Sridhar Sundaram

The Conditional Relation between Beta and Returns

Unlike previous studies, this paper finds a consistent and highly significant relationship between beta and cross-sectional portfolio returns. The key distinction between our tests and previous tests is the recognition that the positive relationship between returns and beta predicted by the Sharpe-Lintner-Black model is based on expected rather than realized returns. In periods where excess market returns are negative, an inverse relationship between beta and portfolio returns should exist. When we adjust for the expectations concerning negative market excess returns, we find a consistent and significant relationship between beta and returns for the entire sample, for subsample periods, and for data divided by months in a year. Separately, we find support for a positive payment for beta risk.

The market valuation effects of the Financial Institutions Reform, Recovery and Enforcement Act of 1989

Abstract This paper evaluates the stock market effects of events leading to the passage of the Financial Institutions Reforms, Recovery, and Enforcement Act of 1989. The evidence suggests that the signing of the Act by President Bush produced positive abnormal returns for both banks and S&Ls and that the addition of tougher capital standards produced positive returns for S&Ls. In addition, the Act increased the risk of both banks and S&Ls.

Payment For Risk: Constant Beta Vs. Dual-Beta Models

Fama and Frenchs (1992) assertion that investors receive premium payments for risk associated with the book value to market price (BE/ME) and size and not for holding beta risk has sparked a lively debate concerning risk factors that are priced in the market. Howton and Peterson (1998) use a dual-beta model to test the Fama and French conclusions. They conclude that the significant relationship between beta and returns depends on the use of the dual-beta model. This work, however, ignores the results reported by Pettengill, Sundaram, and Mathur (PSM, 1995). PSM find a significant relation between a constant risk beta and returns when data are segmented between up and down markets, but do not consider the impact of size and BE/ME. In this paper we show that the PSM (1995) market segmentation procedure alone provides a sufficient condition to identify a significant relation between beta and returns in the presence of size and BE/ME. Dual market betas may be relevant in explaining risk and return. However, the market segmentation procedure of PSM (1995) is the critical condition for finding a significant relationship between returns and betas. Copyright 2002 by the Eastern Finance Association.

An Empirical analysis of cancelled mergers, board composition and ownership structure

This paper examines the effects of board composition and ownership structure in the valuation of target firms in cancelled mergers. These results find no significant association between board composition and shareholder wealth. On the contrary, when a merger is cancelled by the target firm, abnormal returns surrounding the announcement are negatively related to share ownership by inside directors. In addition, we find the likelihood that the target firm is subsequently taken over depends largely on two factors: stock ownership by inside directors and the presence of multiple bids. These results suggest a strong association between ownership structure and the valuation of target firms in cancelled mergers.

Welfare effects of expanding banking organization opportunities in the securities arena

Abstract This study examines the welfare consequences of expanding, via deregulation, securities activities of banking organizations. The wealth effect of expanding the permissible scale of Bank Holding Company (BHC) securities activities is redistributive: when revenue limits are relaxed, BHCs gain at the expense of investment banks and their customers. However, removing prudential interaffiliate firewalls to permit BHCs to freely pursue synergies from the joint performance of banking and securities activities shows negative wealth effects for BHCs and an increase in their idiosyncratic risk. Relaxing firewalls appears to raise concerns about stockholder and customer exposure to “ethical risk” loss from management conflicts of interest.

Reaction of bank stock prices to the multiple events of the Brazilian debt crisis

Rather than assessing the market reaction to individual dates associated with the Brazilian debt crisis, eight significant dates associated with the crisis are studied simultaneously. The results show a systematic shift in the returns generating process, caused by the debt crisis. The beta of the money centre bank portfolio increased significantly subsequent to the agreement on the rescheduling of Brazilian debt, while the beta for banks without LDC debt decreased significantly after the agreement. Contagion effects associated with the announcement of the Citicorp loan loss reserves were also observed

Momentum returns: market, seasonal and aging considerations

This paper examines the momentum returns from portfolios constructed using the NYSE-AMEX stocks. Following the methodology of Jegadeesh and Titman (1993), we form the momentum portfolio by going long on winners, defined as securities with returns in the top decile of previous six-month cumulative return, and short on losers, defined as securities with returns in the bottom decile of previous six-month cumulative return. Consistent with previous literature, we find that momentum portfolios earn significantly higher returns in the six-month period following the formation period. But, we also find that loser portfolios earn returns significantly greater than zero during this period. Further examination of the returns to the momentum portfolio during up and down markets and during each month of the year reveal a strong seasonality in these returns. Specifically, we find higher returns to winners occur primarily in down markets and a significant reversal in momentum returns in observed in the month of January. These empirical results support neither the under reaction nor the overreaction hypothesis. Further research is needed to examine the sources of these momentum returns.

The market effects of acquisition-related foreign direct investments in the U.S

Abstract Theories of foreign direct investment (PDI) indicate that both location and firm specific advantages must be present for FDI to be feasible. These advantages can be readily exploited by expansion through the utilization of external markets. Therefore, international acquisitions can best be explained by the perceived benefits associated with intemalization. Acquisitions allow bidders to capture partially the gains associated with internalization of markets for their products and services, and to partially distribute them to target firm shareholders. The results of this study support the hypothesis that target shareholders receive abnormal positive returns. However, returns to bidder stockholders are zero, indicating that either investors do not price positively the benefits of FDI, or that costs associated with managerial perquisites, the winners curse, and ineffective utilization of free cash flow outweigh positive FDI benefits.

Relaxing Glass-Steagall provisions: wealth and risk effects on foreign banks and their domestic corporate customers

Abstract We provide evidence that expanding the permissible scale of Bank Holding Company (BHC) securities activities in the US redistributes wealth from foreign banks and their domestic customers to domestic BHCs. However, removing prudential interaffiliate firewalls to permit BHCs to freely pursue synergies from the joint performance of banking and securities activities results in wealth losses for all interest groups. Securities activity deregulation increases the systematic risk for the foreign bank sector. Our evidence highlights that the application of the US regulatory policy of national treatment, which seeks to provide equality of competitive opportunity to foreign banking institutions operating in domestic markets, results in competitive inequities.