This paper examines the impact of securitization announcements on share prices of multibank holdi... more This paper examines the impact of securitization announcements on share prices of multibank holding companies. Prior studies report share price responses are industry-specific. Because a few frequent issuers dominate multibank holding company securitizations, we move from an industry comparison to a comparison of firms within the banking industry. The data are partitioned on financial characteristics, and we observe significantly positive wealth effects for banks with high bond ratings, high financial leverage, low non-interest expense, and high issue frequency. We argue that these characteristics serve as proxies for, respectively, information asymmetry and creditworthiness, financial slack, comparative advantage in loan origination, and reputation. When the data are partitioned into Citigroup, MBNA and other MBHCs, we find that the two major securitizers differ substantially and that the other MBHCs exhibit significantly positive share price responses.
Based upon an efficient estimator model for capital asset pricing, the importance of accounting i... more Based upon an efficient estimator model for capital asset pricing, the importance of accounting information in capital asset pricing is empirically demonstrated. The sales maximization vs. profit maximization issue is also empirically examined. MARKET INFORMATION VS. ACCOUNTING INFORMATION IN CAPITAL ASSET PRICING: A COMPLEMENTARY ANALYSIS I.
This study examines the responses of security and portfolio returns to up-and down-markets. The v... more This study examines the responses of security and portfolio returns to up-and down-markets. The variance of portfolio returns is divided into upand down-market segments based on the hypothesis that investors expect a premium for downside risk but will pay a premium for \ipside variation. The results suggest securities and portfolios do respond differently in upand down-markets and that investors are cognizant of differences in upside and downside risk.
Regulatory rate hearings reveal the three common approaches to estimating equity capital costs, t... more Regulatory rate hearings reveal the three common approaches to estimating equity capital costs, the comparable earnings method, the discounted cash flow model, and the capital asset pricing model, coexist more as rival rather than complementary techniques. This paper attempts to reconcile these three approaches to public utility rate regulation.
It has been observed that utility executives generally argue for inflation adjusted rate bases wh... more It has been observed that utility executives generally argue for inflation adjusted rate bases while consumer groups advocate original cost valuation methods. Recent analytic and empirical studies indicate that rate base valuation methods should not and do not account for differences in utilities' realized rates of return. However, there is evidence that changes in valuation methods may cause changes in realized returns due to over or under compensation for the effects of inflation. This study examines the impact of changes in rate base valuation methods on (I) expected shareholder returns, (2) realized shareholder returns, and (3) systematic risk. A unique time series data set and a new statistical procedure are used. Overall, the results are consistent with earlier studies. However, the results for utilities in one state provide support for the argument that investors fare better under fair value regulation.
Current financial difficulties faced by the Electric Utility Industry are a consequence of foreca... more Current financial difficulties faced by the Electric Utility Industry are a consequence of forecasting models developed over a decade ago. The Opec Oil Crisis of 1973-74 could not have been foreseen during the earlier modeling periods. Using several statistical models, including the relatively recently-applied multivariate Box-Jenkins transfer function analysis, aggregate industry EPS and stock price are forecasted. One modeling period includes "pre-Opec" data; the second includes only data after 1973.
Stock prices are the inputs necessary for the direct estimation of systematic risk. However, ther... more Stock prices are the inputs necessary for the direct estimation of systematic risk. However, there are two occasions when price data are unavailable; when the investment is a division of a market traded company or when the stock of a company is closely-held and not traded. This paper develops a methodology for estimating systematic risk for non-market traded telephone companies. This paper combines the analytic and "pure play" approaches to estimating systematic risk and uses a stepwise regression procedure in developing the model. Variables which are specific to public utilities are used. The results suggest this methodology provides reasonably good estimates for systematic risk of non-market traded telephone companies. ESTIMATING BETA FOR NON-MARKET TRADED TELEPHONE COMPANIES I.
Revolving credit loans allow flexibility in the renegotiation of the magnitude, the maturity, and... more Revolving credit loans allow flexibility in the renegotiation of the magnitude, the maturity, and the pricing of the loan over time. Thus, revolving credit loans allow the borrower to more precisely match the funds required for the firm's investment opportunities and to market-time by borrowing at times when financing costs are attractive. Consistent with the renegotiation flexibility provided by revolving credit loans, our empirical results show that these loans are positively valued by the market both initially and over the longer term. We conclude that revolving credit loans provide firms the financial flexibility to better match their financing and investment decisions.
