Matt Pinnuck

An Examination of the Performance of the Trades and Stock Holdings of Fund Managers: Further Evidence

Recent research has examined the performance of stocks held by U.S. mutual funds and found they realize abnormal returns. The result is significant as it stands in contrast to the general consensus from traditional performance studies that mutual funds do not possess superior information. Employing a unique dataset, I examine the performance of the monthly stock holdings and trades of a sample of Australian fund managers. When stock holdings are observable, performance measures can be constructed that are more precise than traditional fund manager performance measures. I find the stocks held by fund managers realize abnormal returns consistent with some stock selection ability across fund managers. Examining the performance of their individual trades, I find that the stocks they buy realize abnormal returns whereas for sell trades I find no evidence of abnormal returns. Overall, the results suggest fund managers have the ability to select stocks that realize positive abnormal returns thus providing out-of-sample support for similar recent findings for U.S. mutual funds.

Impact of On-Field Football Success on the Off-Field Financial Performance of AFL Football Clubs

In this study, we examine the factors that contribute to the financial performance of clubs in the Australian Football League over the period from 1993 to 2002. Primarily, we examine the association between the on-field football success of clubs and their level of off-field financial performance. We find that match attendance is positively related to both short-term and long-term success of football clubs and also to the uncertainty as to the match outcome (i.e. the expected closeness of the match). We also find that club membership is highly persistent and is positively related to both the past football success of the club and the marketing expense incurred. Finally, we find that there is a significant association between the level of marketing revenue and the level of on-field success in the prior 2 years.

Competition Among Exchanges Through Simplified Disclosure Requirements: Evidence from the American and Global Depositary Receipts

In this study, we address the ongoing debate as to whether the competition among the worlds major exchanges through simplified disclosure requirements is justified. Companies from across the globe have a choice of cross-listing shares as either American or Global Depositary Receipts (ADRs and GDRs, respectively). The former are primarily listed on the US exchanges – NYSE, NASDAQ and AMEX – whereas the latter are issued into non-US markets such as the London Stock Exchange (LSE). The GDRs listed on the LSE are subject to simplified disclosure requirements compared to their exchange-listed ADR peers that have to meet more stringent compliance standards. Proponents of the ‘light touch’ approach argue that firms cross-listing as GDRs are not subject to the higher reporting costs faced by ADRs yet still face similar valuation benefits. Those who challenge this approach argue that simplified disclosure requirements set by the LSE will ultimately be recognised by the market as ineffective, diverting traders from investing in GDRs. This study provides evidence that supports the LSEs ‘light touch’ approach and shows that the benefits of information risk reduction for ADRs and GDRs are comparable. The explanation for this finding is that the two avenues through which information asymmetry is expected to be resolved after cross-listing – disclosure and analysts – are substitutive and make equally important contribution to information risk reduction, eventually leading to similar cost of capital decline for ADRs and GDRs.

Top Management Turnover: An Examination of Portfolio Holdings and Fund Performance

We examine the performance and portfolio characteristics of actively managed equity funds impacted by top management turnover. Utilizing a unique database of monthly portfolio holdings, our study finds that, post-replacement, previously poor performing funds experience improved returns. However, this improved performance is not attributable to superior stock selection skill. We also find these new managers decrease the funds reliance on momentum strategies and decrease the portfolios concentration, which then leads to a reduced tracking-error volatility. Prior to the replacement event, underperforming investment managers exhibit preferences for larger, growth-oriented stocks, as well as riding momentum strategies and increasing portfolio turnover.

What is the Abnormal Return Performance of Mutual Funds due to Private Earnings Information

Abstract This study, employs a unique database of monthly portfolio holdings of Australian mutual funds to measure the monthly abnormal returns realised by mutual funds due to earnings information across all months in a typical year. We find evidence consistent with mutual funds realising abnormal returns due to earnings news in both the pre-announcement period and over the announcement window. The results suggest that earnings information explains approximately 25% of a mutual funds average monthly abnormal performance. Finally, we find that the contribution of earnings to the performance of mutual funds is greatest in the month in which earnings are announced.

