Steven D. Dolvin

Seasonal affective disorder and the pricing of IPOs

Purpose - It has been found that stock market returns vary seasonally with the amount of daylight, and they attribute this effect to seasonal affective disorder (SAD), which is a psychological condition that causes depression and heightened risk aversion during the fall and winter months. The goal of this study is to examine whether this effect also manifests itself in the pricing of initial public offerings (IPOs). Design/methodology/approach - The authors conduct an empirical analysis on IPO data collected over the period 1986-2000. Specifically, we examine potential pricing differences between IPO that go public during the fall and winter months, relative to other issues. The paper begins by exploring differences on a univariate basis (i.e. testing via Findings - The paper finds that IPOs experience higher levels of underpricing in both the fall and winter months and that offer price revisions are higher during the winter months. Both of these results are consistent with SAD influencing the IPO pricing process. Originality/value - The results suggest that behavioral issues (i.e. the emotions of buyers) may have as much of an effect on the pricing of IPOs as more traditional characteristics. Further, the results imply that firms with flexible issuance schedules should avoid going public during months affected by SAD, thereby potentially reducing the cost of issuance.

Venture Capitalist Certification of IPOs

This article analyses a set of 4606 IPOs from the 1986 to 2000 period, specifically focusing on the certification effect associated with venture capital backing. It concludes that venture capitalists, particularly those of higher quality, are associated with lower issuance costs (both direct and indirect), increased upward price adjustments, and shorter lockup periods, all of which are consistent with a valuable certification role. In addition, it is found that even lower quality venture capitalists perform a certification role; however, it is specific to a set of penny stock (i.e. high information asymmetry) IPOs.

Venture capitalist quality and IPO certification

Abstract The opportunity cost of going public is directly related to the level of information asymmetry associated with the issuing firm. Independent third parties, such as underwriters and venture capitalists, are believed to mitigate this asymmetry through certification, thereby reducing this cost. Existing studies illustrate that higher quality underwriters provide increased certification value; however, current research is essentially mute with regard to the effect of venture capitalist quality. We fill this gap, finding that higher quality venture capitalists also provide incremental certification value relative to those of lower quality. Additionally, we suggest that the most appropriate measure of venture capitalist quality is a simple binary variable that captures prior experience as the lead of an IPO venture capital syndicate.

S&P ETFs: Arbitrage Opportunities and Market Forecasting

The article examines the pricing differences between two S&P 500 ETFs (ticker symbols SPY and IVV) and the underlying stock index. The author finds that, on average, both ETFs trade at a premium relative to the S&P 500; however, the level of the daily premium (and, on occasion, discount) varies between the two securities, which creates the opportunity for arbitrage. Since the passage of Regulation NMS in mid-2005, the pricing differences, as expected, have declined, implying that any current/future arbitrage opportunity will be confined to periods of high market volatility, such as 2008. Beyond issues related to arbitrage, the author finds that the relative pricing of the ETFs also provides a valuable signal of future (particularly next day) market activity. Thus, he suggests that active traders and longer-term investors may both benefit from recognition of relative ETF prices.

The impact of bank venture capital on initial public offerings

Abstract Studies of the role of venture capital in the IPO process generally assume that all venture capitalists are alike. We relax this assumption and focus on the role of venture capitalists affiliated with either commercial or investment banks. We find that firms backed by these bank venture capitalists experience a lower opportunity cost of going public. This result holds mainly for small issuers, suggesting that banks are superior to traditional venture capitalists in providing certification services to this segment of the market. We also find that bank venture capital-backed firms experience a less negative abnormal return at lockup expiration, which is consistent with the hypothesis that banks are motivated, at least in part, by ‘relationship building’ when providing venture capital funding.

