• Selected
• Entire List

Abstract:
The first-year MBA finance course regularly includes a discussion of the CAPM. This teaching note extends the typical textbook discussion of CAPM in two ways. First, it provides a step-by-step approach explaining empirically how one can calculate beta and alpha using simple regression. Second, it extends the risk-return asset pricing relationship to the richer three-factor Fama-French model. By examining and controlling for the multiple betas of this model, students can come to understand mutual fund investment styles and multi-factor alphas.

Abstract:

Finance is an inherently quantitative subject, and educators at both the undergraduate and graduate levels often struggle with finding the optimal approach that maximizes understanding and retention for their students, especially for students who are mathematically challenged.

In this column, we offer and encourage an approach we label "Spreadsheet Modeling" that has been quite successful in our classes and is growing in popularity. Obviously, spreadsheet modeling is not new. Academics and practitioners have benefited from it since the early 80's. Nor is our recommended approach completely new or the definitive final word on the subject. Our primary conviction is simply that the optimal use of spreadsheets for teaching finance and investments has been only modestly explored, and the benefits of using them is strictly "positive NPV" for initial student learning and concept retention.

In this column, we first summarize the pedagogical issues of why "Spreadsheet Modeling" as an overall approach works so well, and the value of differing sub-approaches. Then we offer several examples from our own classes and a survey of available resources (including textbook supplements) especially for investments-type courses.

Abstract:
Managers of firms going public usually do not sell their own shares at the initial public offering. Instead, they often sell a portion of their shares at the end of the lockup period. We develop a model in which the manager strategically underprices the IPO in order to maximize his wealth from selling shares at lockup expiration. First-day underpricing creates information momentum, i.e., it generates incremental comments and recommendations by research analysts, especially by non-lead underwriter analysts. This increased research coverage shifts the demand curve for the stock outwards, allowing the manager to sell shares at the lockup expiration at prices higher than he would otherwise be able to obtain. We test the model on a sample IPOs in the 1990s. We find that managerial share and option holdings are positively correlated with first-day underpricing and that higher first-day underpricing leads to more analyst research coverage. We also find that research coverage is positively correlated with stock price performance through the lockup expiration and with insider selling at the expiration of the lockup. Overall, the empirical results are consistent with the model.

IPO, lockup expiration, insider selling, underpricing

Abstract:
Finance is a core discipline of business studies. This analysis and its accompanying spreadsheets attempt to document the state of required finance coursework in 19 of the top 20 MBA programs according to the Business Week poll taken in 2000 and in 3 other international programs. Core requirements in general (usually taken in the first year of the traditional 2-year MBA program) are in a state of flux. At least two schools have abandoned "required" finance courses in favor of distributional requirements or alternatively using first-year courses as prerequisites for more advanced electives in the program. Other programs have rationalized or reduced core requirements, while at least one school has added a second required course in the first year. This analysis will focus on the commonalities and differences in the core MBA requirements. The key issues to be examined in this document include time on task (the number of hours required by the top programs), the topics that are common among most programs, the textbooks that are used, and finally, the ordering of the topics within the course.

Abstract:
The information value of analysts' recommendations is particularly enhanced by taking an industry perspective. Three benefits emerge. First, we show that analyst recommendation changes provide signals that can be used to successfully rank future relative underperforming and outperforming stocks within industries. When this ranking is used to form industry-neutral portfolios, the return-to-risk ratio improves almost 100% relative to portfolios in which industry weighting is ignored. The value of analyst recommendation signals, examined with the industry perspective, is remarkably consistent through time. Industry-neutral portfolio Sharpe ratios are six times larger than those of typical price momentum strategies. Second, examining recommendation information by industry permits the disentanglement of the value added by analysts from the well-documented price momentum anomaly. Equal-industry-weighted recommendation portfolios have greatly reduced loadings on price momentum relative to un-weighted strategies. Third, the industry perspective permits an examination of the link between analyst recommendation information, aggregated at the industry level, and industry returns.

Industry returns precede industry-aggregated analyst information in the next month, suggesting that analysts take strong cues from recent industry returns in revising their opinions on stocks they follow. Perhaps more interestingly, however, we do not find that industry-aggregated analyst recommendation information predicts future relative underperforming and outperforming industries in any meaningful, incremental way.