The purpose of this paper is to examine the impact of the 28 March 1979 accident at the Three Mil... more The purpose of this paper is to examine the impact of the 28 March 1979 accident at the Three Mile Island (TMI) nuclear power facility on the systematic risk of General Public Utilities (TMI's owner) and other electric utilities heavily invested in nuclear power facilities. The results have implications for the returns required by investors and, therefore, on the economic viability of nuclear power for electricity generation. This paper compares the results of a traditional cumulative abnormal residual analysis (CAR) with the results of intervention analysis, It is found that the CAR analysis indicates abnormal negative returns occurred after the TMI accident. However, intervention analysis shows the assumptions necessary for the CAR method to be appropriate are violated. When adjustments are made for a shift in systematic risk and autocorrelation, no abnormal returns are generated.
However, the views expressed in this paper are strictly those of the authors and do not necessari... more However, the views expressed in this paper are strictly those of the authors and do not necessarily reflect those of the Southwestern Bell Corporation or its employees.
The success of mutual funds engaging in momentum and contrarian trading strategies is predicated ... more The success of mutual funds engaging in momentum and contrarian trading strategies is predicated on the identification of mispriced stocks. Stock investor sentiment betas capture salient characteristics that predispose stocks to mispricing. Funds engage in momentum and contrarian trading in equal proportions, but differ in the sentiment betas of the stocks in their portfolios. Momentum funds hold stocks with higher sentiment betas, and with a wider spread of betas compared to contrarian funds. Fund excess returns are strongly related to Baker and Wurgler's (2007) change in sentiment index, and the mean and spread of the sentiment betas of their stocks.
Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective v... more Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective valuations. We contend that sentiment beta also captures the duration of mispricing. Accordingly, stocks with high (low) sentiment betas provide opportunities for momentum (contrarian) traders. We form hypothetical zero investment portfolios of high (low) sentiment betas stocks, and show that momentum profits decompose to reveal positive (negative) serial correlation of idiosyncratic returns, that contribute to momentum (contrarian) profits. Furthermore, actual mutual funds identified as momentum (contrarian) traders hold stocks with higher (lower) sentiment betas. Additionally, funds adjust sentiment betas to enhance performance as sentiment changes.
We use portfolio holdings to show that mutual funds preferentially trade stocks according to the ... more We use portfolio holdings to show that mutual funds preferentially trade stocks according to the stocks" sentiment betas. Stocks with high sentiment betas are more responsive to investor sentiment and increase (decrease) in value as sentiment increases (decreases). Sentiment-based trades may be motivated by the opportunity to increase fund returns through timing predictability in sentiment, or by management of portfolio risk. Sentiment is mean-reverting, but its level and recent change only partially explain these trades. In contrast, 30 percent of sentiment-based trades are explained by the initial sentiment beta of funds that trade to reduce their tracking error variance.
The 1997/98 financial crisis forced the Indonesian government to inject capital into selected ban... more The 1997/98 financial crisis forced the Indonesian government to inject capital into selected banks, introduce deposit insurance and change capital requirements. This study investigates the relation between highly concentrated ownership and bank risk-taking using a sample of 52 insured private commercial Indonesian banks during the 1995-2003 period. For restructured banks, ownership concentration is positively related to overall risk, and negatively related to credit and liquidity risk, especially during the relaxed capital adequacy requirement period. Liquidity risk is reduced when the government and owners contribute additional capital, and credit risk is lowered as the government removes bad loans from problematic banks.
The Quarterly Review of Economics and Finance, 2003
Prior research examining the role of financial intermediaries in reducing the problems of informa... more Prior research examining the role of financial intermediaries in reducing the problems of information asymmetry has reported that borrowers experience a positive share price reaction to credit agreement announcements. However, it is generally acknowledged that these studies have the potential for a reporting bias because they use only one source of information for credit agreement announcements. To examine this reporting bias, we distinguish between "published" and "non-published" announcements in Australia. We find that borrowers' share prices react positively to announcements that are published in both the financial press and by a dedicated information provider. No statistically significant reaction is observed for the non-published credit agreements.
Closed‐end fund (CEF) discounts vary widely over time due to changes in share price, net asset va... more Closed‐end fund (CEF) discounts vary widely over time due to changes in share price, net asset value (NAV), or both. Prior studies suggest discounts are mean‐reverting. We examine the mean‐reversion issue by employing cointegration procedures. Specifically, we identify bond and equity CEFs that exhibit stationary time‐series properties and find statistically significant error correction terms that quantify the speed of mean reversion. The results indicate that mean reversion is caused by changes in both share price and NAVs. However, CEFs can only provide excess returns when the discount narrows due to share price increases.
