Investment analysis

For the last fifty years, the efficient market hypothesis has been the central
pillar of economic thought and touted by all, despite Sanford Grossman’ and
Nobel prize winner Joseph Stiglitz’ objection in 1980. Andrew Lo updated the
efficient market hypothesis in 2004 to reconcile irrational human behavior and
cold, calculating automatons. This thesis utilizes 33 years of oil futures, GARCH
regressions, and the Jensen-Shannon informational criteria to provide extensive
empirical objections to informational efficiency. The results demonstrate
continuously inefficient oil future markets which exhibit decreased informational
efficiency during recessionary periods, advocating the adaptive market
hypothesis over the efficient market hypothesis.

In this dissertation, I examine three main issues in mutual fund research: 1) the performance of "sector funds" over the business cycles; 2) the performance and managerial characteristics of "focus funds" and finally 3) the impact of taxes and tax overhang on flow of funds & performance of "corporate bond funds". My first essay analyzes the performance of sector funds across different stages of business cycles. Using a sample of 1,488 sector funds over the period 1990 to 2005, I demonstrate that sector funds perform differently across different stages in the business cycles. Average difference between expansion and recession cycles ranges from 2.75 percent per year to 3.78 percent per year. Findings of this essay further suggest that sector funds do exhibit different timing effects across recessions and expansions. Flow of funds and buy turnover ratio have differential effects across business cycles whereas sell turnover trading activities have a negative effect on funds' overall performance. My second essay analyzes the performance of "focus funds". These funds are well managed but tend to keep 50 or less stocks in their portfolio. Using a sample of 926 focus funds that existed during all or part of the period 1997 to 2006, I find that on average focus funds do not outperform a corresponding passive benchmark. My results further indicate that focus funds that are more concentrated in their top holdings, have larger net asset size, relatively young management and lower turnover ratios may offer higher abnormal returns compared to passive benchmarks. The third essay analyzes the effect of taxes and tax overhang on the flow of funds and performance in bond funds. Using a sample of 741 corporate bond funds that existed at some time during the period 1997 to 2006, findings of this essay indicate that new investors to bond funds are sensitive to unrealized capital gains/losses, however, the flow of funds is not affected by past dividend distributions. Findings further indicate that tax liabilities, unrealized gains/losses, and managerial tenure explain post-tax abnormal performance after controlling for investment style, and other known factors that explain the pre-tax performance ofbond funds.

I investigate the effect of shareholder rights and information asymmetry on
option-related repurchase activity. Prior research shows that the dilution effect of the
exercise of the employee stock options on earnings per share (EPS) decreases the value of
stock options. Thus, managers tend to use stock repurchases rather than dividends to
return cash to shareholders (the dividend substitution effect). I document that the
executive stock option incentives to repurchase stock as a substitute for dividends are
stronger when firms have weak shareholder rights and the level of information
asymmetry positively influences managerial stock option incentives to repurchase stock.
Furthermore, prior research indicates that information asymmetry is positively associated
with stock repurchases. I also provide evidence indicating that the relationship between
information asymmetry and stock repurchases is stronger when firms have weaker shareholder rights.

The purpose of this study is to find out the effect of government spending on capital
investments in the American Recovery and Reinvestment Act (ARRA) of 2009 on GDP
and employment growth. This research utilized US quarterly data from 2003 QI to 2013
QII. In the first part the research used variables from the Keynes economic model and
utilized two-stage least square analysis to assess the effect of government spending on
GDP. The results from the regression analysis indicate that an increase of one dollar in
government spending increases GDP by 1.569 dollars. The researcher found that the
general government spending multiplier was 1.9. The coefficient for government
spending in the Recovery Act was 0.383, implying that for every one dollar in
government spending, Recovery Act spending on capital investments contributed 0.383
dollars.

