Research articles for the 2021-02-20
A Short History of Value Investing and its Implications
SSRN
This paper argues that what came to be called value investing was an historical accident. It arose in large part because the influential work of Graham and Dodd preceded the development of electronic spreadsheets leading them to propose short-cut estimates of value based on accounting ratios. The demise of the value premium in the last twelve years has led to doubts regarding the efficacy of this approach to value investing and an efforts to adjust the accounting ratios to make them more robust. The argument here is that this effort is misguided. Instead, it must be recognized that value investing amounts to comparing estimates of fundamental value with price and that accounting ratios, however tweaked, are not a reasonable way to estimate value â€" it requires a full blown DCF analysis. The paper then goes on to address some of the implications of that assertion.
SSRN
This paper argues that what came to be called value investing was an historical accident. It arose in large part because the influential work of Graham and Dodd preceded the development of electronic spreadsheets leading them to propose short-cut estimates of value based on accounting ratios. The demise of the value premium in the last twelve years has led to doubts regarding the efficacy of this approach to value investing and an efforts to adjust the accounting ratios to make them more robust. The argument here is that this effort is misguided. Instead, it must be recognized that value investing amounts to comparing estimates of fundamental value with price and that accounting ratios, however tweaked, are not a reasonable way to estimate value â€" it requires a full blown DCF analysis. The paper then goes on to address some of the implications of that assertion.
CEO Pet Projects
SSRN
Using hand-collected data on CEOs’ personal assets, we find that CEOs prioritize corporate investment projects that increase their private assets’ value. Such pet projects are implemented sooner, receive more capital, and are less likely to be dropped. This investment strategy delivers large personal gains to the CEO, but selects lower NPV projects for the firm and erodes its investment efficiency. Using information from CEOs’ relatives as an instrument for the location of their private assets, we argue that these effects are causal. Overall, we uncover the impact of CEOs’ private monetary interests in capital budgeting decisions.
SSRN
Using hand-collected data on CEOs’ personal assets, we find that CEOs prioritize corporate investment projects that increase their private assets’ value. Such pet projects are implemented sooner, receive more capital, and are less likely to be dropped. This investment strategy delivers large personal gains to the CEO, but selects lower NPV projects for the firm and erodes its investment efficiency. Using information from CEOs’ relatives as an instrument for the location of their private assets, we argue that these effects are causal. Overall, we uncover the impact of CEOs’ private monetary interests in capital budgeting decisions.
Risk Sharing Within and Outside the Firm: The Disparate Effects of Wrongful Discharge Laws on Expected Stock Returns
SSRN
We study the effect of wrongful-discharge laws (WDL) on firm-level stock returns. We find disparate effects depending on the exact design of the law. Consistent with rational, risk-based pricing, the effect on returns seems to be linked to how firms share systematic risk with their employees under the respective laws. Firms in states with WDLs prohibiting employers from acting in bad faith have more intra-firm risk sharing and lower expected returns. Vaguer legislation that prohibits discharges in retaliation for acting in accordance with public policy is associated with less intra-firm risk sharing and higher expected returns.
SSRN
We study the effect of wrongful-discharge laws (WDL) on firm-level stock returns. We find disparate effects depending on the exact design of the law. Consistent with rational, risk-based pricing, the effect on returns seems to be linked to how firms share systematic risk with their employees under the respective laws. Firms in states with WDLs prohibiting employers from acting in bad faith have more intra-firm risk sharing and lower expected returns. Vaguer legislation that prohibits discharges in retaliation for acting in accordance with public policy is associated with less intra-firm risk sharing and higher expected returns.
Testing the Bulk Volume Classification Algorithm
SSRN
We document that the existing evidence that bulk volume trade classification (BVC) measures informed trading arises largely due to mis-specified tests. Simulations show that these tests detect spurious relationships in data containing only uninformed liquidity trades. We also assess the performance of BVC order imbalances in the NASDAQ HFT dataset, showing that BVC order imbalances underperform conventional order imbalance measures in detecting informed trading. The component of order flow designated by BVC as passive informed trading fails to predict returns with the correct sign. On balance, our evidence supports the use of conventional order imbalance measures to identify informed trading.
SSRN
We document that the existing evidence that bulk volume trade classification (BVC) measures informed trading arises largely due to mis-specified tests. Simulations show that these tests detect spurious relationships in data containing only uninformed liquidity trades. We also assess the performance of BVC order imbalances in the NASDAQ HFT dataset, showing that BVC order imbalances underperform conventional order imbalance measures in detecting informed trading. The component of order flow designated by BVC as passive informed trading fails to predict returns with the correct sign. On balance, our evidence supports the use of conventional order imbalance measures to identify informed trading.
