Friday, October 29, 2010

FMA papers Part V

Synthetic shortImage via Wikipedia
Some more papers from last week's FMA conference.  

Shorts:  Gundy, Lim, and Verwijmeren give a fascinating analysis of whether option markets allow market participants to get around short sale bans.  The short answer is NO.  This is likely because many who sell the puts, hedge their risk by shorting the stock.  When the short is disallowed, the put contract volume for shares of firms on the "do not short" list also falls.  This leades to more "mispricing" in option markets as well.  Very interesting.

Is it time to change fund managers?  If you do, you can expect cash outflows even if performance increases.   So you better think twice.  Robeco, Lansdorp and Verbeek examine fund flows following the replacement of a money manager.  They find that net flows are negative following the replacement even though on average the fund performs better (which may be caused by mean reversion?)  Surprisingly this is more pronounced for institutional funds than retail funds.  Why?  Good question.  Maybe the new manager does not fit the style the investor desires?  Or maybe people just do not like change. 

Financial flexibility is valuable.  That is the key finding from a paper by Clark who confirms the long-held view (just ask any manager) that having the ability to raise new money quickly (debt issuance) is an important benefit.   This helps to explain the supposed "under leverage" issues that we often see in Capital Structure models.

So you are on the board of a firm that allowed backdating.  You also sit on other boards.  You notice  that fewer shareholders are supporting you.  You are not alone. Ertimur, Ferri, and Maber find that investors "punish" Board Members of firms for transgressions done at the past at other firms by withholding votes.  This is shownby looking at baord members of firms that allowed backdating, and then looking at shareholder voting for or against those baord members at other firms.  The authors find "the percentage of votes withheld from directors at backdating firms is twice the percentage withheld from their counterparts at non-backdating firms. This voting penalty is more pronounced for directors sitting on the compensation committee (CC)...."

previous FMA article posts:
Part 1
Part 2
Part 3
Part 4

1 comment:

Richard Warr said...

Great summary of articles. Thanks for posting.