Aharon R. Ofer

Seasonalities in security returns: The case of earnings announcements

An examination of the behavior of stock returns around quarterly earnings announcement dates finds a seasonal pattern: small firms show large positive abnormal returns and a sizable increase in the variability of returns around these dates. Only part of the large abnormal returns can be accounted for by the fact that firms with good news tend to announce early. Large firms show no abnormal returns around announcement dates and a much smaller increase in variability.

Convertible call policies: An empirical analysis of an information-signaling hypothesis

Abstract This paper tests an information-signaling hypothesis as a potential explanation for corporate convertible bond call policies and for the negative share price reaction to the announcement of the calls. We test this hypothesis by trying to ascertain whether the information signaled is realized. Our results show an unexpected decline in the firms performance subsequent to the call. We also find significant negative cumulative returns during a sixty-month period following the calls.

Correcting for Heteroscedasticity in Tests for Market Timing Ability

Evaluating the performance of portfolio managers has received wide attention in the finance literature. The common practice is to divide performance into (a) market timing ability and (b) security selection ability. The former is the ability of a fund manager to produce a better return distribution by forecasting marketwide movements. The latter is the ability to produce more favorable return distributions based on superior information about individual stocks. Several methods have been proposed in the literature for the evaluation of the selection and the timing abilities of portfolio managers, using only the observed time series of realized returns on the managed portfolios. Among the approaches proposed, the multiple regression approach suggested by Treynor and Mazuy (1966), Henriksson and Merton (1981), and Pfleiderer and Bhattacharya (1983) are particularly attractive since they are simple and easy to apply. While the above multiple regression methods are easy to apply, statistical inference requires care. 1 In this paper we examine the parametric test proposed by Henriksson and Merton for evaluating the market timing ability of portfolio managers. Using simulation techniques we show that correction for heteroscedasticity can significantly affect the conclusions. We find that the heteroscedasticity corrections suggested by Hansen and by White are particularly effective.

The information content of equity-for-debt swaps : An investigation of analyst forecasts of firm cash flows

Abstract We demonstrate that analysts revise their forecasts of net operating income downward following the announcement of an equity-for-debt swap. Their revisions are positively correlated with the size of the stock-price reaction to the swap announcement. This evidence supports the hypothesis that announcements of equity-for-debt swaps convey information about the expected level of cash flows of the firm. We also provide evidence that this information is about transitory changes in the expected cash flows.

Expected inflation, unexpected inflation, and relative price dispersion: An empirical analysis

Abstract Using inflation expectations extracted from index bond prices, we examine the relations between expected inflation, unexpected inflation and relative price dispersion in stable and volatile monetary regimes. We find that expected inflation is positively related to relative price dispersion in the high inflation period, and that inflation shocks are positively related to relative price dispersion in the low inflation period.

The Use of Changes in Equity Value as a Measure of the Information Content of Announcements of Changes in Financial Policy

Recent work uses the change in equity value surrounding an announcement of a change in financial policy as an explanatory variable in regressions that examine whether changes in financial policy convey information about firm performance. We explore the methodological and econometric issues of this approach and show that using the change in equity value as an explanatory variable can severely bias ordinary least squares estimates. We demonstrate the effect of this bias on standard statistical tests and conclude that the bias has a significant impact on the power of these tests. We propose an estimator to partially correct the biases.

Variable versus stationary beta in the market model: A comparative analysis*

The assumption of stable beta coefficient within the context of the market model, and the consequent use of ordinary least squares. estimation, has been widely criticized. In this study an alternative market model is offered in which beta is allowed to vary over time. Varying parameters regression is used to estimate the variable beta and the estimates are compared to those produced by ordinary least squares in terms of accuracy of predictions. The results indicate that neither model shows a clear advantage over the other. Even when a large change in beta was simulated, the differences in prediction errors were rather small though slightly in favor of the varying parameters model.

Learning from Trading with Ambiguous Information

In this paper we study long-term learning process under the conditions of ambiguous information. We study a unique empirical setting in which pieces of the ambiguous information are sequentially provided to institutional investors. We use parametric and non-parametric models to show that the actual convergence process is non-linear and takes a specific, sigmoid shape. We show that the learning process is strict and that the convergence is towards an unbiased point that represents the set of prices, which are dictated by the available information. The theoretical and experimental literature on learning processes is rich, but there are only a handful of empirical studies. We contribute direct empirical evidence that supports important theoretical and experimental predictions.

New Tests of Market Efficiency Using Fully Identifiable Equity Cash Flows

Despite the fact that stock market efficiency has been tested in numerous studies and through several approaches, it is still not clear to what extent stock prices correctly reflect information. The inability to test whether stock prices correctly incorporate information stems from the infinite life of a corporation, which inhibits complete measurement of realized corporate cash flows. Using a unique dataset of publicly traded venture capital funds, we examine the relation between investor reaction to announcements of identifiable investments by funds and realized results of these investments. The advantage of our dataset is that these investments retain their original structure until fully realized. Our results indicate that, upon the announcement of investments, investors are able to properly forecast the eventual realizations of these investments and share prices reflect these forecasts.

Abstract–Capital Structure and the Value of the Firm

In their 1958 article Modigliani and Miller showed that if two firms are in the same risk class and in an economy with a perfect capital market having no transaction costs, taxes, or no bankruptcy costs, then their relative market values are independent of their capital structures.