Volume 11, No. 4, Fourth Quarter 2013

Farming and Futures

by: Jack L. Treynor

“Case Studies” presents a case pertinent to contemporary issues and events in investment management. Insightful and provocative questions are posed at the end of each case to challenge the reader. Each case is an invitation to the critical thinking and pragmatic problem solving that are so fundamental to the practice of investment management.

Practitioner’s Digest • Vol. 11, No. 4

The “Practitioners Digest” emphasizes the practical significance of manuscripts featured in the “Insights” and “Articles” sections of the journal. Readers who are interested in extracting the practical value of an article, or who are simply looking for a summary, may look to this section.

Finance Professionals in the Financial Crisis: Values, Fairness and Culture

by: Meir Statman

Finance professionals have expressed their views on values, fairness, and culture in the great debate about the global financial crisis and its aftermath. Yet, their positions remain precarious because they stand accused of instigating the crisis, because their views on values, fairness, and culture are not widely shared in society, and because they fail to persuade that their work has social benefits.

The Evolving Structure of the Private Equity and Venture Capital Industry

by: Mark A. Wolfson

What Drives the Value Premium? Risk Versus Mispricing: Evidence From International Markets

by: Denis B. Chaves, Jason Hsu, Vitali Kalesnik and Yoseop Shim

Value stocks outperform growth stocks. The academic literature provides two competing interpretations on what drives the value premium: exposure to risk factors or mispricing of securities. Existing empirical studies, which are largely based on U.S. data, have not conclusively rejected one theory in support of the other. Up to this point, large scale studies based on multiple countries have not been conducted. Past studies also employ data which end before 2000 and do not cover the tech bubble, the housing bubble, the global financial crisis and the European debt crisis, when the relative performance of value stocks was extremely volatile. Applying Fama and MacBeth (1973) two-stage cross-sectional regression and Daniel and Titman (1997) double-sorted portfolio methods to 30 years of cross sectional data from 23 developed countries, we find evidence that the value premium is driven by mispricing.

Stress-Testing Portfolio-Specific Risk

by: Jason D. Fink, Kristin E. Fink and Hui H. Sono

We establish a relationship between the idiosyncratic risk of portfolios and a parsimonious group of market variables. Because we are able to summarize idiosyncratic risk with this small group of variables, we are able to design stress-tests that describe portfolio-specific risks as market variables change. These stress tests provide portfolio managers with important information that cannot be gleaned from standard volatility forecasts.

Analyst Forecasts: It Pays to Be Off!

by: Gilles Hilary and Charles Hsu

We show that analysts who display more consistent forecast errors have a greater effect on stock prices than analysts who provide more accurate but less consistent forecasts. This result leads to three implications. First, consistent analysts are less likely to be demoted to a less prestigious brokerage house and are more likely to be named All Star analysts. Second, analysts strategically "lowball" (that is, deliver downward-biased forecasts) to increase their consistency. This is because lowballing gives management an easier target to beat and, in turn, management grants analysts greater access to company information. Finally, the benefits of both consistency and lowballing increase while those of accuracy decrease when institutional/sophisticated investors are more of a presence in the analysts audience.

The Behavior Gap Simple Ways to Stop Doing Dumb Things with Money

by: Carl Richards • reviewed by: Javier Estrada

“Book Reviews” identifies important, and often popular, new books from a wide range of investment topics. Beyond providing a summary and review of the content and style of the books, “Book Reviews” seeks to contribute to a conscious, critical, and informed approach to investment literature.