Browsing by Author "Taffler, Richard J."
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Item Open Access Are analysts biased? an analysis of analysts’ stock recommendations for stocks that perform contrary to expectations(Cranfield University, 2005-09) Mokoaleli-Mokoteli, Thabang; Taffler, Richard J.The finance literature suggests that analysts’ stock recommendations have negligible impact on market prices. Some studies suggest this lack of market impact may be partly driven by the affiliations between investment banks and the firms their brokerage arms cover (conflicts of interest). However, most of these studies fail to take into account other factors including institutional and trading issues and psychological biases which may well be just as important in influencing analysts when they gather, process and interpret information about stocks. The aim of the current study is to establish the factors which are associated with analysts issuing stock recommendations that lack market impact. I find that nonconforming analysts’ stock recommendations are associated with overconfidence bias (as measured by optimism in the language they use) and representativeness bias (as measured by previous stock price performance, market capitalisation, book-to-market and change in target price). Thus, stocks that receive a buy rating and subsequently underperform the respective benchmark are associated with a high level of optimism in the tone of the language used by analysts in their investment reports that they prepare to justify their recommendations, have positive previous price momentum, have large market capitalisation, have low book-to-market ratio and have their target prices changed in the same direction as the stock recommendation. Not surprisingly, there is also a relationship between the investment bank issuing the recommendation and the firm. In addition, stocks that are awarded sell rating and subsequently outperform the benchmark have characteristics opposite to those of nonconforming buys. Finding that potential conflicts of interest significantly predict analysts’ nonconforming stock recommendations supports recent policy-makers’ and investors’ allegations that analysts’ recommendations are driven by the incentives they derive from investment banking deals. These allegations have led to implementation of rules governing analysts’ and brokerage houses’ behaviours. However, finding that cognitive biases play a major role in the type of recommendation issued suggests that these rules may work only in as far as regulating conflicts of interest, but will have a limited role in regulating psychological bias, as my results suggest that analyst bias is inherent in their work. Surveys of what fund managers expect of analysts indicate low rankings of analysts’ investment advice as manifested in their recommendations (e.g., All-America Research Team Survey 2002). My results further indicate that fund manager concern is likely to continue because not all behavioural factors in analyst stock recommendations can be controlled.Item Open Access Are markets efficient? The extreme case of corporate bankruptcy - a systematic review(2005-08) Coelho, Luis; Taffler, Richard J.Fama (1970) presents the classical definition of an efficient market: in such a market, prices always reflect all available information. Recently, behavioural finance has emerged as an alternative theoretical framework to the traditional paradigm. This new approach is based on the idea that not all investors are rational and that rational investors face limits to arbitrage. The market's reaction to corporate bankruptcy announcements is a privileged context within which to explore the conflicting predictions of these two competing theoretical frameworks. In fact, existing research does not provide clear guidance on this issue. Some studies suggest that the market is efficient in the event of corporate failure (e.g. Clark and Weinstein, 1983; Morse and Shaw, 1988; Elayan and Maris, 1991) while others conclude that the market is highly inefficient when dealing with extreme bad news (e.g. Katz et al, 1985; Eberhart et al, 1999; Indro et al, 1999). This study resorts to the systematic literature review methodology to organize a survey on the existing literature that analyses the market's reaction to corporate bankruptcy announcements. The purpose of the review is to identify suitable research gaps that can be explored at a PhD level. A brief overview of the thematic under analysis is presented in the first part of the study. Subsequently, a detailed analysis of the systematic literature review methodology is provided, including both the search strategy employed and the different selection criteria used. The last part presents the results. These suggest that the area under analysis has received considerable attention from the finance academic community but some interesting research questions still remain unsettled, providing the context for future research in the field.Item Open Access Bad news disclosures and market bias: do investors underreact?