European Financial Management 2014 Archive

January 2014, VOL 20:1 March 2014, VOL 20:2 June 2014, VOL 20:3 September 2014, VOL 20:4 November 2014, VOL 20:5

European Financial Management, VOL 20:1, January 2014

The Economics of Donations and Enlightened Self-Interest

Andrea Buraschi and Francesca Cornelli

We use a unique dataset from the English National Opera to study what motivates individuals to donate. The data includes both attendance and benefits (granted and consumed) by all donors. We find that individuals clearly respond to incentives. However, only some individuals are motivated exclusively by private benefits. Some individuals are willing to fund public goods, even though they could free-ride. Moreover, donors who attend special events or new productions develop loyalty and increase their donations over time. Finally, individuals are sensitive to social pressure and network connections. These results can help charities to refocus the design of their fund-raising.

Keywords: Donations, Charity, Altruism

JEL Classification: D1, D64, H41, L3

The Alternative Three-Factor Model: An Alternative beyond U.S. Markets?

Christian Walkshaeusl and Sebastian Lobe

We investigate the performance of the alternative three-factor model across markets. The important U.S. evidence of Chen, Novy-Marx, and Zhang (2010) in favor of the alternative model does not translate to a test setting using data from 40 non-U.S. stock markets. The three-factor model of Fama and French provides persistently a better description of average returns. Our analysis is robust across developed and emerging markets, robust to alternative measures of investment and profitability, to seasonality effects, to size-segmented subsamples and subperiods, to various test assets, and to the two-stage cross-section regression approach to test for priced factors.

Keywords:Alternative Three-Factor Model, Classic Three-Factor Model, International Markets

JEL Classification: G12, G15

Dynamic Relations Between Stock Returns and Exchange Rate Changes

A. Can Inci and Bong Soo Lee

We reexamine the relation between stock returns and exchange rate changes in five major European countries (France, Germany, Italy, Switzerland, and the U.K.), the U.S., Canada, and Japan by taking into account dynamic effects, including lagged changes of variables, and employing causal relations. We find that lagged exchange rates have a significant impact on stock returns. We find evidence of Granger causality from exchange rate changes to stock returns, and also for the reverse direction. Furthermore, the dynamic relation has been more significant and stronger in recent years and recession periods than in early periods and expansion periods.

Keywords:exchange rate exposure, Granger causality, forward premium puzzle

JEL Classification: F31; G12; G15

Impacts of Internal Financing on Investment Decisions by Optimistic and Overconfident Managers

Shinsuke Kamoto

The paper examines the interactions of investment decisions by managers who display optimistic and overconfident biases on the prospects of firm growth and riskiness with internal financing. The model demonstrates that the investment threshold for optimistic and overconfident managers can both rise above and fall below the threshold to maximize the market value of the firm, depending on the level of internal funds. It also derives the optimal level of internal funds that induces the managers to maximize the market value of the firm and illustrates the impacts of managerial optimism and overconfidence.

Keywords:managerial optimism; managerial overconfidence; real options; internal financing

JEL Classification: G13, G31, G32

Illiquidity, Illiquidity Risk, and Stock Returns: Evidence from Japan

Bo Li, Qian Sun and Changyun Wang

This paper investigates whether liquidity and liquidity risk are priced in Japan. Using modified Amihud illiquidity measures, we find both cross-sectional and time series evidence that liquidity is priced in the Japanese stock market during the period 1975ֲ006. The evidence is largely consistent with Amihudӳ (2002) findings in the U.S. market. We further employ the liquidity-adjusted CAPM proposed by Acharya and Pedersen (2005) to examine whether liquidity risk is priced in Japan. Consistent with Acharya and Pedersenӳ findings in the U.S, we show that liquidity risk is priced in the stock market, in addition to the liquidity level. These findings strengthen the confidence that liquidity is a determinant of stock returns.

Keywords:liquidity, Amihud illiquidity measure, liquidity-adjusted CAPM, Japan

JEL Classification: G12

The Sophisticated and the Simple: The Profitability of Contrarian Strategies from a Portfolio Manager's Perspective

Daniel Giamouridis and Chris Montagu

Valuation signals have been among the most popular between equity portfolio managers. Given the large variation of techniques and theories with regard to how value is measured, this study investigates the efficacy of alternative value measures. We consider a cross section of simple and sophisticated alternative measures and focus on comparison metrics of primary interest to equity portfolio managers. Our results show that sophisticated valuation models are superior ֠although not universally ֠relative to simple valuation models in many respects. Thus, we conclude that sophisticated models have interesting attributes and, in general, should be considered as an additional if not primary perspective on equity valuation and portfolio management.

