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Abstract:
There is substantial evidence that indicates that stocks that perform the best (worst) over a three- to 12-month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the evidence of price and earnings momentum and the potential explanations for the momentum effect.

Price momentum, earnings momentum, earnings forecast revisions, market efficiency, behavioral models

Abstract:
An exclusive focus on bottom-line income misses important information about the quality of earnings. Accruals (the difference between accounting earnings and cash flows) are reliably, negatively associated with future stock returns. Earnings increases that accompanied by high accruals, suggesting low-quality earnings, are associated with poor future returns. We explore various hypotheses - earnings manipulation, extrapolative biases about future growth, and under-reaction to business conditions - to explain accruals' predictive power. Distinctions between the hypotheses are based on evidence from operating performance, the behavior of individual accrual items, and discretionary versus nondiscretionary components of accruals.

Abstract:
We show that, consistent with economic incentives, analysts from sell-side firms generally recommend "glamour" (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naive adherence to these recommendations can be costly, because the level of the consensus recommendation adds value only among stocks with favorable quantitative characteristics (i.e., high value and positive momentum). Among stocks with unfavorable quantitative characteristics, higher consensus recommendations are associated with worse subsequent returns. In contrast, the quarterly change in the consensus recommendation is a robust return predictor that appears to contain information orthogonal to a large range of other predictive variables.

Analyst, Stock recommendations, Market efficiency, Investment, Trading rules, Quantitative analysis, Fundamental analysis

Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990's suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-holding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.

Abstract:
We investigate the value of active mutual fund management by examining the stockholdings and trades of mutual funds. We find that stocks widely held by funds do not outperform other stocks. However, stocks purchased by funds have significantly higher returns than stocks they sell-this is true for large stocks as well as small stocks, and for value stocks as well as growth stocks. We find that growth-oriented funds exhibit better stock-selection skills than income-oriented funds. Finally, we find only weak evidence that funds with the best past performance have better stock-picking skills than funds with the worst past performance.

Abstract:
Earnings manipulation has become a widespread practice for US corporations. However, most studies in the literature focus on whether certain incentives would facilitate managers to manipulate earnings and there has been little evidence documenting the consequences of earnings manipulation. This paper fills this gap by examining how current accruals affect future earnings (the accrual effect) and measuring the size of this effect. We find that the aggregate future earnings will decrease by $0.046 and $0.096, respectively, in the next one and three years for a $1 increase of current accruals. Over the very long-term (25 years), 20% of current accruals will reverse. This negative accrual effect is more significant for firms with high price-earnings ratios, high market-to-book ratios and high accruals where earnings management is more likely to occur. We show that incorporating the accrual effect is useful in improving the accuracy of earnings forecasts for these firms. Accordingly, the empirical results are consistent with the notion that earnings management causes the negative relationship between current accruals and future earnings. In addition, this paper shows that one recently developed accrual model has better performance than the popularly cited model in identifying manipulated earnings.

Abstract:
Earnings manipulation has become a widespread practice for US corporations. However, most studies in the literature focus on whether certain incentives would facilitate managers to manipulate earnings and there has been little evidence documenting the consequences of earnings manipulation. This paper fills this gap by examining how current accruals affect future earnings (the accrual effect) and measuring the size of this effect. We find that the aggregate future earnings will decrease by $0.046 and $0.096, respectively, in the next one and three years for a $1 increase of current accruals. Over the very long-term (25 years), 20% of current accruals will reverse. This negative accrual effect is more significant for firms with high price-earnings ratios, high market-to-book ratios and high accruals where earnings management is more likely to occur. We show that incorporating the accrual effect is useful in improving the accuracy of earnings forecasts for these firms. Accordingly, the empirical results are consistent with the notion that earnings management causes the negative relationship between current accruals and future earnings. In addition, this paper shows that one recently developed accrual model has better performance than the popularly cited model in identifying manipulated earnings.

Abstract:
Financial markets are increasingly integrated globally. We examine the extent to which firms from different countries rely on alternative sources of capital, the locations where they raise capital, and the factors that affect these choices. During the 1990-2001 period, firms raised about $25.9 trillion of new capital, including $4.7 trillion from abroad. International debt issuances are substantially more common than equity, accounting for over 90% of the international security issues, and about 20% of all public debt issues. In contrast, international equity issues account for about 4.4% of all international security issues, and about 6% of all equity issues during our sample period. Market timing considerations appear to be very important in security issuance decisions. Firms all around the world are more likely to issue equity prior to periods of low market returns. Most of the cross-border equity is issued in the U.S. and the U.K., and these issues tend to occur in 'hot' markets and prior to relatively low market returns. Finally, firms issue more debt when interest rates are lower, and issue debt overseas when interest rates in the place of issue are lower than they are at home.

