Robert A. Weigand

Sources of Bank Interest Rate Risk

We investigate bank stockssensitivity to changes in interest rates and the factors affecting this sensitivity. We focus on whether the exposure of commercial banks to interest rate risk is conditioned on certain balance sheet and income statement ratios. We find a significantly negative relation between bank stock returns and changes in interest rates over the period 1991-1996. We also find that bank characteristics measured from basic financial statement information explain bank stockssensitivity to interest rate changes. These results suggest that bank managers, analysts, and regulators can use this information to assess the relative risk exposure of banks. Copyright 2002 by the Eastern Finance Association.

The information content of dividend initiations: Additional evidence

We hypothesize that the initiation of cash dividends indicates that a firm?s earnings and cash flows have become fundamentally less risky. We present evidence to support this hypothesis. A sample of firms initiating dividends displays a precipitous decrease in risk immediately following the dividend announcement. Although these firms? earnings do not subsequently increase, earnings volatility is significantly lower following the dividend decision. We also find that the decrease in risk is related to the excess return observed around the dividend announcement.

Explaining persistence in mutual fund performance

This study investigates the determinants of persistence in mutual fund performance. Previous research that uses factor-mimicking portfolios and characteristic benchmarks to model fund performance fails to explain all the persistence in fund returns. This study employs a model that directly relates mutual fund returns to the characteristics of the stocks held by funds. Adjusting fund returns for the size of the stocks in which funds invest and financial ratios intended to capture fund manager investment styles explains all the persistence in mutual fund returns from 1976-1985, the period in which persistence is most prevalent.

The Cross-Sectional Dispersion of Stock Returns, Alpha and the Information Ratio

Both the cross-sectional dispersion of U.S. stock returns and the VIX provide forecasts of alpha dispersion across high-performing and low-performing portfolios of stocks that are statistically and economically significant. These findings suggest that absolute return investors can use cross-sectional dispersion and time-series volatility as signals to improve the tactical timing of their alpha-focused strategies. Because active risk increases by a greater amount than alpha, however, high-return-dispersion/high-VIX periods are followed by slightly lower information ratio dispersion. Therefore, relative return investors who keep score in an information ratio framework are unlikely to find return dispersion useful as a signal regarding when to increase or decrease the activeness of their portfolio strategies.

The Market P/E Ratio, Earnings Trends, and Stock Return Forecasts

This is an analysis of periods characterized by high price/equity ratios, using measures of the market P/E based on both one-year trailing earnings and ten-year smoothed earnings. High P/E periods are preceded by accelerating equity returns and declines in both nominal interest rates and stock market volatility. Stock returns following a high P/E period are marginally higher when earnings growth remains strong and interest rates continue falling. Even when these mitigating factors are in place, however, real returns are appreciably lower for decades following high levels of the market P/E ratio. The worst case scenario for future equity returns occurs when P/E ratios expand during periods of strong earnings growth. Once earnings growth slows, equities are left profoundly overvalued, which leads to prolonged periods of low and sometimes negative real returns. The findings suggest that U.S. equities are currently priced to deliver real returns that are positive, but well below their historical average.

Cross‐sectional differences in the profits, returns and risk of firms initiating dividends

Purpose– The purpose of this paper is to examine cross-sectional differences in the profits, returns and risk of high- and low-market-to-book ratios (M/B) stocks before and after the initiation of regular cash dividend payments. Design/methodology/approach– This study uses parametric and non-parametric statistics and ordinary least squares regression to test for differences in the profits, returns and risk of high- and low-M/B stocks before and after dividend initiation. Findings– Low-M/B stocks display the most positive price reaction to dividend initiation announcements. High-M/B firms have larger profits, cash levels and capital expenditure before and at the time of dividend initiation, but more closely resemble the low-M/B firms in terms of these characteristics within three years following dividend initiation. Excess returns earned by low-M/B firms are related to decreases in systematic risk, while the returns of high-M/B firms are related to their higher profitability. Research limitations/implications– Averaging results from 1965-2000 does not account for possible changes in the information content of dividend initiations over time (as evidenced by steadily declining dividend yields over this period). Practical implications– The findings are consistent with the idea that firms begin paying dividends as they are maturing into a slower growth period, and do not support the idea that dividend initiation signals faster future earnings growth. Originality/value– The analysis adds to the body of knowledge by explicitly conditioning the expectations from various dividend theories based upon individual firms’ growth phase as reflected in their M/B ratios, and suggests that signaling, agency and risk explanations for dividends must be considered jointly with a firms growth prospects when studying dividend events.

