Funke Selected Essays in Empirical Asset Pricing

Information Incorporation at the Single-Firm, Industry and Cross-Industry Level
2008
ISBN: 978-3-8349-9814-9
Verlag: Betriebswirtschaftlicher Verlag Gabler
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, Band 69, 109 Seiten, eBook

Reihe: ebs-Forschung, Schriftenreihe der EUROPEAN BUSINESS SCHOOL Schloß Reichartshausen

Christian Funke aims at developing a better understanding of a central asset pricing issue: the stock price discovery process in capital markets. Using U.S. capital market data, he investigates the importance of mergers and acquisitions (M&A) for stock prices and examines economic links between customer and supplier firms. The empirical investigations document return predictability and show that capital markets are not perfectly efficient.

Dr. Christian Funke completed his doctoral studies under the supervision of Prof. Dr. Lutz Johanning at the European Business School Oestrich Winkel. He is portfolio manager and partner at Source For Alpha, a quantitative asset management boutique.

Zielgruppe

Research

Autoren/Hrsg.

Funke, Christian

Weitere Mitwirkende

Johanning, Prof. Dr. Lutz

Inhaltsverzeichnis

1;Foreword;6
2;Preface;8
3;Overview;10
4;Table of Contents;11
5;List of Tables and Figures;13
6;List of Abbreviations;15
7;List of Symbols;16
8;1 Introduction;17
8.1;1.1 Overview and General Research Objective;17
8.2;1.2 Essay 1: Research Question and Main Findings;19
8.3;1.3 Essay 2: Research Question and Main Findings;21
8.4;1.4 Essay 3: Research Question and Main Findings;22
9;2 Information Signaling and Competitive Effects of M&A: Long- Term Performance of Rival Companies;25
9.1;Abstract;25
9.2;2.1 Introduction;26
9.3;2.2 Related Literature;29
9.4;2.3 Data and Methodology;31
9.5;2.4 Results;40
9.6;2.5 Conclusion;52
9.7;Appendix;54
10;3 Predictability of Industry Returns After M&A Announcements;55
10.1;Abstract;55
10.2;3.1 Introduction;56
10.3;3.2 Data and Methodology;59
10.4;3.3 Results;64
10.5;3.4 Conclusion;81
11;4 Predictability of Supplier Returns After Large Customer Price Changes;83
11.1;Abstract;83
11.2;4.1 Introduction;84
11.3;4.2 Related Literature;87
11.4;4.3 Data and Methodology;91
11.5;4.4 Results;99
11.6;4.5 Conclusion;112
12;5 Conclusion;115
13;References;117

Information Signaling and Competitive Effects of M&A: Long-Term Performance of Rival Companies.- Predictability of Industry Returns After M&A Announcements.- Predictability of Supplier Returns After Large Customer Price Changes.- Conclusion.

Leseproben

4 Predictability of Supplier Returns After Large Customer Price Changes (S. 67-68)

Abstract

This essay documents return predictability across stocks, specifically from customers to their suppliers. I extend the investigation of Cohen and Frazzini (2006), who examine monthly return predictability for economically linked firms, to analysis at the daily level and show that for large positive (negative) customer price change events supplier stock prices experience significantly positive (negative) cumulative abnormal returns for up to 20 days after the event. However, the major part of these returns arises in the first five days and such return predictability cannot be observed for the largest stocks and the most recent time period, indicating that capital markets are relatively efficient in incorporating extreme customer return shocks into supplier stock prices. Hence, limited investor attention to information on economically linked firms seems to be less severe for the attention-grabbing events investigated in this essay.

4.1 Introduction

Limited investor attention (investor inattention) and its consequences for information processing in capital markets have recently generated a lot of interest in the asset pricing literature.46 In a new paper Cohen and Frazzini (2006) examine economically linked firms and document widespread cross-asset return predictability in U.S. capital markets. They conclude that investors do not take into account ex-ante available and often longstanding customer-supplier relationships due to their limited attention, so that prices of supplier firms have a predictable lag in updating to new information about its customer firms. I examine this apparently wide-spread return predictability across assets further. Specifically, my interest lies in the short-run return dynamics at the daily horizon not examined by Cohen and Frazzini (2006) who base their study of supplier-customer relationships on monthly returns.

I want to know more precisely for how long return predictability from customer to supplier firms can be observed, and to which extent this return predictability is also visible in the extremes of the return distribution. In the light of this, I focus on extreme daily customer price changes, i.e., events which should grab investor’s attention due to related underlying news or by becoming news themselves. In this situation, I want to know whether we can still observe supplier return predictability due to limited investor attention to the consequences of this customer stock return information for supplier prices. Alternatively, I hypothesize that given such attention-grabbing customer events, limited attention is less of an issue for the related supplier firms and cross-asset return predictability could be relatively shortlived. My results show that this is the case.

I use publicly available customer information from firms’ financial statements to build my database on customer-supplier rela tionships.47 Using an event study framework and daily stock returns from 1981 to 2004, I investigate abnormal supplier stock returns after large abnormal customer price changes, i.e., a daily customer abnormal stock return three standard deviations or more from the mean. I show that after such large customer price changes there is indeed some supplier return predictability: after large positive events supplier 20-day cumulative abnormal returns (CAR) are statistically significant positive 0.569% and after large negative events supplier 20-day CAR amount to statistically significant negative 0.372%.

Über Autor(innen)

Dr. Christian Funke completed his doctoral studies under the supervision of Prof. Dr. Lutz Johanning at the European Business School Oestrich Winkel. He is portfolio manager and partner at Source For Alpha, a quantitative asset management boutique.