Keywords:capital markets, valuation, market efficiency, portfolio strategies

JEL Classification: G11, G12, G14, M41

Has Europe Been Catching Up? An Industry Level Analysis of Venture Capital Success over 1985ֲ009

Roman Kraussl and Stefan Krause

After nearly two decades of US leadership during the 1980s and 1990s, are Europeӳ venture capital (VC) markets in the 2000s finally catching up regarding the provision of financing and successful exits, or is the performance gap as wide as ever? Are we amid an overall VC performance slump with no encouraging news? We attempt to answer these questions by tracking over 40,000 VC-backed firms stemming from six industries in 13 European countries and the US between 1985 and 2009; determining the type of exit ֠if any ֠each particular firmӳ investors choose for the venture.

Keywords:Venture capital; private equity; entrepreneurial activity; performance gap

JEL Classification: G24, G3

European Financial Management, VOL 20:2, March 2014

Evaluating the Rating of Stiftung Warentest: How Good are Mutual Fund Ratings and Can they be Improved?

Sebastian Muller and Martin Weber

We test the abilities of the Stiftung Warentest fund rating system to predict future fund performance among German registered funds for six equity categories: Germany, Euro-Zone, Europe, North-America, Pacific, and World. Stiftung Warentest is a consumer protection agency and a major provider of fund ratings in Germany. Our empirical analysis documents predictive abilities of the rating system. The reason is that measures of past performance are positively related to future performance in several of these markets, even after controlling for momentum. Measures of fund activity (e.g. Active Share) are also helpful to predict performance, in particular to identify likely future losers. Hence, they should be taken into consideration by consumers when selecting a fund and rating agencies when revising current rating methodologies.

Keywords:mutual funds, performance evaluation, performance persistence, mutual fund ratings, active management

JEL Classification: G11, G12, G1

Financial professionalsҠoverconfidence: Is it experience, function, or attitude?

Oliver Gloede and Lukas Menkhoff

This paper examines financial professionalsҠoverconfidence in their forecasting performance. We compare individualsҠself-rating of performance with the true performance, both mea- sured relative to the same peer group. The forecasters in our sample show overconfidence on average, although to a moderate degree, including many cases of underconfidence. In ana- lyzing this, we find that working experience is accompanied by less overconfidence. Function is also related to less overconfidence, such as being a fund manager and using fundamental analysis. The same effect is found for the attitude to herd, whereas recent success appears with more overconfident professionals.

Keywords:better-than-average, self-rating, forecasting, foreign exchange, performance

JEL Classification: G1, D84, F31

Time-varying Integration in European Government Bond Markets

Pilar Abad, Helena Chulia and Marta Gomez-Puig

Bond market integration clearly changes in response to economic and financial conditions, since the level of risk aversion changes and investors require time-varying compensation for accepting a risky payoff from financial assets. In this paper we examine the dynamic behavior of European Government bond market integration using an asset pricing model based on that of Bekaert and Harvey (1995). Our sample period begins in 2004, after a period of calm and tranquility, and ends in 2009, with a significant widening of sovereign bond spreads. Our results show evidence of time-varying level of integration for all European countries and suggest that, from the beginning of the financial market tensions in August 2007, markets moved towards higher segmentation, and the differentiation of country risk factors increased substantially across countries. However, the impact of the financial and economic crisis has been much more harmful for EMU membersҠsovereign bond markets, since it has prompted an important backward step in their integration process.

Keywords:Monetary Union, sovereign securities markets, bond market integration

JEL Classification: E44, F36, G15

The Liquidity Dynamics of Bank Defaults

Stefan Morkoetter, Matthias Schaller and Simone Westerfeld

We compare liquidity patterns of 10,979 failed and non-failed US banks from 2001 to mid-2010 and detect diverging capital structures: Failing banks distinctively change their liquidity position about three to five years prior to default by increasing liquid assets and decreasing liquid liabilities. The build-up of liquid assets is primarily driven by short term loans, whereas long term loan positions are significantly reduced. By abandoning (positive) term transformation throughout the intermediate period prior to a default, failing banks drift away from the traditional banking business model. We show that this liquidity shift is induced by window dressing activities towards bondholders and money market investors as well as a bad client base.

