The SSRN top ten financial papers, measured by hits for papers announced over the past sixty days, include a number of papers that may be of interest to investors.
Papers dealing with portfolio withdrawals
6. Pfau, Wade D. and Kitces, Michael E., Reducing Retirement Risk with a Rising Equity Glide-Path (September 12, 2013). Available at SSRN: http://ssrn.com/abstract=2324930 or http://dx.doi.org/10.2139/ssrn.2324930
Forum discussion: Bogleheads • View topic - "Rising Equity Glide Path" ?Abstract:
This study explores the issue of what is an appropriate default equity glide-path for client portfolios during the retirement phase of the life cycle. We find, surprisingly, that rising equity glide-paths in retirement – where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon – have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios. This result may appear counter-intuitive from the traditional perspective, which is that equity exposure should decrease throughout retirement as the retiree’s time horizon (and life expectancy) shrinks and mortality looms. Yet the conclusion is actually entirely logical when viewed from the perspective of what scenarios cause a client’s retirement to “fail” in the first place. In scenarios that threaten retirement sustainability – e.g., an extended period of poor returns in the first half of retirement – a declining equity exposure over time will lead the retiree to have the least in stocks if/when the good returns finally show up in the second half of retirement (assuming the entire retirement period does not experience continuing poor returns). With a rising equity glide-path, the retiree is less exposed to losses when most vulnerable in early retirement and the equity exposure is greater by the time subsequent good returns finally show up. In turn, this helps to sustain greater retirement income over the entire time period. Conversely, using a rising equity glide-path in scenarios where equity returns are good early on, the retiree is so far ahead that their subsequent asset allocation choices do not impact the chances to achieve the original retirement goal.
9. Frank, Larry R. and Mitchell, John B. and Pfau, Wade D., Lifetime Expected Income Breakeven Comparison between SPIAs and Managed Portfolios (August 29, 2013). Available at SSRN: http://ssrn.com/abstract=2317857 or http://dx.doi.org/10.2139/ssrn.2317857
Forum discussion : Bogleheads • View topic - Best age to purchase SPIAs ?Abstract:
This paper provides insight and guidance for the retiree decision making between whether to annuitize or manage their retirement savings. Tables and graphs demonstrate the breakeven age between annuitizing with a single premium immediate annuity (SPIA) versus managing a portfolio and the likelihood of outliving the breakeven cash flow sums for various annuitization ages (65 to 85), longevity percentiles of Period Life Tables, and portfolio allocations.
What are breakeven asset allocations below which a SPIA provides a higher lifetime expected total cash flow? Managed portfolios retain a balance at death while SPIAs have none. How does the cash flow breakeven comparison change when that balance is, or is not, considered? Does age matter in the decision to switch from a managed portfolio to a SPIA? Is there a different conclusion if different tables are used (Social Security Table "General Population" vs Annuity 2000 Table ("Healthy Population"))? How do good vs median vs poor markets affect the breakeven comparison? How do fees affected the comparison? Can the Annual Payout Rate (APR) of a SPIA be useful in the decision making process?
Papers dealing with market factors
5. Asness, Clifford S. and Frazzini, Andrea and Pedersen, Lasse Heje, Quality Minus Junk (August 21, 2013). Available at SSRN: http://ssrn.com/abstract=2312432 or http://dx.doi.org/10.2139/ssrn.2312432
We define a quality security as one that has characteristics that, all-else-equal, an investor should be willing to pay a higher price for: stocks that are safe, profitable, growing, and well managed. High-quality stocks do have higher prices on average, but not by a very large margin. Perhaps because of this puzzlingly modest impact of quality on price, high-quality stocks have high risk-adjusted returns. Indeed, a quality-minus-junk (QMJ) factor that goes long high-quality stocks and shorts low-quality stocks earns significant risk-adjusted returns in the U.S. and globally across 24 countries. The price of quality – i.e., how much investors pay extra for higher quality stocks – varies over time, reaching a low during the internet bubble. Further, a low price of quality predicts a high future return of QMJ.
Papers dealing with performance
2. Bortolotti, Bernardo and Fotak, Veljko and Megginson, William L., The Sovereign Wealth Fund Discount: Evidence from Public Equity Investments (September 17, 2013). Paolo Baffi Centre Research Paper No. 2013-140; FEEM Working Paper No. 22.2009. Available at SSRN: http://ssrn.com/abstract=2322745 or http://dx.doi.org/10.2139/ssrn.2322745
4. Jenkinson, Tim and Jones, Howard and Martinez, Jose Vicente, Picking Winners? Investment Consultants' Recommendations of Fund Managers (September 17, 2013). Available at SSRN: http://ssrn.com/abstract=2327042 or http://dx.doi.org/10.2139/ssrn.2327042Abstract:
Using a sample of 1,018 Sovereign Wealth Fund (SWF) equity investments in publicly traded firms and a control sample of 5,975 transactions by private-sector financial institutions over 1980-2012, we find that announcement-period abnormal returns of SWF investments are positive, but lower than those of comparable private-sector investments by approximately 2.67 percentage points. We do not find evidence of long-term stock price performance of SWF investment targets differing from that of private-sector investment targets. We do find, however, significant differences among SWFs which are only partially captured by the short-term market reaction: firms acquired by passive funds tend to underperform over the following three years, while positive abnormal returns are associated with actively monitoring SWFs. We conclude that SWFs’ corporate governance role tends to affect the value of the firm.
7. Bebchuk, Lucian A. and Brav, Alon and Jiang, Wei, The Long-Term Effects of Hedge Fund Activism (July 9, 2013). Columbia Business School Research Paper No. 13-66. Available at SSRN: http://ssrn.com/abstract=2291577 or http://dx.doi.org/10.2139/ssrn.2291577Abstract:
U.S. plan sponsors managing over $13 trillion rely on investment consultants for advice about which funds to invest in. Using survey data, we analyze what drives consultants’ recommendations of institutional funds, what impact these recommendations have on flows, and how much value they add to plan sponsors. We examine the aggregate recommendations of consultants with a share of over 90% of the U.S. consulting market. We find that consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows, but we find no evidence that these recommendations add value to plan sponsors.
Bogleheads • View topic - SSRN: Top 10 (hits) papers , August 5, 2013Abstract:
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 shareholders, and in particular activist hedge funds, have an adverse effect on the long-term interests of companies and their shareholders. While this “myopic activists” claim has been regularly invoked and has had considerable influence, its supporters have thus far failed to back it up with evidence. This paper presents a comprehensive empirical investigation of this claim and finds that it is not supported by the data.
We study the universe of about 2,000 interventions by activist hedge funds during the period 1994-2007, examining a long time window of five years following the intervention. We find no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions. These improvements in long-term performance, we find, are present also when focusing on the two subsets of activist interventions that are most resisted and criticized – first, interventions that lower or constrain long-term investments by enhancing leverage, beefing up shareholder payouts, or reducing investments and, second, adversarial interventions employing hostile tactics.
We also find no evidence that the initial positive stock price spike accompanying activist interventions fails to appreciate their long-term costs and therefore tends to be followed by negative abnormal returns in the long term; the data is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Finally, we find no evidence for concerns that activist interventions during the years preceding the financial crisis rendered companies more vulnerable and that the targeted companies therefore were more adversely affected by the crisis.
Our findings that the considered claims and concerns are not supported by the data have significant implications for ongoing policy debates on corporate governance, corporate law, and capital markets regulation. Policymakers and institutional investors should not accept the validity of the frequent assertions that activist interventions are costly to firms and their long-term shareholders in the long term; they should reject the use of such claims as a basis for limiting the rights and involvement of shareholders.
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