Abstract:
First graduate-level finance courses in investments or corporate finance often presuppose knowledge of the first essential finance paradigm: time value of money (TVM). Yet, many incoming MBAs do not know the concept and need to get up the learning curve quickly on how to calculate present and future values of single cash flows and annuities. This tutorial attempts to link the mathematical concepts (and their equations) to step-by-step calculating steps a student needs to learn on both spreadsheet and calculator. It has been used with success as a self-contained, pre-course tutorial that takes the typical student 2-3 hours to complete. Additional practice problems with worked out answers are also included.

Abstract:
Option valuation is one of the most difficult topics to teach in the basic finance course. It is intimidating to many students as being too abstract and involving too much mathematics. The purpose of this paper is to introduce the essential ideas behind option valuation using an intuitive and visual approach.

We focus on building the student's intuition about uncertainty in stock prices and its impact on option value through simple examples and simulation. Nothing more than basic knowledge of probability distributions and present value is required to understand our approach.

Abstract:
Mutual fund performance evaluation in its simplest form in a first-year MBA investments course can be thought of as examining the residual alpha of a fund after controlling for multiple beta risks. This empirical exercise, which may be used with the teaching note, Understanding Risk and Return, the CAPM, and the Fama-French Three-Factor Model, allows students to apply their understanding of multi-factor models to a typical real-world investment problem. The case is accessible for students that have a basic understanding of multiple regression.

Abstract:
Despite underwriters' efforts to balance supply and demand in the IPO price setting mechanism, we show that the market accurately predicts (in the first-day return and volume) the direction but not the full magnitude of underwriters' pricing errors. That is, first-day winners continue to be winners on average (outperforming a size-adjusted benchmark) over the first year, and first-day "dogs" continue to be relative "dogs". A trading rule of "buy first-day solid performers" beginning at the close of the IPO's second trading day outperforms the portfolio of first-day losers by about 14% in the next year during the 1988-1995 time period. An exception to this rule is the performance of extra- hot IPOs (with a first-day return greater than 50 to 60%) which are poor one-year performers on average. We also find that a measure of flipping, the dollar volume of sell-motivated block trades as a percent of total dollar volume on the first-day, has significant power to predict future returns, lending credence to investors' "flipping" of cold IPOs as a rational strategy. Furthermore, we show that first-day flipping can be predicted from ex ante factors. Thus, we conclude that underwriters' pricing errors at both extremes (initial cold and very hot IPOs) are intentional and strategic.

Abstract:
This paper presents and analyzes a survey taken of core (required) finance courses in the curricula of the highest-reputation MBA programs in the school year 2004-2005. Five of the nineteen schools responding have increased hours spent in the finance core substantially, compared to results of our earlier survey in 2001. We received mixed signals on the trends or tendencies that we were able to ascertain from our previous survey in 2001. We consolidate item-by-item response from these schools in the Key Summary Table in the hope to present a true and holistic picture of core finance course teaching in top MBA programs.

Abstract:
The bookbuilding procedure for selling initial public offerings (IPO) to investors has captured significant market share from auction alternatives in recent years, despite the significantly lower costs related to the auction mechanism in terms of direct fees and initial underpricing. This article shows that in the French market, where the frequency of bookbuilding and auctions was approximately equal in the 1990s, the ostensible advantages to the issuer using bookbuilding were advertising-related benefits. Specifically, we find that book-built issues were more likely to be followed and positively recommended by the lead underwriters, as well as to receive "booster shots" after issuance if the shares had fallen. Even nonunderwriters' analysts appear to promote book-built issues more but only as a way of currying favor with the IPO underwriter for allocations of future deals. Yet we do not observe valuation or post-IPO return differentials that suggest these types of promotion have any value to the issuing firm. We conclude that underwriters using the bookbuilding procedure have convinced issuers of the questionable value of the advertising and promotion of their shares.

