John S. Howe

The Exchange Rate Exposure of U.S. and Japanese Banking Institutions

In this paper, we examine the foreign exchange exposure of a sample of U. S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of the Japanese banks. We find that the stock returns of a significant fraction of the U. S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U. S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging. JEL Classification: F31, F23, G21, G28

REIT Advisor Performance

In this article, we examine whether the performance of real estate investment trusts (REITs) is correlated with advisor type. Seven categories of advisors are used in the analysis. All categories exhibit zero or negative performance measures and the average abnormal returns across advisor types are significantly different from each other. We conclude that advisor type is an important determinant of the returns realized by a REITs shareholders. Additional analysis suggests that firm size and property location may partially explain REIT performance. Copyright American Real Estate and Urban Economics Association.

The impact of international listings on risk: Implications for capital market integration

Abstract In this paper, we examine the impact of international listing on common-stock risk. While previous research has used event study methodology, our research focuses on permanent shifts in risk. Different measures of risk are estimated to test for intertemporal shifts in risk attributable to an overseas listing. No significant shifts in risk from international listing are documented. The results are robust with respect to the location and year of listing. These findings suggest that: (1) markets are already reasonably well integrated; or (2) listing is an ineffective mechanism for reducing segmentation.

The Stock Price Impacts of Overseas Listings

In the period since World War II, an increasing number of American corporations have chosen to list their common stock on securities exchanges outside of the United States, in addition to their listings on organized exchanges in the U.S. A number of possible benefits to an overseas listing have been suggested. First, listing may improve the relationship between the American corporation, the foreign government and the foreign financial community [10, 13]; in turn, this may reduce political risk. If political risk is not diversifiable, such a reduction will lower the firms cost of capital. Second, a possible increase in demand for the firms stock provided by foreign investors with no increase in supply may result in stock price increases [10, 11, 13]. Third, foreign markets may provide a less expensive source of funds (stemming, say, from different tax structures abroad). Having a corporations stock listed may provide the company greater access to foreign money markets [5] and make it easier to sell debt o Euromarket investors [13]. A Fortune magazine [8] article states:

The Predictive Content of Aggregate Analyst Recommendations

Using more than 350,000 sell-side analyst recommendations from January 1994 to August 2006, this paper examines the predictive content of aggregate analyst recommendations. We find that changes in aggregate analyst recommendations forecast future market excess returns after controlling for macroeconomic variables that have been shown to influence market returns. Similarly, changes in industry-aggregated analyst recommendations predict future industry returns. Changes in aggregate analyst recommendations also predict one-quarter-ahead aggregate earnings growth. Overall, our results suggest that analyst recommendations contain market- and industry-level information about future returns and earnings.

Stock Market Liquidity and the Decision to Repurchase

We examine the impact of stock market liquidity on managerial payout decisions. We argue that stock market liquidity influences payout policy through a first-order effect on the share repurchase decision, and a second-order or residual effect on the dividend decision. Managers compare the tax and flexibility advantages of a repurchase against its liquidity cost disadvantage. All else equal, higher market liquidity encourages the use of repurchases over dividends. Our empirical results confirm that stock market liquidity plays a significant role in repurchase and dividend initiations, as well as in recurring payout decisions. Unlike previous studies that measure liquidity changes following the repurchase decision, we examine liquidity levels prior to the payout decision. We show that managers condition their repurchase decision on a sufficient level of market liquidity, consistent with Barclay and Smiths (1988) theoretical analysis and Brav et al.s (2005) CFO survey results. Repurchases have recently become the payout decision of choice in part because of rising stock market liquidity.

Old Age and the Decline in Financial Literacy

Households age 60 and older bear increasing responsibility for managing retirement portfolios, and they hold the majority of financial assets in the United States. Cognitive aging studies find evidence of a decline in fluid and crystallized intelligence in old age that may impact the ability to manage money effectively. Using a large sample of older respondents, we test whether knowledge of basic concepts essential to effective financial choice declines after age 60. We find a consistent linear decline in financial literacy score after age 60. A nearly identical rate of decline among men, stockowners, older, and college-educated respondents indicates that cohort effects are not driving the results. Confidence in financial decision-making abilities does not decline with age. A separate analysis using data that include measures of cognitive ability suggests that a natural decline in both fluid and crystallized intelligence in old age contributes to falling financial literacy scores. This paper was accepted by Brad Barber, finance.

Information associated with dividend initiations: Firm-specific or industry-wide?

We examine the intra-industry information effects of announcements of dividend initiations. Our results indicate that the stock prices of industry competitors do not react to dividend initiations. Further, analysts do not revise their earnings forecasts for nonannouncing, rival firms. These findings are not sensitive to the manner in which we estimate abnormal returns or calculate forecast revisions. Thus, the information conveyed to the market by the decision to initiate dividends contains no industry-wide component. Dividend initiation appears to be a firm-specific event.

The Relation between Aggregate Insider Transactions and Stock Market Returns

A vector autoregressive (VAR) model is used to examine the relation between aggregate insider transactions and stock market returns. Consistent with the extant literature, there is some predictive content associated with aggregate insider transactions, but its magnitude is slight. In contrast, market returns have substantial influence on the aggregate purchases and sales of corporate insiders. The findings suggest that: 1) the degree of mispricing observed by insiders is small; 2) very little of the mispricing is associated with unanticipated macroeconomic factors; and 3) investors cannot use aggregate insider transactions to profitably predict future market returns over the following eight weeks.

SEC Trading Suspensions: Empirical Evidence

This article explores the price behavior of a sample of corporate securities in which trading was temporarily suspended by the SEC. Suspensions are found to coincide with substantial devaluations of the suspended securities. Further, significant and prolonged negative abnormal returns are observed in the postsuspension period, an apparent violation of semistrong form market efficiency.