I examine how managerial reputation affects the quality of non-GAAP earnings
disclosures and how the market reacts to non-GAAP earnings disclosures associated with
managerial reputation. Although there was an initial dip in the frequency of non-GAAP
earnings disclosures after SOX and Regulation G, the frequency of non-GAAP earnings
disclosures has increased in recent years (Brown, Christensen, Elliott and Mergenthaler
2012). Motivated by the efficient contracting theory and managerial reputation
incentives, I investigate whether reputable managers are associated with higher quality
non-GAAP earnings disclosures. I also investigate whether the market is more responsive
to non-GAAP earnings disclosed by reputable managers. Using empirical models
modified from prior research, I find that reputable managers are less likely to disclose
non-GAAP earnings, which is consistent with the efficient contracting explanation. I also
find that reputable managers exclude more recurring items that are related to future
operating earnings when they disclose non-GAAP earnings, which is consistent with the rent extraction explanation in prior research. Finally, I find that managerial reputation has
an incremental effect on the market reaction and that the market is more responsive to
non-GAAP earnings disclosed by reputable managers if the unexpected earnings are
positive. The study contributes to both non-GAAP earnings disclosures literature and
managerial reputation incentives literature. It also has implications for investors,
managers, and regulators.

By analyzing the information provided by analyst recommendations in the
banking industry, I find that analyst recommendations trigger an immediate impact on
the value of banks (Essay 1), they profitably guide the investment decisions of investors
for periods of up to three months (Essay 2), and they also have an immediate impact on
the values of rival banks (Essay 3). In addition, I find that analysts’ ability to provide
new information depends on the information environment of the bank. The degree of
information asymmetry, the degree of complexity, the risk of the bank, the risk of the
time period, as well as regulatory reforms that affect these characteristics, have a
significant impact on the analyst’s ability to provide new information to the investors.
Specifically, I find that analyst recommendations are more informative when
banks suffer from a high degree of information asymmetry. In addition, regulatory reforms that reduced the information asymmetry of the banking industry also diminished
the analyst’s ability to provide new information. Similarly, I find that analyst
recommendations have a greater impact on the values of the rated and the rival banks
when these banks operate in a risky environment. This result is robust to several
measures of bank risk, period risk, and regulatory events that affected the risk of the
banking industry. However, the results of Essay 2 show that positive recommendations
that occur during riskier periods or after regulatory events that increased the risk of the
banking industry result in lower value for the investors over the following 1-month or 3-
month periods. Lastly, I find that as banks become more complex, analyst
recommendations have a smaller immediate impact on the value of the bank, deliver a
smaller investment value for the investors, and also have a smaller immediate impact on the value of the rival banks.

The purpose of this thesis is to compare the effectiveness of several interest
rate models in fitting the true value of interest rates. Up until 1990, the universally
accepted models were the equilibrium models, namely the Rendleman-Bartter model,
the Vasicek model, and the Cox-Ingersoll-Ross (CIR) model. While these models
were probably considered relatively accurate around the time of their discovery, they
do not provide a good fit to the initial term structure of interest rates, making them
substandard for use by traders in pricing interest rate options. The fourth model
we consider is the Hull-White one-factor model, which does provide this fit. After
calibrating, simulating, and comparing these four models, we find that the Hull-White
model gives the best fit to our data sets.

This thesis uses a fundamentalist approach to portfolio selection similar to
that proposed by Benjamin Graham. The purpose is to examine the existence of
undervalued securities and to test a methodology designed to identify those that
could be considered superior investments. The model designed to select, combine
and evaluate performance on risk adjusted basis takes into consideration
fundamental principles of modern portfolio theory. Specifically, this analysis
evaluates the informational contribution of price earnings ratios, earnings growth
and dividend payments. The hypothesis tested is that undervalued securities
selected under the conditions here proposed can produce performance results
consistently superior than those of a strategy based on passively holding a market
portfolio.

This thesis deals with the efficient markets hypothesis as
it applies to the securities market. The first chapter
provides the various forms of the EMH and its theoretical
basis. Chapter two analyzes the weak form of the EMH and
the major empirical contributions concerning it. Chapter
three presents the strong forms of the EMH. It is concluded
on the basis of a substantial and consistent body of analysis
that efficient is an accurate description of the securities
market.

This paper brings together the auditor quality, asset reliability and firm valuation literatures by examining the role of auditor quality in equity valuation. The study broadly follows the Richardson et al. (2005) categorization of the reliability of accounting accruals of balance sheet components and conjectures that the role of auditor quality in equity valuation is more pronounced when asset reliability is not high. Auditor quality is measured using reputation, industry specialist and tenure metrics. The underlying assumption is that auditor quality enhances the market's perception of firm value; as such, auditor quality may mitigate the cost of security mispricing documented by Richardson et al. (2005) for low or medium reliability accruals. The results of the study provide some support that high quality auditors contribute to the valuation of equity for assets. It is less clear as to whether the value is more pronounced for low or medium reliability assets.