George Athanassakos

Value‐based management, EVA and stock price performance in Canada

Purpose – The purpose of this paper is to determine the extent to which Canadian companies have embraced value‐based management (VBM) methods, identify the characteristics of these companies and of the executives responsible for the introduction of VBM in their organisations and assess the stock price performance of the companies that use VMB vs. those that do not.Design/methodology/approach – The study is based on a survey of CEOs of a large sample of Canadian companies and examines the relation of a number of explanatory variables, including stock price performance, to the probability of using VBM versus not using VBM via a regression analysis of qualitative choice, namely logit analysis.Findings – The study finds that value‐based management methods are widely used in Canada, with the likelihood of usage being higher for larger companies with younger and more educated executives with an accounting/finance background. The statistical analysis that follows the tabulation of survey results indicates compan...

An empirical analysis of the relationship of bond yield spreads and macro economic factors

This study develops and tests a model that explores the relationship between bond yield spreads for various industries, as represented by the spread between corporate and equivalent government bond yields, and the business cycle/economic environment while at the same time controlling for default risk, tax implications and issue traits, such as liquidity, callability and the existence of sinking fund. The overall sample consists of over 50000 quarterly observations for individual corporate bonds in the industrial, utilities and transportation sectors over the period September 1990 to March 1996. The results confirm the typical direct relationship between default risk and yield spreads. More importantly, it is found that the impact of the business cycle (macro economy) on the yield spread of a corporate bond depends on the industry sector to which the issuer of the bond belongs. Thus, while in the industrial sector, bond yield premia are generally higher during recessionary periods (periods of lower industrial production), the opposite is true for utilities.

Professional portfolio managers and the January effect: theory and evidence

Abstract While many researchers have documented a pronounced seasonality of stock returns in the month of January, a universally accepted theory of why this so-called “January effect” occurs has yet to be put forward. This paper develops a theory of portfolio rebalancing which is based on the effects induced by the calendar year planning horizon of professional portfolio managers. A simple model of portfolio choice and leisure consumption is developed via which it is shown that portfolio allocations early in the calendar year should be more heavily weighted towards the stock market and less heavily weighted towards cash and cash equivalents than later in the calendar year. The paper provides evidence on the impact systematic shifts in the portfolio holdings of institutional investors have had on the aggregate stock market in Canada over the period 1973:Q1 to 1992:Q4. It is shown that institutional trading actively influences stock price changes and that portfolio rebalancing on the part of professional fund managers, prompted by conflict-of-interest considerations, causes the bidding up of stock prices in January.

Do Value Investors Add Value

The purpose of this article is first to examine whether a value premium exists following a mechanical screening process (i.e., the search process) in the Canadian markets between two distinctly different periods,1985–1999 and 1999–2007, and second whether value investors add value in the stock selection process by being able to find truly undervalued stocks from the universe of the possibly undervalued stocks identified from the search process. We find that a strong and pervasive value premium exists in Canada over our sample periods that persists in bull and bear markets and during recessions/recoveries. Value stocks, on average, beat growth stocks even when using the very mechanical screening of the search process. Furthermore, this article demonstrates that value investors do add value, in the sense that their process of selecting truly undervalued stocks, via in-depth security valuation of the possibly undervalued stocks and arriving at their investment decision using the concept of “margin of safety”, produces positive excess returns over and above the naive approach of simply selecting low P/E–P/BV ratio stocks. The article was extended to the years of the “great recession” (2008–2009) and despite the fact that over this extended period we had a severe recession and bear market, on average, the sophisticated portfolio still beat the naïve value portfolio, consistent with earlier evidence.

Firm Size, Stock Return Seasonality, and the Trading Pattern of Individual and Institutional Investors: The Canadian Experience

Consistent with U.S. evidence showing a significant January effect, Canadian stocks, both large and small, are found to exhibit a strong first quarter seasonal effect. Evidence appears to support the hypothesis that the behavior of institutional investors explains this effect to some extent for both large- and small-cap stocks. Individual investors seem to be the marginal traders whose trades affect the prices of small stocks in all but the first quarter. The findings have implications for market efficiency as well as for identifying the best times that portfolio managers and brokers aggressively approach potential customers.

Seasonality in Canadian treasury bond returns: An institutional explanation

Abstract This paper empirically investigates the seasonality in quarterly bond returns in the Canadian government bond market. Four equally weighted bond return indices were calculated for each quarter in the period from 1963:Q2 to 1990:Q3. The seasonality in these quarterly returns was tested and the results support the existence of seasonality in quarterly bond returns in the Canadian government bond market. It appears that bond returns in the last quarter of the year are significantly higher than in any other quarter of the year. This finding contrasts to the results in U.S. studies on Treasury bond returns. An institutional explanation is offered for the documented seasonality in bond returns, linking it to the annual Canada Savings Bond campaign in the last quarter of the year, a unique Canadian phenomenon. This hypothesis is supported by empirical evidence based on a regression analysis. Such finding is consistent with the fact that no seasonality in Treasury bond returns is found in the U.S., at the U.S. Savings Bonds are sold regularly throughout the year.

Determinants of Investor Demand for Cross-Listed Firms

By focusing on the decisions of investors to invest in cross-listed stocks, this paper presents new evidence on why we observe striking differences in the percentage of trade in foreign markets for cross-listed stocks. With a large sample of Toronto Stock Exchange (TSX) stocks cross-listed in the U.S. and Canada, we document the effect of investor recognition and risk characteristics on the distribution of trading volume. Firms that are more visible to American investors are traded more heavily in the U.S. At the same time, firms that offer diverse risk characteristics are attractive to Americans. While investors understand the benefits of international diversification, as they are attracted to stocks that are different (e.g., the stock of small firms with few assets in the U.S.), they also seek stocks that provide them with high returns.

Are Negative P/E and P/B ratio Firms Different?

Using separately AMEX, NASDAQ and NYSE stock market data for the period 1968-2011, the purpose of this paper is to examine whether negative multiple firms are different from positive ones by examining the performance of negative P/E or P/B firms and how this performance compared with the most widely examined positive multiples firms. We find that firms with negative multiples are indeed different than firms with positive in that (a) a relatively small number of firms with negative multiples experience high forward stock returns even though the majority of them does not resulting in a large difference between mean and median returns and (b) the small firm-low liquidity effect observed in positive multiple firms is not as clearly observed in the case of negative multiple firms. This indicates that prior academic research was right in excluding negative multiple firms from their analysis as inclusion would have affected the homogeneity of their sample and would have diluted their findings and tests of significance.

Stockholder wealth effects of Eurobond financing: A Canadian perspective

This paper empirically assesses stockholder wealth gains from the issuance of Canadian dollar denominated Eurobonds, in lieu of domestic bonds, for a sample of Canadian firms which employed both types of bond financing during the period 1983- 1990. We find no difference in stockholder wealth gain achieved from issuing Eurobonds than from issuing domestic bonds. This leads us to conclude that Eurobond financing bargains were nonexistent during the time period of our study.

Is Volatility Risk? The Bad Influence of Academia to the Discussion

Finance academics define risk as volatility, whereas value investors define risk as the probability that adverse outcomes in the future will permanently impair the cash flow potential of a business leading to permanent (long run) impairment of capital. Which is the right definition? It all depends on your investment horizon. But if maximizing terminal wealth is of importance to investors, and it is difficult to argue otherwise, then the latter is the right way to look at risk. In this sense, academia may be bad for an investor’s wealth and prosperity.