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Author: Qunfeng Liao Publisher: ISBN: Category : Earnings management Languages : en Pages : 107
Book Description
Prior literature has shown that managers have incentives to opportunistically and selectively withhold bad news from investors because of career concerns, compensation contracts, litigation risks, earnings targets, and empire building. In their 2006 paper, Jin and Myers develop the "Bad News Hoarding" theory which suggests that when managers conceal bad news for extended periods of time, negative information is likely to get stockpiled within the firm. When managers' incentives for hiding bad news collapse or when the accumulation of bad news reaches a critical threshold level, all of the hitherto undisclosed negative firm-specific shocks become public at once, resulting in an abrupt decline in stock prices. Earnings management (EM) has been identified as the primary means employed by managers to conceal bad news. Earlier studies have shown separately that overvalued firms and firms characterized by high EM are associated with a greater risk of future stock price crash risk. In this thesis, I investigate the joint effect of extreme overvaluation and high EM on future stock price crash risk. It is shown that there is a robust positive relationship between extreme overvaluation accompanied by high EM and one-year ahead stock price crashes for a sample of U.S. public firms during the years 1995-2011. This result is consistent with Jensen's (2004, 2005) argument that when a firm becomes extremely overvalued it sets up organizational forces and incentives that are likely to impair the value of the firm. However, I also find that extremely overvalued firms that are not accompanied by high EM as well as firms with high EM that are not extremely overvalued do not exhibit greater crash risk. The results are robust to alternative proxies of crash risk and EM and hold after controlling for endogeneity. The effects are more pronounced in the post-SOX period and for firms that engage in real earnings management (REM), are small size, or have low analyst coverage. In addition, I find that accrual earnings management (AEM) is positively associated with future stock price crash risk in the early stages of overvaluation whereas REM is positively associated with future stock price crash risk in the late stages of overvaluation. Finally, I find that extreme overvaluation with high EM is negatively associated with future stock price jumps. I interpret these results as suggesting that the incentives to conceal bad news through EM do not necessarily arise in all cases of overvaluation and that both extreme overvaluation and high EM should co-exist for the crash risk to increase. In this way, my results fine tune Jensen's conjecture regarding overvalued firms.
Author: Qunfeng Liao Publisher: ISBN: Category : Earnings management Languages : en Pages : 107
Book Description
Prior literature has shown that managers have incentives to opportunistically and selectively withhold bad news from investors because of career concerns, compensation contracts, litigation risks, earnings targets, and empire building. In their 2006 paper, Jin and Myers develop the "Bad News Hoarding" theory which suggests that when managers conceal bad news for extended periods of time, negative information is likely to get stockpiled within the firm. When managers' incentives for hiding bad news collapse or when the accumulation of bad news reaches a critical threshold level, all of the hitherto undisclosed negative firm-specific shocks become public at once, resulting in an abrupt decline in stock prices. Earnings management (EM) has been identified as the primary means employed by managers to conceal bad news. Earlier studies have shown separately that overvalued firms and firms characterized by high EM are associated with a greater risk of future stock price crash risk. In this thesis, I investigate the joint effect of extreme overvaluation and high EM on future stock price crash risk. It is shown that there is a robust positive relationship between extreme overvaluation accompanied by high EM and one-year ahead stock price crashes for a sample of U.S. public firms during the years 1995-2011. This result is consistent with Jensen's (2004, 2005) argument that when a firm becomes extremely overvalued it sets up organizational forces and incentives that are likely to impair the value of the firm. However, I also find that extremely overvalued firms that are not accompanied by high EM as well as firms with high EM that are not extremely overvalued do not exhibit greater crash risk. The results are robust to alternative proxies of crash risk and EM and hold after controlling for endogeneity. The effects are more pronounced in the post-SOX period and for firms that engage in real earnings management (REM), are small size, or have low analyst coverage. In addition, I find that accrual earnings management (AEM) is positively associated with future stock price crash risk in the early stages of overvaluation whereas REM is positively associated with future stock price crash risk in the late stages of overvaluation. Finally, I find that extreme overvaluation with high EM is negatively associated with future stock price jumps. I interpret these results as suggesting that the incentives to conceal bad news through EM do not necessarily arise in all cases of overvaluation and that both extreme overvaluation and high EM should co-exist for the crash risk to increase. In this way, my results fine tune Jensen's conjecture regarding overvalued firms.
