Glamour Brands and Glamour Stocks
Matthew T. Billett, Zhan Jiang, Lopo Rego
We explore the influence of customer perceptions from the product market on firms’ return characteristics in the stock market. Using a unique dataset containing customers’ opinions on over 1,200 brands, we find that stocks of companies with prestigious brands have large negative loadings on the Fama-French HML factor. This relation holds after controlling for risk explanations of HML (distress risk and asset irreversibility/growth). This relation, however, does not persist over time: it appears (dissipates) when overall market-wide investor sentiment is high (low); it attenuates as the brand becomes well-known; it varies as customer perceptions vary over time; and it diminishes as institutional holdings increase. Overall we conclude that glamour in the product market appears to partially drive glamour in the stock market.
Stocks of Admired and Spurned Companies
Deniz Anginer and Meir Statman
Do stocks of admired companies yield admirable returns? Are increases in admiration followed by high stock returns, and how reliable is the relation between admiration and returns? These questions are answered by the authors based on their study of Fortune magazine's annual list "America's Most Admired Companies." They find that from April 1983 through December 2007 stocks of admired companies had lower returns, on average, than stocks of spurned companies and that increases in admiration were followed, on average, by lower returns. The authors also find that the dispersion of returns is high, especially in the portfolio of spurned company stocks, implying that investors who would like to benefit from the return advantage of spurned company stocks must diversify widely among them.
POPULARITY A Bridge between Classical and Behavioral Finance
Roger G. Ibbotson, Thomas M. Idzorek, CFA,
Paul D. Kaplan, CFA, and James X. Xiong, CFA
Why does value investing work? Why do other factor strategies work? For
that matter, why does any active strategy—meaning, any strategy other than
capitalization-weighted indexing—“work” in the sense of having a reasonable
chance of beating the cap-weighted index other than by random variation?
The answer could lie in classical finance, or behavioral finance, or both.
Rolling Mental Accounts
Cary D. Frydman, Samuel M. Hartzmark, David H. Solomon
When investors sell one asset and quickly buy another, their trades are consistent with
rolling the mental account into the new asset rather than closing it. When trading the new
position, investors exhibit a disposition effect based on the amount invested in the original
position that is no longer in the portfolio. On days when an investor buys and sells (~31% of
observations) there is no disposition effect, consistent with no disutility from realizing a loss.
Mutual funds exhibit a larger disposition effect when unable to roll accounts due to outflows.
Sales occurring with a purchase have better performance, suggesting that avoiding the emotion
of closing a mental account at a loss improves decisions.
The Dividend Disconnect
SAMUEL M. HARTZMARK,DAVID H. SOLOMON
Many individual investors, mutual funds, and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g., the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if dividends are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend-paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend-paying stocks.
Common risk factors in the returns on stocks and bonds
E. Fama, and K. French
This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, and they are linked to bond returns through shared variation in the bond-market factors. Except for low-grade corporates, the bond-market factors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.
Dividend Policy, Growth, and the Valuation Of Shares
Merton H. Miller and Franco Modigliani
In the hope that it may help to overcome these obstacles to effective empirical testing, this paper will attempt to fill the existing gap in the theoretical literature on valuation. We shall begin, in Section I , by examining the effects the effects of differences in dividend policy on the current price of shares in an ideal economy characterized by perfect capital markets, rational behavior, and perfect certainty. Still within this convenient analytical framework we shall go on in Section II and III to consider certain closely related issues that appear to have been responsible for considerable misunderstanding of the role of dividend policy. In particular, Section II will focus on the longstanding debate about what investors "really" capitalize when they buy shares; and Section III on the much mooted relations between price, the rate of growth of profits, and the rate of dividends per share. Once these fundamentals have been established, we shall proceed in Section IV to drop the assumption of certainty and to see the extent to which the earlier conclusions about dividend policy must be modified. Finally, in Section V , we shall briefly examine the implications for the dividend policy problem of certain kinds of market imperfections.
http://rikeizai.cocolog-nifty.com/blog/files/dividend_policy_growth_and_the_valuation_of_shares.pdf
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