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Now showing items 1 - 16 of 80

  • Quenching Hell: The Mystical Theology of William Law – By Alan Gregory

    Joshua Davis  

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  • More Than Just Contrarians: Insider Trading in Glamour and Value Firms

    Alan Gregory   Rajesh Tharyan   Ian Tonks  

    This study examines the patterns of, and the long run returns to, directors' (insiders) trades along the value/glamour continuum. To test this, we deliberately exploit the different regulatory environment in the UK, and our sample covers all directors' share trades made in FTSE All Share stocks between 1986 and the end of 2003. Post trade share price performance was analysed over a 2 year period (to end 2005). We find that directors consistently trade in what appears to be a contrarian fashion, buying more "value" stocks and selling more "glamour" stocks, and also buying following price falls and selling following price rises. Our results show that directors' trading signals clearly generate significant positive abnormal returns in these value stocks on the "buy" side, but smaller and generally insignificant negative returns in the glamour stocks on the "sell" side. These abnormal returns persist for up to two-years after the initial directors' trade, and are concentrated in value stocks in general, and smaller value stocks in particular. The particular contribution of this paper is to analyse specifically what directors' trades add to a "na?ve" value-glamour strategy. We do this by looking at different definitions of "value" in defining trades, and also by controlling for different definitions of "value" in our benchmark portfolios, so that directors' trades are evaluated net of any value-glamour effect, variously defined. Having considered various ratios as candidates for defining "value" stocks, we find the consistent result, no matter how "value" is defined, is that directors' purchases in value stocks in general and small-value firms in particular generate significant abnormal returns, after allowing for size and alternative value/glamour effects in the benchmarks. These abnormal returns persist for over two-years after the initial directors' trade.
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  • Stock Market Patterns around Insiders' Trades: Are Women Really Different?

    Alan Gregory   Rajesh Tharyan   Ian Tonks  

    It has been argued that board diversity, represented by women's representation on boards of directors*, can enhance firm performance. However this argument relies on female directors being different from male directors. We examine whether there are differences in male and female directors in the way that they trade their own-company shares, since there are documented gender differences in risk aversion, self-confidence and ethical behaviour. We examine whether insiders in UK companies can time the market when they trade in their own- company stock, using a comprehensive dataset on all insiders' trades from 1994-2006 for FTSE All Share companies and AIM-listed companies. We find that in the 20 days before an insider's buy (sell) trade prices fall (rise) such that abnormal returns are -2.48% (+2.17%); in the 20 days after an insiders' buy (sell) trade, abnormal returns are 1.55% (-1.19%). We go on to examine whether the gender (male or female) of the insider differ in the information they posses about their own firms, how they trade on this information and how markets respond to their trades. We find no difference in the trading patterns and stock market response to insiders' gender differences after conditioning on the position of the insider. We further show that these results are robust to extending the analysis to longer term returns. Our results stand in marked contrast to those of Bharath, Narayanan and Seyhun (2009). The implication of our findings is that there is no difference in risk-aversion, self-confidence and dealing ethics of male versus female directors.
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  • The Expected Cost of Equity and the Expected Risk Premium in the UK

    Alan Gregory  

    In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on government bond (‘gilt’) with those of the realised and expected returns on equities. These estimates are frequently used to infer a risk premium relative to either the current yield on index-linked gilts or an ‘adjusted’ current yield measure. This is incorrect on two counts; first, inconsistent estimates of the risk-free rate are implied on the right-hand side of the capital asset pricing model; second, they compare the realised returns from a bond that carried inflation risk with the realised and expected returns from equities that may be expected to have at least some protection from inflation risk. The third, and most important, source of bias arises from uplifts to expected returns. If markets exhibit ‘excess volatility’, or if part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from the historical returns or the price growth must be used with great care when uplifting average expected returns to derive simple discount rates. Adjusting expected returns for the effect of such biases leads to lower expected cost of equity and risk premia than those that are typically quoted. Copyright
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  • Industry Cost of Equity Capital: UK Evidence