Abstract:
Financial markets are increasingly integrated globally. We examine the extent to which firms from countries around the world rely on different sources of capital, the locations where they raise capital, and the factors that affect these choices during the 1990-2001 period. International security issuances are widespread, totaling about $4.6 trillion. International debt issuances are substantially more common than equity issues, accounting for over 90% of the international security issues, and about 20% of all public debt issues. In contrast, international equity issues account for about 4.4% of all international security issues, and about 6% of all equity issues during the our sample period. Market timing considerations appear to be very important in security issuance decisions. Firms all around the world are more likely to issue equity prior to periods of low market returns. Most of the cross-border equity is issued in the U.S. and the U.K., and these issues tend to occur in "hot" markets, and prior to relatively low market returns. Finally, firms issue more debt when interest rates are lower, and issue debt overseas when interest rates in the place of issue are lower than they are at home.

International Capital Raising, Timing of Security Issues

Abstract:
This paper evaluates the information content of analysts' one-quarter ahead earnings forecast revisions and recommendation revisions at various points in time relative to earnings announcement dates. We conduct three sets of tests to evaluate the information content of revisions. Across all tests, we find that the revisions are least informative in the week after earnings announcements and that the information content of revisions generally increases over event time. We find a sharp increase in the information content of upward forecast revisions and recommendations upgrades, but we do not find a similar increase for downward revisions and recommendation downgrades.

Financial markets, Brokerage analysts, Earnings forecasts, Analyst recommendations, Asymmetric and private information

Abstract:
This paper examines analyst recommendations in the G7 countries and evaluates the value of these recommendations over the 1993 to 2002 period. We find that the proportion of sell and strong sell recommendations in all of the countries are less than the proportion of the buy and strong buy recommendations. The frequency of sell recommendations is the lowest in the U.S. We also find that stock prices react significantly to recommendation revisions on the day of recommendation and on the following day in all of these countries except Italy. We find the largest price reactions in the U.S., followed by Japan. We evaluate trading strategies that buy upgraded stocks and sell downgraded stocks. Here again, the trading strategies have the highest profits in the U.S., followed by Japan.

Analyst recommendations, market efficiency, stock recommendations

Abstract:
This paper examines the relation between revenue surprises and future stock returns. It also investigates how analysts update their earnings forecasts following announcements of revenue and earnings surprises. The results indicate that the stock price reaction on the earnings announcement date is significantly related to both revenue surprises and earnings surprises. I also find significant abnormal returns in the post announcement period for stocks that have large revenue surprises, after controlling for earnings surprises. Although analysts revise their forecasts of future earnings in response to revenue and earnings surprises, they are slow to incorporate all the information in their forecast revisions. In particular analysts underestimate the extent to which revenue and earnings surprises have permanent effects on future earnings.

Revenue growth, revenue surprises, earnings growth, Standardized unexpected earnings, Standardized unexpected revenue growth, post-announcement drift, market efficiency

Abstract:
This paper develops and implements a new test to investigate whether sell-side analysts herd around the consensus when they make stock recommendations. Our empirical results support the herding hypothesis. Stock price reactions following recommendation revisions are stronger when the new recommendation is away from the consensus than when it is closer to it, indicating that the market recognizes analysts' tendency to herd. We find that analysts from larger brokerages and analysts following stocks with smaller dispersion across recommendations are more likely to herd.

herding, market efficiency, private information

Abstract:
This paper develops and implements a new test to investigate whether sell-side analysts herd around the consensus when they make stock recommendations. Our empirical results support the herding hypothesis. Stock price reactions following recommendation revisions are stronger when the new recommendation is away from the consensus than when it is closer to it, indicating that the market recognizes analysts' tendency to herd. We find that analysts from larger brokerages and analysts following stocks with smaller dispersion across recommendations are more likely to herd.

Abstract:
This paper develops and implements a new test to investigate whether sell-side analysts herd around the consensus when they make stock recommendations. Our empirical results support the herding hypothesis. Stock price reactions following recommendation revisions are stronger when the new recommendation is away from the consensus than when it is closer to it, indicating that the market recognizes analysts' tendency to herd. We find that analysts from larger brokerages and analysts following stocks with smaller dispersion across recommendations are more likely to herd.