Keywords:Liquidity, bank default, capital structure, income structure

JEL Classification: G21, G01

Time Varying Liquidity Trading, Private Information and Insider Trading

Qin Lei and Xuewu Wang

This paper investigates the insider trading before scheduled versus unscheduled corporate announcements to explore how corporate insiders utilize their private information in response to the time-varying liquidity trading. Using a comprehensive insider trading database, we show that: (1) the insiderӳ propensity to trade increases in the amount of liquidity trading before both the scheduled and unscheduled announcements; (2) insiders buy (sell) more before positive (negative) announcements; and (3) insider purchases are more profitable before unscheduled announcements than before scheduled ones. They suggest that insiders time their trades around scheduled and unscheduled announcements to exploit the varying extent of liquidity trading.

Keywords:Time Varying, Liquidity Trading, Insider Trading

JEL Classification: G10, G14

Direct and Indirect Effects of Index ETFs on Spot-Futures Pricing and Liquidity: Evidence from the CAC 40 Index

Laurent Deville, Carole Gresse and Beatrice de Severac

This paper investigates how the introduction of an Exchange-Traded Fund (ETF) directly or indirectly impacts the underlying-index spot-futures pricing. Using intraday data for financial instruments related to the CAC 40 index, we do not find that the spot-futures price efficiency improvement observed after ETF introduction is explained either by the direct effect of ETF shares being used in arbitrage trades or by the indirect effect of ETF trading improving the liquidity of index stocks in the short-run. Some of our findings suggest that the efficiency improvement could rather result from a structural change in the way index traders distribute across index markets, with the ETF market absorbing the liquidity demand from some hedgers or passive index traders.

Keywords:Futures; Exchange-Traded Fund; ETF; Efficiency; Arbitrage; Liquidity

JEL Classification: G12; G13; G14

Delistings, Controlling Shareholders, and Firm Performance in Europe

Ettore Croci and Alfonso Del Giudice

Using a novel European data set, we investigate the role of controlling shareholders in delisting decisions. Minority shareholders earn lower abnormal returns when the controlling shareholder takes the company private, but this lower premium disappears when we control for the firmӳ characteristics. After the delisting, firms delisted by their controlling shareholders do not improve their operating performance. These results do not suggest that controlling shareholders expropriate minority investors with minority freeze-outs. Our findings are not due to heterogeneity across controlling shareholders. In fact, when we focus on family controlling shareholders, we find no evidence of performance improvement after the delisting.

Keywords:delisting, freeze-out, private firm, going private

JEL Classification: G34

Private Equity Lemons? Evidence on Value Creation in Secondary Buyouts

Ann-Kristin Achleitner and Christian Figge

This paper analyses whether secondary buyouts have a value creation profile and offer equity returns different to that of primary buyouts. Using a sample of 2,456 buyout transactions (including 448 secondary buyouts), we find no evidence that secondary buyouts generate lower equity returns or offer fundamentally lower operational value creation potential. However, we can show that secondary buyouts obtain 28-30% more leverage (measured in terms of debt / EBITDA) than primary buyouts, even after having controlled for debt market conditions. Furthermore, we find evidence that secondary buyouts are 6-9% more expensive than other buyouts.

Keywords:secondary buyouts, private equity, value creation

JEL Classification: G11, G24, G34

European Financial Management, VOL 20:3, June 2014

U.S. Analyst Regulation and the Earnings Forecast Bias around the World

Armen Hovakimian and Ekkachai Saenyasiri

We examine the spillover effects of the Global Analyst Research Settlement (or Global Settlement) on analystsҠearnings forecasts in 40 developed and emerging markets. Prior to the Global Settlement, analysts generally made overly optimistic forecasts, this bias tending to be higher in countries with less investor protection. This forecast bias declined significantly after passage of the Global Settlement, the spillover effect being stronger for countries with lower investor protection. The spillover effect is also stronger for countries with a more significant presence of the analysts of the 12 banks directly involved in the Global Settlement.