    Alan Gregory   Maria Michou  

    Abstract:  This paper explores the industry cost of equity capital for the UK. We replicate the Fama and French (1997) US analysis for UK industries, but additionally investigate the industry cost of equity capital obtained from a conditional CAPM, the Cahart (1997) four factor model, and the Al-Horani, Pope and Stark (2003) R&D model. In line with the Fama-French US results, the out of sample performance of all the models is disappointing Whilst the FF3F model has a somewhat higher explanatory power than the CAPM in terms of explaining past returns, the SMB and HML factor slopes show considerable variability through time. However, all our models of the cost of equity capital in the UK outperform a simple ‘beta one’ model, a result that has implications for the regulatory process. There is also some evidence to suggest that a conditional CAPM may be of interest to regulators. The new R&D model of Al-Horani et al. clearly has potential, in that over the limited period for which data is available it yields return errors not dissimilar to those found under the FF3F model, but exhibits slope coefficients on the fourth R&D factor that seem to be relatively stable.
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  • UK IPOs: Long Run Returns, Behavioural Timing and Pseudo Timing

    Alan Gregory   Cherif Guermat   Fawaz Al-Shawawreh  

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  • Cash Acquirers: Sources of Funding, Free Cash Flow, and Shareholder Returns

    Alan Gregory   Yuan-Hsin Wang  

    For a comprehensive sample of UK cash acquirers, we can reject the Free Cash Flow (FCF) hypothesis. Both at announcement and over the 60 month post acquisition window, high FCF firms out-perform low FCF firms. There is no evidence that high FCF, low q firms under-perform. In fact, they appear to be the best-performing sub- group at announcement and over the long term. Contrary to the expectation under the FCF hypothesis, it seems that the announcement period return difference between high FCF and low FCF firms is strongest amongst firms using internal finance. At announcement, low FCF, high q firms are the group of firms that exhibit the worst returns. This effect is robust in regression-based tests that control for factors shown to influence announcement returns elsewhere, and such tests also reveal that high pre-bid gearing has a weak but negative influence on announcement returns. In the longer term, over the 5 years post-bid low FCF firms as a whole exhibit significant negative performance, although the worst performing sub-group is the group of high q, high FCF firms. This particular effect appears to be driven by q being a proxy for over- valuation. We also show that low FCF, high q firms have the highest loadings on the SMB and HML factors, and that low FCF firms have higher loadings on these factors than high FCF firms. Our results are consistent with low FCF firms having a greater likelihood of being financially distressed, and high q firms being more likely to be over-valued.
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  • Foreign Acquisitions by UK Limited Companies: Short and Long-Run Performance

    Alan Gregory   Steve McCorriston  

    In this paper, we consider the short and long-run performance of UK firms following foreign acquisitions. Based on a near-exhaustive sample of significant foreign acquisitions by UK companies over the period 1985-1994, we show that short-run returns are insignificantly different from zero irrespective of the location of the acquisition. Further analysis reveals that the distribution of the event period returns is determined by changes in the exchange rate, the presence of the acquiring firm in the target country and by US tax reforms. While long-run returns are not significantly different from zero on average, they show considerable variation by region. Specifically, firms under-perform following acquisition in the US, show insignificant returns following acquisitions in the EU and acquisitions elsewhere show significant positive returns. Examination of the distribution of these returns suggest that, in accordance with the ownership-location-internalisation hypothesis of FDI, long-run performance is more likely to depend on the firm-specific advantages such as R&D.
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  • Insider trading in Glamour and Value firms

    Alan Gregory   Rajesh Tharyan   Ian Tonks  

    This study examines the patterns of, and the long run returns to, directors' trades along the value/glamour continuum. We find that directors consistently trade in what appears to be a contrarian fashion, buying more "value" stocks and selling more "glamour" stocks, and also buying following price falls and selling following price rises. Our results show that directors' trading signals clearly generate significant positive abnormal returns in these value stocks on the "buy" side, and some smaller but still significant negative returns in the glamour stocks on the "sell" side. These abnormal returns persist for up to two-years after the initial directors' trade, and are in excess of size and value/glamour benchmarks, implying that directors use more than a na?ve contrarian strategy, in making their trading decisions. We also show that these excess returns remain after controlling for varying definitions of "value" and "glamour", and also that abnormal returns are concentrated in smaller stocks in general, and smaller value stocks in particular.
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  • An Introduction to World Anglicanism – By Bruce Kaye

    Alan Gregory  

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  • Cash Acquirers: Free Cash Flow, Shareholder Monitoring, and Shareholder Returns

    Alan Gregory   Yuan-Hsin Wang  

    Although Jensen (1988) argues that high levels of free cash flow and unused borrowing capacity are likely to encourage low-value mergers, the "pecking order" theory offers a different perspective, where managers conserve cash flow to undertake positive NPV investments. We argue that the stronger position of shareholders, as opposed to firm managers, in the UK compared to the US makes the Free Cash Flow (FCF) hypothesis less likely to hold in the UK. In support of this, by analysing both announcement period and long term returns, we show that for a comprehensive sample of UK cash acquirers we can reject the Free Cash Flow (FCF) hypothesis. Our evidence is consistent with greater shareholder monitoring mitigating any agency problem associated with high FCF. Our results are also consistent with low FCF firms having a greater likelihood of being financially distressed.
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  • UK IPOs: Long Run Returns, Behavioural Timing and Pseudo Timing

