Article "Hedge Funds and Stock Market Efficiency" by Joni Kokkonen (Catolica) and Matti Suominen has been accepted for publication in the Management Science.

Abstract:     

We measure misvaluation using the discounted residual income model. As shown in the literature, this measure of stocks’ misvaluation significantly explains their future cross-sectional returns. We measure the market level misvaluation (market inefficiency) by the misvaluation spread: the difference in the misvaluation of the most over- and undervalued shares. We show that the misvaluation spread is a strong predictor of a misvaluation based long-short portfolio’s returns, reinforcing the hypothesis that it proxies for the level of mispricing in the stock market. Using data on hedge fund returns, hedge fund industry AUM, flows, and individual hedge fund holdings, we present evidence that hedge funds’ trading reduces market level misvaluation. Our results are robust across different time periods and are not driven by market liquidity. Moreover, we find that mutual funds do not have a similar, price-correcting effect as hedge funds.

Paper can be downloaded at SSRN: http://ssrn.com/abstract=2133394

Article "Funding vs. real economy shock: The impact of the 2007-2009 crisis on small firms' credit availability" by Gunhild Berg (World Bank) and Karolin Kirschenmann has been accepted for publication in the Review of Finance.

Abstract:     

We analyze how banks adjust their lending to small firms after distinct shocks from the cross-border transmission of the 2007-2009 crisis by using unique loan application and contract data from AccessBank Azerbaijan. These data allow us to disentangle the effects of a funding shock from the effects of a real shock. Contrary to conventional assumptions, we find that the funding shock works through reduced prospecting — as opposed to tightened lending standards — and leads to fewer loan applications among new applicants in particular, which improves the borrower pool. The real economy shock instead works through loan approval and affects SME rather than micro borrowers.

Information:

Paper can be downloaded from SSRN: link to the article.

Professor Markku Kaustia appointed as an Associate Editor for the Journal of Economic Behavior and Organization (JEBO).

JEBO is the leading field journal for behavioral economics, covering a wide range of topics from finance to education, labor, politics, etc.

The Economist article "Risk off: Why some people are more cautious with their finances than others" that appeared on January 25, 2014 printed magazine.

The article discusses the results of working paper "Labor Market Experiences and Portfolio Choice: Evidence from the Finnish Great Depression" by Samuli Knüpfer (London Business School), Elias Rantapuska (Aalto University), and Matti Sarvimäki (Aalto University).

Article “Board expertise: Do directors from related industries help bridge the information gap?” by Nishant Dass (Georgia Institute of Technology), Omesh Kini (Georgia State University), Vikram Nanda (Georgia Institute of Technology), Bünyamin Önal, and Jun Wang (City University of New York) has been accepted for publication in The Review of Financial Studies.

Abstract
We investigate the importance of board expertise by analyzing the role of “directors from related industries” (DRIs) on a firm’s board. DRIs are officers and/or directors of companies in the upstream (supplier) or downstream (customer) industries of the firm. About 40% of firm-years in our sample have at least one DRI. We propose and test information, market structure, and agency hypotheses about when DRIs are likely to add value. Consistent with the information hypothesis, DRIs are present when the information gap is more severe, such as in innovative firms/industries and in firms with less informative stock prices. Consistent with the market structure hypothesis, DRIs are also more likely in firms with larger market share and in more concentrated or vertically integrated industries. After correcting for endogeneity, DRIs have an economically significant impact on firm value and performance – especially when information problems are worse and boards have relatively greater power to monitor managers. Hence, a possible explanation for DRIs not being sought more widely is managerial resistance to monitoring by a better informed board. Finally, DRIs appear to enhance the ability of firms to handle negative industry shocks, suggesting that they narrow the information gap.

Information:
Download the article here.

Markku Kaustia and Milla Perttula won the Emerald 2013 Award for Excellence – Outstanding Paper Award for their article “Overconfidence and debiasing in the financial industry” published in Review of Behavioral Finance.

Every year Emerald invites each journal’s Editorial Team to nominate what they believe has been that title’s Outstanding Paper and up to three Highly Commended Papers from the previous year (2012). Further information regarding the Awards for Excellence can be found at the following site: www.emeraldinsight.com/literati.