Keywords:analyst regulation; investor protection; cross-country spillover; analyst forecast bias; analyst conflicts of interest

JEL Classification: G15, G24, G28, G29, G38

Manager Divestment in Leveraged Buyouts

James Ang, Irena Hutton and MaryAnne Majadillas

We examine changes in managersҠinvestment in the firm around leveraged buyouts and find agency costs counter to those described in extant literature. In majority of deals during 1997-2008, managers divested a portion of their pre-LBO shareholdings while maintaining an ownership stake in the post-LBO firm. Such divestment opportunities encourage managers to behave in a way that benefits existing shareholders but is costly to new investors. We report a positive relation between managementӳ divestment and pre-LBO earnings management, market timing, and better buyout pricing. Although managerial divestment also leads to subpar post-buyout performance, the involvement of private equity mitigates it.

Keywords: Leveraged buyouts, private equity, agency costs, earnings management, buyout pricing, buyout premium, buyout performance

JEL Classification: G340

The Performance of Socially Responsible Funds: Does the Screening Process Matter?

Gunther Capelle-Blancard and Stephanie Monjon

This paper examines whether the financial performances of socially responsible investment (SRI) mutual funds are related to the features of the screening process. Based on a sample of French SRI funds, we find evidence that a greater screening intensity slightly reduces financial performance (but the relationship runs in the opposite direction when screening gets tougher). Further, we show that only sectoral screens ֠such as avoiding ԳinԠstocks ֠decrease financial performance, while transversal screens ֠commitment to UN Global Compact Principles, ILO/Rights at Work, etc. רave no impact. Lastly, when the quality of the SRI selection process is proxied by the rating provided by Novethic, its impact is not significant, while a higher strategy distinctiveness amongst SRI funds, which also gives information on the quality of the selection process, is associated with better financial performance.

Keywords:Socially Responsible Investment (SRI), Sustainable and Responsible Investment, Ethical Investment, Corporate Social Responsibility (CSR), Strategy Distinctiveness Index, Portfolio Choice, Ratings.

JEL Classification: G11, Q56, C32

Strategic Asset Allocation and the Role of Alternative Investments

Douglas Cumming, Lars Helge Hass and Denis Schweizer

We introduce a framework for strategic asset allocation with alternative investments. Our framework uses a quantifiable risk preference parameter, ?, instead of a utility function. We account for higher moments of the return distributions and approximate best-fit distributions. Thus, we replace the empirical return distributions with two normal distributions. We then use these in the strategic asset allocation. Our framework yields better results than Markowitzӳ framework. Furthermore, our framework better manages regime switches that occur during crises. To test the robustness of our results, we use a battery of robustness checks and find stable results.

Keywords:alternative investments; higher moments; strategic asset allocation

JEL Classification: G2, G12, G31

What Drives Contagion in Financial Markets? Liquidity Effects versus Information Spill-Over

Lars Helge Hass, Christian Koziol and Denis Schweizer

The objective of this paper is to study how contagion works in financial markets by identifying the mechanisms which drive the spill-over of shocks from one market to other markets. To address this question we use open-ended property funds (OPFs) as they offer a unique institutional setting which allows separating between liquidity and information spill-over. We find that that liquidity risk captures the observed discounts very well when the danger of potential future impairments is low. Once the impending NAV impairments become very likely, also this component matters and attributes for a fraction of the total discount.

Keywords:Financial Contagion, Liquidity Risk, Information Spill-Over, Open-ended Property Funds, Temporary Suspension of Share Redemptions

JEL Classification: G1, G14

The Co-movement Dynamics of European Frontier Stock Markets

Jarno Kiviaho, Jussi Nikkinen, Vanja Piljak and Timo Rothovius

We examine, through application of wavelet coherency, the co-movement of European frontier stock markets with the US and developed markets in Europe. We find that the strength of co movement varies considerably across the frontier markets, at different frequencies (time horizons), and over time. Co-movement is relatively weaker for the frontier markets of Central and Southeastern Europe than in the Baltic region. Of the markets examined, Slovakia in particular shows low dependence, whereas Lithuania seems to be the most dependent market. Co-movement is stronger at lower frequencies (longer horizons) and increases during the turbulent period of the global financial crisis of 2008/2009. We identify several macroeconomic factors related to variations in co-movement at different time frequencies.

