Selected Essays in Empirical Asset Pricing (eBook)

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.

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

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%.