S. G. Badrinath

Momentum Trading by Institutions

We document the equity trading practices of approximately 1,200 institutions from the third quarter of 1987 through the third quarter of 1995. We decompose trading by institutions into the initiation of new positions (entry), the termination of previous positions (exit), and adjustments to ongoing holdings. Institutions act as momentum traders when they enter stocks but as contrarian traders when they exit or make adjustments to ongoing holdings. We find significant differences in trading practices among different types of institutions.

On the measurement of Tobin's q

Abstract We examine the methods commonly employed to estimate Tobins q ratios and find them to be flawed in design and arbitrary in implementation. We propose an alternative procedure which is both simpler and more accurate. The key to the procedure is an improved measure of fixed asset replacement costs, through the proper identification of the vintages of fixed assets that are in place for a firm. Application of this procedure to a large sample of nonfinancial corporations indicates that existing methods generally produce downward-biased measures of q and can result in errors in the ordering of firms by their qs.

On Measuring Skewness and Elongation in Common Stock Return Distributions: The Case of the Market Index

This article is an exploratory investigation of the distributional properties of market index returns using J. W. Tukeys g and h distributions. Specifically, it is shown that over sufficiently long periods of time, the distribution of the market index is adequately explained as a skewed, elongated (g x h) distribution. Estimates of skewness and elongation are developed that are easy to calculate and are robust with respect to outliers. Functional forms for the appropr iate distributions are provided. The findings reported here have implications for understanding skewness and elongation, developing appropriate portfolio strategies, and devising pricing models incorporating higher moments. Copyright 1988 by the University of Chicago.

A Data-Analytic Look at Skewness and Elongation in Common-Stock-Return Distributions

This article explores the nature of skewness and elongation in daily common-stock-return distributions of individual firms using estimates of g (for skewness) and h (for elongation) obtained form Turkeys g and h distributions. Both parametric and nonparametric (bootstrap) estimates of standard errors of the g estimates are computed and compared. Daily return distributions are first examined cross-sectionally over a large sample of firms. The estimates of the skewness parameter exhibit variation across individual firms, but some general trends are evident across industry groups and firm sizes. Return distributions typically seem to be more elongated than the Gaussian distribution. From a time series perspective, both skewness and elongation are persistent in the return distributions of individual firms and vary over a finite range. First-order autocorrelation coefficients of monthly g and h estimates are large and suggest a certain degree of predictability.

Characteristics of Common Stock Holdings of Insurance Companies

This article investigates the stock market portfolios of insurance company portfolio managers and compares the characteristics of their equity holdings with those of other (noninsurance) institutional equity portfolios. The main finding is that the cross-sectional determinants documented by earlier researchers for aggregate institutional ownership levels in firms do not have the same explanatory power for levels of ownership of insurance companies. On the other hand, these same firm characteristics have significantly high explanatory power regarding the decision of insurance companies to invest in a firm.

The Role of Market Forces in EPA Enforcement Activity

As corporate concern regarding environmental issues grows, recent studies have debated the stock markets role as an enforcer of environmental regulation. We examine stock market reactions to EPA judicial actions on a sample of publicly traded firms from 1972–91. Specifically, we find that (a) there is a significant decline of 0.43% in violator firm value during the week of settlement; (b) the market penalty is unrelated to fine size, (c) more pronounced for citations under the Clean Air Act, (d) for repeat violators, and (e) for more recent EPA actions. These stock market reactions appear to reinforce the intent of EPA enforcement efforts.

Does conditional mutual fund outperformance exist

Purpose - Glode provides theoretical and empirical evidence that, in aggregate, funds underperform during economic expansions and outperform during contractions. The authors find that this result is not robust to the more appropriate conditional CAPM and to alternative methods for estimating market states. The purpose of this paper is therefore to thoroughly analyze mutual fund performance across the business cycle by disaggregating funds into different investment objectives to determine which funds possess this cyclical performance and which do not. Design/methodology/approach - In this paper, the authors employ a conditional asset pricing model that better captures the variations in the pricing kernel in different economic states. The empirical model adjusts for time-variation in both risk (beta) and performance (alpha). The authors specify economic states using an ex-ante measure, the expected market risk premium. This measure is continuous and better captures changing economic circumstances than the ex-post, binary NBER cycle dates that are common in the mutual fund literature. Findings - In this conditional framework, the authors find that recession protection is only offered by certain types of equity mutual funds. Managers of small-cap and mid-cap growth equity funds are able to deliver such state-dependent performance but managers of value funds do not. In a comparison of active mutual funds with passive counterparts, it is found that both the stocks held by the small-cap managers as well as their stewardship of the portfolio contribute to that performance. Originality/value - Drawing from the recent asset pricing literature, the authors are the first to adapt an integrated conditional CAPM framework to examine the state-dependent performance of mutual funds. Rather than report aggregate equity mutual fund performance, the authors provide an analysis for subsets of mutual funds separated by investment styles. Both managers of and investors in these funds will benefit from an understanding of how portfolio performance is impacted by changing economic conditions.

Systematic risk estimation in the presence of large and many outliers

It is well recognized that the effect of extreme points on systematic risk estimates is not adequately captured through least squares estimation. This article uses the reweighted least median squares (RWLMS) approach, first proposed by Rousseeuw (1984), which accurately detects outlier presence. Using a large sample of 1350 NYSE/AMEX firms, the article demonstrates that least squares does indeed mask several potentially influential points, that this masking is very pervasive over the sample, and that it may persist even after conventional robust estimation techniques are applied. When these masked points are “unmasked” by RWLMS and zero weights assigned to such observations, the resulting RWLMS estimates of beta are on average 10%–15% smaller. However, a Bayesian treatment of such points (assigning a priori nonzero weights) is possible in both one and two factor market models.

Segmented markets, differential information, and asset return dynamics

In a rational expectations framework under the assumption that the stock market is segmented because of legal restrictions, it is demonstrated that the returns of large firm stocks are predictors of small firm stock returns. Empirical tests supporting this prediction are also presented.

Is It Prudent to Trade Around Analyst Recommendation Changes?: An Analysis of Transactions Costs

In the wake of an increased emphasis on managing transactions costs, we investigate if the period surrounding analyst recommendation changes is appropriate for trading from the point of view of incurring lower transactional costs. We pick analyst recommendation changes because they are a highly frequent corporate event and it behooves a buy-side trader to know exactly how to react to such events. Using a sample of analyst recommendation changes made on all stocks trading in the NYSE and AMEX over an 18-month period, we find that public announcements of analyst recommendation changes are accompanied by a decrease in transaction costs over a period of 10 days surrounding the event. Our finding is surprisingly robust to the quality of the analyst, strength of the signal, size of the firm and level of institutional ownership in the firm. These results indicate that analyst recommendation changes (or news of impending recommendation changes) provide opportunities to institutional traders to execute large orders without increasing the costs of such executions.