Sudhir Nanda

Wealth Effect of Drug Withdrawals on Firms and Their Competitors

In this paper, we examine the impact of a drug withdrawal on shareholders of firms and their direct competitors. We find shareholders suffer significant wealth losses when there are reports of adverse drug reactions and when the firm actually withdraws a drug from the market. Additionally, shareholder wealth losses are inversely related to the firm’s market capitalization. Firms that withdraw drugs during advanced clinical investigations experience greater wealth loss than drugs withdrawn during post-marketing surveillance. Wealth losses are lower if many firms withdraw the same type of drug and if that drug has available substitutes.

Multistyle Rotation Strategies

Terminal wealth improves dramatically by shifting from single–factor to multifactor models of portfolio formation. The authors provide simulated results to demonstrate the variability in terminal wealth for each style portfolio. They find that terminal wealth increases more than 50% by rotating across multiple– versus single–investment style portfolios. Their results provide downside risk assessment that is unencumbered by distributional assumptions and time diversification problems, and that lends itself well to value at risk analysis.

Can firms do well while doing good

We investigate the relationship between a firms degree of social responsibility and its performance. To accomplish this objective, we examine the stock market reaction to the announcement of Fortune magazines list of 100 Best Companies to Work For over the 1998-2003 period. We find significant positive excess returns, which indicate that being included on the list is viewed positively by the stock market. To explain the positive abnormal performance, we regress the excess returns against firm-specific variables. Excess return has a positive relation to the job growth rate, but not to firm rank, on a pre-listing basis. However, the additional analysis reveals that the firms with a more favourable ranking are relatively small and have a higher job growth rate, low employee turnover, high betas and extremely positive stock market performance prior to their inclusion on the list. In the year following the publication, sample firms with a favourable ranking have higher sales and gross profit margin than their lower-ranked counterparts. Overall, the results indicate that firms exhibiting a high degree of social responsibility towards their employees are positively rewarded by stock market participants, and that the rankings are somewhat related to pre- and post-survey financial performance.

A Very Long-Term Buy-and-Hold Portfolio

A buy-and-hold strategy over a 44-year investment period turns out to perform as well as a strategy of investing in a broad market index. At the end of 44 years, the buy-and-hold portfolio tracks the S&P 500 index much the same as portfolios of most active managers. Although it is concentrated, its fundamental characteristics are attractive. This strategy will be more tax-efficient than indexing.

Do Long–Short and Market Neutral Mutual Funds Sail on an Even Keel?

Long–short and market neutral funds seek superior risk-adjusted returns while limiting their exposure to stock market risk. Over the 1999 to 2013 period, the number of funds with these investment objectives increased by more than 700%. Despite their growing popularity, the authors find that long–short and market neutral funds deliver lower risk-adjusted returns than U.S. Treasuries. Their investigation also reveals that the returns of both types of funds are positively and significantly correlated with the stock market. However, both fund types perform better in down markets. Finally, the authors report that market neutral funds outperform long–short funds.