Author: Ahsan Habib Publisher: ISBN: Category : Languages : en Pages :
Book Description
This paper examines empirically the effect of firm-level business strategies on future stock price crash risk and the extent to which equity overvaluation moderates this relation. By exploring the extent to which firms following particular business strategies are more or less likely to experience crash risk, we provide evidence that increases our understanding of the underlying determinants of crash risk. Using a composite strategy score developed by Bentley, Omer and Sharp (2013) and applying two variants of crash risk, we document that firms following innovative business strategies (prospectors) are more prone to future crash risk than defenders. We extend our analysis by examining the moderating role of equity overvaluation and find that prospectors are more prone to equity overvaluation which increases future crash risk.
Author: Arthur Ritter Publisher: GRIN Verlag ISBN: 3656956332 Category : Business & Economics Languages : en Pages : 18
Book Description
Seminar paper from the year 2014 in the subject Business economics - Investment and Finance, grade: 15 (2,0), University of St Andrews (School of Management), course: Corporate Financial Management, language: English, abstract: Stock market crashes had occurred in the financial market since the very beginning and in every generation (Sornette, 2003a). “Greed, hubris and systemic fluctuations have given us the Tulip Mania, the South Sea bubble, the land booms in the 1920s and 1980s, the U.S. stock market and great crash in 1929, the October 1987 crash, to name just a few of the hundreds of ready examples“ (Sornette, 2003a, p. 7.). This essay will compare and contrast the last three major stock market crashes in 1987, 2000 and 2007. To do this, the essay will pay special emphasis on the causes of the three crashes. From there the essay will draw out the similarities and differences and will answer the question if boom and bust can be predicted.
Author: William T Ziemba Publisher: World Scientific ISBN: 9813223863 Category : Business & Economics Languages : en Pages : 309
Book Description
'Overall, the book provides an interesting and useful synthesis of the authors’ research on the predictions of stock market crashes. The book can be recommended to anyone interested in the Bond Stock Earnings Yield Differential model, and similar methods to predict crashes.'Quantitative FinanceThis book presents studies of stock market crashes big and small that occur from bubbles bursting or other reasons. By a bubble we mean that prices are rising just because they are rising and that prices exceed fundamental values. A bubble can be a large rise in prices followed by a steep fall. The focus is on determining if a bubble actually exists, on models to predict stock market declines in bubble-like markets and exit strategies from these bubble-like markets. We list historical great bubbles of various markets over hundreds of years.We present four models that have been successful in predicting large stock market declines of ten percent plus that average about minus twenty-five percent. The bond stock earnings yield difference model was based on the 1987 US crash where the S&P 500 futures fell 29% in one day. The model is based on earnings yields relative to interest rates. When interest rates become too high relative to earnings, there almost always is a decline in four to twelve months. The initial out of sample test was on the Japanese stock market from 1948-88. There all twelve danger signals produced correct decline signals. But there were eight other ten percent plus declines that occurred for other reasons. Then the model called the 1990 Japan huge -56% decline. We show various later applications of the model to US stock declines such as in 2000 and 2007 and to the Chinese stock market. We also compare the model with high price earnings decline predictions over a sixty year period in the US. We show that over twenty year periods that have high returns they all start with low price earnings ratios and end with high ratios. High price earnings models have predictive value and the BSEYD models predict even better. Other large decline prediction models are call option prices exceeding put prices, Warren Buffett's value of the stock market to the value of the economy adjusted using BSEYD ideas and the value of Sotheby's stock. Investors expect more declines than actually occur. We present research on the positive effects of FOMC meetings and small cap dominance with Democratic Presidents. Marty Zweig was a wall street legend while he was alive. We discuss his methods for stock market predictability using momentum and FED actions. These helped him become the leading analyst and we show that his ideas still give useful predictions in 2016-2017. We study small declines in the five to fifteen percent range that are either not expected or are expected but when is not clear. For these we present methods to deal with these situations.The last four January-February 2016, Brexit, Trump and French elections are analzyed using simple volatility-S&P 500 graphs. Another very important issue is can you exit bubble-like markets at favorable prices. We use a stopping rule model that gives very good exit results. This is applied successfully to Apple computer stock in 2012, the Nasdaq 100 in 2000, the Japanese stock and golf course membership prices, the US stock market in 1929 and 1987 and other markets. We also show how to incorporate predictive models into stochastic investment models.