    Alan Gregory   Cherif Guermat   Fawaz Al-Shawawreh  

    In this paper we examine a comprehensive set of 2,567 UK IPOs launched between mid-1975 and the end of 2004. We find compelling evidence of long run under- performance that persists for between 36 and 60 months post-flotation, depending on the precise method chosen to measure abnormal returns. Following Schultz (2003), we ask whether our results are consistent with pseudo-timing . Equally-weighted returns in calendar time provide further evidence of under-performance, a result that favours the Loughran and Ritter (2000) behavioural timing hypothesis rather than the Schultz (2003) pseudo-timing hypothesis. However, when we measure value- weighted returns in calendar time we find that abnormal returns are not significantly different from zero. To some degree, this result is consistent with the findings of other studies which show that IPO under-performance is concentrated in smaller firms. However, we also show that these value-weighted returns are heavily influenced by the high abnormal returns associated with UK privatisations.
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  • Industry Cost of Capital: UK Evidence

    Alan Gregory   Maria Michou  

    This paper explores the cost of equity capital at industry level in the UK. We replicate the Fama and French (1997) US analysis for UK industries, but also investigate the results obtained from both a conditional CAPM and the Cahart (1997) four factor model. In addition, we extend the work of Gregory, Harris and Michou (2003) to investigate whether the factors in the three and four factor model have the properties one would expect if they were capturing systematic risk. Whilst we find some support for SMB and HML (though not momentum) reflecting macroeconomic risk, the out of sample performance of the model in predicting future returns is little different than that of the CAPM. However, both the CAPM and the three factor model outperform a simple beta one model, a result that has implications for the regulatory process. There is also some evidence to suggest that a conditional CAPM may be of interest to regulators.
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  • How Low is the UK Equity Risk Premium?

    Alan Gregory  

    In this paper, it is argued that previous estimates of the UK arithmetic risk premium show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on Government Bond ( Gilt ) to realised returns on equities. These estimates are frequently used to infer a risk premium relative to the current yield on index-linked gilts. This is incorrect on two counts; first, inconsistent estimates of the risk free rate are implied on the right hand side of the CAPM (Jenkinson, 1993); second, they compare realised returns from a bond which carried inflation risk with realised returns from equities which may be expected to have at least some protection from inflation risk. The second source of bias arises from the difference between arithmetic and geometric premia. If markets exhibit excess volatility (Shiller 1981), or if part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from historical returns or price growth must be used with great care when uplifting geometric averages to arithmetic averages. Adjusting expected returns for the effect of such biases leads to lower ex ante premia than those that are typically quoted. At current market values, the arithmetic premium ranges between 2% and 4.3%, although the higher estimates require optimistic assumptions concerning growth; the geometric equivalent ranges between 1.5% and 3.3%.
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  • Industry Cost of Capital: UK Evidence

    Alan Gregory   Maria Michou  

    This paper explores the cost of equity capital at industry level in the UK. We replicate the Fama and French (1997) US analysis for UK industries, but additionally investigate the results obtained from a conditional CAPM, the Cahart (1997) four factor model, and the Al-Horani, Pope and Stark (2003) R&D model. In line with the Fama-French US results, the out of sample performance of all the models is disappointing Whilst the FF3F model has a somewhat higher explanatory power than the CAPM in terms of explaining past returns, the SMB and HML factor slopes show considerable variability through time. However, all our models outperform a simple beta one model, a result that has implications for the regulatory process. There is also some evidence to suggest that a conditional CAPM may be of interest to regulators. The new R&D model of Al- Horani et al clearly has potential in that over the limited period for which data is available it yields return errors not dissimilar to those found under the FF3F model, but exhibits slope coefficients on the fourth R&D factor which seem to be relatively stable.
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  • Industry Cost of Capital in the UK

    Alan Gregory   Maria Michou  

    Performance of all models is disappointing sim (but worse) 3FM has some merit, in that HML and SMB hav in part) characteristics of rationally priced risk fac WML does not But does not decisively out-perform CAPM in return Conditional CAPM also has some merit But hard to recommend either 4FM or Beta=1 mo Clear need for more UK-specific research on tr capital
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