(Cranfield University, 2005-08) Kausar, Asad; Taffler, Richard J.The seminal market efficiency paradigm in finance is being increasingly challenged by evidence apparently inconsistent with its predictions. Such "anomalies" tend to show that the market does not fully incorporate information upon its release in an unbiased way. Recent literature in finance identifies two potential types of anomalous market reaction to news disclosures; overreaction, and underreaction. The overreaction phenomenon does not find much empirical support but market underreaction, on the other hand, appears quite robust, particularly in the case of bad news which the market appears to take time to process in many situations. My PhD explores these issues. The first part of my thesis tests the hypothesis that if investors rationally incorporate new pessimistic (optimistic) information then after controlling for risk, bad (good) news firms will not 'under- (over-) react'. I test this hypothesis in the going-concern modified audit report disclosure domain. Going-concern opinions offer an appropriate test for the underreaction model as such information releases are associated with acute psychological stress and where a clear distinction between bad and good news can easily be made by considering the parallel case of going-concern withdrawal events. The second part of my thesis extends my work to investigate the market underreaction phenomenon conditional on the underlying bankruptcy regime of the institutional environment. Specifically, I explore the market response to the information content of closely related going-concem modified audit report disclosures (bad news) conditional on the underlying bankruptcy codes in very similar institutional and market environments differing only in the nature of bankruptcy regimes. More specifically, I work with the debtor-friendly U. S. and the creditor - friendly U. K. legal regimes. I hypothesize that investors in a creditor-friendly bankruptcy regime (the U. K. ) will react more adversely to the publication of first-time going-concem modified audit report indicating increased risk of loss than do investors in a debtor-friendly bankruptcy regime (the U. S. ). This is because of a remarkable divergence across the bankruptcy codes of the two different countries with regards to the rights of claimholders in the event of a default on debt contracts. The idea is to test whether there is any difference in investor response to similar bad news signals highlighting financial distress across different institutional environments. In the first part of my thesis, I find that there is asymmetric market response to first-time going-concern modified audit report disclosures (bad news) and withdrawal of the going-concern modified audit report disclosure (good news). Using a large sample of 845 U. S. firms from 1994-2002,1 find that the market underreacts to going-concern modified audit report disclosures (bad news), resulting in a downward drift of around 16% over the one-year period subsequent to the publication of going-concern modified audit opinion, but treats its withdrawal (good news) consistent with theory with no subsequent abnormal returns. To ensure that my empirical results are robust I employ various methodologies and also conduct additional tests to control for alternative explanations to my market underreaction story such as post-earnings announcement drift, momentum etc. My main results on market underreaction to going-concern modified audit report disclosures remain unchanged. I also test if there is an opportunity to eam profits by trading on this underreaction anomaly but find that any profit opportunity is illusory and highly risky. I conduct additional analyses that explore the trading behaviour of different classes of investors in my sample firms. This analysis is important as it could highlight whether institutional investors and retail investors exhibit similar trading biases. Results reveal that institutional investors reduce their holdings in such stocks on a timely basis in contrast to retail investors who appear to increase their holdings in such distressed stocks. The evidence is even clearer when such analysis is conducted by splitting my going-concern sample by subsequent outcomes. I conclude that despite clear adverse signals about the firm's continuing financial viability being conveyed to investors by the publication of the going-concern modified audit report, this information is not being fully impounded by the market, in contrast to the good news conveyed by going-concern withdrawals. My findings add to the existing literature calling into question the ability of the market to rationally price stocks in the case of acute public-domain bad news disclosures, as opposed to good news releases. My results suggest that my evidence of stock mispricing and extended post-going-concern drift might then be explained by a limits to arbitrage argument with naive (retail) investors keeping stock prices artificially high by inappropriately in these stocks due to behavioural biases identified in the literature and skilled investors (professional arbitrageurs) having limited incentive to trade in these small firms because of high costs. In terms of the second main theme of my thesis, my empirical analysis comparing the market response to going-concern modified opinions in the U. S. and the U. K. shows that, as hypothesized, investors in a creditor-friendly regime (the U. K. ) react more adversely, -31%, than investors in a debtor-friendly regime (the U. S. ), 18%, in the eight year time-period (1995-2002). One particular reason is that the U. S. bankruptcy regime is biased more towards the rights of debtors, whereas the U. K. regime is biased more towards the rights of creditors and once a firrn enters bankruptcy proceedings in the U. K., it is unlikely that stockholders' equity has any residual value. These results provide evidence of the important role of