Terry Walter - Profile on Academia.edu (original) (raw)
Papers by Terry Walter
Accounting and finance, May 1, 1986
Accounting and finance, Nov 1, 1995
Social Science Research Network, 2007
We examine whether and why implicit equity transaction costs incurred by institutional investors ... more We examine whether and why implicit equity transaction costs incurred by institutional investors across 51 countries differ from those of domestic institutions in the United States. Using a proprietary institutional trading dataset that discloses the home country of the initiator of a trade, we analyze round-trip implicit transaction costs conditional on the trader's country of origin. The average daily equally (trade) weighted disadvantage of foreign institutional investors for purchases is 3.3 (3.3) basis points (bps) and 4.1 (3.0) bps for sales of common stocks and American Depository Receipts that traded on the NYSE, AMEX and NASDAQ between 1 July 1999 and 30 September 2004. Therefore a roundtrip daily equally weighted disadvantage to foreign institutional investors is approximately 7.4 (6.3) bps. Several institutional background factors related to foreign investors' countries of origin are relevant in explaining their disadvantage.
Social Science Research Network, 2012
This study investigates how the quality of stocks owned by mutual funds affects the performance o... more This study investigates how the quality of stocks owned by mutual funds affects the performance of those funds during 2000-2009. The quality of a stock is positively related to its size, while quality is inversely related to volatility. Evidently, stocks in the lowest quality decile perform particularly poorly amidst volatile market conditions with a mean monthly Daniel, Grinblatt, Titman and Wermers (DGTW) alpha 1.93% [25.73% per annum (pa)] less than high-quality stocks. Furthermore, funds which hold the lowest quality stocks exhibit substantial underperformance, particularly during market downturns, with funds in the lowest decile of quality incurring a mean monthly DGTW alpha 0.96% (12.14% pa) lower than their higher quality counterparts. Interestingly, we discover a trend to funds investing in higher quality stocks over time. Publication Details
The Role of Non-Accounting Information in Understanding Stock Return Volatility
Social Science Research Network, 2008
ABSTRACT Uncertainty about firms' future payoffs is the dominant factor in explaining... more ABSTRACT Uncertainty about firms' future payoffs is the dominant factor in explaining stock return volatility at the firm level. However, summary financial statement numbers such as earnings only provide a limited measure of expected payoffs, as they do not reflect firms' fundamentals on a timely basis. We demonstrate theoretically and empirically that information about firms' fundamentals contained in analysts' forecasts (which we label as "non-accounting information") is expected to influence future stock return volatility. When combined with Ohlson's (1995) linear information dynamics, the accounting version of the Campbell-Shiller model (Campbell and Shiller 1988a, 1988b; Vuolteenaho 2002) implies that if current non-accounting information is more uncertain, then future stock returns are expected to be more volatile. Our empirical evidence supports the theoretical predictions, and the results are valid for measures of both systematic and idiosyncratic volatility. Additional analysis yields some evidence that both favourable and unfavourable news from non-accounting information increases future stock return volatility. Overall, our results highlight the relevance of information in analysts' forecasts beyond what is contained in the current financial statements.
Social Science Research Network, 2010
Cross-region and cross-sector asset allocation decisions are one of the most fundamental issues i... more Cross-region and cross-sector asset allocation decisions are one of the most fundamental issues in international equity portfolio management. Equity returns exhibit higher volatilities and correlations, and lower expected returns, in bear markets compared to bull markets. However, static mean-variance analysis fails to capture this salient feature of equity returns. Using a regime switching model across both regions and sectors, the regime-dependent asset allocation substantially outperforms the static mean-variance allocation. This outperformance is robust both in-sample and out-of-sample, as well as under various asset allocation constraints. In addition, optimal allocation across sectors provide greater benefits compared to international diversification, which is characterized by higher returns, lower risks, lower correlations with the world market and a higher Sharpe ratio..
Social Science Research Network, 2008
We examine implicit equity transaction costs incurred on United States exchanges by domestic inst... more We examine implicit equity transaction costs incurred on United States exchanges by domestic institutional investors compared to foreign domiciled money managers. The average equally weighted disadvantage of foreign investors for purchases (sales) is 3.6 (5.1) basis points on a daily interval, and 19.1 (20.5) basis points weekly. The disadvantage persists across different stock types and exchanges. Foreign investors pay three cents per share less than local institutions in brokerage commissions, an insufficient edge to offset their disadvantage in implicit costs. Relating explicit costs to realized prices, we show that local investors benefit more from their brokerage commissions than foreigners.