IPO, book-building, auctions

Abstract:
The advent of personal computer technology in the last two decades has brought with it new opportunities for pedagogy. While the principles of good pedagogy are essentially timeless, the cosmetic delivery of the message through course files and web pages, intra-net servers, and presentation software has become more sophisticated and certainly more efficient. For those who are considering a switch to PowerPoint, this paper makes recommendations on getting up the learning curve efficiently, including recommendations on additional hardware and software devices that make developing and presenting easier. At the entry level, PowerPoint is hardly more than a page-based word processing program. However, using its advanced features, it provides a highly professional system for class note organization and electronic delivery that can dominate the standard tools (transparencies and blackboard) of prior decades for some types of teaching. Not surprisingly, the use of PowerPoint has strengths and weaknesses, depending on the teaching style the professor employs. PowerPoint is least effective in a case-based environment and most effective when it is used to produce course notes, which supplement or replace a textbook, or background bullet points for a lecture.

Abstract:
Contrary to concerns about the equity research analysis industry's perceived decline, we find that both the amount of coverage and the precision of earnings estimates have increased over the past twenty-four years. We also study how the stock market behaves around changes in analyst coverage. We find that firms added (dropped) by analysts have positive (negative) contemporaneous abnormal returns and zero (positive) future abnormal returns. Evidence on the bias of cash flow expectations and divergence of opinions suggests a mispricing rather than a fundamentals explanation. Moreover, the abnormal returns are captured by individuals rather than institutions and are compensation to individuals for holding illiquid stocks.

Abstract:
The events of September 11 provided an extraordinary teaching experience for schools and educators. Schools cancelled classes, organized prayer services, made grief counselors available, heightened security, organized ways for members of the community to help, assisted alumni to establish roll-calls to check for the missing, and encouraged tolerance. For those of us in the classroom, the response was somewhat more intimate. Many students looked to faculty in new ways - not simply as experts who helped them learn Finance, but also as sources of direction in troubled times. We asked the members of the Advisory Board about their teaching experiences in this time and how they and their schools reacted to the events. We are grateful to those educators who choose to share their reflections with us and we hope you find them interesting. If you would like to share your thoughts, please send them in an email to Roundtable@SSRN.Com, let us know whether you want to be identified by name. We will post the follow up as an addendum to this feature.

Abstract:
Between 1999 and 2007, WR Hambrecht completed 19 IPOs in the U.S. using an auction mechanism. We analyze investor behavior and mechanism performance in these auctioned IPOs using detailed bidding data. The existence of some bids posted at high prices suggests that some investors (mostly retail) try to free-ride on the mechanism. But institutional demand in these auctions is very elastic, suggesting that institutional investors reveal information in the bidding process. Investor participation is largely predictable based on deal size, and demand is dominated by institutions. Flipping is at most as prevalent in auctions as in bookbuilt deals – but unlike in bookbuilding, investors in auctions do not flip their shares more in “hot” deals. Finally, we find that institutional investors, who provide more information, are rewarded by obtaining a larger share of the deals that have higher 10-day underpricing. Our results therefore suggest that auctioned IPOs can be an effective alternative to traditional bookbuilding.

Initial public offerings, investment banking, auctions

Abstract:
Between 1999 and 2007, WR Hambrecht has completed 19 IPOs in the U.S. using an auction mechanism. We analyze investor behavior and mechanism performance in these auctioned IPOs using detailed bidding data. The existence of some bids posted at high prices suggests that some investors (mostly retail) try to free-ride on the mechanism. But institutional demand in these auctions is very elastic, suggesting that institutional investors reveal information in the bidding process. Investor participation is largely predictable based on deal size, and demand is dominated by institutions. Flipping is equally prevalent in auctions as in bookbuilt deals - but unlike in bookbuilding, investors in auctions tend to flip their shares more in cold deals. Finally, we find that institutional investors, who provide more information, are rewarded by obtaining a larger share of the deals that have higher initial returns. Our results therefore suggest that auctioned IPOs could be an effective alternative to traditional bookbuilding.

