splits are more consistent with the signaling hypothesis.
Keywords: Frequency of stock splits, trading range/liquidity hypothesis, signaling
The Diversification Discount Puzzle: Evidence for a Transaction Cost Resolution
Raj Aggarwal and Shelly Zhao
The literature on the corporate diversification discount and the relative efficiency of internal versus external capital markets provides mixed results. We argue that transaction cost economics is useful in understanding this puzzle. According to transaction cost economics, diversified firms should outperform single segment firms in industries with higher external transaction costs (e.g., emergent industries) and under-perform in industries with low external transaction costs and high agency and other internal costs (e.g., some mature industries). This paper provides evidence supporting these contentions.
Keywords: Corporate diversification, transaction cost economics, internal capital markets
The Correlation Structure of Unexpected Returns in U.S. Equities
R. Brian Balyeat and Jayaram Muthuswamy
We examine the correlations between unexpected market moves and unexpected equity portfolio moves conditional on market performance. We derive unexpected returns from a two-stage regime switching model. The model allows for time-varying expected returns where the market portfolio alone dictates the regime switching process. Portfolios exhibit a natural hedge where correlations during extreme unexpected market downturns are generally negative. During unexpected market upswings, correlations increase. Using the unconditional analysis would lead to overhedging during market downturns and underhedging during market upswings. The adjustments to the unconditional hedging strategy conditional on extreme market movements frequently exceed +/- 10%.
Keywords: Large returns, conditional correlation, equity portfolios, diversification, portfolio performance, heteroskedasticity, conditional beta