Price Behaviour Surrounding Blocks: Asymmetric or Bid-Ask Bias
Social Science Research Network, 2003
ABSTRACT This paper analyses price effects of block trades for the 30 stocks that comprise the Do... more ABSTRACT This paper analyses price effects of block trades for the 30 stocks that comprise the Dow Jones Industrial Average for the period January 1993 to October 2001. Previous research shows prices revert following sales, but remain high after buys, creating an asymmetry between block purchases and sales. Extant literature has offered several conjectures as to the source of the asymmetry. We replicate the asymmetry documented in previous literature and provide a new conjecture as to its source, specifically bid-ask bias. Results show that purging block trade price effects of bid-ask bias produces symmetry in the behaviour of block trade price effects. This suggests research design issues are driving the asymmetry documented in previous literature, and that purchases are not more informative than sales.
Abacus, Dec 1, 2013
This study extends the theoretical framework of and to investigate the association between accrua... more This study extends the theoretical framework of and to investigate the association between accrual variability and firm-level stock return volatility. The empirical evidence supports our prediction that increased uncertainty in current-period accounting accruals is associated with significantly higher volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. When accrual variability is decomposed into fundamental and discretionary portions, we find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. Overall, our results suggest that uncertainty reflected in accrual information is subsequently reflected in the fluctuation of future stock returns, and that the predictive content in accruals primarily reflects firms' fundamental uncertainty, rather than any effects of managerial choices and interventions in the accounting process. Publication Details
Social Science Research Network, 2010
We demonstrate that the articulation among accruals, cash flows and revenues which is typically a... more We demonstrate that the articulation among accruals, cash flows and revenues which is typically assumed in tests of earnings management does not hold when large (positive or negative) external financing activities are present. Our study provides evidence that managers' "normal" operating decisions associated with net external financing activities are likely to lead to economically and statistically significant measurement errors in unexpected accruals. This is a serious concern given the frequency with which the partitioning variable used to identify instances of alleged earnings management is correlated with significant movements in net external financing. Simulation tests show that even at modest levels of net external financing changes, rejection frequencies for the null hypothesis of no earnings management rise dramatically. This result underscores the importance of additional specification tests being conducted to control for estimation biases in unexpected accruals associated with external financing. We suggest the use of matched-firm approach using industry and external financing matches. Using this approach, we demonstrate that prior conclusions about the existence of earnings management around open market repurchases do not appear robust when attempts are made to control for the effect on expected accruals of large changes in net external financing.
Social Science Research Network, 2005
Using a representative sample of monthly portfolio holdings and daily trades, this study presents... more Using a representative sample of monthly portfolio holdings and daily trades, this study presents unique evidence of significant stock selection skill amongst institutional small-cap equity managers on a risk-adjusted basis. Of particular importance is the magnitude of the performance generated by fund managers in our sample. Aggregate four-factor and five-factor alphas are 68 and 59.6 basis points per month before management expenses and tax, respectively. The evidence from holdings and transaction-based metrics of performance also reveals that small-cap equity managers possess superior stock selection ability, from both a statistical and economic perspective. Our results are robust to the deduction of transaction costs. Our research provides important non-U.S. evidence concerning the value of active management, in a market segment which exhibits both lower liquidity and lower analyst coverage. Publication Details
Pacific-basin Finance Journal, Apr 1, 2004
The apparent predictability of stock prices, and the related profitability of investment strategi... more The apparent predictability of stock prices, and the related profitability of investment strategies based on this, has generated a great deal of research. Since the late 1980s, momentum strategies have attracted considerable attention and have been found to be profitable in numerous markets. This paper investigates the returns to short-term and intermediate-horizon momentum strategies in the Australian equity market. We focus on 'practical' or 'realistic' investment strategies, and find that momentum is prevalent in the Australian market and that the returns are of greater magnitude than previously found in overseas markets. These momentum strategy returns are robust to risk adjustment and prevail over time. We also examine the interaction of momentum on size and liquidity variables and conclude that the observed profits to these investment strategies are not explained by size or liquidity differences among the stocks.
Social Science Research Network, 2008
The uncertainty of firm's future payoffs is the dominant factor in explaining firm-level stock re... more The uncertainty of firm's future payoffs is the dominant factor in explaining firm-level stock return volatility at the firm level. However, financial statement numbers (e.g. dividends, accounting earnings), only provide a limited measure of expected payoffs, as they do not reflect firms' fundamentals on a timely basis. We demonstrate theoretically and empirically that information about firms' fundamentals contained in analysts' forecasts, (which we label as "non-accounting information"), is expected to influence future stock return volatility. When combined with Ohlson's (1995) linear information dynamics, the accounting version of the Campbell-Shiller model and Vuolteenaho ( )) implies that if current non-accounting information is more uncertain, then future stock returns are expected to be more volatile. Our empirical evidence supports the theoretical predictions, and the results are valid for measures of both systematic and idiosyncratic volatility. Additional analysis yields some evidence that both favourable and unfavourable news from non-accounting information increases future stock return volatility. Overall, our results indicate that information in analysts' forecasts beyond what is contained in the current financial statements (i.e. dividends, accounting earnings, etc) is associated with fundamentals, and its uncertainty drives the cross-sectional differences in stock return volatility.