Keywords:frontier market, co-movement of stock returns, wavelets

JEL Classification: C40, F30, F36, G15

The Impact of the Corporate Governance Code on Earnings Management: Evidence from Chinese Listed Companies

Jean J Chen and H. Zhang

This study investigates the impact of implementation of the Code of Corporate Governance for Listed Companies in China adopted in 2002 on constraining earnings manipulations. We find that, in general, the 2002 CODE had a positive impact on curbing earnings management through the introduction of independent non-executive directors to the board of directors and the audit committee, and accounting/financial experts on the audit committee. Although such an impact was minimal when the listed firms were state-controlled, it became significant once they were privately-controlled. Overall, our findings reveal that the quality of corporate governance is essential in deterring the use of earnings management, where regulatory reform plays an important role in improving this process.

Keywords:Earnings Management, Corporate Governance, Chinese Corporate Governance Code

JEL Classification: M4, G39, M52

Ambiguity Aversion, Company Size and the Pricing of Earnings Forecasts

Constantinos Antoniou, Emilios Galariotis and Daniel Read

Several authors have reported an unconditional size effect in returns around earnings announcements. In this study we show how this finding can be understood as resulting from ambiguity aversion. We hypothesize that analyst forecasts for smaller companies are relatively more ambiguous; hence they are priced pessimistically by ambiguity-averse investors. As the quarter comes to a close and ambiguity gradually subsides, the stock prices of smaller companies rise to correct this pessimism, creating the size effect. Our results support these hypotheses.

Keywords:Ambiguity aversion, size premium, analyst earnings forecasts

JEL Classification: D03, D81, D84, G11, G14

How Does CEO Power Affect Analyst Coverage?

Pornsit Jiraporn,Yixin Liu and Young S. Kim

We examine how CEO power affects the extent of analyst coverage. CEO power may influence the CEOӳ incentives to disclose information. The amount of information disclosed by the firm in turn influences the information environment, which affects the financial analystӳ incentives to ԣoverԠor ԦollowԠthe firm. Consistent with this notion, we show that firms with powerful CEOs are covered by fewer analysts. In addition, the evidence shows that firms with more powerful CEOs experience less information asymmetry. Powerful CEOs are well-insulated and have less incentives to conceal information, resulting in more transparency. The information provided to investors directly by the firm substitutes for the information in the analystӳ report. As a result, the demand for analyst coverage is lower. Our results are important as they show that CEO power matters to corporate outcomes, such as corporate transparency and analyst following.

Keywords:analyst coverage, analyst following, CEO power, agency theory, agency costs, agency conflicts

JEL Classification: G34, M41

European Financial Management, VOL 20:4, September 2014

Are all Credit Default SWAP Databases Equal?

Sergio Mayordomo, Juan Ignacio Pena and Eduardo S. Schwartz

We compare the five major sources of corporate Credit Default Swap prices: GFI, Fenics, Reuters, CMA, and Markit, using the most liquid single name 5-year CDS in the iTraxx and CDX indexes from 2004 to 2010. Deviations from the common trend among prices in the different databases are not random but are explained by idiosyncratic factors, financing costs, global risk, and other trading factors. The CMA quotes lead the price discovery process. Moreover, we find that there is not a full agreement among databases in the results of the price discovery analysis between stock and CDS returns.

Keywords: Credit Default Swap prices, Databases, Liquidity

JEL Classification: F33, G12, H63

Understanding Short versus Long-run Risk Premia

Andrea Buraschi and Andrea Carnelli

This paper studies the link between short and long-run risk premia. We extract short-term risk premia from contemporaneous information on short-term futures and cash equity markets under the assumption of no arbitrage. Predictability regressions reveal that short-term risk premia capture different information from long-run risk premia. Counter to the intuition that a high price of risk commands high returns, high short-run risk premia on dividend claims predict low returns on the index. While inconsistent with models featuring either habit persistence or long-run risk, the results may be reconciled with some models of uncertainty aversion.

