Praveen Das

The role of corporate governance in foreign investments

This article examines whether and how the corporate governance practices of firms affect foreign investors’ decisions to invest in their firms. Using a comprehensive data set of foreign equity holdings of mutual funds from 37 countries worldwide, we find that fund managers tend to tilt their portfolio weights towards firms with strong governance systems. Particularly, they invest more in foreign firms with good board characteristics and independent auditors. This result suggests that mutual funds, facing informational disadvantage in their foreign investments, prefer firms with better governance systems as a substitute for their own costly information acquisition and monitoring activities. Furthermore, firms with better governance structures attract more foreign investments irrespective of their country-level investor protection environments.

The value premium and the January effect

Purpose - The purpose of this paper is to investigate the seasonal effect in the value premium puzzle. It studies whether the book-to-market effect is an outcome of the January effect observed among stock returns. Design/methodology/approach - The paper uses returns of portfolios based on size and BE/ME ratios as Fama and French suggest to define value premium and investigate the seasonality of the BE/ME effect. The paper tests whether the value premiums observed among large and small stocks are different in January and non-January months. It examines the turn-of-the-year effect on the value premium by analyzing the returns of BE/ME portfolios during the first and last ten trading days of a calendar year. Findings - Empirical evidence supports the fact that value premium has different patterns in January and non-January months for large and small capitalization firms. It was found that large stocks have a significant value premium only in January and this high January value premium among large stocks is mainly driven by loser stocks at the turn of the year. In contrast with large stocks, the value premium of small stocks occurs only in non-January months. Originality/value - This paper shows that value premium of large and small stocks are different in January and non-January months. Furthermore, the past performance of stocks plays a key role in the observed January value premium among large stocks. Finally, this study provides evidence to show that the value premium among large stocks may be explained by investor trading behavior.

Market timing and selectivity performance of socially responsible funds

Purpose - – The purpose of this paper is to examine the market timing and stock selection abilities of socially responsible (SR) mutual funds. Some high-profile SR fund managers try to embrace market timing and security selection plans to add value to the performance. Market timing relies on forecasting the equity market and shifting assets into or out of the market in anticipation of market movements. The selectivity measure assesses fund managers ability to select undervalued securities. Furthermore, the authors examine whether fund characteristics play any role in market timing and security selection ability. Design/methodology/approach - – The authors use Treynor and Mazuys’ (1966) and Henriksson and Mertons’ (1981) model to examine the market timing and security selection ability. The study uses a decade of monthly returns to examine the skills of fund managers in the SR industry for the period from July 2002 to June 2012. Findings - – The main findings are that the managers – though not very successful – do indulge in stock selection and market timing activities. It was found that 48 funds have positive statistically significant stock selectivity coefficients and only a very small number of five funds with positive statistically significant market timing coefficients. Results suggest that there is a trade-off between the two activities. It was found that aggressive funds, funds with higher growth rate and riskier funds are more likely to engage in market timing rather than stock selection. Practical implications - – The implication is that SR managers cannot achieve superior stock selection and market timing ability simultaneously. Risk-averting investors in SR funds expect SR behavior from the managers. This means that managers of SR funds, with very little evidence of market timing ability, may have to refrain from market timing of SR funds. Originality/value - – Using a Morningstar dataset comprising almost all SR funds in existence as of June 2012, this is probably the most exhaustive long-term study to date on market timing and stock selection abilities of SR fund managers.