Financial markets, Herding, Brokerage analysts, Analyst recommendations

Abstract:
Although much work has been done on evaluating long-run equity abnormal returns, the statistical tests used in the literature are misspecified when event firms come from nonrandom samples. Specifically, industry clustering or overlapping returns in the sample contribute to test misspecification. We propose a new test of long-run performance that uses the average long-run abnormal return for each monthly cohort of event firms, but weights these average abnormal returns in a way that allows for heteroskedasticity and autocorrelation. Our tests work well in random samples and in samples with industry clustering and with overlapping returns, without a reduction in power compared to the methodologies of Lyon, Barber and Tsai (1999).

Long-run performance, statistical test

Abstract:
We relate the predictability of future returns from past returns to the market's underreaction to information, focusing on past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Market risk, size and book-to- market effects do not explain the drifts. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Abstract:
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past returns and past earnings surprise each and predict large drifts in future returns after controlling for the other. Market risk, size and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Abstract:
We study the relation between gender and job performance among brokerage firm equity analysts. Women's representation in analyst positions drops from 16% in 1995 to 13% in 2005. We find women cover roughly 9 stocks on average compared to 10 for men. Women's earnings estimates tend to be less accurate. After controlling for forecast characteristics, the difference in accuracy is roughly equivalent to four years of experience. Despite reduced coverage and lower forecast accuracy, we find women are significantly more likely to be designated as All-Stars, which suggests they outperform at other aspects of the job such as client service.

Abstract:
We study the relation between gender and job performance among brokerage firm equity analysts. Women's representation in analyst positions drops from 16% in 1995 to 13% in 2005. We find women cover roughly 9 stocks on average compared to 10 for men. Women's earnings estimates tend to be less accurate. After controlling for forecast characteristics, the difference in accuracy is roughly equivalent to four years of experience. Despite reduced coverage and lower forecast accuracy, we find women are significantly more likely to be designated as All-Stars, which suggests they outperform at other aspects of the job such as client service.

Gender, discrimination, affirmative action, Sell-side analysts

Abstract:
Theory suggests the most profitable way to exploit stock picking skill is to set up an investment fund, yet in practice buy-side and sell-side stock analysts coexist. We examine the relative merits of stock picks from institutional investors and brokerage analysts, and the extent to which institutions use sell-side analysts' recommendations. We find that sell-side analysts' recommendations are informative. Although mutual fund purchases significantly outperform their sales the difference, in performance is largely concentrated on the day of the trade. Mutual funds tend to trade in the direction of recommendation revisions but their trade direction is not incrementally informative.

Analyst, Mutual Funds

Abstract:
An exclusive focus on bottom-line income misses important information about the quality of earnings. Accruals (the difference between accounting earnings and cash flow) are reliably, negatively associated with future stock returns. Earnings increases that are accompanied by high accruals, suggesting low-quality earnings, are associates with poor future returns. We explore various hypotheses - earnings manipulation, extrapolative biases about future growth, and under-reaction to changes in business conditions - to explain accruals' predictive power. Distinctions between the hypotheses are based on evidence from operating performance, the behavior of individual accrual items, discretionary versus nondiscretionary components of accruals, and special items. We check for robustness using within-industry comparisons, and data on U.K. stocks.

Abstract:
An exclusive focus on bottom-line income misses important information about the quality of earnings. Accruals (the difference between accounting earnings and cash flow) are reliably, negatively associated with future stock returns. Earnings increases that are accompanied by high accruals, suggesting low-quality earnings, are associated with poor future returns. We explore various hypotheses - earnings manipulation, extrapolative biases about future growth, and under-reaction to business conditions - to explain accruals' predictive power. Distinctions between the hypotheses are based on evidence from operating performance, the behavior of individual accrual items, and discretionary versus nondiscretionary components of accruals.

Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990's suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-hiding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.

Abstract:
We estimate the risk and expected returns of private equity investments based on the market prices of exchange-traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects unlisted private equity funds to earn abnormal returns of approximately 1% per year. We also find that the market expects listed private equity funds to earn zero or marginally negative abnormal returns net of fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are positively related to GDP growth and negatively related to the credit spread. In addition, we find that market returns of exchange traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
The study reported here consisted of estimating earnings and sales (or revenue) surprises either with historical time-series data or with analyst forecasts. Post-earnings-announcement drift was found to be stronger when the revenue surprise was in the same direction as the earnings surprise. This result proved to be robust to various controls, including the proportions of stock held by institutional investors, arbitrage risk, and turnover (prior 60-month average trading volume). This finding is consistent with prior evidence that earnings surprises have a more persistent effect on future earnings growth when they consist of higher revenue surprises than when they consist of lower expense surprises.