Social Science Research Network, 2012
This paper examines the role of industry specialist advisors in M&A transactions using the Additi... more This paper examines the role of industry specialist advisors in M&A transactions using the Additive Revealed Comparative Advantage (ARCA) index to proxy advisors' relative level of industry specialization prior to deal announcement. We find that industry specialist advisors are able to generate higher returns for their acquirer clients, especially in cross-industry transactions, with the value creation resulting primarily from the selection of more synergistic targets and negotiating to pay a lower takeover premium. While specialist advisors are associated with a lower completion probability, they are able to complete tender offers in less time. In addition to superior advice, we find that specialist advisor charge lower fees, suggesting that they are able to pass some cost efficiencies onto their bidder clients. The findings are consistent with the traditional perception of the superiority of industry specialists and show that specialization is beneficial to the M&A advisory market.
Social Science Research Network, 2016
Say on pay" legislation has been introduced in several countries but Australia's version, namely ... more Say on pay" legislation has been introduced in several countries but Australia's version, namely the "two-strikes" rule, is unique in that it empowers shareholders to vote on a board spill if the compensation report of a public company receives 25% or more dissenting votes for two consecutive years. We test the proposition that the "two strikes" rule has increased directors' accountability beyond executive pay because it has substantially lowered the cost to activists of organizing sufficient votes to threaten managers with a board spill. Consistent with this expectation, we find Australian firms respond to negative say-on-pay votes by curbing excessive CEO pay, reducing the growth rate of pay and changing the pay mix. In addition, the results suggest that the market regards negative SOP votes as a value-destroying signal since there is a negative market reaction, lower valuation and long-run underperformance. We also find an increase in CEO turnover but directors do not seem to bear reputational costs through the loss of outside directorships. The findings provide important insights to investors, company directors and regulators. to the passing of SOP legislation is positive in the UK (Cunat et al. 2015). In contrast, in the US stock prices reacted positively when the SOP proposals were defeated (Cai and Walking 2011). It is important to note that inferences drawn from this research provide insights as to how firms respond to empowered shareholder rights, but cannot speak to actions taken by the board in response to shareholder negative votes on compensation or reputational costs, given the uncertainty of voting outcome after adopting SOP. The third line of research considers shareholder SOP votes on compensation, and mostly investigates the impact of shareholder negative votes on the level or structure of future compensation. The results of this research provides mixed evdience. Whilst, Carter and Zamora ( ) and Conyon and Sadler (2010) find no changes on the level or mix of CEO pay, Alissa (2015) suggests that firms respond selectively by reducing the excessiveness of CEO pay, though only when performance is poor. Kimbro and Xu (2016) report that the growth rate of CEO total pay reduces in response to shareholder dissatifaction. This study examines the impact of SOP using the unique Australian setting. In 2011, Australia introduced "say-on-pay" legislation, Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011, which is commonly known as the "two-strikes" rule. Under the "two-strikes" rule, a firm receives a strike if 25% or more of eligible votes are against the remuneration report at the Annual General Meeting (AGM). When a firm receives a strike for two consecutive years (i.e., two strikes), there is then a further majority-based vote on a "spill resolution" to determine whether all directors except the CEO should stand for re-election. If the spill resolution is approved, the firm is required to hold an extraordinary general meeting (the spill meeting) to re-elect all directors except the CEO within 90 days after the AGM. 1 The two-strikes rule attempts to empower minority shareholders by a number of important and innovative ways, including (1) only requiring a 25% vote against the remuneration report to trigger a strike, (2) preventing directors or managers from voting on say on pay resolutions, and (3) forcing the directors to face re-election if the firm obtains two initial "strikes" and a third "spill vote" strike. These innovations provide opportunities to examine the economic consequences of SOP in a unique setting, where shareholder dissent over executive compensation is more likely to be recognized publicly by a strike and directors are more likely to face reputational costs and the threat of board re-election. Thus, our study differs substantially from the first two streams of SOP literature that examine the adoption of SOP regulations or shareholder-sponsored SOP proposals, but relates to the third stream of research testing SOP votes on compensation. Using a hand-collected data for a sample of Australian firms including 369 strikes over 2011-2014, we find that firms receiving a strike tend to have higher CEO abnormal pay and higher growth of CEO cash pay. They are also more likely to have the CEO as the chairman of the board, lower blockholder ownership, poor financial performance, lower market-to-book ratio and smaller size. In addition, our results suggest that firms with higher CEO abnormal pay, a lower market-to-book ratio and small market value are more likely to receive a second strike. We then examine how firms respond to a strike by making changes to CEO compensation. The findings confirm that the "two-strikes" rule results in changes in the size and composition of CEO pay. Specifically, upon receiving the first strike, 1 It is important to note that the "two-strikes" rule has a resetting mechanism where consideration of a spill resolution is only allowed at every second AGM.