Author: B. Korcan Ak Publisher: ISBN: Category : Languages : en Pages :
Book Description
Individual equity securities are prone to large and abrupt stock price drops. In this article, the authors provide a framework for measuring, forecasting, and avoiding such stock price crashes. First, the authors identify the events that most frequently cause stock prices to crash, and then they construct a parsimonious model for forecasting stock price crashes. Finally, they examine how positioning a portfolio to reduce exposure to stocks with high crash risk can improve investment performance. This article provides a framework that should help investors construct equity portfolios with fewer stock price crashes, higher returns, and lower volatility.
Author: Sophia Hamm Publisher: ISBN: Category : Languages : en Pages : 63
Book Description
Many recent studies explore how earnings properties such as opacity, conservatism, and comparability relate to stock price crash risk. Motivated by the importance of earnings guidance as a voluntary disclosure mechanism that directly provides new information to the market, we investigate how guidance and the bias therein are linked to crash risk. Our initial analysis shows that on average, more guidance is associated with a higher crash risk. After an in-depth investigation, we find that this positive relation is driven by guidance optimism that the market does not instantly detect. This finding is consistent with optimistic guidance temporarily disguising bad news until its future revelation. Overall, our finding highlights that bias in earnings guidance can expose equity investors to significant downside risk.
Author: Peter Rössel Publisher: GRIN Verlag ISBN: 3668728003 Category : Business & Economics Languages : en Pages : 16
Book Description
Academic Paper from the year 2018 in the subject Business economics - Investment and Finance, grade: A, Post University (Malcolm Baldrige School of Business), language: English, abstract: This paper was written in the course "Investment Management". It outlines the history of stock market crashes that occurred throughout time. Starting with the first big crash, the tulip mania, in the years of 1636 and 1637. Following, further big crashes up to recent days are presented and the reasons and outcomes of these are explained. A stock market crash can be defined as an extreme price collapse on the stock market. Usually this process takes a few days to a few weeks. During this period mostly panic sales, which generate a large excess supply and thus lead to drastically falling prices dominate the scene.
Author: Jeewon Jang Publisher: ISBN: Category : Languages : en Pages : 65
Book Description
We estimate an ex ante probability of extreme negative returns (crashes) of individual stocks as a measure of potential overpricing and find that stocks with a high probability of crashes earn abnormally low returns. Stocks with high crash probability are overpriced regardless of the level of institutional ownership or variations in investor sentiment, and moreover, they exhibit increasing institutional demand until their prices reach the peak of overvaluation. We also find that institutional investors who overweight high crash probability stocks outperform the others, indicating that they have skill in timing bubbles and crashes of individual stocks. Our findings imply that sophisticated investors may not always trade against mispricing but time the correction of overpricing, and suggest that the crash effect we find could arise at least partially from rational speculative bubbles, not entirely from sentiment-driven overpricing.
Author: Gagari Chakrabarti Publisher: Springer Science & Business Media ISBN: 8132204638 Category : Business & Economics Languages : en Pages : 69
Book Description
This work is an exploration of the global market dynamics, their intrinsic natures, common trends and dynamic interlinkages during the stock market crises over the last twelve years. The study isolates different phases of crisis and differentiates between any crisis that remains confined to the region and those that take up a global dimension. The latent structure of the global stock market, the inter-regional and intra-regional stock market dynamics around the crises are analyzed to get a complete picture of the structure of the global stock market. The study further probing into the inherent nature of the global stock market in generating crisis finds the global market to be chaotic thus making the system intrinsically unstable or at best to follow knife-edge stability. The findings have significant bearing at theoretical level and on policy decisions.
Author: Qunfeng Liao
Author: Qunfeng Liao
Author: Ahsan Habib
Author: Arthur Ritter
Author: William T Ziemba
Author: B. Korcan Ak
Author: Sophia Hamm
Author: Peter Rössel
Author: Jeewon Jang
Author: Gagari Chakrabarti
Author: Elroy Dimson