legal regimes on the informativeness of accounting inforination. My results suggest that as standard-setters pursue uniform accounting and auditing standards across the world, they need to take into account how such standards interact with local legal regimes and consequently their informativeness to investors and other financial statement users. As such, these results present crucial empirical evidence that adds to the ongoing debate about the relevance of global standards among standard- setters, regulators and academics. Overall, my thesis makes important theoretical and empirical contributions to the behavioural finance, market pricing, and accounting literature in the bad news disclosure domain.Item Open Access Comparing the performance of market-based and accounting-based bankruptcy prediction models(Elsevier Science B.V., Amsterdam., 2008-01-01T00:00:00Z) Agarwal, Vineet; Taffler, Richard J.Recently developed corporate bankruptcy prediction models adopt a contingent claims valuation approach. However, despite their theoretical appeal, tests of their performance compared with traditional simple accounting-ratio-based approaches are limited in the literature. We find the two approaches capture different aspects of bankruptcy risk, and while there is little difference in their predictive ability in the UK, the z-score approach leads to significantly greater bank profitability in conditions of differential decision error costs and competitive pricing regime. (C) 2007 Published by Elsevier B.V.Item Open Access The Determinants and Effects of Effective Investor Relations (IR)(Cranfield University, 2005-04) Nash, Eloise; Taffler, Richard J.This research concerns relationships between effective IR and stock pricing and stock liquidity and analyst coverage. This thesis develops the IR literature by using an original and focused measure of IR performance, numbers of firms' nominations for the Investor Relations Magazine IR awards 1999-2002, and by testing for any direct relationships between firms' number of award nominations and stock price, liquidity and analyst coverage over periods surrounding these awards and by exploring a wider range of firm characteristics compared to existing research. It is motivated by a seminal paper claiming that effective IR indirectly reduces the cost of equity capital, based a chain of existing research (Brennan and Tamaronski, 2000). Firstly, effective IR increases analyst coverage by reducing analysts' information-search costs, (Bhushan, 1989b, Lang and Lundholm, 1996, Francis, Hannah and Philbrick, 1997, Holland 1998b). Higher coverage can directly reduce information asymmetry and trading costs, increasing liquidity and indirectly increasing equity trading volumes (Brennan and Subrahmanyan, 1996). Finally, Amihud, Mendelson and Lauterbach (1997) show a direct inverse relationship between stock liquidity and stock prices, thus completing the putative chain between effective IR and a reduced cost of equity. However, any research showing a direct relationship between effective IR and the cost of capital is limited, with Botosan (1997) only finding a direct negative relationship for a sample of US firms with effective annual reports and low analyst coverage, and more recent research by Botosan and Plumlee (2002) shows no relationship to firms' IR ratings from analysts of the Association of Investment Management and Research (AIMR). I find, firstly, that prior to the IR awards the smaller-sized firms earn excess equity returns and a positive relationship between the number of firms' IR award nominations and prior analyst coverage. Secondly, I find that subsequent to the IR awards the firms continue to have high levels of analyst coverage, but do not earn excess stock returns. These findings suggest that analysts cover high momentum small-firm stocks and generally follow firms with effective IR, and also contributes to other research on prior factors that appear to influence firms' ratings in subjective firm-surveys, which behavioural finance attributes to the survey respondents' psychological preferences and biases. Finally, I find that effective IR is associated with a subsequent significant increase in stock liquidity and a reduced cost of equity, consistent with information risk and agency theories, which predict that effective IR will reduce risks attached to stocks due to high information asymmetry.Item Open Access Does Financial Distress Risk Drive the Momentum Anomaly?(Financial Management Association -- J S Rader, 2008-01-01T00:00:00Z) Agarwal, Vineet; Taffler, Richard J.This paper brings together the evidence on two asset pricing anomalies-continuation of prior returns (momentum) and the market mispricing of distressed firms-using UK data. Our analysis demonstrates both these effects are driven by market underreaction to financial distress risk. In particular, we find momentum is proxying for distress risk, and is largely subsumed by our distress risk factor. We also find, as with US studies, no evidence that size and book-to-market (B/M) effects in stock returns are linked to financial distress.Item Open Access Does the distress factor hypothesis explain the size and value effects in equity returns?