Initial public offerings, investment banking, auctions

Abstract:
When an analyst changes his recommendation of a stock, his valuation differs from the market's valuation based on differences in earnings estimates and/or discount rate estimates. We argue that earnings-based recommendation changes are characterized by hard information, greater verifiability, and shorter forecast horizons compared to discount rate-based recommendation changes. Therefore, earnings-based recommendation changes are less subject to analysts' cognitive and incentive biases and thus they are more informative than discount rate-based recommendation changes. Consistent with this argument, we find that investors differentiate between earnings-based and discount rate-based recommendation changes. Both the initial market reaction to and the drift after recommendation changes are twice as big for earnings-based versus discount rate-based recommendation changes. Trading on earnings-based recommendation changes earns risk-adjusted returns of over three percent per month.

analysts, brokers, recommendations, earnings, growth rates, discount rates, information, market efficiency

Abstract:
Initiations and omissions of dividend payments are important changes in corporate financial policy. This paper investigates the market reaction to such changes in terms of prices, volume, and changes in clientele. Consistent with the prior literature we find that short run price reactions to omissions are greater than for initiations (-7.0% vs. +3.4% three day return). However, we show that, when we control for the change in the magnitude of dividend yield (which is larger for omissions), the asymmetry shrinks or disappears, depending on the specification. In the 12 months after the announcement (excluding the event calendar month), there is a significant positive market-adjusted return for firms initiating dividends of +7.5% and a significant negative market-adjusted return for firms omitting dividends of -11.0%. However, the post dividend omission drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples (long in initiation stocks and short in omission stocks) earns positive returns in 22 out of 25 years. Although these changes in dividend policy might be expected to produce shifts in clientele, we find little evidence for such a shift. Volume increases, but only slightly and briefly, and there are no important changes in institutional ownership.

Abstract:
Initiations and omissions of dividend payments are important changes in corporate financial policy. This paper investigates the market reaction to such changes in terms of prices, volume, and changes in clientele. Consistent with the prior literature we find that short run price reactions to omissions are greater than for initiations (-7.0% vs. +3.4% three day return). However, we show that, when we control for the change in the magnitude of dividend yield (which is larger for omissions), the asymmetry shrinks or disappears, depending on the specification. In the 12 months after the announcement (excluding the event calendar month), there is a significant positive market-adjusted return for firms initiating dividends of +7.5% and a significant negative market-adjusted return for firms omitting dividends of -11.0%. However, the post dividend omission drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples (long in initiation stocks and short in omission stocks) earns positive returns in 22 out of 25 years. Although these changes in dividend policy might be expected to produce shifts in clientele, we find little evidence for such a shift. Volume increases, but only slightly and briefly, and there are no important changes in institutional ownership.

Abstract:
The book-building procedure for selling initial public offerings to investors has captured significant market share from auction alternatives in recent years, despite significantly lower costs in both direct fees and initial underpricing when using the auction mechanism. This Paper shows that in the French market, where the frequency of book-building and auctions was about equal in the 1990s, the ostensible advantages to the issuer using book-building were advertising-related quid pro quo benefits. Specifically, we find that book-built issues were more likely to be followed and positively recommended by the lead underwriters and were also more likely to receive 'booster shots' post-issuance if the shares had fallen. Even non-underwriters' analysts appear to promote book-built issues more, but only when their underwriters stood to gain from acquiring shares in future issues from the recommended firm's lead underwriter. Book-built issues also appeared to garner more press in general (but only after they had chosen book-building, not before). Yet, we do not observe valuation or return differentials to suggest these types of promotion have any value to the issuing firm. We conclude that underwriters using the book-building procedure have convinced issuers of the questionable value of advertising and promotion of their shares.

IPOs, book-building, auctions

Abstract:
Between 1999 and 2007, WR Hambrecht completed 19 IPOs in the U.S. using an auction mechanism. We analyze investor behavior and mechanism performance in these auctioned IPOs using detailed bidding data. The existence of some bids posted at high prices suggests that some investors (mostly retail) try to free-ride on the mechanism. But institutional demand in these auctions is very elastic, suggesting that institutional investors reveal information in the bidding process. Investor participation is largely predictable based on deal size, and demand is dominated by institutions. Flipping is equally prevalent in auctions as in bookbuilt deals – but unlike in bookbuilding, investors in auctions tend to flip their shares more in cold deals. Finally, we find that institutional investors, who provide more information, are rewarded by obtaining a larger share of the deals that have higher 10-day underpricing. Our results therefore suggest that auctioned IPOs could be an effective alternative to traditional bookbuilding.

