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Article
Publication date: 26 July 2021

Jinglin Jiang and Weiwei Wang

This paper investigates individual investors' responses to stock underpricing and how their trading decisions are affected by analysts' forecasts and recommendations.

Abstract

Purpose

This paper investigates individual investors' responses to stock underpricing and how their trading decisions are affected by analysts' forecasts and recommendations.

Design/methodology/approach

This empirical study uses mutual fund fire sales as an exogenous source that causes stock underpricing and analysts' forecasts and recommendations as price-correcting information. The study further uses regression analysis to examine individual investors' responses to fire sales and how their responses vary with price-correcting information.

Findings

The authors first show that individual investors respond to mutual fund fire sales by significantly decreasing net buys, and this effect appears to be prolonged. Next, the authors find that the decrease of net buys diminishes following analysts' price-correcting earnings forecast revisions and stock recommendation changes. Hence, the authors suggest that individual investors are not “wise” enough to recognize flow-driven underpricing; however, this response is weakened by analysts' price-correcting information.

Originality/value

There is an ongoing debate in the literature about whether individual investors should be portrayed as unsophisticated traders or informed traders who can predict future returns. The authors study a unique information event and provide new evidence related to both perspectives. Overall, our evidence suggests that the “unsophisticated traders” perspective is predominant, whereas a better information environment significantly reduces individual investors' information disadvantage. This finding could be of interest to both academic researchers and regulators.

Details

International Journal of Managerial Finance, vol. 18 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 7 July 2020

Caroline Heqing Zhu

The purpose of this paper is to examine the effectiveness of hedge fund activism (HFA) in preventing corporate policy deviations.

Abstract

Purpose

The purpose of this paper is to examine the effectiveness of hedge fund activism (HFA) in preventing corporate policy deviations.

Design/methodology/approach

This paper identifies HFA interventions through a hand-collected sample of Schedule 13D filings between 1994 and 2016, and uses mechanical mutual fund fire sales as the instrument variable (IV) for the likelihood of such interventions. Armed with the instrument, this paper estimates firm's distribution, managerial compensation and investment policies in response to a change in the perceived likelihood of HFA interventions.

Findings

An increase in the HFA intervention likelihood leads to increases in shareholder distribution, decreases in CEO pay and investments and increases in operating performance. Compared to the sample average, a one standard deviation increase in the intervention likelihood leads to a 9.29% increase in the firm's payout ratio, a 7.42% decrease in CEO compensation, a 2.67% decrease in capital expenditures and a 4.96% decrease in R&D expenses. These changes are consistent with the threat of intervention curbing managerial empire-building behaviors and improving firm operation. The relationships are causal, significant and robust to a variety of alternative specifications and sample divisions.

Originality/value

Results of this paper suggest that as a mechanism for corporate governance, the threat of HFA is effective in preventing corporate policy deviations. They also demonstrate a stronger and broader impact of HFA on corporate policy than previously documented. By showing that HFA is an effective and viable mechanism for corporate governance, this study allows policymakers to make more informed decisions to whether increase hedge fund regulations or not.

Details

International Journal of Managerial Finance, vol. 17 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 11 September 2017

Sitikantha Parida

The purpose of this paper is to investigate if there is any impact of reporting delays on profitability of front-running strategies against the mutual funds.

Abstract

Purpose

The purpose of this paper is to investigate if there is any impact of reporting delays on profitability of front-running strategies against the mutual funds.

Design/methodology/approach

The author studies if freshness of mutual fund holding information from public disclosures affects precision of flow-based front-running strategies against the funds and if the allowed 60-day reporting delay is able to protect the funds from these front-running activities against them.

Findings

Assuming no reporting delay, the author finds that returns from hypothetical front-running strategies are significant, when these are based on the most recent holding information and are not significant, when based on relatively old holding information. Interestingly, these front-running returns appear to be mostly driven by anticipated forced buys by the mutual funds (rather than anticipated forced sales). The return from a front-running strategy long on anticipated forced buys is higher when it is based on relatively illiquid assets. The author also finds that return from a front-running strategy short on anticipated forced sales is significant, when it is based on illiquid assets from relatively old holding information.

Practical implications

Hence, it appears that the allowed 60-day reporting delay is able to protect most of the funds from front-running activities against them, except for the funds holding illiquid assets from anticipated forced sales motivated front-running activities against them.

Originality/value

The paper addresses an interesting question, which has not been studied before – if freshness of fund holding information helps the front-running strategies against the funds and if the allowed reporting delay is effective in protecting the funds from these activities.

Details

Managerial Finance, vol. 43 no. 9
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 14 May 2019

Sitikantha Parida

The purpose of this paper is to investigate the impact of competition in financial markets on the frequency of portfolio disclosures by mutual funds and its implications…

Abstract

Purpose

The purpose of this paper is to investigate the impact of competition in financial markets on the frequency of portfolio disclosures by mutual funds and its implications for consumer search costs.

Design/methodology/approach

The empirical analysis merges the Center for Research in Security Prices (CRSP) survivorship bias-free mutual fund database, the Thompson Financial CDA/ Spectrum holdings database and the CRSP stock price data. The sample covers the time period between 1993 and 2010 and OLS and logistic regressions are used to investigate the impact of competition on fund disclosures.

Findings

This paper finds that mutual fund disclosures decrease with market competition and this effect is amplified for funds holding illiquid assets. These results provide empirical support for the findings of Carlin et al. (2102). Mutual funds use portfolio disclosures as a marketing tool to attract investments in a tournament-like market, where superior relative performance and greater visibility are rewarded with convex payoffs. With competition, the likelihood of receiving new investments decreases for each fund and funds respond by reducing costly voluntary disclosures. The disclosure costs are higher for funds holding illiquid assets, and hence, the effect is stronger for them.