This paper examines the impact of securitization announcements on share prices of multibank holdi... more This paper examines the impact of securitization announcements on share prices of multibank holding companies. Prior studies report share price responses are industry-specific. Because a few frequent issuers dominate multibank holding company securitizations, we move from an industry comparison to a comparison of firms within the banking industry. The data are partitioned on financial characteristics, and we observe significantly positive wealth effects for banks with high bond ratings, high financial leverage, low non-interest expense, and high issue frequency. We argue that these characteristics serve as proxies for, respectively, information asymmetry and creditworthiness, financial slack, comparative advantage in loan origination, and reputation. When the data are partitioned into Citigroup, MBNA and other MBHCs, we find that the two major securitizers differ substantially and that the other MBHCs exhibit significantly positive share price responses.
Based upon an efficient estimator model for capital asset pricing, the importance of accounting i... more Based upon an efficient estimator model for capital asset pricing, the importance of accounting information in capital asset pricing is empirically demonstrated. The sales maximization vs. profit maximization issue is also empirically examined. MARKET INFORMATION VS. ACCOUNTING INFORMATION IN CAPITAL ASSET PRICING: A COMPLEMENTARY ANALYSIS I.
This study examines the responses of security and portfolio returns to up-and down-markets. The v... more This study examines the responses of security and portfolio returns to up-and down-markets. The variance of portfolio returns is divided into upand down-market segments based on the hypothesis that investors expect a premium for downside risk but will pay a premium for \ipside variation. The results suggest securities and portfolios do respond differently in upand down-markets and that investors are cognizant of differences in upside and downside risk.
Regulatory rate hearings reveal the three common approaches to estimating equity capital costs, t... more Regulatory rate hearings reveal the three common approaches to estimating equity capital costs, the comparable earnings method, the discounted cash flow model, and the capital asset pricing model, coexist more as rival rather than complementary techniques. This paper attempts to reconcile these three approaches to public utility rate regulation.
It has been observed that utility executives generally argue for inflation adjusted rate bases wh... more It has been observed that utility executives generally argue for inflation adjusted rate bases while consumer groups advocate original cost valuation methods. Recent analytic and empirical studies indicate that rate base valuation methods should not and do not account for differences in utilities' realized rates of return. However, there is evidence that changes in valuation methods may cause changes in realized returns due to over or under compensation for the effects of inflation. This study examines the impact of changes in rate base valuation methods on (I) expected shareholder returns, (2) realized shareholder returns, and (3) systematic risk. A unique time series data set and a new statistical procedure are used. Overall, the results are consistent with earlier studies. However, the results for utilities in one state provide support for the argument that investors fare better under fair value regulation.
Current financial difficulties faced by the Electric Utility Industry are a consequence of foreca... more Current financial difficulties faced by the Electric Utility Industry are a consequence of forecasting models developed over a decade ago. The Opec Oil Crisis of 1973-74 could not have been foreseen during the earlier modeling periods. Using several statistical models, including the relatively recently-applied multivariate Box-Jenkins transfer function analysis, aggregate industry EPS and stock price are forecasted. One modeling period includes "pre-Opec" data; the second includes only data after 1973.
Stock prices are the inputs necessary for the direct estimation of systematic risk. However, ther... more Stock prices are the inputs necessary for the direct estimation of systematic risk. However, there are two occasions when price data are unavailable; when the investment is a division of a market traded company or when the stock of a company is closely-held and not traded. This paper develops a methodology for estimating systematic risk for non-market traded telephone companies. This paper combines the analytic and "pure play" approaches to estimating systematic risk and uses a stepwise regression procedure in developing the model. Variables which are specific to public utilities are used. The results suggest this methodology provides reasonably good estimates for systematic risk of non-market traded telephone companies. ESTIMATING BETA FOR NON-MARKET TRADED TELEPHONE COMPANIES I.
Revolving credit loans allow flexibility in the renegotiation of the magnitude, the maturity, and... more Revolving credit loans allow flexibility in the renegotiation of the magnitude, the maturity, and the pricing of the loan over time. Thus, revolving credit loans allow the borrower to more precisely match the funds required for the firm's investment opportunities and to market-time by borrowing at times when financing costs are attractive. Consistent with the renegotiation flexibility provided by revolving credit loans, our empirical results show that these loans are positively valued by the market both initially and over the longer term. We conclude that revolving credit loans provide firms the financial flexibility to better match their financing and investment decisions.
