Kimberly F. Luchtenberg

The effect of exogenous information signal strength on herding

Purpose - – In the controlled environment of a professional business seminar, the paper collects data on the willingness of participants to strategically default on a mortgage that is underwater by varying degrees. By providing the participants with fabricated exogenous strong and weak information signals, the paper is able to examine the effect of the signals on their responses. The purpose of this paper is to find evidence suggesting that gender, moral opposition, level of susceptibility to information, and information signal strength influence herding in business professionals. Design/methodology/approach - – The paper adopts the Hirshleifer and Hong Teoh (2003) definition of herding as “any behavior similarity/dissimilarity brought about by the interaction of individuals.” In the controlled environment of a professional business seminar, the paper collects data on the willingness of participants to strategically default on a mortgage that is underwater by varying degrees. By providing the participants with fabricated exogenous strong and weak information signals, the paper is able to examine the effect of the signals on their responses. Findings - – The major contribution is that the paper finds evidence suggesting that signal strength does indeed matter. The paper finds that a weak signal is more likely to produce herding when respondents answer questions relating their own decisions and strong signals produce more herding when respondents provide advice to others. The paper also finds that women are less likely to herd and people who report they are susceptible to information influences are more likely to herd. Not surprisingly, participants who are morally opposed to strategic default are less likely to herd in most scenarios. Originality/value - – No other study of which the authors are aware looks specifically at signal strength in a financial setting or uses a sample of business professionals to examine herding of a financial nature.

Do Institutional and Individual Investors Differ in Their Preference for Financial Skewness

Employing a unique sample of individual and institutional investors, we conduct experiments to determine investors’ preference for (or indifference to) financial skewness. We present investors with a series of stocks with varying levels of skewness. Using Instant Response Devices, we then collect investors’ choices to hold or sell each stock. Among stocks with equal expected returns, we find strong evidence that the sample investors use a prospect theory utility function rather than a mean-variance expected utility function to decide to sell or hold stocks. In the loss domain, we find that investors are ambivalent about the choice between positively and negatively skewed stocks. However, in the gain domain, we find that both individual and institutional investors prefer negatively skewed stocks—a contrast from previous research suggesting that individuals (and not institutional investors) prefer positive skewness. We also find evidence suggesting that reference points are important in financial decision m...

REIT Unit Investment Trusts and Fund Manager Skill

This study examines fund manager skill using a sample of Real Estate Investment Trust Unit Investment Trusts (REIT UITs). It also investigates how REIT UIT performance compares to investing in REIT mutual funds. Are REIT UIT fund managers able to select REITs that deliver superior performance? Using a hand-collected sample of REIT UITs from May 2009 to July 2015, this study finds that REIT UITs do not deliver statistically significant positive alpha. This result is consistent with the Comer and Rodriguez (2015) finding for a sample of diversified UITs, but counter to the Cici et al. (2011) finding of positive alpha for REIT mutual fund managers. This is the first paper to investigate fund manager stock selection skill in REIT UITs.

Cure Rates on Defaulted Junior Lien Mortgage Debt

Junior lien mortgage debt proliferated during the housing market run up as borrowers used piggyback loans to buy homes or extract home equity. Defaulted second liens now trade in the distressed debt market at large discounts. In this paper, we examine the previously unstudied second lien cure rate topic and find that the size and status of the associated senior mortgage is an important cure rate predictor as are other borrower debt usage characteristics revealed in credit bureau data. Results should be of interest to distressed debt investors, lenders, and policymakers alike.

The Impact of Credit Line Drawdowns on Investment Evidence from the Financial Crisis

Using a unique dataset of credit line drawdowns and liquidity hedging, we study the relation between credit line usage and corporate investment. In line with theoretical predictions that credit lines aid firms to invest during times of limited credit availability, our findings reveal that the liquidity insurance function of lines of credit does facilitate the undertaking of value-enhancing investments during severe credit market conditions. Although the financial crisis did reduce firm investment, this effect was mitigated somewhat by credit line usage. We also find that in contrast to non-crisis times, during the crisis older, higher net worth firms were more likely to have access to credit lines. Similarly, firms with a higher firm value and bond rating were more likely to have extensive credit line drawdowns during the crisis than non-crisis years.