Emerald | International Journal of Managerial Finance | Table of Contents

Canadian Corporate Payout Policy

Fri, 21 Jun 2013 00:00:00 +0100

Abstract

Purpose - The purpose of this paper is to examine cash dividends and stock repurchases in Canada from 1988 to 2006 and their relationship with earnings. Design/methodology/approach - The study uses logistic regressions to examine the likelihood of paying dividends and the timing of repurchases and OLS regressions to examine the level of payout. Findings - The fraction of dividend-paying firms declines from 1988 to 2001 and then slightly rebounds until the end of the sample period in 2006. Firm size, profitability, investment opportunities, and catering incentives explain the likelihood of paying dividends. Unlike U.S. firms, Canadian repurchase-only firm do not become important payers in terms of either the percentage of firms or the level of payout. Dividend-only firms pay out significant amount of cash. Firms with both regular dividends and regular repurchases pay out the largest amount. The payout of different groups of payers is determined by their earnings. Testing firms with both regular dividends and regular repurchases reveals that earnings, undervaluation, and availability of cash explains the timing of repurchases but earnings mainly explains the level of repurchases.Research limitations/implications - Canadian data are unavailable after 2006, which precludes investigating the potential implications of the financial crisis beginning in 2007. Practical implications - The findings show that stylized U.S. facts about dividends and repurchases cannot be generalized to Canada due to differences between Canada and the United States involving size, tax treatment, and institutional aspects of stock repurchases.Originality/value - This study contributes to the finance literature in several ways. First, we are the first to study the relationship between the level of payouts and earnings in Canada and its evolution during the past two decades. Second, although we extend Skinner’s (2008) study to Canadian firms, we find several major differences with his findings. For instance, unlike the extinct dividends-only firms in the United States, Canadian dividends-only firms are increasingly important in payouts. Also unlike the increase of the payout of repurchase-only firms in the United States, Canadian repurchase-only firms payout little in the way of dividends. These differences indicate the importance of international research on corporate payouts because not all U.S. findings can be generalized to other countries.

Dividend Investing - Performance and Explanations: A Practitioner Perspective

literatinetwork@emeraldinsight.com (Michael Clemens) — Fri, 21 Jun 2013 00:00:00 +0100

Abstract

Purpose - This paper aims to illustrate the total return and risk characteristics of ‘high dividend yield’ as a long-term equity investing strategy.Design/methodology/approach - Two data sets are examined for total return and risk characteristics. Firstly, the portfolios sorted on dividend yield as provided by F&F data set at Dartmouth College is examined for the period 1928-2011. Secondly, global equity indices for ‘high dividend yield’ stocks, ‘value’ stocks and ‘the market’ are examined for the period July 1995 to March 2012.Findings - Investing in high dividend-paying firms earns abnormal returns in a long short-strategy in the US and in world indices, confirming earlier studies. Different overlapping strategies and agency theory are used to provide explanations for the dividend strategy’s persistence. Research limitations/implications - While the US findings were significant at conventional levels, the results using the world indices had significance levels that were slightly below the usual academic cut off but may be acceptable to practitioners. Practical implications - Seemingly anomalous findings should disappear once reported yet the high dividend-paying strategy continues to persist and this article provides some explanations relating to the value premium, beta puzzle and agency theory. Originality/value - By using different databases earlier research is confirmed and also found to be robust across different time periods. The contribution of this paper is to link the value premium, the beta puzzle and agency issues of free cash flows together to explain the outperformance and persistence of dividend investing from a practitioner viewpoint.