Changing perspectives on distribution policy: The evolution from dividends to share repurchase

Purpose - The purpose of this paper is to provide a synthesis of the literature on the changing perspectives of corporate distribution policy. Design/methodology/approach - This paper synthesizes and interprets the theoretical, empirical and survey-based research on corporate payout policy. Findings - Dividends once constituted a prominent part of an investors total return, but this role has declined over time. Although many companies still pay cash dividends, share repurchases have risen dramatically and are now a significant component of payout. Research limitations/implications - New theories and perspectives on corporate distribution are likely to be introduced; while this paper represents an up-to-date view on the topic, it is not possible to anticipate new research developments that may affect some of the perspectives expressed herein. Practical implications - No single explanation fully accounts for the changes in distribution policy, most notably, the declining incidence of dividend-paying firms and the increasing level of repurchase activity. Factors that explain the popularity of share repurchases in the USA include the improved regulatory environment, economic conditions, and the flexibility of repurchases relative to dividends. Developing a comprehensive model that explains the choice between dividends and share repurchase remains a challenge facing researchers. Originality/value - The paper adds to the body of knowledge by providing an integrated perspective on dividends and share repurchase, summarizing decades of theoretical, empirical, and survey-based research.

The Ex-Dividend Day Behavior of American Depository Receipts

We compare the ex-dividend day stock returns and trading volume of foreign stocks that trade in U.S. markets as American Depository Receipts (ADRs) with the ex-day returns and volume of a matched sample of U.S. stocks. This experiment allows us to investigate whether differences in the way dividends are paid and/or foreign currency risk affect the stock returns and trading volume of ADRs on the ex-dividend day. If these factors inhibit dividend capture in ADRs, then ADRs should earn larger ex-day returns than U.S. stocks, and their ex-day trading volume should be lower. We present evidence consistent with these hypotheses. The results of a cross-sectional regression analysis of ex-day returns and volume are not consistent with a foreign exchange risk premium suppressing dividend capture in ADRs, however, suggesting that differences in dividend payment policies account for the lower level of dividend capture in ADRs.

Trading volume and firm size: A test of the information spillover hypothesis

Abstract This study investigates information transfer across firms by using the trading volume of large-and small-stock portfolios as a proxy for the flow of information in financial markets. I find bi-directional Granger-causality between the trading volume of large and small firms. The results do not support previous studies that report evidence of one-way information transfer using the returns and variances of different-sized firms. My findings suggest several explanations. Either information arrival in financial markets has a different impact on trading volume than it does on returns and variances, or certain information shocks may affect different firms more rapidly, with these shocks eventually influencing the volume of trade of all firms.

Measuring Alpha Based Performance:Implications for Alpha Focused, Structured Products

Portable Alpha, an alpha-focused absolute return product with tremendous potential, has met with somewhat muted demand. Much of the confusion arises from a lack of clear consensus regarding a strict definition of alpha. Inquiries by potential investors are too often met with off the cuff, vague, and inconsistent explanations of the product. One remedy is to improve the clarity of exactly what alpha is, and when it is worth paying for. These ideas should be broadly disseminated. Relative return products such as active portfolio extensions (130/30 funds) pose an additional challenge for Portable Alpha, as they serve as substitute goods. Direct comparisons between Portable Alpha and active extension products have traditionally been difficult to obtain, in large part due to asymmetric performance methodologies in which the information ratio is only computed for active extension products. Reconciling this and other performance measurement issues, and moving to a common assessment methodology in which both absolute and relative return products are assessed via an investor focused information ratio would do much to improve investor demand for both products. The result will likely be a significant increase in collective demand for all professionally managed alpha-focused products.