The evolution of audit market structure and the emergence of the Big 4: Evidence from Australia*

We use a long time series from Australia to investigate the determinants and consequences of audit market concentration. The time series begins when the market is still fragmented and extends through recent years, by which time the Big 4 is dominant. We show that increasing skewness in the size of public companies is associated with increased concentration of the audit market. We also show that the emergence of the Big N is associated with the growth in non-audit services, and provide evidence of increasing returns to scale in auditing that become more pronounced over time. The results suggest that the primary driver of concentration is the growth of the largest public companies and the associated need for audit firm scale. The rate of audit switching and the extent of fee discounting increase over time, which provides some assurance that the audit market remains competitive in spite of greater concentration.

Are active fund managers collectors of private information or fast interpreters of public information

Recent studies of fund manager performance find evidence of outperformance. However limited research exists as to whether such outperformance is because of privately collected information, or merely expedient interpretation of publicly released information. In this study, we examine the trade sequences of active Australian equity fund managers around earnings announcements to provide insights into the source of fund managers’ superior information. We document an increased occurrence of buy-sell trade sequences around good-news earnings announcements. The evidence is consistent with fund managers having both private information about forthcoming good-news earnings announcements and being ‘short-term profiteers’. We find no evidence that fund managers have private information about forthcoming bad-news earnings announcements. However, we do find an increase in the frequency of fund managers not trading before bad-news earnings announcements only to subsequently sell during announcements.

Speculation and e-commerce: The long and the short of IT

Over the past 25 years, the development of electronic commerce (e-commerce) has challenged and threatened firms to adapt their business models and processes. Successful adaptation can lead to improved efficiencies, growth in market share, expansion into new markets, or simply survival in competitive markets. Short-window event studies provide evidence that the market places significant value on investments in e-commerce. However, if the market misunderstands how these projects add value, value measurement based on short-run returns could be misleading. We address this possibility by examining the market reaction to e-commerce investment announcements by a sample of mining companies. We argue that this group of companies represents a sample for which, a priori, there is no expected value added to the firm from the type of investment they announce. We find strong evidence that the market reacts positively to these announcements in the days surrounding the information release. However, we find that in the three-year period subsequent to the announcement the firms realize long-run negative abnormal returns. Significant share-price rises leading up to and immediately subsequent to the announcement dates were completely reversed over the subsequent three years. We interpret this result as being consistent with the market not always understanding when e-commerce adds value. While our result is only applicable to equity investments in small, speculative ventures, it suggests some caution in the use of short-run market value changes as a measure of the value added to firms by an e-commerce investment.

Earnings Management: The Role of Economics and Ethics on Managers' Decision Making

A significant amount of earnings management (EM) research has treated managers’ EM decision processes as a “black box”. The objective of this study is to begin to open the black box though examining the relative importance of economic factors as well as ethical considerations in managers’ EM decisions. We performed a survey of 225 CFOs and CEOs of listed companies. They were provided with a case study where the firm’s earnings were projected to be below market expectations and they were asked whether their firm in the same situation would manage earnings via accounting adjustments versus real operational adjustments and then they were asked about a number of economic factors and ethical considerations related to this decision. We find the predominant factors in the initial decision to manage earnings is whether the EM is ethically questionable and the economic consequences to stakeholders – rather than manager self-interest. We also find ethics is substantially more important in the choice of EM method than the relative economic costs of the two methods. The stronger the CFOs’ and CEOs’ belief that the use of accounting (real operational) adjustments is ethically questionable the more likely their firms would use real operational (accounting) to manage earnings. Finally, we find a significant portion of the explanatory power of ethics in EM decisions is due to CFOs’ and CEOs’ perceiving the decision to be lying for both the initial decision to manage earnings and also for the choice of method to manage earnings.

Does the change of accounting regulation on employee share options give rise to greater scope for earnings management

Purpose – The purpose of this paper is to address the concern about the impact of accounting regulatory change pertaining to employee share options (ESOs) on earnings management. Following Australias adoption of International Financial Reporting Standards (IFRS) in 2005, companies are required to recognise the fair value of ESOs as expenses. Due to inherent imprecision in the estimate of ESOs fair value, the regulatory change from disclosure to recognition was widely claimed to potentially give rise to an alternative mechanism to manage earnings. This study provides empirical evidence on whether the regulatory change leads to earnings management problems.Design/methodology/approach – This study uses the regulatory change in accounting for ESOs to provide a direct test of earnings management between disclosed versus recognised regimes for the same sample of firms. The sample consists of Australian firms from S&P/ASX300 for the period from 2003 to 2006.Findings – The results show that, although the accoun...