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Abstracts of Articles in
The Financial Review
Vol. 35, No. 2 - May 2000
"The 'Dogs of the Dow' Myth"
Mark Hirschey"Valuing the Potential Transformation of Banks into Financial Service Conglomerates: Evidence from the Citigroup Merger"
Jarrod Johnston and Jeff Madura"The Impact of Country Diversification on Wealth Effects in Cross-Border Mergers"
Halil Kiymaz and Tarun K. Mukherjee"Real Activity, Inflation, Stock Returns, and Monetary Policy"
Kwangwoo Park and Ronald A. Ratti"January Anomalies: Implications for the Market's Incorporation of News"
Rohan Christie-David, and Mukesh Chaudhry"The Predictive Ability of Dividend and Earnings Yields for Long-Term Stock Returns"
Chunchi Wu and Xu-Ming Wang"Informed and Uninformed Trading in an Electronic, Order-Driven Environment"
Paul Brockman and Dennis Y. Chung"Stock-price Effects of Internet Buy-Sell Recommendations: The Motley Fool Case"
Mark Hirschey, Vernon J. Richardson, and Susan Scholz
"The 'Dogs of the Dow' Myth"
Mark Hirschey
Volume 35, No. 2, pp. 1-16Abstract: The "Dogs of the Dow" (or "Dow Dog") investment strategy, is a popular investment approach that promises huge abnormal returns for investors in the ten top yielding stocks from the Dow Jones Industrial Average (DJIA). However, periods of evident outperformance are balanced by periods of conspicuous underperformance. When strategy returns are adjusted for taxes and rebalancing costs, Dow Dogs perform in line with the DJIA over the 1961–1998 period. As a result, there is no robust evidence of an average return anomaly tied to Dow Dogs.
"Valuing the Potential Transformation of Banks into Financial Service Conglomerates: Evidence from the Citigroup Merger"
Jarrod Johnston and Jeff Madura
Volume 35, No. 2, pp. 17-36Abstract: The merger between Citicorp and Travelers Group on April 6, 1998 could have emitted two relevant signals for firms that provide financial services. The first signal is the endorsement by two prominent financial institutions that benefits from cross-selling of bank services with insurance services, brokerage services, and other financial services can be realized. The second signal is that regulators will allow the combination of commercial banking with insurance underwriting and full-service brokerage, paving a path for similar combinations in the future. We document a favorable share price response for commercial banks, insurance companies, and brokerage firms, which supports the argument that the merger sets a precedent for other combinations between banks and nonbank financial services that will facilitate cross-selling and efficiencies.
"The Impact of Country Diversification on Wealth Effects in Cross-Border Mergers"
Halil Kiymaz and Tarun K. Mukherjee
Volume 35, No. 2, pp. 37-58Abstract: We posit that country diversification via cross-border mergers creates wealth by providing benefits for firms that are not available to their shareholders. We hypothesize that these benefits are inversely related to the extent of co-movement in the economies of the bidder’s and target’s countries. We examine the wealth effects of U.S. targets and bidders involved in cross-border mergers with firms in other countries during 1982–1991. We show that wealth effects vary, depending on country affiliations of two merging firms, and are inversely related to the degree of economic co-movement between the two countries.
"Real Activity, Inflation, Stock Returns, and Monetary Policy"
Kwangwoo Park and Ronald A. Ratti
Volume 35, No. 2, pp. 59-78Abstract: We find that contractionary monetary policy shocks generate statistically significant movements in inflation and expected real stock returns, and that these movements go in opposite directions. Since positive shocks to output precipitate monetary tightening, we argue that the countercyclical monetary policy process is important in explaining the negative correlation between inflation and stock returns. Examining the 1979–1982 period, we find that monetary policy tightens significantly in response to positive shocks to inflation, and that the impact of monetary policy shocks on stock returns is negative and volatile. Therefore, we see evidence that an "anticipated policy" hypothesis is at work.
"January Anomalies: Implications for the Market's Incorporation of News"
Rohan Christie-David, and Mukesh Chaudhry
Volume 35, No. 2, pp. 79-96Abstract: We examine the responses of five interest rate instruments to the release of macroeconomic announcements to determine whether January returns behave differently from returns in other months when information is released. Our results suggest that in all instruments, returns in January are less sensitive to macroeconomic news, compared with other months. This is true even though the number and type of announcements are much the same in January as in other months. The instruments examined feature important differences in liquidity, maturity, credit risk, and other institutional differences, suggesting that our evidence is robust.
"The Predictive Ability of Dividend and Earnings Yields for Long-Term Stock Returns"
Chunchi Wu and Xu-Ming Wang
Volume 35, No. 2, pp. 97-124Abstract: We use empirical models to examine the predictive ability of dividend and earnings yields for long-term stock returns. Results show that dividend and earnings yields share a similar predictive power for future stock returns and growth. We find that the predictive power of dividend yields increases with the return horizon, but that yields forecast future returns and growth over a much longer horizon. Finally, dividend and earnings yields exhibit high autocorrelation and strong contemporaneous relations.
"Informed and Uninformed Trading in an Electronic, Order-Driven Environment"
Paul Brockman and Dennis Y. Chung
Volume 35, No. 2, pp. 125-146Abstract: The purpose of our study is to investigate the trading behavior of informed and uninformed investors in a screen-based, order-driven environment. As more and more exchanges conduct trading through electronic limit-order books, it is increasingly important to analyze consequent trading behavior and its impact on the liquidity provision process. We examine one of the largest electronic, order-driven markets in the world, the Stock Exchange of Hong Kong. Our findings show that the interaction of informed and uninformed traders plays a significant role in determining corporate liquidity.
"Stock-price Effects of Internet Buy-Sell Recommendations: The Motley Fool Case"
Mark Hirschey, Vernon J. Richardson, and Susan Scholz
Volume 35, No. 2, pp. 147-174Abstract: The Motley Fool has attracted significant notoriety for stock market buy-sell advice on the Internet. Across five different investment portfolios, Motley Fool buy recommendations appear to generate an average 1.62% rise in stock prices on the announcement Day 0, and 2.40% returns over the announcement period Day -1, Day +1. Sell recommendations seem to cause a -1.49% announcement day return, and a -3.33% announcement period return. Small cap growth stock buy recommendations for The Motley Fool's flagship Rule Breaker Portfolio are associated with returns of 3.66% on the announcement day, and a 6.15% return over the announcement period. These findings suggest herd-like behavior among Internet investors, and that such announcements are more newsworthy than second-hand buy-sell recommendations published in traditional print and electronic media.