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156
Estimating standard errors in finance panel data sets: comparing approaches.
- Review of Financial Studies
, 2009
"... Abstract In both corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms and across time, and OLS standard errors can be biased. Historically, the two literatures have used different solut ..."
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Cited by 890 (7 self)
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Abstract In both corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms and across time, and OLS standard errors can be biased. Historically, the two literatures have used different solutions to this problem. Corporate finance has relied on clustered standard errors, while asset pricing has used the Fama-MacBeth procedure to estimate standard errors. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use.
Hedge Funds and the Technology Bubble
- THE JOURNAL OF FINANCE • VOL. LIX, NO. 5 • OCTOBER 2004
, 2004
"... This paper documents that hedge funds did not exert a correcting force on stock prices during the technology bubble. Instead, they were heavily invested in technology stocks. This does not seem to be the result of unawareness of the bubble: Hedge funds captured the upturn, but, by reducing their pos ..."
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Cited by 195 (9 self)
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This paper documents that hedge funds did not exert a correcting force on stock prices during the technology bubble. Instead, they were heavily invested in technology stocks. This does not seem to be the result of unawareness of the bubble: Hedge funds captured the upturn, but, by reducing their positions in stocks that were about to decline, avoided much of the downturn. Our findings question the efficient markets notion that rational speculators always stabilize prices. They are consistent with models in which rational investors may prefer to ride bubbles because of predictable investor sentiment and limits to arbitrage.
A catering theory of dividends
- JOURNAL OF FINANCE
, 2002
"... We develop a theory in which the decision to pay dividends is driven by investor demand. Managers cater to investors by paying dividends when investors put a stock price premium on payers and not paying when investors prefer nonpayers. To test this prediction, we construct four time series measures ..."
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Cited by 148 (22 self)
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We develop a theory in which the decision to pay dividends is driven by investor demand. Managers cater to investors by paying dividends when investors put a stock price premium on payers and not paying when investors prefer nonpayers. To test this prediction, we construct four time series measures of the investor demand for dividend payers. By each measure, nonpayers initiate dividends when demand for payers is high. By some measures, payers omit dividends when demand is low. Further analysis confirms that the results are better explained by the catering theory than other theories of dividends.
Can investors profit from the prophets? Security analyst recommendations and stock returns
- Journal of Finance
, 2001
"... We document that purchasing ~selling short! stocks with the most ~least! favorable consensus recommendations, in conjunction with daily portfolio rebalancing and a timely response to recommendation changes, yield annual abnormal gross returns greater than four percent. Less frequent portfolio rebala ..."
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Cited by 137 (5 self)
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We document that purchasing ~selling short! stocks with the most ~least! favorable consensus recommendations, in conjunction with daily portfolio rebalancing and a timely response to recommendation changes, yield annual abnormal gross returns greater than four percent. Less frequent portfolio rebalancing or a delay in reacting to recommendation changes diminishes these returns; however, they remain significant for the least favorably rated stocks. We also show that high trading levels are required to capture the excess returns generated by the strategies analyzed, entailing substantial transactions costs and leading to abnormal net returns for these strategies that are not reliably greater than zero. THIS STUDY EXAMINES WHETHER INVESTORS can profit from the publicly available recommendations of security analysts. Academic theory and Wall Street practice are clearly at odds regarding this issue. On the one hand, the semistrong form of market efficiency posits that investors should not be able to trade profitably on the basis of publicly available information, such as analyst
Can the market add and subtract? Mis-pricing in tech stocks carve-outs,”
- Journal of Political Economy
, 2003
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Investor psychology in capital markets: evidence and policy implications
, 2002
"... We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market par ..."
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Cited by 99 (22 self)
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We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially
Does Arbitrage Flatten Demand Curves for Stocks?, Journal of Business, 75, 583-608. Endnotes While S&P 500 firms are generally large, this is not always the case. There are large companies not in the S&P 500, such as USA Networks and Liberty Media. Also,
, 2004
"... In textbook theory, demand curves for stocks are kept flat by arbitrage between perfect substitutes. Myron Scholes argues in his study of large-block sales that “the market will price assets such that the expected ..."
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Cited by 89 (8 self)
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In textbook theory, demand curves for stocks are kept flat by arbitrage between perfect substitutes. Myron Scholes argues in his study of large-block sales that “the market will price assets such that the expected
Anomalies and Market Efficiency
, 2002
"... Anomalies are empirical results that seem to be inconsistent with maintained theories of asset-pricing behavior. They indicate either market inefficiency (profit opportunities) or inadequacies in the underlying asset-pricing model. The evidence in this paper shows that the size effect, the value eff ..."
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Cited by 64 (0 self)
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Anomalies are empirical results that seem to be inconsistent with maintained theories of asset-pricing behavior. They indicate either market inefficiency (profit opportunities) or inadequacies in the underlying asset-pricing model. The evidence in this paper shows that the size effect, the value effect, the weekend effect, and the dividend yield effect seem to have weakened or disappeared after the papers that highlighted them were published. At about the same time, practitioners began investment vehicles that implemented the strategies implied by some of these academic papers. The small-firm turn-of-the-year effect became weaker in the years after it was first documented in the academic literature, although there is some evidence that it still exists. Interestingly, however, it does not seem to exist in the portfolio returns of practitioners who focus on small-capitalization firms. All of these findings raise the possibility that anomalies are more apparent than real. The notoriety associated with the findings of unusual evidence tempts authors to further investigate puzzling anomalies and later to try to explain them. But even if the anomalies existed in the sample
Competing theories of financial anomalies
- Review of Financial Studies
, 2002
"... We present a comparative analysis of two sets of competing theories of financial anomalies: (1) “behavioral ” theories relying on investor irrationality; and (2) rational “structural uncertainty” theories where investors have incomplete information about the economic environment. Each set of theorie ..."
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Cited by 61 (7 self)
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We present a comparative analysis of two sets of competing theories of financial anomalies: (1) “behavioral ” theories relying on investor irrationality; and (2) rational “structural uncertainty” theories where investors have incomplete information about the economic environment. Each set of theories deviates from the rational expectations ideal, relaxing one, but not the other, of its two major assumptions. Despite their differing theoretical foundations, the two sets of theories share remarkable mathematical and predictive similarities and differ mainly in the labels they attach to similar modeling techniques and in the interpretations they give to resulting predictions. Their similarity leaves the theories virtually indistinguishable empirically, even as their normative implications differ significantly. This similarity, however, may point to deeper and overlooked connections between investor irrationality and rational structural uncertainty. We illustrate our ideas by examining competing theories of IPO underperformance.