Abstract of the awarded article

Purpose – The purpose of this paper is to measure overconfidence amongst finance professionals in domain relevant knowledge, and test for the impact of different debiasing methods.
Design/methodology/approach – The approach used was survey field experiments with varying debiasing attempts.
Findings – The subjects were overconfident in terms of probability calibration, better-than-average beliefs, and unfounded confidence. Debiasing attempts yielded mixed results. Explicit written warnings reduced better-than-average-type of overconfidence. There was a further strong effect from attending lectures on investor psychology covering relevant examples. In contrast, there was only
limited success in reducing miscalibration in probability assessments.
Research limitations/implications – Different types of overconfidence are distinct and respond differentially to debiasing. Future research on debiasing professional judgment should concentrate on testing in-depth/personally engaging methods.
Practical implications – It is important for bankers to acknowledge the dangers of overconfidence. Correct confidence interval calibration is needed in order to have a sense of the risks involved in different asset allocation policies and trading strategies. Bankers should also be able to help their clients avoid overconfidence.
Social implications – Debiasing overconfidence in the finance industry likely carries public benefits. The results imply that this task is not easy, but not impossible either. The authors think further investment in this endeavor is justified.
Originality/value – Documenting an important judgment bias among finance professionals and estimating the effects of debiasing.

Citation

Kaustia, Markku and Perttula, Milla, 2012, “Overconfidence and debiasing in the financial industry”, Review of Behavioral Finance 4(1), 46-62. DOI: 10.1108/19405971211261100

For more information please contact Markku Kaustia.

Article “Do hedge funds supply or demand liquidity?” by Petri Jylhä (Imperial College), Kalle Rinne (Luxembourg School of Finance), and Matti Suominen has been accepted for publication in the Review of Finance.

Abstract
Regressing hedge funds’ returns on returns to a long-short contrarian trading strategy, a measure of the returns from providing liquidity, we find that hedge funds typically supply liquidity in the stock market. In the cross-section, strict redemption restrictions and large fund size increase funds’ propensity to supply liquidity. In time-series, poor market liquidity and good funding conditions increase funds’ propensity to supply liquidity. Although the hedge funds typically supply liquidity, during crises they demand liquidity. We also find that increases in the amount of speculative capital improve market liquidity and reduce the amount of short-term return reversals and volatility.

Information:
Download the article here.

Article “Firm expansion and stock price momentum,” by Peter Nyberg and Salla Pöyry (Hanken School of Economics) has been accepted for publication in the Review of Finance.

Abstract
We document a significant and robust connection between firm-level asset changes and return momentum. Momentum profits are large and significant for firms that have experienced large asset expansions or contractions, whereas they otherwise are small and often insignificant. The interaction pattern is not subsumed by previously documented drivers of momentum and shows up in market states where prior literature has documented an absence of momentum profits. Furthermore, we find a positive time-series relationship between aggregate asset growth and return momentum, and the effect of aggregate asset growth is stronger than that of variables related to business cycles and investor sentiment. While most existing models of firm investment and momentum cannot explain our results, recent real options models appear to hold the most promise.

Information:
For more information, read the article and the online appendix.

Article “Do investors buy what they know? Product market choices and investment decisions,” by Matti Keloharju, Samuli Knüpfer (London Business School), and Juhani Linnainmaa (Chicago Booth) has been accepted for publication in The Review of Financial Studies.

Abstract
This paper shows individuals' product market choices influence their investment decisions. Using microdata from the brokerage and automotive industries, we find a strong positive relation between customer relationship, ownership of a company, and size of the ownership stake. Investors also are more likely to purchase and less likely to sell shares of companies they frequent as customers. These effects are stronger for individuals with longer customer relationships. A merger-based natural experiment supports a causal interpretation of our results. We find weaker causality in the other direction: inheritances and gifts of stocks have only a modest effect on individuals' patronage decisions. A setup in which customer-investors regard stocks as consumption goods, not just as investments, seems to best explain our results.

Information:
Download the article here.

Heli Huvinen's Finance Master's thesis “Easy as ABC? Political connections and zoning of service station stores” investigates whether the political connections of the S Group coincide with more favorable zoning decisions for the S Group owned ABC service stations compared to the service stations of their less politically connected peers.

Keywords: ABC, S Group, Service Stations, Zoning Decisions, Political Connections

Download the thesis (pdf, 710 KB)

SUOMEKSI: Poliittiset kytkökset ja ABC-asemien kaavoitus

Heli Huvisen rahoituksen pro gradu “Easy as ABC? Political connections and zoning of service station stores” tutkii S-ryhmän poliittisten kytkösten vaikutuksia ABC-liikennemyymälöiden kaavoituspäätöksissä verrattuna vähemmän poliittisesti kytkeytyneiden kilpailijoiden kaavapäätöksiin.

