Asset Management

We test the empirical validity of a claim that has been playing a central role in debates on corporate governance — the claim that interventions by activist hedge funds have a detrimental effect on the long-term interests of companies and their shareholders. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data.

A long stream of papers documents robust correlations between firm characteristics and future stock returns. Most of these characteristics involve accounting numbers. Usually, characteristics have been identified from data analysis, resulting in a proliferation of characteristics. A 2013 survey of published papers and working papers found 186 predictors — a number that the authors said likely under represents the total.

Six years after the passage of the 2008 Troubled Asset Relief Program, commonly known as TARP, it remains hard to measure the total social costs and benefits of the assistance to banks provided under TARP programs. TARP was not a single approach to assisting weak banks but rather a variety of changing solutions to a set of evolving problems. TARP's passage was associated with significant improvements in financial markets and the health of financial intermediaries, as well as an increase in the supply of lending by recipients.

We ask nearly 400 CFOs about the definition and drivers of earnings quality, with a special emphasis on the prevalence and detection of earnings misrepresentation. CFOs believe that the hallmarks of earnings quality are sustainability, absence of one-time items, and backing by actual cash flows. Earnings quality is determined in about equal measure by controllable factors like internal controls and corporate governance, and non-controllable factors like industry membership and macroeconomic conditions.

Despite their strong positive average returns across numerous asset classes, momentum strategies can experience infrequent and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in "panic" states — following market declines and when market volatility is high — and are contemporaneous with market rebounds. We show that the low ex-ante expected returns in panic states are consistent with a conditionally high premium attached to the option-like payoffs of past losers.

We analyze strategic speculators' incentives to trade on information in a model where firm value is endogenous to trading, due to feedback from the financial market to corporate decisions. Trading on private information reveals this information to managers and improves their real decisions, enhancing fundamental value. While this feedback effect increases the profitability of buying on good news, it reduces the profitability of selling on bad news, and thus has an asymmetric effect on trading behavior.

We develop a simple dynamic investment strategy that allows long‐term passive investors to hedge climate risk without sacrificing financial returns. Our proposed hedging strategy goes beyond a simple divestment of high carbon footprint or stranded assets stocks. This is just the first step. The second step is to optimize the composition of the low carbon portfolio so as to minimize the tracking error with the reference benchmark index. We show that tracking error can be almost eliminated even for a low carbon index that has 50% less carbon footprint.

Value stocks earn higher returns than growth stocks on average, but it is well documented that those returns come with risk. This paper supplies an understanding of that risk in terms of fundamentals. The fundamental analysis informs that, in buying value stocks, the investor may be trapped into buying firms where prospective earnings growth is quite risky. However, the trap can be avoided by recognizing how earnings and book value are accounted for in financial statements. Specifically, the application of conservative accounting informs the investor ex ante of the risk involved.