Australian Journal of Management, Dec 1, 2010
This paper examines the magnitude and determinants of trading costs for small-cap funds in Austra... more This paper examines the magnitude and determinants of trading costs for small-cap funds in Australia. The total price impact for these funds is 0.99% (-0.34%) for purchases (sales). This is considerably larger than costs reported in prior literature. Both purchases and sales exhibit price continuations after the trade package, consistent with an information effect. Although we do not observe the directional asymmetry typically shown in the literature, the magnitude of the total and permanent effects for purchases is larger than for sales. We also show that price impact is related to fund inflows and outflows. Publication Details
Social Science Research Network, 2000
In an environment where expected litigation costs are relatively low (Australia), we provide evid... more In an environment where expected litigation costs are relatively low (Australia), we provide evidence strongly consistent with signaling considerations influencing the choice of auditor by initial public offering (IPO) firms. When our analysis is confined to smaller IPOs and /or IPOs using less prestigious underwriters (i.e., those IPOs where the use of a high quality auditor is less "routine"), we find that the probability of selecting a high quality auditor is positively related to IPO firms' riskiness, negatively related to the level of retained ownership by the initial owners and positively related to the decision to voluntarily provide information about expected earnings. These results jointly provide support for the signaling models of and , whereby the choice of a high quality auditor represents a trade-off with the level of retained ownership, but is complimentary to the extent of direct disclosure.
Australian Journal of Management, Apr 5, 2012
We provide one of the first comprehensive studies on the out-of-sample stock returns predictabili... more We provide one of the first comprehensive studies on the out-of-sample stock returns predictability in Australia. Whilst most of the empirically well-known predictive variables fail to generate out-of-sample predictability compared to forecasts generated from the historical average equity risk premium, we document a statistically significant out-of-sample prediction in forecasting one year, and to a lesser extent, one quarter future excess returns, using a combination forecast of these variables. Money supply, dividend-to-price ratio and consumption-to-GDP ratio contribute the most information in predicting equity premium. We also find an improved asset allocation performance by relying on the predicted returns generated from the combination forecast of these predictors. However, the improvement of the asset allocation performance is not robust to different sample periods examined. The combing methods are also useful in predicting different sector premia. A dynamic sector rotation strategy relying on forecasts generated by the combining methods significantly outperforms the historical market returns.
To Complete or Not to Complete a Takeover Deal: Will Managers Swim Against the Current?
Social Science Research Network, 2008
ABSTRACT Recent research gives support to the idea that the market reaction to a merger and acqui... more ABSTRACT Recent research gives support to the idea that the market reaction to a merger and acquisition (M&A) announcement predicts whether the acquirer and the target complete the deal. Using a sample of Australian mergers from 1992 to September 2006, we find that the relationship between the probability of deal completion and the market reaction to the announcement, as manifested in the acquirer returns, is affected by investors' consensus. The higher the consensus, the more likely completion is, given a positive market reaction for the acquirer. This effect is observed with our four proxies of consensus / opinion divergence: turnover, bid-ask spread, total return volatility and order imbalance.