Avainsanat: ABC, S-ryhmä, liikennemyymälä, kaavoituspäätökset, poliittiset kytkökset

Lataa pro gradu -tutkielma (englanniksi, pdf, 710 KB)

The New York Times article "What High-I.Q. Investors Do Differently" by Robert Shiller that appeared on February 26, 2012 discusses the results of "IQ and Stock Market Participation" by Mark Grinblatt (UCLA), Matti Keloharju, and Juhani Linnainmaa (Chicago Booth).

A January 19, 2012 Bloomberg Business Week news story "Smart Money Owns More Equities Says IQ Study of Who Buys Stocks" by Ksenia Galouchko and Katia Porzecanski also discusses the same research article.

The "IQ and Stock Market Participation" article was published in The Journal of Finance December 2011 issue. Download the article as a pdf file.

Professor Vesa Puttonen and Finance students Tomi Fyrqvist, Eetu Isto, Jukka Leponen, Teemu Mattila, Markku Tervo, Tuomas Toiviainen, Kaisa Valtanen, and Katrin Vatiska prepared a report on the European Banking Authority's stress test results of European Banks.

Download the report (pdf, 2MB)

“Cyclical default and recovery in stress testing loan losses” by Esa Jokivuolle (Aalto University and Bank of Finland) and Matti Virén (University of Turku and Bank of Finland) was accepted for publication in Journal of Financial Stability.

Abstract
We present a macro variable-based empirical model for corporate bank loans' credit risk. The model captures the well-known positive relationship between probability of default (PD) and loss given default (LGD; ie, the inverse of recovery) and their counter-cyclical movement with the business cycle. In the absence of proper micro data on LGD, we use a random-sampling method to estimate the annual average LGD. We specify a two equation model for PD and LGD which is estimated with Finnish time-series data from 1989-2008. We also use a system of time-series models for the exogenous macro variables to derive the main macroeconomic shocks which are then used in stress testing aggregate loan losses. We show that the endogenous LGD makes a considerable difference in stress tests compared to a constant LGD assumption.

"Cross-border relocations of headquarters in Europe " by Tomi Laamanen (University of St. Gallen), Tatu Simula, and Sami Torstila was accepted for publication in Journal of International Business Studies. Journal of International Business Studies is on the list of 45 journals Financial Times uses to rank business schools, and is currently 3rd by impact factor (4.184) in the Business category of the ISI Journal Citation Reports.

Abstract
This paper analyzes the relocations of both corporate and regional headquarters in a multi-country setting. On the basis of a dataset of 52 cross-border headquarters relocations in Europe during 1996-2006, we document an increasing trend towards relocation, push and pull factors affecting headquarters location choice, and catalyzing factors that affect the relocation decision. High taxes and a high employment rate represent push factors that we find to increase the likelihood of headquarters relocation. In particular, at the mean rate of corporate tax, a one percent point increase in tax translates into a 6.8% increase in headquarters relocation likelihood. In contrast, central location and low taxes represent pull factors that increase the attractiveness of the headquarters location. In terms of catalyzing factors, we find that export-oriented companies and regional headquarters have a higher tendency to relocate. As a whole, we extend the existing research by putting forward a conceptual framework of headquarters relocation decisions and by providing novel empirical evidence on the headquarters relocation phenomenon. Our findings contribute to an improved understanding of the determinants of corporate headquarters relocation decisions and provide important tax policy considerations for public policy decision makers in individual European countries and in the European Commission.

More info
Read the article on the publishers' website

An article "Corporate governance, finance, and the real sector" by Paolo Fulghieri (UNC) and Matti Suominen was accepted for publication in the Journal of Financial and Quantitative Analysis.

Abstract
This paper presents a theory of the linkages between corporate governance, corporate finance and the real sector of an economy. We examine a model of industry equilibrium with endogenous entry. We show that poor corporate governance and low investor protection generates less competitive economies, populated by firms with more insider ownership and greater leverage. The quality of the corporate governance system can also affect an economy's industrial structure: better corporate governance promotes the development of sectors more exposed to moral hazard, such as the high-technology industry. We also show that entrepreneurs may have a preference for "extreme" corporate governance systems, where the quality of corporate governance and the level of investor protection are either very high or very low. This suggests that entrepreneurs operating in economies endowed with a corporate governance system of low-quality may have little or no incentive to seek (or to lobby for) an improvement of the governance system of their economy. Finally we show that financial liberalizations facilitate firm entry and the adoption of more productive technologies, promoting economic growth. Our stylized model generates predictions that are consistent with several observed empirical regularities.

