Partha Gangopadhyay

Interpreting Mean Reversion in Stock Returns

This research attempts to distinguish between two competing economic explanations of mean reversion in stock returns: 1) mispricing in irrational markets versus 2) predictable time variation in security risk premia. Excess portfolio returns are decomposed into explained and unexplained components using the CAPM. If one restricts the market risk premium to be constant over time, then mean reversion could be interpreted as a manifestation of mispricing in irrational markets. But changing the assumption about the time-series behavior of the market risk premium dramatically alters the test results. If one permits the conditional market risk premium to vary and to differ from the unconditional market risk premium, then mean reversion in stock returns is consistent with rational pricing in the framework of the CAPM. This suggests one need not abandon models based on rationality to explain this puzzling return behavior.

The wealth effects of accelerated stock repurchases

Purpose - – The wealth effect of accelerated stock repurchase (ASR) documented by previous studies is not as large as the authors would have expected. The authors believe that there are potentially important sampling problems in the previous studies, which make the results less reliable. Identifying a number of factors that can possibly affect the announcement-period returns, the purpose of this paper is to reexamine the wealth effect of ASRs. Design/methodology/approach - – The paper identifies a number of factors that can possibly affect the announcement-period returns to ASRs which include: whether an ASR announcement in the press is the initiation date or the completion date of the ASR; the size of the ASR program; whether an ASR is part of an open market repurchase (OMR) program; the frequency of ASR announcements by a firm; whether other corporate news is announced simultaneously with an ASR. The paper partitions the ASR sample into three groups, and then examines the wealth effect of these groups. Findings - – The empirical results show that the market reacts differently to the announcement of ASR in these three groups. The three-day announcement-period CAR ( Originality/value - – These findings suggest that the weaker wealth effects of ASRs that have been documented in previous studies are due to sampling related issues.

Insider response to credit watch placements

An examination of insider trading before and after the announcement of Credit Watch placements sheds new light on the study of both bond rating changes and insider trading. This paper utilizes Credit Watch placements classified by 11 indentifiable trigger events for the years 1981‐1990. We find significant insider purchases before positive implication placements, but no sales before negative implication placements. Among individual trigger events, we observe significant insider purchases before and after placements due to improved operating performance, bidding on a firm with a higher debt rating and firms increasing their debt‐to‐equity ratios. Significant insider purchases are found before placements due to purchasing assets. Significant insider sales are found before and after placements due to poor operating performance.