Pseudo Market Timing: A Reappraisal

AbstractThe average firm going public or issuing new equity underperforms the market in the long run. This underperformance could be related to the endogeneity of the number of new issues if new issues cluster after periods of high abnormal returns on new issues. In such a case, ex post measures of new issue abnormal returns may be negative on average, despite the absence of ex ante abnormal returns. We evaluate this endogeneity problem in event studies of long-run performance. We argue that it is unlikely that the endogeneity of the number of new issues explains the long-run underperformance of equity issues.

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Ex ante and ex post long-run average cost functions

Applied Economics ◽

10.1080/00036848700000128 ◽

1987 ◽

Vol 19 (10) ◽

pp. 1411-1419 ◽

Cited By ~ 3

Author(s):

L. J. Hubbard ◽

P. J. Dawson

Keyword(s):

Average Cost ◽

Cost Functions ◽

Ex Post ◽

Long Run ◽

Ex Ante

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Chasing the deal with the money: Measuring the required risk premium and expected abnormal returns of private equity funds to maximize their internal rate of return

Risk Governance and Control Financial Markets & Institutions ◽

10.22495/rgcv3i3art6 ◽

2013 ◽

Vol 3 (3) ◽

pp. 56-69

Author(s):

Fernando Scarpati ◽

Wilson Ng

Keyword(s):

Decision Making ◽

Asset Pricing ◽

Risk Premium ◽

Private Equity ◽

Investment Decision ◽

Abnormal Returns ◽

Expected Returns ◽

Ex Post ◽

Investment Decision Making ◽

Ex Ante

A number of scholars of private equity (“PE”) have attempted to assess the ex-post returns, or performance, of PEs by adopting an ex-post perspective of asset pricing. In doing so a set of phenomena has been recognized that is thought to be specific to the PE sector, such as “money-chasing deal phenomenon” (Gompers and Lerner, 2000) and “performance persistence” (Lerner and Schoar, 2005). However, based on their continuing use of an ex-post perspective, few scholars have paid attention to the possible extent to which these and other PE phenomena may affect expected returns from PE investments. To address this problem this article draws on an ex-ante perspective of investment decision-making in suggesting how a number of drivers and factors of PE phenomena may produce “abnormal returns”, and that each of those drivers and factors should therefore be considered in accurately assessing the required risk premium and expected abnormal returns of PE investments. In making these contributions we examined a private equity investment of a regional PE in Italy and administered a telephone questionnaire to 40 PEs in Italy and the UK and found principally that while size is the most important driver in producing abnormal returns illiquidity alone cannot explain the expected returns of PE investments (cf. Franzoni et al., 2012). Based on our findings we developed a predictive model of PE decision-making that draws on an ex-ante perspective of asset pricing and takes into account PE phenomena and abnormal returns. This model extends the work of Franzoni et al. (2012), Jegadeesh et al. (2009), and Korteweg and Sorensen (2010) who did not consider the possible influence of PE phenomena in decision-making and will also help PE managers in making better-informed decisions

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The historically realised equity risk premium as a guide to future expectations in an emerging market: The case of South Africa

Journal of Economic and Financial Sciences ◽

10.4102/jef.v2i1.361 ◽

2008 ◽

Vol 2 (1) ◽

pp. 89-104

Author(s):

Jesse De Beer

Keyword(s):

Risk Premium ◽

Emerging Market ◽

Equity Risk Premium ◽

Future Expectations ◽

Investment Performance ◽

Equity Risk ◽

Ex Post ◽

Long Run ◽

Ex Ante

The concept of an equity risk premium (ERP) is fundamental to modern financial theory and central to every decision at the heart of corporate finance. Efforts to quantify ERP are well rewarded by insights into the stability and dynamics of long-term investment performance. Such efforts require the quantification of both historically realised (ex post) and expected future (ex ante) premiums. Finding an appropriate proxy for the expected (ex ante) ERP remains a challenging aspect. One widely used application is the use of long-term averages of observed market premiums as a proxy for expected returns. The aim of this paper is to analyse the appropriateness of the historical methodology of estimating expected ERP in the South African context. The analysis in this paper suggests that analysing past historical figures remains useful in the SA context. This is supported by the results of the statistical analysis, showing stationarity of the ERP time-series, meaning that the true mean does not change over time. This implies that the historical average mean may be used as a proxy for the long-run expected ERP. However, the well-documented problems relating to large standard errors (predictability problem) and relevance due to changing circumstances are also evident in the SA data. Thus, investors would be well advised to analyse the past and apply informed judgments as to future differences, if any, when attempting to arrive at fair forecasts.