Download the paper (pdf)

An article "The gender effect in risky asset holdings" by Marja-Liisa Halko (Aalto, Economics), Markku Kaustia, and Elias Alanko (OP-Pohjola Group) was accepted for publication in the Journal of Economic Behavior and Organization.

Abstract
We study the relation between gender and stock holdings in Finland, a particularly gender equal country. We show that it is crucial to control for risk aversion using a measure of subjective risktaking, rather than measures derived from abstract gambles. Controls related to financial knowledge and resources also explain the gender difference. The residual effect of the male gender on the conditional equity share, after all appropriate controls, is 3 percentage points and statistically significant. The effect on stock market participation on the other hand is close to zero or negative, so men contribute more to the nonparticipation puzzle conditional on covariates. The gender difference mainly works through women’s higher risk aversion, which we find extends to finance professionals and wealthy private banking customers.

Download the paper here.

Article "IQ, trading behavior, and performance" by Mark Grinblatt (UCLA), Matti Keloharju and Juhani Linnainmaa (Chicago Booth) has been accepted for publication in the Journal of Financial Economics.

Abstract
We analyze whether IQ influences trading behavior, performance, and transaction costs. The analysis combines equity return, trade, and limit order book data with two decades of scores from an intelligence test administered to nearly every Finnish male of draft age. Controlling for a variety of factors, we find that high-IQ investors are less subject to the disposition effect, more aggressive about tax-loss trading, and more likely to supply liquidity when stocks experience a one-month high. High-IQ investors also exhibit superior market timing, stock-picking skill, and trade execution.

Information:
Download the article here.

Article "Peer performance and stock market entry" by Markku Kaustia and Samuli Knüpfer (LBS) has been accepted for publication in the Journal of Financial Economics.

Abstract
Peer performance can influence the adoption of financial innovations and investment styles. We present empirical evidence of this type of social influence: recent stock market returns that local peers experience strongly influence an individual's stock market entry decision. This effect is limited to positive returns that encourage entry, whereas negative returns do not make entry less likely. Market returns, media coverage, returns on locally held stocks, omitted local variables, and stock purchases within households do not drive our results. This type of social influence may partly explain, among other things, why participation rates tend to sharply increase in times of high market returns.

Information:
Download the article here.

Article "IQ and stock market participation" by Mark Grinblatt (UCLA), Matti Keloharju, and Juhani Linnainmaa (U Chicago) has been accepted for publication in the Journal of Finance.

Abstract
Stock market participation is monotonically related to IQ, controlling for wealth, income, age, and other demographic and occupational information. The high correlation between IQ, measured early in adult life, and participation, exists even among the affluent. Supplemental data from siblings, studied with an instrumental variables approach and regressions that control for family effects, demonstrate that IQ’s influence on participation extends to females and does not arise from omitted familial and non-familial variables. High-IQ investors are more likely to hold mutual funds and larger numbers of stocks, experience lower risk, and earn higher Sharpe ratios. We discuss implications for policy and finance research.

Information:
Download the article here.
(The internet appendix of additional results referred to available here)

Professor Matti Keloharju has won the Best Conference Paper Award at the 2010 European Finance Association Meeting in Frankfurt.

The title of the winning paper is “Do Smart Investors Outperform Dumb Investors?” and it is a joint work with Professors Mark Grinblatt (University of California in Los Angeles) and Juhani Linnainmaa (University of Chicago).

The Best Paper Award is the highest distinction awarded for an academic paper during this prestigious conference. More than 1,300 manuscripts were submitted to the conference, 220 were selected to its program, and three papers were awarded the Best Paper Prize.

The awarded paper is the first to uncover a direct link between cognitive ability and investment performance. Combining data from ability tests performed by the military with trading records of 87,000 investors, the paper finds that smart investors’ purchases are informative about future stock price movements. The influence of ability on stock-picking skill is particularly strong for returns measured two days after the trade, when the purchases of the smartest investors outperform the purchases of their below-average ability peers at an annualized rate of about 11% per year. High ability investors’ purchases earn superior and significant returns up to one month in the future. The performance of smart investors’ sell transactions does not differ significantly from that of their lower-ability peers.

More information:

Matti Keloharju's homepage

EFA confrence website