Australian Journal of Management, Oct 23, 2013
This study extends an examination of Quality investing in the US to the Australian market. Specif... more This study extends an examination of Quality investing in the US to the Australian market. Specifically, a Quality score is computed as the aggregate of eight fundamental accounting metrics. An investment strategy investing in the highest (lowest) quality stock quintile, that is, Quintile 5 (1) generates an average annual Daniel, Grinblatt, Titman and Wermers (DGTW)-adjusted alpha of 6.37% (-7.98%), which is significant at the 5% level over April 2000-March 2010. A two-way segmentation based on size first, and quality second, reveals that the strong positive quality effect is primarily driven by small stocks, as the average DGTW-alpha for the top-quality tercile of small stocks is 14.02%, significant at the 5% level. Statistically significant positive DGTW-alphas are also determined for quality micro and large stocks. The quality analysis is also applied to a sample of Active Equity Mutual Funds' stock holdings. Weak evidence of the quality return premium is detected at the fund level. Publication Details
Accounting and finance, May 1, 1986
Accounting and finance, Nov 1, 1995
Social Science Research Network, 2007
We examine whether and why implicit equity transaction costs incurred by institutional investors ... more We examine whether and why implicit equity transaction costs incurred by institutional investors across 51 countries differ from those of domestic institutions in the United States. Using a proprietary institutional trading dataset that discloses the home country of the initiator of a trade, we analyze round-trip implicit transaction costs conditional on the trader's country of origin. The average daily equally (trade) weighted disadvantage of foreign institutional investors for purchases is 3.3 (3.3) basis points (bps) and 4.1 (3.0) bps for sales of common stocks and American Depository Receipts that traded on the NYSE, AMEX and NASDAQ between 1 July 1999 and 30 September 2004. Therefore a roundtrip daily equally weighted disadvantage to foreign institutional investors is approximately 7.4 (6.3) bps. Several institutional background factors related to foreign investors' countries of origin are relevant in explaining their disadvantage.
Social Science Research Network, 2012
This study investigates how the quality of stocks owned by mutual funds affects the performance o... more This study investigates how the quality of stocks owned by mutual funds affects the performance of those funds during 2000-2009. The quality of a stock is positively related to its size, while quality is inversely related to volatility. Evidently, stocks in the lowest quality decile perform particularly poorly amidst volatile market conditions with a mean monthly Daniel, Grinblatt, Titman and Wermers (DGTW) alpha 1.93% [25.73% per annum (pa)] less than high-quality stocks. Furthermore, funds which hold the lowest quality stocks exhibit substantial underperformance, particularly during market downturns, with funds in the lowest decile of quality incurring a mean monthly DGTW alpha 0.96% (12.14% pa) lower than their higher quality counterparts. Interestingly, we discover a trend to funds investing in higher quality stocks over time. Publication Details
The Role of Non-Accounting Information in Understanding Stock Return Volatility
Social Science Research Network, 2008
ABSTRACT Uncertainty about firms' future payoffs is the dominant factor in explaining... more ABSTRACT Uncertainty about firms' future payoffs is the dominant factor in explaining stock return volatility at the firm level. However, summary financial statement numbers such as earnings only provide a limited measure of expected payoffs, as they do not reflect firms' fundamentals on a timely basis. We demonstrate theoretically and empirically that information about firms' fundamentals contained in analysts' forecasts (which we label as "non-accounting information") is expected to influence future stock return volatility. When combined with Ohlson's (1995) linear information dynamics, the accounting version of the Campbell-Shiller model (Campbell and Shiller 1988a, 1988b; Vuolteenaho 2002) implies that if current non-accounting information is more uncertain, then future stock returns are expected to be more volatile. Our empirical evidence supports the theoretical predictions, and the results are valid for measures of both systematic and idiosyncratic volatility. Additional analysis yields some evidence that both favourable and unfavourable news from non-accounting information increases future stock return volatility. Overall, our results highlight the relevance of information in analysts' forecasts beyond what is contained in the current financial statements.
Social Science Research Network, 2010
Cross-region and cross-sector asset allocation decisions are one of the most fundamental issues i... more Cross-region and cross-sector asset allocation decisions are one of the most fundamental issues in international equity portfolio management. Equity returns exhibit higher volatilities and correlations, and lower expected returns, in bear markets compared to bull markets. However, static mean-variance analysis fails to capture this salient feature of equity returns. Using a regime switching model across both regions and sectors, the regime-dependent asset allocation substantially outperforms the static mean-variance allocation. This outperformance is robust both in-sample and out-of-sample, as well as under various asset allocation constraints. In addition, optimal allocation across sectors provide greater benefits compared to international diversification, which is characterized by higher returns, lower risks, lower correlations with the world market and a higher Sharpe ratio..
Social Science Research Network, 2008
We examine implicit equity transaction costs incurred on United States exchanges by domestic inst... more We examine implicit equity transaction costs incurred on United States exchanges by domestic institutional investors compared to foreign domiciled money managers. The average equally weighted disadvantage of foreign investors for purchases (sales) is 3.6 (5.1) basis points on a daily interval, and 19.1 (20.5) basis points weekly. The disadvantage persists across different stock types and exchanges. Foreign investors pay three cents per share less than local institutions in brokerage commissions, an insufficient edge to offset their disadvantage in implicit costs. Relating explicit costs to realized prices, we show that local investors benefit more from their brokerage commissions than foreigners.
