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Abstract: We examine the positions of short-sellers following longer-term price declines. Critics of short-sellers argue that short-selling forces stock prices below their fundamental values by amplifying price declines. We find evidence of short-sellers holding significant positions in stocks following price declines, and of short-sellers increasing their positions while the stock price is declining, consistent with the view of critics that short-selling exacerbates price declines. When we condition on fundamental value, however, we do not find any reliable evidence that the targets of short-sellers are trading below their fundamental values. Instead a significant proportion of short-sellers' positions are concentrated in stocks that appear overvalued relative to their fundamentals. In addition, we find that while short-sellers tend to unwind (decrease) their positions following a price decline, they tend to increase their positions in stocks that remain overpriced relative to fundamental value. Our results show that short-sellers employ a variety of strategies. Specifically, while not all short positions appear to be motivated by perceptions regarding firm value, a significant concentration of short positions following price declines appear to align prices with fundamentals rather than force prices below fundamental values.
Short-selling, price declines, fundamental analysis
Abstract: We examine the economic consequences of changes in the financial statement presentation of discontinued operations. Recent reporting requirements under SFAS 144 broadened the classification of discontinued operations beyond the divestiture of lines of business to include divestitures that can be distinguished operationally and for financial reporting purposes from the company's ongoing operations. We document a significant increase in the frequency of discontinued operations following the rule change, and find that discontinued operations are less associated with economic factors in the post SFAS 144 period. We then show that the persistence of income from discontinued operations increases dramatically, while the persistence of continuing income is essentially unchanged. In contrast to the FASB's intention of SFAS 144 resulting in the classification of more homogenous transactions within discontinued operations, our results suggest that the broader scope of the rule has resulted in transactions being classified as discontinued operations that would be better characterized as income from continuing operations. Our findings illustrate the importance of financial statement presentation on the properties of earnings. We conclude that the change in the presentation of discontinued operations had the unanticipated result of lowering the quality of earnings from continuing operations.
Discontinued operations, financial reporting, SFAS 144
Abstract: We examine how analysts’ incentives to build their reputation through accurate forecasting changes the relative association between analyst recommendations and rigorous valuation models versus valuation heuristics. Controlling for the firm-specific difficulty of valuation, we show that the recommendations of the most accurate forecasters within each industry have a significantly higher correlation with rigorous valuation models and a significantly lower correlation with valuation heuristics than their less accurate peers. Our results are robust to potentially confounding firm-specific effects using a within-firm sample design, a changes analysis, and for short-term, long-term and combined measures of forecast accuracy. Consistent with reputation building, we find that the recommendations of “All-Star” analysts and accurate forecasters have similar associations on rigorous and heuristic valuation approaches. Our results are consistent with the incentive to build a good reputation mitigating the influence of factors other than identifying mispriced securities, using fundamental analysis, on stock recommendations.
Forecast accuracy, Fundamental valuation, Stock recommendations, Analyst reputation
Abstract: I investigate the possibility that recent price movements include significantly larger speculative components than observed historically. My investigation is motivated by the continuing debate on recent volatility observed in stock prices. On one side of the debate, price movements are due to changes in risk and growth expectations, on the other side of the debate price movements are considered too volatile given movements in fundamentals. Using a model of fundamental value that incorporates expected risk and growth, I examine the stability of the relation between price and value over time. I observe that price and fundamental values are cointegrated over the period 1979-1993 but in the more recent 1994-2008 period there is no evidence of cointegration. I find no systematic support for alternative explanations based on expected risk or growth in not captured in fundamentals driving these results. My results provide evidence of a significant change in the long-run association between price and accounting fundamentals and imply that large speculative components in price cannot be ruled out in recent periods.
Fundamental analysis, Speculative markets, Cointegration
Abstract: I examine the effect of arbitrage risk on the alignment between stock prices and accounting fundamentals, where arbitrage risk is measured as the lack of close substitutes that can be used as a hedge. I find evidence consistent with the disparity between value and price being positively associated with arbitrage risk. Consistent with short-positions being more sensitive to arbitrage risk, my results are more pronounced for strategies that require short positions. I then show that the timeliness of the alignment between stock prices and accounting fundamentals is negatively related to arbitrage risk. My results provide empirical support for the hypothesis that price requires time to reflect accounting information and has implications for research that assumes that prices are measured without error.
Fundamental analysis, Limits to arbitrage, Timeliness
Abstract: We examine analysts' implied expected rates of return for recent IPO firms relative to more seasoned firms. We document that analysts have relatively more optimistic expectations about recent IPO firms relative to seasoned firms, and these optimistic expectations persist, on average, for four years following the IPO. We also document that the market has optimistic expectations for recent IPO firms relative to more seasoned firms, but only for the first year following listing. Our results are robust to controls for industry, size, book-to-market, the age of the firm, analysts' expected long-term growth, the number of analysts following the firms, the level of dispersion in analysts' forecasts, and external financing activities. Our results suggest that analysts' retain optimistic expectations regarding recent IPO firms relative to more seasoned firms for an extended period of time after the IPO event.
IPOs, analysts expectations
Abstract: This study contributes to the body of research that examines the valuation of initial public offers (IPOs). The aim of this study is to assess the relative predictive ability of residual income valuation against the popular alternative of comparable firm valuation for predicting the offer prices of IPO firms. The results show that the residual income model outperforms a number of comparable firm multiples in predicting the offer price. The results suggest that fundamental valuation is a valuable tool in the IPO context for investors even when there is limited data available for estimating these models.
residual income, comparable firm valuation, initial public offerings
Abstract: This paper examines the intra-day returns to initial public offerings on the first day of trade from an information arrival perspective. We examine underpricing as reflected in the first and subsequent trades on the first day of listing. We find that underpricing is primarily reflected in the first trade. On average, prices tend to decline in the subsequent fifteen minutes with minimal returns after the first fifteen minutes of trade. Despite the majority of information apparently being reflected in the first trade the use of first-day returns is essentially equivalent to the use of first-trade returns when examining the cross-sectional variation in underpricing.
Information, Underpricing, Intra-day, Initial Day
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