initial public offerings, investment banking, auctions

Abstract:
The bookbuilding IPO procedure has captured significant market share from auction alternatives recently, despite the significantly lower costs related to the auction mechanism. In France, where both mechanisms were used in the 1990s, the ostensible advantages of bookbuilding were advertising-related benefits. Book-built issues were more likely to be followed and positively recommended by lead underwriters. Even nonunderwriters' analysts promote book-built issues more in order to curry favor with the IPO underwriter for allocations of future deals. Yet we do not observe valuation or post-IPO return differentials that suggest these types of promotion have any value to the issuing firm.

G24, G32

Abstract:
During the mid-1990s, 30% of firms that completed a seasoned equity offering (SEO) within three years of their initial public offering (IPO) switched lead underwriter. This article provides evidence on why they switched. Contrary to predictions of prior research, there is little evidence that firms switch due to dissatisfaction with underwriter performance at the time of the IPO. A surprising result is that switchers' IPOs were significantly less underpriced than non-switchers' IPOs. However, switchers raised fewer proceeds than expected, compared to the mid-point of the filing range, while non-switchers raised significantly more proceeds. We find two main reasons for switching lead underwriter. Firms graduate to higher reputation underwriters, and they strategically buy additional and influential analyst coverage from the new lead underwriter. Survey results support these conclusions.

Abstract:
Brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public. We show that stocks that underwriter analysts recommend perform more poorly than "buy" recommendations by unaffiliated brokers prior to, at the time of, and subsequent to the recommendation date. We conclude that the recommendations by underwriter analysts show significant evidence of bias. We show also that the market does not recognize the full extent of this bias. The results suggest a potential conflict of interest inherent in the different functions that investment bankers perform.

Abstract:
Brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public. These "booster shots," as they are called in the financial press, may constitute a conflict of interest between an investment bank's fiduciary responsibility to its investing clients (to make accurate recommendations) and its incentive to market the stocks it underwrites. Indeed, we show that the stocks that underwriters recommend perform poorly (compared to "buy" recommendations by unaffiliated underwriters) prior to, at the time of, and subsequent to the recommendation date. Our results are evidence of the substantial conflicts of interest inherent in the different functions investment bankers perform, and demonstrate that these conflicts bias their views and recommendations of the firms they take public. We show that the market does not recognize the full extent of this bias.

Abstract:
An analysis of new buy and sell recommendations of stocks by security analysts at major U.S. brokerage firms shows significant, systematic discrepancies between precommendation prices and eventual values. The initial return at the time of the recommendations is large, even though few recommendations coincide with new public news or provide previously unavailable facts. However, these initial price reactions are incomplete. For buy recommendations, the mean post-event drift is modest (+2.4%) and short-lived, but for sell recommendations, the drift is larger (-9.1%) and extends for six months. Analysts appear to have market timing and stock picking abilities.

Abstract:
An analysis of stock buy and sell recommendations by security analysts at fourteen major U.S. brokerage firms shows significant, systematic discrepancies between prices and eventual values, in contrast to the conclusions of many previous studies. The average initial price change at the time of the recommendations is large, even though few recommendations coincide with other public information releases or provide previously unavailable facts. These price changes which are then ostensibly due primarily to information processing and dissemination are consistent with the expanded Grossman and Stiglitz (1980) definition of market efficiency where informed investors earn a return on their information gathering and processing efforts. Furthermore, these initial price reactions are incomplete. Post-recommendation risk-adjusted price drift implies that analysts' recommendations provide tradable value for investors. For buy recommendations, the mean, post-event drift is modest (+2.4%) and short-lived (one month), but for sell recommendations, the drift is larger (-9.1%), accruing over a longer six-month interval. Analysts appear to have market timing as well as stock picking abilities. Also, accurate industry predictions appear to be an important component for pessimistic recommendations ("sell" and "removed from buy" ) but not for optimistic ones ("buy" and "removed from sell").