In the 1980s, U.S. banks became systematically less profitable and riskier as nonbank competition eroded the profitability of banks' traditional activities. Bank failures rose exponentially during this decade. The leading explanation for the persistence of these trends centers on fixed‐rate deposit insurance: the insurance gives bank equityholders an incentive to take on risk when the value of bank charters falls. We propose and test an alternative explanation based on corporate control considerations. We show that managerial entrenchment played a more important role than did the moral hazard associated with deposit insurance in explaining the recent behavior of the banking industry.
We propose a conditional measure of capital market integration that allows us to characterize both the cross-section and time-series of expected returns in developed and emerging markets.Our measure, which arises from a conditional regime-switching model, allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample.Our results suggest that a number of emerging markets exhibit time-varying integration.Interestingly, some markets appear to be more integrated than one might expect based on prior knowledge of investment restrictions.Other markets appear segmented even though foreigners have relatively free access to their capital markets.
We explore performance persistence in mutual funds using absolute and relative benchmarks. Our sample, largely free of survivorship bias, indicates that relative risk‐adjusted performance of mutual funds persists; however, persistence is mostly due to funds that lag the S&P 500. A probit analysis indicates that poor performance increases the probability of disappearance. A year‐by‐year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed, and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories or risk adjustment procedures.
Several recent studies suggest that equity mutual fund managers achieve superior returns and that considerable persistence in performance exists. This study utilizes a unique data set including returns from all equity mutual funds existing each year. These data enable us more precisely to examine performance and the extent of survivorship bias. In the aggregate, funds have underperformed benchmark portfolios both after management expenses and even gross of expenses. Survivorship bias appears to be more important than other studies have estimated. Moreover, while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s.
Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. In this article, we examine the information content and predictive power of implied standard deviations (ISDs) derived from Chicago Mercantile Exchange options on foreign currency futures. The article finds that statistical time‐series models, even when given the advantage of “ex post” parameter estimates, are outperformed by ISDs. ISDs, however, also appear to be biased volatility forecasts. Using simulations to investigate the robustness of these results, the article finds that measurement errors and statistical problems can substantially distort inferences. Even accounting for these, however, ISDs appear to be too variable relative to future volatility.
All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence (“package”) of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size, and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact.
Preface xi Richard H. Thaler Acknowledgments xix List of Abbreviations xxiii Chapter 1: A Survey of Behavioral Finance by Nicholas Barberis and Richard H. Thaler 1 Part I: Limits to Arbitrage Chapter 2: The Limits of Arbitrage by Andrei Shleifer and Robert W. Vishny 79 Chapter 3: How Are Stock Prices Affected by the Location of Trade? by Kenneth A. Froot and Emil M. Dabora 102 Chapter 4: Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs by Owen A. Lamont and Richard H. Thaler 130 Part II: I Stock Returns and the Equity Premium Chapter 5: Valuation Ratios and the Long-run Stock Market Outlook: An Update by John Y. Campbell and Robert J. Shiller 173 Chapter 6: Myopic Loss Aversion and the Equity Premium Puzzle by Shlomo Benartzi and Richard H. Thaler 202 Chapter 7: Prospect Theory and Asset Prices by Nicholas Barberis, Ming Huang, and Tano Santos 224 Part III: Empirical Studies of Overreaction and Underreaction Chapter 8: Contrarian Investment, Extrapolation, and Risk by Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny 273 Chapter 9: Evidence on the Characteristics of Cross-sectional Variation in Stock Returns by Kent Daniel and Sheridan Titman 317 Chapter 10: Momentum by Narasimhan Jegadeesh and Sheridan Titman 353 Chapter 11: Market Efficiency and Biases in Brokerage Recommendations by Roni Michaely and Kent L. Womack 389 Part IV: Theories of Overreaction and Underreaction Chapter 12: A Model of Investor Sentiment by Nicholas Barberis, Andrei Shleifer, and Robert W. Vishny 423 Chapter 13: Investor Psychology and Security Market Under- and Overreaction by Kent Daniel, David Hirshleifer, and Avanidhar Subrahmanyam 460 Chapter 14: A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets by Harrison Hong and Jeremy C. Stein 502 Part V: Investor Behavior Chapter 15: Individual Investors by Brad M. Barber and Terrance Odean 543 Chapter 16: Naive Diversification Strategies in Defined Contribution Savings Plans by Shlomo Benartzi and Richard H. Thaler 570 Part VI: Corporate Finance Chapter 17: Rational Capital Budgeting in an Irrational World by Jeremy C. Stein 605 Chapter 18: Earnings Management to Exceed Thresholds by Francois Degeorge, Jayendu Patel, and Richard Zeckhauser 633 Chapter 19: Managerial Optimism and Corporate Finance by J. B. Heaton 667 List of Contributors 685 Index 695
Departures from purchasing power parity imply that different countries have different prices for goods when a common numeraire is used. Stochastic changes in exchange rates are associated with changes in these prices and constitute additional sources of risk in asset pricing models. This article investigates whether exchange rate risks are priced in international asset markets using a conditional approach that allows for time variation in the rewards for exchange rate risk. The results for equities and currencies of the world's four largest equity markets support the existence of foreign exchange risk premia.
Companies issuing stock during 1970 1990, whether an initial public offering (IPO) or a seasoned equity offering (SEO), have been poor long run investments for investors. During the five years after the issue, investors have received average returns of only 5% per year for companies going public and only 7% per year for companies conducting an SEO. Book to market effects account for only a modest portion of the low returns. An investor would have had to invest 44% more money in the issuers than in non issuers of the same size to have the same wealth five years after the offering date.
We document that forced resignations of top managers are preceded by large and significant declines in operating performance and followed by large improvements in performance. However, forced resignations are rare and are due more often to external factors (e.g., blockholder pressure, takeover attempts, etc.) than to normal board monitoring. Following the management change, these firms significantly downsize their operations and are subject to a high rate of corporate control activity. Normal retirements are followed by small increases in operating income and are also subject to a slightly higher than normal incidence of postturnover corporate control activity.