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Determinants of Going-Public Decision in an Emerging Market: Evidence from India

Vikalpa The Journal for Decision Makers ◽

10.1177/0256090920130106 ◽

2013 ◽

Vol 38 (1) ◽

pp. 65-86 ◽

Cited By ~ 2

Author(s):

Manas Mayur ◽

Manoj Kumar

Keyword(s):

Initial Public Offerings ◽

Emerging Market ◽

Rank Test ◽

Firm Characteristics ◽

Eligibility Criteria ◽

Going Public ◽

Research Issues ◽

Ex Post ◽

Ex Ante ◽

Public Decision

During the past two decades, numerous Indian firms have gone public by undertaking Initial Public Offerings (IPOs) of their equity shares. Yet, many other Indian firms have intentionally chosen to remain private even though they fulfill the eligibility criteria of going public. This raises the question as to what are the determinants of firms' going-public decision. While researchers have propounded several theories to explain the firms� going-public decision, yet the empirical studies conducted to test the proposed theories are still scarce, mainly due to lack of data on privately held firms necessary for a direct investigation of the choice between going public and remaining private. None of the existing studies have assessed the determinants of Indian firms' going-public decision. Besides, no consistent stylized facts have so far emerged. Rather contradictory findings have been reported in some of the existing studies. Further these individual studies have not been comprehensive as each of them has focused only on a limited number of determinants. This study investigates the determinants of going-public decision of the Indian firms, juxtaposing the following two related research issues: What ex-ante (pre-IPO) characteristics of going-public Indian firms differentiate them from those Indian firms that continue to remain private even though they fulfill the eligibility criteria of going public? What ex-post consequences of IPOs on firm characteristics influence their goingpublic decision? The preceding research issues are examined using two independent analyses. First, a panel probit regression analysis is done to identify the ex-ante characteristics of going- public Indian firms that differentiate them from those Indian firms that continue to remain private even though they fulfill the eligibility criteria of going public. This analysis reveals that going-public Indian firms tend to be younger, riskier, transparent, more profitable, experiencing higher sales growth, and larger-sized than firms that decide to remain private. Also if a firm belongs to retail trade sectors, it increases its probability to go public. In the second analysis, ex-post consequences of IPOs on firm characteristics are examined by comparing pre-IPO characteristics of IPO firms with their post-IPO characteristics using Wilcoxon two-sample signed rank test. This analysis suggests that Indian firms go public to: finance their growth and investments diversify owners' risk rebalance their capital structure bring down their borrowing rates.

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On the non-neutrality of the financing policy and the capital regulation of banking firms

Studies in Economics and Finance ◽

10.1108/sef-09-2014-0179 ◽

2016 ◽

Vol 33 (4) ◽

pp. 466-487 ◽

Cited By ~ 7

Author(s):

Rainer Masera ◽

Giancarlo Mazzoni

Keyword(s):

Capital Requirements ◽

Analytical Models ◽

Capital Regulation ◽

Market Prices ◽

Financing Policy ◽

Content Type ◽

Bank Supervision ◽

Ex Post ◽

Long Run ◽

Ex Ante

Purpose The paper aims to investigate whether the value of banks is affected by their financing policies. Higher capital requirements have been invoked by exploiting a renewed edition of the Modigliani–Miller (M&M) theorem. This paper shows the limits of this claim by highlighting that the general statement that “bank equity is not expensive” can be misleading. The authors argue that market prices should play an important role in bank supervision. Expectations of future profits in prices supply timely information on the viability of a bank. Design/methodology/approach The authors use the Merton model to show the inapplicability of M&M theorem to banks. The long-run viability of a bank is analyzed with a dividend discount model which allows to compare a bank’s long-term profitability with its overall cost of capital implicit in market prices. Findings The authors show that the M&M framework cannot be applied to banks neither ex-ante nor ex-post. Ex-ante the authors focus on government guarantees, ex-post they emphasize the risk-shifting phenomena that may increase the overall risk of the bank. The authors show that a bank’s stability cannot be achieved if the market expectations of its future profits stay below the cost of funding. Research limitations/implications The authors use simple analytical models. In a future study, some key peculiarities of banks, such as the monetary nature of deposits, should be analytically modelled. Practical implications The paper contributes to the debate on capital regulation on the level of capital requirements and the instruments to assess the viability/stability of banks. Originality/value This paper uses simple models to assess analytically the key issues in the debate on banks’ capital regulation.

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Value-creation through spin-offs: Australian evidence

Australian Journal of Management ◽

10.1177/0312896217729728 ◽

2017 ◽

Vol 43 (3) ◽

pp. 353-372 ◽

Cited By ~ 2

Author(s):

Daniel Chai ◽

Ziyang Lin ◽

Chris Veld

Keyword(s):

Information Asymmetry ◽

Value Creation ◽

Abnormal Returns ◽

Bank Debt ◽

Announcement Effect ◽

Stock Performance ◽

Announcement Effects ◽

Ex Post ◽

Long Run ◽

Focus Information

We examine announcement effects and the long-run stock performance associated with spin-offs for companies listed on the Australian Securities Exchange. The 3-day announcement effect is a significantly positive 2.93%. Contrary to previous studies, we find no differences between ex post completed and non-completed spin-off announcements. The abnormal returns do not seem to be related to factors found significant in previous studies, such as an increase in industrial or geographical focus, information asymmetry, and the amount of bank debt of the parent company. There is some evidence that Australian spin-offs are associated with a positive long-run excess stock performance for up to 24 months after the spin-off. This effect is mostly driven by focus-increasing spin-offs.

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