ABSTRACT It is not uncommon for mutual fund managers to make significant adjustments to their all... more ABSTRACT It is not uncommon for mutual fund managers to make significant adjustments to their allocations before closing out their portfolios at the end of the quarter. The common wisdom on the street and in the financial press is that part of this activity is due to "window dressing" which has become widespread as investors are becoming increasingly sophisticated in analyzing fund holdings as well as past returns in an effort to detect manager skill. So far, the academic literature on equity mutual funds has provided little empirical evidence to this effect. We analyze the semi-annual holdings and daily net asset values of 4,025 U.S. domestic equity mutual funds over the period from 1997 to 2002 and find strong evidence of increased turnover during the last days of the quarter, consistent with window dressing. In particular, we show that growth funds and funds with poor recent performance are more likely to report misleading holding. Furthermore, the end of quarter trading activity is not easily accounted for by momentum/relative strength strategies and is not associated with strategies that on average provide any added value to investors, even before accounting for expenses. Nor can liquidity costs explain these findings.
International Journal of Commerce and Management, Jun 21, 2013
PurposeThe objective of this study is to test whether financial flexibility has value. Using the ... more PurposeThe objective of this study is to test whether financial flexibility has value. Using the current financial crisis, the authors investigate whether firms that built up financial flexibility over the years preceding the crisis yield superior performance during the financial crisis.Design/methodology/approachFinancial flexibility is measured along the following dimensions: cash and cash equivalents, debt (short‐term and total) and net debt. These proxies are measured as an average over the five years prior to the crisis, from September 2002 to August 2007. Firms are then sorted into ten portfolios and monthly stock returns for each portfolio are evaluated over the crisis period from September 2007 to March 2010.FindingsThe authors' results show that high pre‐crisis levels of cash do not seem to have a positive impact on firm value during the crisis. However, the results provide evidence that high pre‐crisis levels of debt had a negative impact on firm value during the latest financial crisis, supporting the hypothesis that financial flexibility has value.Originality/valueThe originality of the authors' approach is to evaluate the value of financial flexibility during a financial crisis. The recent financial crisis offers an ideal test case to evaluate whether financial flexibility has indeed value for the firm.
To create value, a firm must invest in projects that provide a return greater than the cost of ca... more To create value, a firm must invest in projects that provide a return greater than the cost of capital. The cost of capital is not observed and its estimation requires assumptions on investors’ consumption, savings, and portfolio decisions. We review the academic literature on firms’ cost of financial capital and the estimation of the different components: cost of equity, cost of debt, and their relative weights. We also review various approaches to estimating the cost of capital and the assumptions justifying these approaches.
ABSTRACT It is not uncommon for mutual fund managers to make significant adjustments to their all... more ABSTRACT It is not uncommon for mutual fund managers to make significant adjustments to their allocations before closing out their portfolios at the end of the quarter. The common wisdom on the street and in the financial press is that part of this activity is due to "window dressing" which has become widespread as investors are becoming increasingly sophisticated in analyzing fund holdings as well as past returns in an effort to detect manager skill. So far, the academic literature on equity mutual funds has provided little empirical evidence to this effect. We analyze the semi-annual holdings and daily net asset values of 4,025 U.S. domestic equity mutual funds over the period from 1997 to 2002 and find strong evidence of increased turnover during the last days of the quarter, consistent with window dressing. In particular, we show that growth funds and funds with poor recent performance are more likely to report misleading holding. Furthermore, the end of quarter trading activity is not easily accounted for by momentum/relative strength strategies and is not associated with strategies that on average provide any added value to investors, even before accounting for expenses. Nor can liquidity costs explain these findings.
International Journal of Commerce and Management, Jun 21, 2013
PurposeThe objective of this study is to test whether financial flexibility has value. Using the ... more PurposeThe objective of this study is to test whether financial flexibility has value. Using the current financial crisis, the authors investigate whether firms that built up financial flexibility over the years preceding the crisis yield superior performance during the financial crisis.Design/methodology/approachFinancial flexibility is measured along the following dimensions: cash and cash equivalents, debt (short‐term and total) and net debt. These proxies are measured as an average over the five years prior to the crisis, from September 2002 to August 2007. Firms are then sorted into ten portfolios and monthly stock returns for each portfolio are evaluated over the crisis period from September 2007 to March 2010.FindingsThe authors' results show that high pre‐crisis levels of cash do not seem to have a positive impact on firm value during the crisis. However, the results provide evidence that high pre‐crisis levels of debt had a negative impact on firm value during the latest financial crisis, supporting the hypothesis that financial flexibility has value.Originality/valueThe originality of the authors' approach is to evaluate the value of financial flexibility during a financial crisis. The recent financial crisis offers an ideal test case to evaluate whether financial flexibility has indeed value for the firm.
To create value, a firm must invest in projects that provide a return greater than the cost of ca... more To create value, a firm must invest in projects that provide a return greater than the cost of capital. The cost of capital is not observed and its estimation requires assumptions on investors’ consumption, savings, and portfolio decisions. We review the academic literature on firms’ cost of financial capital and the estimation of the different components: cost of equity, cost of debt, and their relative weights. We also review various approaches to estimating the cost of capital and the assumptions justifying these approaches.
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Papers by Iwan Meier