Keywords:equity risk premium, predictability, dividend prices, asset pricing models

JEL Classification: G10, G12, G13

Expected Returns to Stock Investments by Angel Investors in Groups

Ramon DeGennaro and Gerald Dwyer

Previous research calculates realized internal rates of return on angel investments but does not estimate expected returns. We present the first estimates of expected returns on angel investments by applying a consistent statistical framework to a new data set. Our sample spans 1972 to 2007 with 419 exited investments. Our results suggest that expected returns on stock for angel investors in groups are about 70 percent per year in excess of the riskfree rate. These expected returns have a large variance and are heavily skewed, with many losses and occasional extraordinarily high returns.

Keywords:Angel Investor, Expected Return, Private Equity, Angel Investments

JEL Classification: G24,G20

Block Premia, Litigation Risk and Shareholder Protection

Julien Le Maux and Claude Francoeur

Blocks of shares are typically traded at a premium for the buyer. The academic literature shows that anticipated private benefits are the main determinant of this premium rather than the projected value of future synergies. The results of this study indicate that a targetӳ litigation risk has a significant impact on the control premium. Acquirers tend to lower block premia significantly in anticipation of potential litigation related to financial disclosure or the targetӳ market value. Legal shareholder protection also plays a significant role in countering shareholder expropriation. Block buyers pay higher premia to acquire targets that operate in protective legal environments.

Keywords:Block premium; block trades; litigation risk; mergers and acquisitions; shareholders rights

JEL Classification: G34; K40

Agency-Based Asset Pricing and the Beta Anomaly

David Blitz

I argue that delegated portfolio management can cause the equilibrium relation between CAPM beta and expected stock returns to become flat, instead of linearly positive, and propose an alternative to the widely used Fama and French (1993) 3-factor asset pricing model which incorporates this agency effect. An empirical comparison of the two models shows that the agency-based 3-factor model is much better at explaining the performance of portfolios sorted on beta or volatility, and at least as good at explaining the performance of various other test portfolios, including those the original 3-factor model was designed to explain.

Keywords:asset pricing, beta anomaly, volatility anomaly, Fama-French 3-factor model, agency problems, delegated portfolio management

JEL Classification: C12, G11, G12, G14

Infrastructure: Real Assets and Real Returns

Ron Bird, Harry Liem and Susan Thorp

Little empirical work has been done on infrastructure as an asset class despite increased allocations by institutional investors. Managers claim infrastructure investments offer real return benefits via a combination of monopolistic and defensive assets. We build a robust factor model of infrastructure returns using US and Australian infrastructure and utility data. We find evidence of excess returns and inflation hedging, but not of defensive characteristics. We compare option-based models designed to replicate infrastructure asset returns, and identify the regulatory risk premium. A combination of inflation linked bonds and covered call strategies results in improved defensive and inflation hedging characteristics.

Keywords:inflation hedging; regulatory risk premium; infrastructure assets

JEL Classification: G12; G14

The Efficiency of Performance-based-fee Funds

Ana C. Diaz-mendoza, German Lopez-espinosa And Miguel Angel Martinez

This paper compares the efficiency of mutual funds that charge management fees based totally or partially on returns (performance) with those that charge them exclusively on assets under management. We analyse Spanish risky mutual funds during 1999-2009 for which both types of management fees are authorized. We find that performance-based fee funds perform significantly better than the other risky funds considered. Moreover, a strongly positive performance-expenses relation is found for such funds, and negative for the other. These results seem to indicate more efficient management in performance-based fee funds, in contrast with their low presence in the fund industry.

Keywords:Risk-adjusted performance; expenses; efficiency; evaluation models

JEL Classification: G11, G12

European Financial Management, VOL 20:5, November 2014

The Impact of Quantitative Methods on Hedge Fund Performance

Ludwig Chincarini

In the last 20 years, the amount of assets managed by quantitative and qualitative hedge funds have grown dramatically. We examine the difference between quantitative and qualitative hedge funds in a variety of ways, including management differences and performance differences. We find that both quantitative and qualitative hedge funds have positive risk-adjusted returns. We also find that overall, quantitative hedge funds as a group have higher as than qualitative hedge funds. The outperformance might be as high as 72 bps per year when considering all risk factors. We also suggest that this additional performance may be due to better timing ability.