Equity Investments, Fundamental Analysis and Valuation Models, Portfolio Management, Equity Strategies

Abstract:
I investigate the long-term performance of firms that issue seasoned equity relative to a variety of benchmarks. I find that these firms significantly underperform all of my benchmarks over the five years following the equity issues. Across SEOs, I find similar levels of underperformance for both small firms and large firms, and both growth firms and value firms. The paper also shows that factor-model benchmarks are misspecified. Hence inferences on SEO underperformance based on such benchmarks are misleading. I also find that SEOs underperform their benchmarks by twice as much within earnings announcement windows as they do outside these windows.

Abstract:
This paper considers an equilibrium model of the term structure that is determined by two stochastic factors: a short term interest rate and a target level to which the short rate is expected to revert. A Kalman filter technique that uses a time series, cross-section of Eurodollar futures prices is developed to estimate the parameters of the model. The term structures of spot LIBOR and Eurodollar futures volatility are compared to that predicted by the model. The empirical results indicate that the two factor specification represents a significant improvement over its one factor version.

Abstract:
Recent research reports significant differences between Eurodollar futures and forward interest rates. In this paper, we document that the futures-forward yield difference was economically and statistically significant only in the early years of the Eurodollar futures contract. The difference has steadily diminished and in recent years has been negligible of nonexistent. The primary explanation in the literature for the observed differences between the futures and forward Eurodollar yields has been the mark-to- market feature of the futures contracts. We derive closed form solutions for the futures-forward yield difference under two popular term structure models and show that the theoretical futures-forward yield difference is indeed small. We also find that liquidity differences and default risk premia cannot explain the large differences observed in the early part of the sample period. Furthermore, we find that there was a delay in the flow of information between the spot and the futures markets during the early years of the futures contract, but we find no evidence of such a delay in the later years. Our results suggest that the differences between the futures and forward rates observed in the early part of the sample period is likely to be attributable to the mispricing of futures contracts relative to the forward rates and that the mispricing was eliminated over time.

Abstract:
This paper evaluates the empirical performance of the Vasicek (1977) model and the extended-Vasicek model proposed by Hull and White (1990) for pricing interest rate caps and hedging their interest rate risks. I find that the Vasicek model cap prices are significantly smaller than the market prices. An important reason for this bias is that this model does not fit the term structure of futures rates particularly well. It is found that the extended-Vasicek model cap prices are closer to the market prices than the original Vasicek model. A strategy to hedge the interest rate risks of caps constructed on the bias of the extended- Vasicek model reduces over 90 percent of the cash flow variance for at-the-money caps with less than one year maturity. The effectiveness of the hedge strategy declines with the time to maturity of the caps and for three year at- the-money caps the hedge strategy reduces cash flow variance by about 63 percent.

Abstract:
We show that the pattern of short-term negative serial covariances for stock returns over different return measurement intervals is consistent with the implications of inventory-based market microstructure models. We develop additional testable implications of these models and document supporting evidence. Our findings indicate that to a large extent the short-horizon return reversals can be explained by dealer-inventory-related market microstructure effects.

Abstract:
This paper examines the contribution of stock price overreaction and delayed reaction to the profitability of contrarian strategies. The evidence indicates that stock prices overreact to firm-specific information but react with a delay to common factors. Delayed reactions to common factors give rise to size-related lead-lag effect in stock returns. In sharp contrast with the conclusions in the extant literature, however, this paper finds that most of the contrarian profit is due to stock price overreaction and a very small fraction of the profit can be attributed to the lead-lag effect.

Abstract:
We estimate the risk and expected returns of private equity investments based on the market prices of exchange traded funds of funds that invest in unlisted private equity funds. Our results indicate that the market expects unlisted private equity funds to earn abnormal returns of about one to two percent. We also find that the market expects listed private equity funds to earn zero to marginally negative abnormal returns net of fees. Both listed and unlisted private equity funds have market betas close to one and positive factor loadings on the Fama-French SMB factor. Private equity fund returns are positively correlated with GDP growth and negatively correlated with the credit spread. Finally, we find that market returns of exchange traded funds of funds and listed private equity funds predict changes in self-reported book values of unlisted private equity funds.

Private equity, listed private equity, risk-return characteristics,; funds of funds

Abstract:
The trade-off theory posits that firms seek to maintain a target capital structure and the market timing hypothesis suggests that managers are able to recognize and exploit stock misvaluation when they recapitalize. Jointly, these theories imply that deviations from target leverage reflect stock mispricing. Our results strongly support this view. We find that firms that are over-levered relative to their target outperform under-levered firms by roughly five percent per year over the next three to five years. The results hold for firms that issue debt or equity as well as for non-issuers. Our findings indicate that firms' capital structure choice is best understood using a combination of trade-off and market timing theories.

capital structure, market timing, target debt ratio, trade-off