Price Behaviour Surrounding Blocks: Asymmetric or Bid-Ask Bias
Social Science Research Network, 2003
ABSTRACT This paper analyses price effects of block trades for the 30 stocks that comprise the Do... more ABSTRACT This paper analyses price effects of block trades for the 30 stocks that comprise the Dow Jones Industrial Average for the period January 1993 to October 2001. Previous research shows prices revert following sales, but remain high after buys, creating an asymmetry between block purchases and sales. Extant literature has offered several conjectures as to the source of the asymmetry. We replicate the asymmetry documented in previous literature and provide a new conjecture as to its source, specifically bid-ask bias. Results show that purging block trade price effects of bid-ask bias produces symmetry in the behaviour of block trade price effects. This suggests research design issues are driving the asymmetry documented in previous literature, and that purchases are not more informative than sales.
Abacus, Dec 1, 2013
This study extends the theoretical framework of and to investigate the association between accrua... more This study extends the theoretical framework of and to investigate the association between accrual variability and firm-level stock return volatility. The empirical evidence supports our prediction that increased uncertainty in current-period accounting accruals is associated with significantly higher volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. When accrual variability is decomposed into fundamental and discretionary portions, we find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. Overall, our results suggest that uncertainty reflected in accrual information is subsequently reflected in the fluctuation of future stock returns, and that the predictive content in accruals primarily reflects firms' fundamental uncertainty, rather than any effects of managerial choices and interventions in the accounting process. Publication Details
Social Science Research Network, 2010
We demonstrate that the articulation among accruals, cash flows and revenues which is typically a... more We demonstrate that the articulation among accruals, cash flows and revenues which is typically assumed in tests of earnings management does not hold when large (positive or negative) external financing activities are present. Our study provides evidence that managers' "normal" operating decisions associated with net external financing activities are likely to lead to economically and statistically significant measurement errors in unexpected accruals. This is a serious concern given the frequency with which the partitioning variable used to identify instances of alleged earnings management is correlated with significant movements in net external financing. Simulation tests show that even at modest levels of net external financing changes, rejection frequencies for the null hypothesis of no earnings management rise dramatically. This result underscores the importance of additional specification tests being conducted to control for estimation biases in unexpected accruals associated with external financing. We suggest the use of matched-firm approach using industry and external financing matches. Using this approach, we demonstrate that prior conclusions about the existence of earnings management around open market repurchases do not appear robust when attempts are made to control for the effect on expected accruals of large changes in net external financing.
Social Science Research Network, 2005
Using a representative sample of monthly portfolio holdings and daily trades, this study presents... more Using a representative sample of monthly portfolio holdings and daily trades, this study presents unique evidence of significant stock selection skill amongst institutional small-cap equity managers on a risk-adjusted basis. Of particular importance is the magnitude of the performance generated by fund managers in our sample. Aggregate four-factor and five-factor alphas are 68 and 59.6 basis points per month before management expenses and tax, respectively. The evidence from holdings and transaction-based metrics of performance also reveals that small-cap equity managers possess superior stock selection ability, from both a statistical and economic perspective. Our results are robust to the deduction of transaction costs. Our research provides important non-U.S. evidence concerning the value of active management, in a market segment which exhibits both lower liquidity and lower analyst coverage. Publication Details
Pacific-basin Finance Journal, Apr 1, 2004
The apparent predictability of stock prices, and the related profitability of investment strategi... more The apparent predictability of stock prices, and the related profitability of investment strategies based on this, has generated a great deal of research. Since the late 1980s, momentum strategies have attracted considerable attention and have been found to be profitable in numerous markets. This paper investigates the returns to short-term and intermediate-horizon momentum strategies in the Australian equity market. We focus on 'practical' or 'realistic' investment strategies, and find that momentum is prevalent in the Australian market and that the returns are of greater magnitude than previously found in overseas markets. These momentum strategy returns are robust to risk adjustment and prevail over time. We also examine the interaction of momentum on size and liquidity variables and conclude that the observed profits to these investment strategies are not explained by size or liquidity differences among the stocks.
Social Science Research Network, 2008
The uncertainty of firm's future payoffs is the dominant factor in explaining firm-level stock re... more The uncertainty of firm's future payoffs is the dominant factor in explaining firm-level stock return volatility at the firm level. However, financial statement numbers (e.g. dividends, accounting earnings), only provide a limited measure of expected payoffs, as they do not reflect firms' fundamentals on a timely basis. We demonstrate theoretically and empirically that information about firms' fundamentals contained in analysts' forecasts, (which we label as "non-accounting information"), is expected to influence future stock return volatility. When combined with Ohlson's (1995) linear information dynamics, the accounting version of the Campbell-Shiller model and Vuolteenaho ( )) implies that if current non-accounting information is more uncertain, then future stock returns are expected to be more volatile. Our empirical evidence supports the theoretical predictions, and the results are valid for measures of both systematic and idiosyncratic volatility. Additional analysis yields some evidence that both favourable and unfavourable news from non-accounting information increases future stock return volatility. Overall, our results indicate that information in analysts' forecasts beyond what is contained in the current financial statements (i.e. dividends, accounting earnings, etc) is associated with fundamentals, and its uncertainty drives the cross-sectional differences in stock return volatility.