(2002-08) Agarwal, Vineet; Taffler, Richard J.The distress factor hypothesis says that value stocks and small stocks are distressed and therefore higher returns on such stocks are merely a compensation for higher risk. I test this hypothesis using z-scores, a cleaner proxy for bankruptcy risk than other proxies used in the literature such as dividend reductions or omissions. I find that unconditionally, distressed stocks earn significantly lower returns than non-distressed stocks and much underperformance is uninfluenced by size and B/M factors. I also find that z-score, size and B/M effects are stronger in different months suggesting little common variation between the three factors. The results show that size and B/M effects are unrelated to bankruptcy risk on an unconditional basis. Of crucial importance is a consideration of the time varying behaviour of bankruptcy risk premia and I consider explicitly the impact of changes in GDP growth rate and the impact of stock market movements on the pricing of distressed firms. I find that risk of bankruptcy is a systematic risk with distressed stocks registering strong underperformance during ‘bad’ states of the world. As with unconditional analysis, the results show there is no link between distress factor and size and B/M effects. Size and B/M effects are stronger in non-distressed stocks. To ensure that the empirical results are robust across different methodologies, I significantly expand on the work of Dichev (1998) by employing two different portfolio formation methods and individual securities in my analysis. My main results on z-scores are robust though size and B/M effects are sensitive to alternative trading rules. I also test the Fama & French (1993) three-factor model for the UK and find that it is unable to explain returns on negative z-score portfolios. A four-factor model that includes a factor mimicking the z-score effect is better specified. The primary contribution of this study is the direct evidence it provides on the distress factor hypothesis of higher returns on value stocks and small stocks and the four-factor model for stock returns. This research has important implications both for extant asset pricing theories and for practitioners especially in evaluation of portfolio performance and computation of abnormal returns.Item Open Access How do analysts deal with bad news? Going-concern opinions and analyst behaviour - a systematic review(2005-08-31) Peixinho, Ruben Miguel Torcato; Taffler, Richard J.This study systematically reviews the literature that can constitute the foundations for the connection of two areas that have hitherto been developed separately: analyst behaviour and going-concern opinions. Financial literature claims that analyst judgement is biased given their tendency to systematically underreact in the presence of bad news and their tendency to systematically overreact in the presence of good news. Considering that goingconcern modifications constitute an unambiguous and acute case of bad news, this event presents a unique opportunity to explore analysts' anticipation of and reaction to the presence of bad news. This analysis can provide further evidence on analysts' optimism and their role in the apparent delayed impact of bad news to investors. A systematic review of the literature is developed in order to guarantee methodological rigour in the review process. The systematic search for studies in the refined scope finds 40 papers that are analysed and synthesised. These papers are discussed in order to justify the potential gap in the literature and the research opportunities available for a doctoral study. The results suggest that the connection between these areas can sustain a doctoral study and contribute for the development of the accounting and finance framework.Item Open Access Internet stocks as “phantastic objects”: A psychoanalytic interpretation of shareholder valuation during dot.com mania.(European Asset Management Association, 2003) Taffler, Richard J.; Tuckett, David A.Item Open Access Investor emotions and the psychodynamics of asset pricing bubbles: a Chinese perspective(Taylor and Francis, 2022-11-12) Taffler, Richard J.; Bellotti, Xijuan; Agarwal, Vineet; Li, LingluThis paper explores the powerful emotions unleashed during asset pricing bubbles. Adopting a psychoanalytic perspective, we develop a five-stage path-dependent model of such financial crises and test this empirically on the Chinese 2005–2008 and 2014–2016 stock market bubbles. Results are consistent with our underlying theory and demonstrate how investors experience a range of highly charged emotions directly related with different market states during such episodes. Our evidence suggests that if we wish properly to understand and explain such destructive events, we also need to recognize the fundamental role investor unconscious fantasies and market psychodynamic processes play in their etiology.Item Open Access The shadow in the balance sheet: The spectre of Enron and how accountants use the past as a psychological defence against the future(2004-01-01T00:00:00Z) Cooper, David; James, Kim; Kwiatkowski, Richard; Taffler, Richard J.Accounting frameworks play a crucial role in enabling us to make sense of business. These frameworks provide a common language for individuals, organizations and broader economic groupings to understand and make decisions about the commercial realm in which they operate. From a psychodynamic perspective, the language of accounting also plays an important role. On the one hand it offers a way to tame the uncertainty and unknowability of the future by representing it in the same comforting terms as it does the past, thus reducing anxiety. Accounting provides a ‘shorthand’, which achieves a balance between positive and negative, debit and