The purpose of this paper is to examine the impact of the 28 March 1979 accident at the Three Mil... more The purpose of this paper is to examine the impact of the 28 March 1979 accident at the Three Mile Island (TMI) nuclear power facility on the systematic risk of General Public Utilities (TMI's owner) and other electric utilities heavily invested in nuclear power facilities. The results have implications for the returns required by investors and, therefore, on the economic viability of nuclear power for electricity generation. This paper compares the results of a traditional cumulative abnormal residual analysis (CAR) with the results of intervention analysis, It is found that the CAR analysis indicates abnormal negative returns occurred after the TMI accident. However, intervention analysis shows the assumptions necessary for the CAR method to be appropriate are violated. When adjustments are made for a shift in systematic risk and autocorrelation, no abnormal returns are generated.
However, the views expressed in this paper are strictly those of the authors and do not necessari... more However, the views expressed in this paper are strictly those of the authors and do not necessarily reflect those of the Southwestern Bell Corporation or its employees.
The success of mutual funds engaging in momentum and contrarian trading strategies is predicated ... more The success of mutual funds engaging in momentum and contrarian trading strategies is predicated on the identification of mispriced stocks. Stock investor sentiment betas capture salient characteristics that predispose stocks to mispricing. Funds engage in momentum and contrarian trading in equal proportions, but differ in the sentiment betas of the stocks in their portfolios. Momentum funds hold stocks with higher sentiment betas, and with a wider spread of betas compared to contrarian funds. Fund excess returns are strongly related to Baker and Wurgler's (2007) change in sentiment index, and the mean and spread of the sentiment betas of their stocks.
Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective v... more Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective valuations. We contend that sentiment beta also captures the duration of mispricing. Accordingly, stocks with high (low) sentiment betas provide opportunities for momentum (contrarian) traders. We form hypothetical zero investment portfolios of high (low) sentiment betas stocks, and show that momentum profits decompose to reveal positive (negative) serial correlation of idiosyncratic returns, that contribute to momentum (contrarian) profits. Furthermore, actual mutual funds identified as momentum (contrarian) traders hold stocks with higher (lower) sentiment betas. Additionally, funds adjust sentiment betas to enhance performance as sentiment changes.
We use portfolio holdings to show that mutual funds preferentially trade stocks according to the ... more We use portfolio holdings to show that mutual funds preferentially trade stocks according to the stocks" sentiment betas. Stocks with high sentiment betas are more responsive to investor sentiment and increase (decrease) in value as sentiment increases (decreases). Sentiment-based trades may be motivated by the opportunity to increase fund returns through timing predictability in sentiment, or by management of portfolio risk. Sentiment is mean-reverting, but its level and recent change only partially explain these trades. In contrast, 30 percent of sentiment-based trades are explained by the initial sentiment beta of funds that trade to reduce their tracking error variance.
The 1997/98 financial crisis forced the Indonesian government to inject capital into selected ban... more The 1997/98 financial crisis forced the Indonesian government to inject capital into selected banks, introduce deposit insurance and change capital requirements. This study investigates the relation between highly concentrated ownership and bank risk-taking using a sample of 52 insured private commercial Indonesian banks during the 1995-2003 period. For restructured banks, ownership concentration is positively related to overall risk, and negatively related to credit and liquidity risk, especially during the relaxed capital adequacy requirement period. Liquidity risk is reduced when the government and owners contribute additional capital, and credit risk is lowered as the government removes bad loans from problematic banks.
The Quarterly Review of Economics and Finance, 2003
Prior research examining the role of financial intermediaries in reducing the problems of informa... more Prior research examining the role of financial intermediaries in reducing the problems of information asymmetry has reported that borrowers experience a positive share price reaction to credit agreement announcements. However, it is generally acknowledged that these studies have the potential for a reporting bias because they use only one source of information for credit agreement announcements. To examine this reporting bias, we distinguish between "published" and "non-published" announcements in Australia. We find that borrowers' share prices react positively to announcements that are published in both the financial press and by a dedicated information provider. No statistically significant reaction is observed for the non-published credit agreements.
Closed‐end fund (CEF) discounts vary widely over time due to changes in share price, net asset va... more Closed‐end fund (CEF) discounts vary widely over time due to changes in share price, net asset value (NAV), or both. Prior studies suggest discounts are mean‐reverting. We examine the mean‐reversion issue by employing cointegration procedures. Specifically, we identify bond and equity CEFs that exhibit stationary time‐series properties and find statistically significant error correction terms that quantify the speed of mean reversion. The results indicate that mean reversion is caused by changes in both share price and NAVs. However, CEFs can only provide excess returns when the discount narrows due to share price increases.
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Papers by Kent Zumwalt