Social Science Research Network, 2012
This paper examines the role of industry specialist advisors in M&A transactions using the Additi... more This paper examines the role of industry specialist advisors in M&A transactions using the Additive Revealed Comparative Advantage (ARCA) index to proxy advisors' relative level of industry specialization prior to deal announcement. We find that industry specialist advisors are able to generate higher returns for their acquirer clients, especially in cross-industry transactions, with the value creation resulting primarily from the selection of more synergistic targets and negotiating to pay a lower takeover premium. While specialist advisors are associated with a lower completion probability, they are able to complete tender offers in less time. In addition to superior advice, we find that specialist advisor charge lower fees, suggesting that they are able to pass some cost efficiencies onto their bidder clients. The findings are consistent with the traditional perception of the superiority of industry specialists and show that specialization is beneficial to the M&A advisory market.
Social Science Research Network, 2016
Say on pay" legislation has been introduced in several countries but Australia's version, namely ... more Say on pay" legislation has been introduced in several countries but Australia's version, namely the "two-strikes" rule, is unique in that it empowers shareholders to vote on a board spill if the compensation report of a public company receives 25% or more dissenting votes for two consecutive years. We test the proposition that the "two strikes" rule has increased directors' accountability beyond executive pay because it has substantially lowered the cost to activists of organizing sufficient votes to threaten managers with a board spill. Consistent with this expectation, we find Australian firms respond to negative say-on-pay votes by curbing excessive CEO pay, reducing the growth rate of pay and changing the pay mix. In addition, the results suggest that the market regards negative SOP votes as a value-destroying signal since there is a negative market reaction, lower valuation and long-run underperformance. We also find an increase in CEO turnover but directors do not seem to bear reputational costs through the loss of outside directorships. The findings provide important insights to investors, company directors and regulators. to the passing of SOP legislation is positive in the UK (Cunat et al. 2015). In contrast, in the US stock prices reacted positively when the SOP proposals were defeated (Cai and Walking 2011). It is important to note that inferences drawn from this research provide insights as to how firms respond to empowered shareholder rights, but cannot speak to actions taken by the board in response to shareholder negative votes on compensation or reputational costs, given the uncertainty of voting outcome after adopting SOP. The third line of research considers shareholder SOP votes on compensation, and mostly investigates the impact of shareholder negative votes on the level or structure of future compensation. The results of this research provides mixed evdience. Whilst, Carter and Zamora ( ) and Conyon and Sadler (2010) find no changes on the level or mix of CEO pay, Alissa (2015) suggests that firms respond selectively by reducing the excessiveness of CEO pay, though only when performance is poor. Kimbro and Xu (2016) report that the growth rate of CEO total pay reduces in response to shareholder dissatifaction. This study examines the impact of SOP using the unique Australian setting. In 2011, Australia introduced "say-on-pay" legislation, Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011, which is commonly known as the "two-strikes" rule. Under the "two-strikes" rule, a firm receives a strike if 25% or more of eligible votes are against the remuneration report at the Annual General Meeting (AGM). When a firm receives a strike for two consecutive years (i.e., two strikes), there is then a further majority-based vote on a "spill resolution" to determine whether all directors except the CEO should stand for re-election. If the spill resolution is approved, the firm is required to hold an extraordinary general meeting (the spill meeting) to re-elect all directors except the CEO within 90 days after the AGM. 1 The two-strikes rule attempts to empower minority shareholders by a number of important and innovative ways, including (1) only requiring a 25% vote against the remuneration report to trigger a strike, (2) preventing directors or managers from voting on say on pay resolutions, and (3) forcing the directors to face re-election if the firm obtains two initial "strikes" and a third "spill vote" strike. These innovations provide opportunities to examine the economic consequences of SOP in a unique setting, where shareholder dissent over executive compensation is more likely to be recognized publicly by a strike and directors are more likely to face reputational costs and the threat of board re-election. Thus, our study differs substantially from the first two streams of SOP literature that examine the adoption of SOP regulations or shareholder-sponsored SOP proposals, but relates to the third stream of research testing SOP votes on compensation. Using a hand-collected data for a sample of Australian firms including 369 strikes over 2011-2014, we find that firms receiving a strike tend to have higher CEO abnormal pay and higher growth of CEO cash pay. They are also more likely to have the CEO as the chairman of the board, lower blockholder ownership, poor financial performance, lower market-to-book ratio and smaller size. In addition, our results suggest that firms with higher CEO abnormal pay, a lower market-to-book ratio and small market value are more likely to receive a second strike. We then examine how firms respond to a strike by making changes to CEO compensation. The findings confirm that the "two-strikes" rule results in changes in the size and composition of CEO pay. Specifically, upon receiving the first strike, 1 It is important to note that the "two-strikes" rule has a resetting mechanism where consideration of a spill resolution is only allowed at every second AGM.