Keywords:quantitative portfolio management, alpha, hedge funds, returns

JEL Classification: G0, G10, G11, and G23

Ranking Underwriters of European IPOs

Katrin Migliorati and Silvio Vismara

Reputational capital is a valuable asset for underwriters in IPO markets. Existing measures of their reputation are tailored to the US market, where the same established investment banks typically handle IPOs on both the NYSE and NASDAQ. The widely used Carter-Manaster rankings do not grade the reputations of underwriters of 67.5% of IPOs in Europe. The European IPO market is a series of domestic markets, where most underwriters operate almost entirely in a single country. This paper presents European-based rankings of 260 underwriters of 3,776 IPOs in France, Italy, Germany, and the UK from 1995 to 2010, with the number of IPOs underwritten and the amount of capital raised.

Keywords: IPOs, underwriters, underpricing, AIM

JEL Classification: G15, G24, G30

Tweets and Trades: The Information Content of Stock Microblogs

Timm O. Sprenger, Andranik Tumasjan, Philipp G. Sandner and Isabell M. Welpe

Microblogging forums (e.g., Twitter) have become a vibrant online platform for exchanging stock-related information. Using methods from computational linguistics, we analyze roughly 250,000 stock-related messages (so-called tweets) on a daily basis. We find an association between tweet sentiment and stock returns, message volume and trading volume, as well as disagreement and volatility. In contrast to previous related research, we also analyze the mechanism leading to an efficient aggregation of information in microblogging forums. Our results demonstrate that users providing above average investment advice are retweeted (i.e., quoted) more often and have more followers, which amplifies their share of voice.

Keywords: Twitter; microblogging; stock market; investor sentiment; text classification; computational linguistics

JEL Classification: G12; G14

European Bond ETFs-Tracking Errors and the Sovereign Debt Crisis

Mikica Drenovak, Branko Urosevic, and Ranko Jelic

This study examines the tracking performance of 31 eurozone sovereign debt exchange traded index funds (ETFs) during 2007-2010. The tracking performance was assessed by four different tracking error models. Overall, funds underperform their respective benchmarks. Active returns (net of fees) vary substantially (from +46.74 to -30.36) basis points and are of considerable economic interest. The significant differences in the performance of swap-based and in-kind funds highlight importance of appropriate metrics (e.g. correlation vs. cointegration) required for assessment of funds adopting different replication methods. We also document important changes in the tracking performance due to changing characteristics of the EU sovereign bonds since the start of the financial crisis.

Keywords:exchange-traded funds, tracking errors, fixed-income, sovereign debt crisis

JEL Classification: D81, E43, G15, G24

Low Risk and High Return - Affective Attitudes and Stock Market Expectations

Alexander Kempf, Christoph Merkle and Alexandra Niessen-Ruenzi

This experimental study investigates the impact of affective attitudes on risk and return estimates of stocks. Participants rate well-known blue-chip firms on an affective scale and forecast risk and return of the firms' stock. We find that positive affective attitudes lead to a prediction of high return and low risk, while negative attitudes lead to a prediction of low return and high risk. This bias increases with participants' confidence in their ratings and decreases with financial literacy. Firm characteristics such as a firm's marketing expenditures and the strength of its brand have a positive impact on its affective rating.

Keywords:Affective Attitudes, Risk and Return Expectations, Behavioral Finance, Affect Heuristic

JEL Classification: D80; G02; G11

Stochastic Equipment Capital Budgeting with Technological Progress

Roger Adkins and Dean Paxson

We provide multi-factor real option models (and quasi-analytical solutions) for equipment capital budgeting under uncertainty, when there is either unexpected, or anticipated, or uncertain (volatile) technological progress. We calculate the threshold level of revenues and operating costs using the incumbent equipment that would justify replacement. Replacement is deferred for lower revenue thresholds. If progress is anticipated or highly uncertain, alert financial managers should wait longer before replacing equipment. Replacement deferral increases with decreases in the expected correlation between revenue and operating costs, and with increases in the revenue and/or operating cost volatility. Uncertain technological progress increases the real option value of waiting. The best approach for equipment suppliers is to reduce the expected revenue and/or cost volatility, and/or reduce the expected uncertainty of technological innovations, since then an incentive exists for the early replacement of old equipment when a technologically advanced version is launched.

Keywords:Equipment Replacement, Capital Budgeting, Quasi-analytical Solution, Real Replacement Option Value, Uncertain Technological Progress

JEL Classification:D81, G31