Research
The Security Price Impact on Firms Utilizing Derivatives Across Industries
The purpose of this study is to shed light on the link between the information content of accounting earnings on security returns in the presence of derivatives within firms. To accomplish this, a study sample was chosen from years 2011-2015 which included firms within eight separate industries. The sample was partitioned by firms which engage in derivatives and firms which do not. Results indicate that firms that do not utilize derivatives have a resultant average security price change that is almost double that of their derivative using counterparts. Also, the variance in the stock movements for non-derivative firms is approximately half of that for the derivative firms studied, indicating the potential for less risk in the non-derivative firms. Also, analysis shows that industry membership may in fact have some bearing on stock price of firms that utilize derivatives. Accounting earnings of derivative-using firms in high growth industries seem to have a greater impact on security prices whereas for those derivative-using low growth firms, the security price impact of accounting earnings is not significant. It may well be that the upside of significant growth outweighs the potential downside of derivative usage in the minds of the investors when it comes to high growth industry firms.
Financial Analyst Accuracy: An Examination by Industry
Prior research into the accuracy of analyst forecasts has spanned several decades. Obrien (1990) conducted a comprehensive analysis of forecast accuracy among financial analysts in nine industries during the period 1975-1982. Sinha, Brown, and Das (1997) reexamined this issue of forecast accuracy among financial analysts during the period 1984-1990, consistent of the fourteen largest industries at the time. These studies reported no or minimal significant differences in forecast accuracy across industries. This study extends the above research and assesses forecast accuracy for eight distinct industries during the period 2010-2015 from the perspectives of: 1. Comparison over forecast horizon 2. Comparison by industry 3. Comparison within industry
The End of Derivatives? What the European Union Model Forebodes, and the Subsequent Stock Market Effect
In 2011 The European Union Tax Commission proposed the establishment of a Financial Transaction Tax (FTT). The FTT was subsequently implemented in France (8/1/12) and Italy (1/1/13). It is also scheduled to be adopted in 9 other European Union states during 2015. Great Britain has thus far failed to accept such a tax. The purpose of the FTT is twofold; minimize and control derivative trading by taxing it, and raise revenues. Opponents of the FTT have suggested that such a tax would increase volatility (i.e., risk) in the securities market and would also lead to a reduction in security trading and a drop in security prices. These are all reasons why Great Britain has thus far refrained from passing the tax.
Does Analyst Coverage Affect Bias and Information Content of Management Forecasts and Are Results Comparable Across Industries?
This study provides empirical evidence regarding the bias of management forecasts and information content of management forecasts as analyst coverage increases both by firm and industry. Findings indicate that, on average, management forecasts in the sample exhibit downward bias in the forecast. This is a result that many prior researchers have found. However, when an industry analysis was performed, the industries with the highest analyst coverage (i.e., oil and gas, technology, and healthcare) had minimal bias. In fact, the bias of the management forecast approached zero. All other industries observed contained negative bias results. With respect to information content of the management forecast, firms with fewer than 14 analysts covering them were compared to firms with coverage by greater than 14 analysts. Findings suggest that firms with analysts exceeding 14 have an enhanced information signal to the investors and other interested parties than do firms with fewer than 14 analysts.
The Stock Price Effect of the Affordable Care Act
This is the first empirical study to assess the stock price effect of the Affordable Care Act. The timeline for appropriate assessment begins when the Act became law on June 28, 2012 in a 5-4 decision by the United States Supreme Court. Although the study is constrained by the fact that not much time has passed since the June, 2012 Court decision, quarterly returns and stock prices were analyzed for each quarter beginning with the third quarter of 2012 and ending with the first quarter of 2014. This is referred to as the post-Act time period. The results were then compared to similar quarterly data for the period 2004-2007. This is referred to as the pre-Act period. Fifty-seven firms and 912 pre-Act firm quarters were assessed for 5 health care industries in the sector (hospital companies, diagnostic companies, medical device companies, drug manufacturing companies, and assisted living companies). These total firm quarters were then compared to the same 57 firms and 399 firm quarters in the post Act period. Findings indicate that stock prices of these firms are significantly positive in the pre-Act study period but significantly negative in the post-Act study period. The analysis was then broken down by each of the five industries in both the pre and post-Act study periods. Findings again show that stock prices are significantly lower in post-Act time periods with hospital companies, diagnostic companies and medical device companies being the most pronounced in stock price decline. These results have significant bearing on managers and investors in a post Affordable Care Act era. It is possible that the health care sector as a whole may experience continued downward pressure on both earnings and stock prices, while specific industries in the sector may experience more significant impact than others in the quarters and years to come.
The Market Impact of Financial Restatements after Sarbanes-Oxley
This study analyzes the market price effect of financial restatements in a pre- versus post-SOX environment. Restatement of financials has long been an issue with investor groups and regulators alike. Since the advent of the Sarbanes-Oxley Act, we have seen a general increase in restatements and this has furthered to alarm these investor groups and regulators. Previous studies have analyzed predominantly pre-SOX effects of restatements on firm security prices, and have found the effects to be negligible. The studies that have attempted to assess the post-SOX security price effects have had limitations in years studied, numbers of firms, and robustness of models. This study overcomes many of these weaknesses by incorporating more study years (8 in each the pre- and post-SOX time periods), more firms (2,104 pre-SOX and 3,407 post-SOX firms), and greater robustness in the model (exclusion of overlapping announcements and tightening of the announcement window). Study results support prior pre-SOX studies that indicate minimal effect of financial restatements on security prices. However, the assessment of post-SOX firm restatements indicate that financial restatements have a significant downward effect on security prices, indicating that investors do perceive post-SOX financial restatements differently from those issued in pre-SOX time frames. The implication is that regulators and investor groups may be justified in their concern over the number of restatements subsequent to the passage of Sarbanes-Oxley. Although the vast bulk of the restatements do not result from misbehavior by management, there seems to exist a negative perception by stockholders of firms filing financial restatements. As a result, investors tend to bid down the market price of such firms. These results hold implications for all firms contemplating financial restatement.
