The Five @ Five Workshop (Wednesday 17 June)
Mark Chun
How do financial analysts interpret industrial firms’ corporate refocusing announcements?
This paper investigates how financial analysts interpret UK-listed industrial firms’ corporate refocusing announcements in 2000s. The results demonstrate that analysts adjust current year and one-year-head earnings forecasts downward in the refocusing announcement year but no more statistically significant adjustment in the post announcement period. This suggests that they expect a decline in the earning performance of refocusing firms in the short run but do not exclude the possibility of an improvement in the long run. They review their target price valuation before refocusing announcement. There is no evidence showing that they issue biased current year and one-year-ahead earnings forecasts after the refocusing announcements and their forecasts also appear no less accurate. Finally, they are aware of the asymmetric timeliness in the realization of the costs and benefits resulting from refocusing activities. Their forecast revisions are more strongly associated with bad news than with good news in the refocusing announcement year. Overall evidences confirm that financial analysts are efficient and effective at processing refocusing announcements.
Oksana Pryshchepa
In the path of the storm: does financial distress cause non-financial forms to risk shift?
We use a novel risk-shifting proxy and a unique identification strategy to study whether financial distress causes non-financial firms to risk-shift. We calculate the risk-shifting proxy by applying modern portfolio theory to operating segment data, and use hurricane strikes as instrument for distress risk. We show that distress risk shocks cause moderately distressed firms to risk-shift. Risk-shifting is facilitated by closing low risk-segments and raises post-hurricane failure rates. We further find that pre-hurricane covenant violations keep the most distressed firms from risk-shifting. Despite its theoretical importance, we are first to offer evidence suggesting that some non-financial firms risk-shift.
Pei Kuang
Long Run Growth Uncertainty
A simple Real Business Cycle model with households' imperfect knowledge of the long-run growth of the economy replicates several major features of postwar U.S. business cycles without requiring unrealistically large shocks and is consistent with observed expectations data. The key to the quantitative success is households’ gradual learning of the long-run growth and mutual stimulation of their growth expectations and market outcomes. A period of sustained growth (declines) triggered by changes in fundamentals say productivity leads to households’ optimism (pessimism) about future growth, which in turn reinforces their optimism (pessimism).
The model suggests during the Great Recession period, fiscal austerity in most European countries may be excessive. Observing persistent and large declines in output leads to over-pessimism of policy makers about future growth, which under-estimates substantially the size of output gap and cyclically-adjusted fiscal balance. It also implies that policy makers with imperfect knowledge of the economy who seek to minimize this bias should put neither too big nor too small weight on the recent data when estimating potential output growth. On the one hand, putting too large weight on the recent data leads to more frequent and substantial deviations of potential output growth estimates from the true value. On the other hand, policy makers’ estimates for potential output growth can remain wrong for long periods of times if they place too little weight on the recent data or track the changes of the economy too slowly.
Marco Ercolani
“It IS a graduate tax”
The specific features of the Student Loans System ‘Plan 2’ introduced in September 2012 mean that it performs more like a graduate tax than a loans system. This was first identified by Professor Susan Cooper (mimeo 2011) and later acknowledged by Nick Clegg MP (Andrew Marr Show, 18/1/2015). Three features of this student loans system make it perform more like a graduate tax. Firstly, because monthly repayments are a function of the level of earnings and not the level of debt (9% of annual earnings above £21000 after pension contributions have been deducted). Secondly, because any debt is written off thirty years after graduation. Thirdly, because simulations (ours and others’) show that the average graduate does not repay the debt in full by the time the debt is written off. Perhaps the fact that for most graduates the student loans system will perform more like a graduate tax is a desirable feature from a social equity standpoint. However, small amendments in the terms of the student loans system could make huge differences and make it perform more like a loans system which would therefore have huge welfare and educational implications.
Wasim Ahmad
Lockups and Long-Run IPO Performance
We analyse the relationship between the lockup length and the long-run performance of initial public offerings (IPOs) on London Stock Exchange Main Market during the period 1995-2006. Our findings suggest that IPOs with longer lockups consistently show superior performance relative to IPOs with shorter lockups across different benchmarks and factor models in both event time and calendar time analysis. Moreover, our cross-sectional results confirm lockup length as a significant predictor of long-run IPO performance. In addition, we investigate abnormal returns around lockup expiry and find that negative abnormal returns around lockup expiry are concentrated in IPOs with shorter lockups. Overall, we document that longer lockups are related to better long-run performance of IPOs and our findings are consistent with the view that issuing firms signal their quality through longer lockups.