Determinants and Effects of Option Listings: Evidence from ADRs

literatinetwork@emeraldinsight.com (Spencer A. Case, Janet Dierker Payne) — Fri, 21 Jun 2013 00:00:00 +0100

Abstract

Purpose - In this paper, we test the assertion that options act as a substitute for short sales by allowing investors an alternative way to act on bearish sentiment. An empirical test of this assertion requires a researcher to observe both types of firm - those that weren’t short sale constrained, as well as those that were. We examine the ability of options to alleviate the short sales constraint directly - in an environment where the constraint is likely to differ across firms in a systematic fashion, namely the market for American Depository Receipts (ADRs). Design/methodology/approach - We examine 190 option introductions on ADRs over the period of 1982 to 2006. The question of how ADRs are chosen for options listing, and whether those criteria differ from those found using purely domestic options is addressed using logistic regressions. We use the event study methods of Brown and Warner (1985) to examine the price effect of the listing. We use OLS regression to identify determinants of the cumulative abnormal return upon option listing. Independent variables are those indicated by existing literature that examines option listing on domestic securities. Findings - In an environment where the effective short sale constraint varies across firms, we find support for the contention that U.S. option listings reduce the effect of the short sales constraint, providing relief for investors who have negative sentiment about the stock and are subject to a short sale constraint. However, it does not appear that option listing entities seek out companies for which short sale constraints are stronger.Originality/value - Our hypotheses are similar to those of Mayhew and Mihov (2004) and Danielson and Sorescu (2001), but we assert that the ADR market is a more robust environment in which to test the hypotheses. This is due to the potentially large variation in the effective short sale constraints that results from the differences in their underlying home market legal and regulatory environments. In addition to relative short interest and the change in relative short interest, this environment allows us to use indicator variables to directly test the ability of options to substitute for short sales.

Profitability of momentum returns under alternative approaches

Fri, 21 Jun 2013 00:00:00 +0100

Abstract

Purpose - The analysis explores how momentum return changes with alternative computational methods and the extent to which the portfolio structure is important in the momentum context. Design/methodology/approach - The focus reflected in the prior research emphasises the method used by Jegadeesh and Titman (1993) and various extensions to test whether momentum returns exist. This study uses alternative methods of buying previous winners and short-selling previous losers to determine ‘if their’ impact significantly changes the returns. Findings - The current study clarifies the impact of several contributory factors that impact upon estimated momentum returns. The large sample of cleaned data upon which this study is based provides a higher degree of confidence that the findings are sound and not just a statistical anomaly.Practical implications - The research is important from a practitioner perspective as details of momentum return are presented for each country using different methods, providing information regarding the most profitable country in which to invest and whether the momentum return is sustainable under different formative approaches. Originality/value - One of the important contributions of this study is a detailed empirical analysis, presenting results in a global context rather than on a single country basis.

Evaluation of Malaysian Mutual Funds in the Maximum Drawdown Risk Measure Framework

Fri, 21 Jun 2013 00:00:00 +0100

Abstract

Purpose - This paper evaluates the risk-adjusted performance of the management styles of Malaysian mutual funds using nine modified performance evaluation measures generated by the maximum drawdown risk measure (M-DRM) based on the modern portfolio theory. The purpose is to report the findings in a manner which is realizable by the average investors and portfolio managers. Design/methodology/approach - This paper evaluates the performance of more than 400 Malaysian mutual funds using risk-adjusted returns over the two sub-periods of 2000 -2005 and 2006-2011. The M-DRM, as a different measure from downside risk, is applied to improve nine risk-adjusted performance measures of Sortino, Treynor, M-squared, Jensen’s alpha, information ratio (IR), MSR, upside partial ration (UPR), FPI, and leverage factor. It proposes a new single-factor model to test the maximum drawdown beta and alpha in the M-DRM framework.Findings - The evidence clearly indicates that the replacement framework in terms of MDB, the maximum drawdown beta, and the maximum drawdown CAPM can be replaced by the conventional frameworks in terms of MVB, beta, and the CAPM and also MSB, downside beta, and D-CAPM for modifying nine performance evaluation measures from the management styles of Malaysian mutual funds.Practical implications - The research evidence reported in this paper can be applied as input in the process of decision making by small and average investors and portfolio managers who are seeking the possibility of participating in the global stock market through mutual funds.Originality/value - This paper is the first study to estimate a new regression model in the M-DRM framework to evaluate the performance of Malaysian mutual funds. In addition, it proposes nine modified performance evaluation measures in the M-DRM framework for the first time.