S. P. Uma Rao

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.

The early performance of American depository receipts listed on the New York Stock Exchange: Does region of issue, level of issue or type of issue matter?

Purpose –This study examines the initial two-week excess performance relative to the S&P 500 Index of American Depository Receipts (ADRs) listed on the New York Stock Exchange from January 1987 to September 2001 to determine whether short-term wealth effects exist. Design/methodology/approach - Standard intial public offering methodology is used to test for significant excess performance. Findings - Results for the entire sample of 281 ADRs suggest the initial excess performance was not significant. However, after segmenting the sample, emerging market ADRs significantly outperformed the S&P 500 by over three per cent while developed market ADRs underperformed by 0.92 per cent. Also, Latin American ADRs outperformed the market index by nearly five per cent during the first two weeks after issue while European ADRs underperformed the market by nearly one per cent. Asia Pacific ADRs underperformed the S&P 500, but not significantly in the early trading. Research limitations/implications- The findings suggest emerging market ADRs, particularly those from the Latin American region, perform well in the early trading while developed market ADRs do not. Future research may identify variables that affect or explain ADR excess returns. Originality/value - The paper provides insights into the types of ADRs that accumulate wealth in the short term investment horizon.

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.

Performance persistence in socially responsible mutual funds

This paper reports on an examination of the performance persistence of 238 socially responsible (SR) mutual funds using ten-year monthly and annual returns. The method used relative percentile ranks and annual returns and reward-to-variability ratios to examine persistence. No evidence of performance persistence was found. The results suggest that superior past performance of SR funds is no indicator of superior performance in future.