Moon K. Kim

Mutual fund objective misclassification

Abstract Mutual funds are usually classified based on their stated objectives. If the stated objectives are not the actual objectives the funds pursue, conclusions drawn by investors and researchers based on the stated objectives will be misleading. This study classifies funds based on their attributes (characteristics, investment style, and risk/return measures). We find that the stated objectives of more than half the funds differ from their attributes-based objectives, and over one third of the funds are severely misclassified. However, contrary to the reports in the financial press, we do not find that mutual funds are gaming their objectives, i.e., deviating from their stated objectives to earn a higher relative performance ranking. Keywords: Mutual funds; Investment objectives JEL classification: G11, G23

The Firm Size Effect and the Economic Cycle

Small firms have, on average, lower return on assets and higher leverage than do large firms. Small firms tend to do well in good economic conditions but to perform poorly in the worst economic conditions. We investigate the hypothesis that the small firm effect is manifest in the expansion phase of the economic cycle but not in the contraction phase. The empirical results of our study confirm the hypothesis for 1976-95. We use the alpha, residual, and regression methods in testing the hypothesis. Southern Finance Association and the Southwestern Finance Association.

Inflation and bond‐stock characteristics of international security returns

Purpose – The purpose of this research is to explain the cross-sectional variation in the relation between international security returns and expected inflation based on their sensitivities to world stock and bond factors. Design/methodology/approach – The paper shows regress inflation sensitivities of returns on country indexes and international mutual funds on their sensitivities to world stock and bond indexes. Findings – This paper shows the inflation sensitivity of a security is positively (negatively) related to its sensitivity to the world bond index (world stock index). Research limitations/implications – The paper shows that while the model is applicable to individual securities as well as portfolios, it is tested using portfolios only. Originality/value – The paper shows the results allow one to assess the inflation sensitivity of a security using its sensitivity to the bond and the stock market. The more bond-like a security is, the higher its sensitivity to inflation.

Accounting data and the prediction of risk in the extremes

Abstract In portfolio formation, the systematic risk of a security is of fundamental importance. In the traditional asset-pricing model, the concept of beta represents anticipated systematic risk which, to be useful in the real-world portfolio formation, can only be estimated by currently-available data. Prior research has revealed variation in the reliability of the prediction of beta across the risk spectrum. In this paper we focus on beta prediction in the extreme risk categories and consider the predictive contribution of accounting information across the risk spectrum. Our empirical model utilizes accounting risk measures, shown to be related to sample-wide average betas in prior research, and incorporates the intertemporal relationship between successive period betas in predicting next-period betas. Our results provide evidence that inclusion of accounting risk measures, alone or in combination with market beta, substantially improves beta prediction for high risk securities, but not for low and medium risk securities. These results are consistent using either traditional OLS or analytically-corrected (Bayesian-adjusted) beta estimation techniques.

The Cross-Sectional Effect of Inflation on Corporate Investment and Employment

This paper examines the cross-sectional effect of inflation on the investment and employment decisions. The paper shows that more heavily capitalized firms tend to have a greater reduction in the capital-labor ratio during an inflationary period. The paper also shows that firms with a higher cost of debt to wage ratios and a larger amount of depreciation shelter tend to use more labor in the inflationary period. Empirical results are generally consistent with these arguments.