Originality/value

This paper has important policy implications for disclosures in a market where relative performance matters. The traditional view is that competition induces voluntary disclosure because entities would like to differentiate themselves from competitors, and hence, competition should increase market transparency. However, this paper sheds light on the negative consequence of competition in a tournament-like mutual fund market.

Details

Review of Accounting and Finance, vol. 18 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 8 September 2021

Qingzhong Ma, David A. Whidbee and Wei Zhang

This paper examines the extent to which noise demand and limits of arbitrage affect the pricing of acquirer stocks both at the announcement period and over the longer horizon.

Abstract

Purpose

This paper examines the extent to which noise demand and limits of arbitrage affect the pricing of acquirer stocks both at the announcement period and over the longer horizon.

Design/methodology/approach

An event study approach was adopted to measure announcement-period cumulative abnormal returns. Long-horizon returns are measured using buy-and-hold abnormal returns (BHARs), calendar time portfolios (CTPRs), and subsequent earnings announcement period abnormal returns. Main methodologies include ordinary least squared (OLS) regressions, Logit regressions, and portfolio analysis.

Findings

(1) Acquirer stocks with high idiosyncratic volatility (the proxy for the security level characteristic most directly associated with limits to arbitrage) earn higher announcement-period abnormal returns. (2) The return pattern reverses over the subsequent longer horizon, resembling news-driven transitory mispricing. (3) The mispricing is greater when deal and firm characteristics exacerbate the limits of arbitrage, and it weakens over time. (4) Transactions by higher idiosyncratic volatility acquirers are more likely to fail.

Originality/value

Limits of arbitrage theory have been tested mostly in information-free circumstances. The findings in this paper extend the supporting evidence for limits of arbitrage explaining mispricing beyond the boundaries of information-free circumstances.

Details

Review of Behavioral Finance, vol. 14 no. 5
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 1 January 2004

Susan S. Krawczyk

During 2003, compensation practices for the retail sale of mutual funds came under fire. Recent revelations about failures in the processing of mutual fund breakpoints had…

Abstract

During 2003, compensation practices for the retail sale of mutual funds came under fire. Recent revelations about failures in the processing of mutual fund breakpoints had triggered a more in‐depth investigation into mutual fund marketing and compensation practice by securities regulators, Congress, and the states. This article focuses on the regulation of sales compensation practices primarily as it affects a broker‐dealer selling mutual funds in the retail market. It addresses the regulatory framework for three key compensation practices: (1) the use of non‐cash compensation in connection with mutual fund sales; (2) marketing and compensation arrangements providing enhanced compensation to a selling firm as well as to its sales representatives for the promotion of certain fund securities over others, such as proprietary funds over non‐proprietary funds, preferred funds over non‐preferred funds, and Class B shares over Class A shares; and (3) the use of commissions for mutual fund portfolio trades as an additional source of selling compensation for selling firms, a practice sometimes referred to as ”directed brokerage.“

Details

Journal of Investment Compliance, vol. 4 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 1 January 2006

Thomas R. Smith

The purpose of this paper is to provide a comprehensive background on the recent legislative, regulatory, and prosecutorial scrutiny of mutual funds and underlying issues…

Abstract

Purpose

The purpose of this paper is to provide a comprehensive background on the recent legislative, regulatory, and prosecutorial scrutiny of mutual funds and underlying issues such as the level and transparency of fees and costs, distribution and sales practices, and fund governance.

Design/methodology/approach

Provides a detailed chronology of events since January 2003 concerning mutual fund scandals such as trading abuses and questionable sales practices and related issues such as revenue sharing, directed brokerage, soft dollars, market timing, late trading, and selective disclosure. The chronology in this issue of JOIC will be followed an article in the next issue that describes reform initiatives that have taken place in response to the scandals.

Findings

Despite criticism and scrutiny of equity mutual funds following poor performance in 2001 and 2002, meaningful efforts to achieve reform began to lose momentum in mid‐2003. Then concern with mutual fund abuses was reignited in September 2003 when New York Attorney General Eliot Spitzer announced a settlement with Canary Capital that involved market timing, late trading, and selective disclosure. Since then there have been numerous disclosures of fund trading abuses and questionable trading practices, and the resulting uproar has triggered significant efforts to reform the manner in which funds and their service providers conduct business.

Originality/value

This comprehensive chronology provides an essential reference by bringing together all the events and underlying issues related to mutual fund scandals, abuses, regulation, compliance, and reform efforts since January 1, 2003.

Details

Journal of Investment Compliance, vol. 7 no. 1
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 1 March 2001

K.G.B. Bakewell

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes…

17154

Abstract

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Details

Structural Survey, vol. 19 no. 3
Type: Research Article
ISSN: 0263-080X

Article
Publication date: 1 September 2001

Index by subjects, compiled by K.G.B. Bakewell covering the following journals: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property…

14437

Abstract

Index by subjects, compiled by K.G.B. Bakewell covering the following journals: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Details

Facilities, vol. 19 no. 9
Type: Research Article
ISSN: 0263-2772

Article
Publication date: 1 March 2001

K.G.B. Bakewell

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes…

13913

Abstract

Compiled by K.G.B. Bakewell covering the following journals published by MCB University Press: Facilities Volumes 8‐18; Journal of Property Investment & Finance Volumes 8‐18; Property Management Volumes 8‐18; Structural Survey Volumes 8‐18.

Details

Property Management, vol. 19 no. 3
Type: Research Article
ISSN: 0263-7472

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