credit, asset and liability. On the other hand, accounting can also provide an arena in which fantasies about the future can be staged. However, the use of accounting language is problematic, particularly when it comes to dealing with the future. First, accounting frameworks are inherently backward looking and second, the reassuring sense of clarity and predictability they give are bought at the price of unrealistic simplification. The shadow is never far away and is a constant source of surprises in the unfolding future of a business. Rationalizing and sanitizing the shadow through accounting language may alleviate anxiety but fails to provide an escape from its effects, and echoes from the shadow side of business are capable of shaking the world in the form of accounting scandals. Governments and businesses have reacted to scandals such as Enron and Worldcom by tightening legislation and refining accounting standards but little, if anything, has been done to bring us any closer to confronting the shadow of business where these scandals have their roItem Open Access What is the wind behind this sail - can fund managers successfully time their investment styles?(Cranfield University, 2005-11) Lu, J.; Taffler, Richard J.There is a considerable body of literature that examines the behaviour of institutional investors as a potential source of market price movement. Most existing studies focus on the market timing abilities of active fund managers and find mixed evidence for their fund timing skills. However, few studies have investigated fund manager timing abilities within segments of the market, such as factor timing and sector timing. This study investigates the style timing behaviour of US domestic equity funds existing at any time during the period 1_2-2002. Specifically, I examine the timing activities of actively managed mutual funds within different market segments based on such established systematic risk factors as size, book-to-market, momentum, and across different fund styles such as aggressive growth, growth and income, and small company funds, etc. Mutual fund timing strategy can be viewed as the fund manager's response to hislher private information regarding future factor premiums. Instead of directly observing how fund managers make their timing decisions, an alternative approach is to look at the direct outcomes of their decisions, which are related to the factor timing loadings derived from a factor timing model. I significantly expand on the work of Bollen and Busse (2001) and Volkman (l~ by combining systematic risk factors unique to equity markets with timing factors unique to actively managed portfolios. Within this empirical timing-activity evaluation framework, I additionally investigate fund timing behaviour in the context of Morningstar star rating performance record, investment objectives, fund age, turnover, and load expense, etc. This Ph.D. is an original contribution to the literature of fund timing activities, which seeks to contribute to our understanding in terms of investigating mutual fund managers' timing strategies with respect to specific systematic risk factors and their evolution over time. This research has important implications both for extant asset pricing theories and for practitioners especially in the evaluation of portfolio performance and investigation of fund managers' timing activities.Item Open Access Why does business support the Arts? Philanthropy, marketing or legitimation?(Cranfield University, 2004-04) Moir, Lance; Taffler, Richard J.This thesis examines the motivation by UK firms for one aspect for corporate philanthropy – support for the arts. The literature has shown that there is an increase in strategic philanthropy – business giving which is designed to meet the objectives of business and society, yet there is no clarity on what the underlying motives are for business giving. This research develops a framework around the dimensions of relative business-society attention and relative stakeholder attention to identify patterns of motivation. The dominant economic motivations of marketing and legitimation were identified through a content analysis of sixty texts which describe business support for the arts. These motivations were further understood through thirty-nine interviews with business managers and managers in the arts and arts-based consultancies; although a small number of firms was shown to act primarily from an intention to benefit society in some way. In all cases, business support for the arts includes a significant economic component, whether the primary motivation is pro-business or pro-society. The analysis of these interviews shows that business supports the arts across the three areas of business benefits – especially branding and customer relations, employee support and community relations yet the importance of these areas varies according to the underlying principle motivation of marketing or legitimation. Further, the research shows that firms with higher business exposure undertake corporate support for the arts as an exercise in legitimation. This thesis contributes to the corporate philanthropy literature by providing a model to understand motivation for corporate giving and by showing how these motivations can be understood in a continuum of corporate philanthropy in the case of business support for the arts in the UK. This continuum shows basic motivation mapped against degree of business exposure, stakeholder focus and type of art form supported.