Friday, August 28, 2015

Scientists Replicated 100 Psychology Studies, and Fewer Than Half Got the Same Results | Science | Smithsonian

This is troubling in many ways.  I would expect the numbers to be better in finance (especially the mathematical studies and modeling studies), but I have no doubt that the timing of studies matters and that the replication is often impossible (possibly in part since the original study influences the subjects/markets).



Scientists Replicated 100 Psychology Studies, and Fewer Than Half Got the Same Results | Science | Smithsonian:

"Across the sciences, research is considered reproducible when an independent team can conduct a published experiment, following the original methods as closely as possible, and get the same results. It's one key part of the process for building evidence to support theories. Even today, 100 years after Albert Einstein presented his general theory of relativity, scientists regularly repeat tests of its predictions and look for cases where his famous description of gravity does not apply. "


Here is another story on this:
http://www.vox.com/2015/8/27/9216383/irreproducibility-research

A simple finance example: CAPM worked well in the era it was developed but could not be replicated in out of sample (more recent) tests).  (and before I get complaints, I realize that CAPM is not a perfect example but it was first one that came to my head).

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Tuesday, August 04, 2015

Bankrupt Family Firms by Massimo Massa, Alminas Zaldokas :: SSRN

For good or bad, family forms are often different.  In this article Massa and Zaldokas investigate these differences during a bankruptcy.



Bankrupt Family Firms by Massimo Massa, Alminas Zaldokas :: SSRN:



"Abstract:      We study the role of family ownership during the bankruptcy process. We argue that at times of distress family blockholders are better positioned to manage the firm and this is appreciated by minority shareholders and lenders alike. We test this hypothesis focusing on the sample of public US corporations between 2001 and 2008. First, we show that family firms are less engaged in forum shopping, emerge from bankruptcy faster and have higher recovery rates.



Two fast "look-ins":

"...anecdotal evidence suggests that different types of large shareholders view bankruptcy proceedings differently and this in turn may affect bankruptcy costs. While institutional investors and professional asset managers are motivated by a purely financial resolution, families may also have reputational concerns and care about the survival of the firm or the welfare of its employees. They also have larger wealth at stake"


and

"Family block ownership is related to a 32% faster exit from bankruptcy, where the average time to exit is 446 days, and a 12% higher recovery rates for lenders, where the average recovery rate is 48%. This supports our hypothesis that family blockholders are more efficient in bankruptcy resolution." 




Definitely a worthy read!



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Monday, August 03, 2015

More than Money: Venture Capitalists on Boards by Natee Amornsiripanitch, Paul A. Gompers, Yuhai Xuan :: SSRN

More than Money: Venture Capitalists on Boards by Natee Amornsiripanitch, Paul A. Gompers, Yuhai Xuan :: SSRN:



In the department of "this fits what I teach perfectly"/ (Confirmation bias?), a new paper shows again that venture capitalists bring more tot the table than just capital.  Their expertise and relationships also matter.



"... a prior relationship with the founder, lead investor status, the size of a venture capital firm’s network of managers and outside board members, and geographic proximity between the venture capital firm and its portfolio companies are positively correlated with taking a board seat in an investment round. We also find that venture capitalists are far more likely to recruit managers or outside board members in portfolio companies on whose boards they serve. Furthermore, we find that these recruiting activities are only done by successful and well-connected venture capital firms on the board and not by their less successful and less connected counterparts. We control for potential endogeity by using the enactment of SOX as an instrument which exogenously increased the demand for sophisticated venture capital directors. This study provides evidence to support the notion that venture capital investors are active investors who take actions to enhance portfolio firm value."


Good stuff!







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Rankings of Published Price-Earnings Ratios and Investor Attention by Jordan Moore :: SSRN



Rankings of Published Price-Earnings Ratios and Investor Attention by Jordan Moore :: SSRN:



Jordan Moore shows that PE Rankings (independent of the PE ratio itself) are associated with returns.  This is a cool finding. It is at least consistent a view that investors' screening practices impact their investment results.



A "look-in":



"Results of empirical tests provide preliminary support for this P/E attention hypothesis.
In monthly time-series regressions, long-short decile portfolios earn average value-weighted
monthly excess returns of 101 basis points with an annual Sharpe ratio of 0.79 from 1974-
2013. In daily time-series regressions, long-short portfolios earn average value-weighted
daily excess returns of 16.99 basis points with an annual Sharpe ratio of 2.91 over the same
period.
Monthly and daily trading strategies earn significant “alphas” after controlling for market,
size, value, profitability, and investment factors in the Fama and French (2014) five-factor
model."








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Politically Connections, Institutional Monitoring and Earnings Quality: Some Evidence from Malaysia by Tee Chwee Ming :: SSRN

Politically Connections, Institutional Monitoring and Earnings Quality: Some Evidence from Malaysia by Tee Chwee Ming :: SSRN:



Ming and Gal have an interesting study on the behavior and monitoring of politically connected firms in Malaysia.  There three main findings are that politically connected firms



  • have lower earnings quality
  • "are not subject to market discipline despite reporting poor accounting quality"
  • where both board members and institutional investors are from matters. Specifically:
"when we consider ethnicity, we obtain
evidence to suggest that poor earnings quality in PCON firms are more prevalent in boards
dominated by Malay/Bumiputera directors as opposed to boards dominated by nonMalay/Bumiputera
directors. We also document evidence that PCON firms are not penalized
by the capital markets despite poor earnings quality. Interestingly, agency problems in PCON
firms can be mitigated through monitoring by institutional investors, particularly local
institutional investors."

Now if they can get around the chicken or the egg problem (are earnings quality low before connections--and hence connections are used to shield their lack of quality, or as a result of the connections.

Will get mentioned in class! 




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