Robert A. Connolly

An Examination of the Robustness of the Weekend Effect

This paper analyzes the robustness of the day-of-the-week (DOW) and weekend effects to alternative estimation and testing procedures. The results show that sample size can distort the interpretation of classical test statistics unless the significance level is adjusted downward. Specification tests reveal widespread departures from OLS assumptions. Hypothesis tests results are reported using robust econometric methods and a GARCH model. The strength of the DOW and weekend effect evidence appears to depend on the estimation and testing method. Both effects seem to have disappeared by 1975.

Stock Market Uncertainty and the Stock-Bond Return Relation

We examine whether time variation in the comovements of daily stock and Treasury bond returns can be linked to measures of stock market uncertainty, specifically the implied volatility from equity index options and detrended stock turnover. From a forward-looking perspective, we find a negative relation between the uncertainty measures and the future correlation of stock and bond returns. Contemporaneously, we find that bond returns tend to be high (low) relative to stock returns during days when implied volatility increases (decreases) substantially and during days when stock turnover is unexpectedly high (low). Our findings suggest that stock market uncertainty has important cross-market pricing in-fluences and that stock-bond diversification benefits increase with stock market uncertainty.

Union Rent Seeking, Intangible Capital, and Market Value of the Firm

This study considers the effect of unions on intangible capital investment and profitability within t he context of market value rather than a more traditional accounting-based appro ach. Theory is provided suggesting unions are able to affect profitability by sh aring in the economic returns to firm-specific intangible capital. Insupport of this hypothesis, we find unionization reduces the returns to R&D and produces a corresponding limiting influence on R&D investment at the firm level. Copyright 1986 by MIT Press.

Momentum and Reversals in Equity-Index Returns During Periods of Abnormal Turnover and Return Dispersion

We document new patterns in the dynamics between stock returns and trading volume. Specifically, we find substantial momentum (reversals) in consecutive weekly returns when the latter week has unexpectedly high (low) turnover. This pattern is evident in equity indices, index futures, and individual stocks. Similarly, we also find that the autocorrelation in equity-index returns is increasing with the unexpected dispersion across the latter weeks firm-level returns. Weeks with extreme turnover and dispersion shocks (both high and low) tend to have more macroeconomic news releases. Our findings bear on understanding price formation and the economic interpretation of turnover and dispersion shocks.

DO UNIONS CAPTURE MONOPOLY PROFITS

This paper challenges the conclusion reached in recent studies that unions reduce profits exclusively in highly concentrated industries. From their review of previous studies and their analysis of 1977 data on 367 Fortune 500 firms, the authors conclude that there is no convincing evidence that concentration produces monopoly profits for unions to capture. Moreover, they find that the union wage effect is not greater in concentrated industries, as suggested by the hypothesis that unions capture concentration-related profits. Evidence is found suggesting that a firms market share, its expenditures on research and development, and its protection from foreign competition provide more likely sources for union rents than does industry concentration.

A posterior odds analysis of the weekend effect

The weekend effect is the tendency for Monday stock returns to be negative. The paper reports a posterior odds evaluation of the day-of-the-week and weekend effect that largely reverses earlier findings. The interaction of large sample sizes and fixed significance level hypothesis testing is identified as the likely source of disagreements between p-values and posterior probabilities. Analysis with informative and relatively diffuse prior distributions indicates this divergence does not apparently reflect special distributional assumptions. Further analysis suggests that earnings announcement behavior and a small number of outliers may account for much of the evidence of systematically negative Monday returns in the few years where posterior odds favor the weekend effect hypothesis.

Market value and patents: A Bayesian approach

Abstract This paper finds a large, positive and statistically significant effect op patent statistics on firm market values. Furthermore, these effects are robust to a variety of alternate specifications of our underlying model. We conclude that patent data provide economically meaningful information on the scope and relative effectiveness of a firms R&D program.

Skill, Luck, and Streaky Play on the PGA Tour

In this study, we implement a random-effects model that estimates cubic spline-based time-dependent skill functions for 253 active PGA Tour golfers over the 1998–2001 period. Our model controls for the first-order autocorrelation of residual 18-hole scores and adjusts for round–course and player–course random effects. Using the model, we are able to estimate time-varying measures of skill and luck for each player in the sample. Estimates of spline-based player-specific skill functions provide strong evidence that the skill levels of PGA Tour players change through time. Using the model, we are able to rank golfers at the end of 2001 on the basis of their estimated mean skill levels and identify the players who experienced the most improvement and deterioration in their skill levels over the 1998–2001 period. We find that some luck is required to win PGA Tour events, even for the most highly skilled players. Player–course interactions contribute very little to variability in golfer performance, but the particular course rotations to which players are assigned can have a significant effect on the outcomes of the few tournaments played on more than one course. We also find evidence that a small number of PGA Tour participants experience statistically significant streaky play.

Firm size and R&D effectiveness : A value-based test

Abstract R&D activity has similar effects on the market value of small and large-scale firms. Using this criterion, size alone does not emerge as a prime determinant of R&D effectiveness.

The intertemporal behavior of economic profits

Abstract The intertemporal behavior of economic profits is examined. Tests show that profit rates are not independent of their initial level. A set of tests for the nature of the profit adjustment mechanism is proposed and a stock market-based profit measure is employed. Despite intertemporal dependence, we find evidence of profit rate adjustment patterns roughly consistent with neoclassical theory for negative profits. In some, but not all cases, the probability of maintaining positive profits appears less than the probability of moving toward zero profits.