An Update on the Performance of Actively Managed ETFs

Actively managed ETFs are a relatively recent introduction to the investing landscape, and understanding their performance against passive funds is becoming increasingly important. Consistent with preliminary studies, I find that active funds are more volatile than their passive counterparts and do not provide an absolute return advantage. Thus, active ETFs are generally not good substitutes for existing passively managed funds. However, in contrast to prior studies, I find that performance metrics based on relative risk (e.g., Information and Treynor ratios) suggest that active funds may be good additions to existing portfolios for their diversification benefits. I also find that these relative benefits are primarily concentrated in the funds with the highest average daily trading volume.

Momentum Trading in Sector ETFs

If markets were efficient, then strategies based on past price behavior would be essentially worthless. However, many traders follow investment plans that are designed to exploit momentum, particularly across sectors. This article examines one common, related trading rule: “There’s Always a Bull Market Somewhere.” Under this approach, investors buy (sell) past 12-month winners (losers). Prior studies find a positive abnormal return in the subsequent 12-month period following implementation of this strategy; however, no study examines the impact of such rules on the short-term trading patterns (returns and volume) of related securities. This article fills this gap, finding that ETFs representing sectors experiencing positive (negative) momentum have higher (lower) returns on days associated with the execution of this momentum strategy. It also finds that calendar days coinciding with the implementation of this rule are associated with increased trading volume in related sector ETFs, particularly on the buy side in more recent periods.

Where Has the Trend Gone? An Update on Momentum Returns in the U.S. Stock Market

Prior studies have found broad-based support for the efficacy of trading strategies based on momentum in stock returns. More recent studies, however, have noted a declining benefit relative to that identified in seminal studies on momentum. These recent studies, however, primarily examined time periods ending prior to or immediately following the 2008 financial crisis. Thus, we extend this line of research by exploring the profitability of momentum trading in the U.S. equity markets over the broader 1986 to 2015 time period. Our results for the earlier part of our sample period (i.e., 1986–2006) fall in line with previous studies, as we find a monotonic relationship between decile portfolios formed based on their prior six-month performance and subsequent twelve-month holding period excess returns. In contrast, when we evaluate more recent periods (i.e., 2007–2015 and 2010–2015), we find dramatically different results. In particular, alphas for the winner portfolio, which have historically been the highest, are actually negative during both subperiods. Furthermore, the curvature of the recent portfolio return distribution is clearly no longer monotonic. Rather, it follows a more inverted U-shaped curve from the winner portfolio (P1) to the loser (P10) portfolio, with excess returns cresting around the fifth decile portfolio (P5). In fact, we find that the risk-adjusted returns of the winner portfolio (P1) are significantly less than those of the middle portfolio (P5) for both recent subperiods. These results suggest that individual and institutional investors seeking to profit from traditionally based momentum trading strategies may need to rethink their approaches.

Seasonal Affective Disorder and IPO underpricing: implications for young firms

A critical event in the life of a firm is when it undergoes an initial public offering (IPO). Drawing on the Seasonal Affective Disorder (SAD) literature, which evidences a psychological condition that produces heightened pessimism and risk aversion during the fall and winter months, this study focuses on understanding the potential implications of SAD for young firms. Our results confirm the influence of SAD on IPO underpricing and demonstrate that younger firms experience even higher underpricing during periods most heavily associated with SAD. However, we find that using a higher-quality underwriter or changing the share retention decision can mitigate this impact.

The Efficacy of Trading Based on Moving Average Indicators

The debate over market efficiency continues to rage, yet it is difficult to argue with published evidence surrounding the efficacy of momentum trading based on moving average indicators. While prior studies find that a comparison of the market price to the 200-day simple moving average provides a profitable trading strategy, such studies overlook many other popular price comparisons and calculation methodologies. Thus, I explore different trading rules, comparing strategies based on combinations of market price, 50-day, 100-day, and 200-day moving averages. In addition, I calculate moving averages using three alternative methods: simple, linear, and exponential. I find that a comparison of the market price to the 50-day exponential moving average generally provides the highest risk-adjusted performance, with the exception of high volatility periods, where a comparison of 50-day versus 200-day exponential moving averages performs better.