Australian Journal of Management, Dec 1, 2010
This paper examines the magnitude and determinants of trading costs for small-cap funds in Austra... more This paper examines the magnitude and determinants of trading costs for small-cap funds in Australia. The total price impact for these funds is 0.99% (-0.34%) for purchases (sales). This is considerably larger than costs reported in prior literature. Both purchases and sales exhibit price continuations after the trade package, consistent with an information effect. Although we do not observe the directional asymmetry typically shown in the literature, the magnitude of the total and permanent effects for purchases is larger than for sales. We also show that price impact is related to fund inflows and outflows. Publication Details
Social Science Research Network, 2000
In an environment where expected litigation costs are relatively low (Australia), we provide evid... more In an environment where expected litigation costs are relatively low (Australia), we provide evidence strongly consistent with signaling considerations influencing the choice of auditor by initial public offering (IPO) firms. When our analysis is confined to smaller IPOs and /or IPOs using less prestigious underwriters (i.e., those IPOs where the use of a high quality auditor is less "routine"), we find that the probability of selecting a high quality auditor is positively related to IPO firms' riskiness, negatively related to the level of retained ownership by the initial owners and positively related to the decision to voluntarily provide information about expected earnings. These results jointly provide support for the signaling models of and , whereby the choice of a high quality auditor represents a trade-off with the level of retained ownership, but is complimentary to the extent of direct disclosure.
Australian Journal of Management, Apr 5, 2012
We provide one of the first comprehensive studies on the out-of-sample stock returns predictabili... more We provide one of the first comprehensive studies on the out-of-sample stock returns predictability in Australia. Whilst most of the empirically well-known predictive variables fail to generate out-of-sample predictability compared to forecasts generated from the historical average equity risk premium, we document a statistically significant out-of-sample prediction in forecasting one year, and to a lesser extent, one quarter future excess returns, using a combination forecast of these variables. Money supply, dividend-to-price ratio and consumption-to-GDP ratio contribute the most information in predicting equity premium. We also find an improved asset allocation performance by relying on the predicted returns generated from the combination forecast of these predictors. However, the improvement of the asset allocation performance is not robust to different sample periods examined. The combing methods are also useful in predicting different sector premia. A dynamic sector rotation strategy relying on forecasts generated by the combining methods significantly outperforms the historical market returns.
To Complete or Not to Complete a Takeover Deal: Will Managers Swim Against the Current?
Social Science Research Network, 2008
ABSTRACT Recent research gives support to the idea that the market reaction to a merger and acqui... more ABSTRACT Recent research gives support to the idea that the market reaction to a merger and acquisition (M&A) announcement predicts whether the acquirer and the target complete the deal. Using a sample of Australian mergers from 1992 to September 2006, we find that the relationship between the probability of deal completion and the market reaction to the announcement, as manifested in the acquirer returns, is affected by investors' consensus. The higher the consensus, the more likely completion is, given a positive market reaction for the acquirer. This effect is observed with our four proxies of consensus / opinion divergence: turnover, bid-ask spread, total return volatility and order imbalance.
Australian Journal of Management, Oct 23, 2013
This study extends an examination of Quality investing in the US to the Australian market. Specif... more This study extends an examination of Quality investing in the US to the Australian market. Specifically, a Quality score is computed as the aggregate of eight fundamental accounting metrics. An investment strategy investing in the highest (lowest) quality stock quintile, that is, Quintile 5 (1) generates an average annual Daniel, Grinblatt, Titman and Wermers (DGTW)-adjusted alpha of 6.37% (-7.98%), which is significant at the 5% level over April 2000-March 2010. A two-way segmentation based on size first, and quality second, reveals that the strong positive quality effect is primarily driven by small stocks, as the average DGTW-alpha for the top-quality tercile of small stocks is 14.02%, significant at the 5% level. Statistically significant positive DGTW-alphas are also determined for quality micro and large stocks. The quality analysis is also applied to a sample of Active Equity Mutual Funds' stock holdings. Weak evidence of the quality return premium is detected at the fund level. Publication Details