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Journal Artikel

Empirical asset pricing via machine learning: Evidence from the European stock market

Wolfgang Drobetz, Tizian Otto
Journal of Asset Management | 11/2021 | Forthcoming
This paper evaluates the predictive performance of machine learning methods in forecasting European stock returns. Compared to a linear benchmark model, interactions and nonlinear effects help improve the predictive performance. But machine learning models must be adequately trained and tuned to overcome the high dimensionality problem and to avoid overfitting. Across all machine learning methods, the most important predictors are based on price trends and fundamental signals from valuation ratios. However, the models exhibit substantial variation in statistical predictive performance that translate into pronounced differences in economic profitability. The return and risk measures of long-only trading strategies indicate that machine learning models produce sizeable gains relative to our benchmark. Neural networks perform best, also after accounting for transaction costs. A classification-based portfolio formation, utilizing a support vector machine that avoids estimating stock-level expected returns, performs even better than the neural network architecture.

Valuing start-up firms: A reverse-engineering approach for fair-value multiples from venture capital transactions

Johannes Barg, Wolfgang Drobetz, Paul P. Momtaz
Finance Research Letters | 03/2021 | Forthcoming
The valuation of start-up firms is challenging, yet highly relevant for entrepreneurs and financiers alike. We reverse-engineer fair-value multiples by comparing the firm value at the time of financing with the firm value at the time of exit. Our framework produces reliable valuation multiples from observed venture capital transactions per industry and financing round. Despite their simplicity, sanity checks confirm that our multiples are highly performant in describing common valuation characteristics. Valuation multiples are higher when more experienced investors are involved, and when the exit occurs through an IPO rather than an M&A. In contrast, later stage financing rounds and larger investment consortia are associated with lower valuation multiples.

Institutional ownership and firm performance in the global shipping industry

Wolfgang Drobetz, Sebastian Ehlert, Henning Schröder
Transportation Research Part E: Logistics and Transportation Review | 01/2021 | Forthcoming
We examine the effect of institutional investors on the valuation of listed shipping firms. Institutional investors have a positive influence on the market value of shipping firms, confirming that institutional ownership is a “universal” corporate governance mechanism. This valuation effect is more pronounced in firms dominated by institutional investors with a short-term investment horizon. It is also stronger in firms with high stock liquidity, suggesting that short-term investors, through the threat of exit, are able to mitigate agency conflicts and improve corporate governance. Investment regressions indicate that shipping firms with a larger fraction of short-term investors are better able to exploit growth opportunities.

The economics of law enforcement: Quasi-experimental evidence from corporate takeover law

Gishan Dissanaike, Wolfgang Drobetz, Paul P. Momtaz, Jörg Rocholl
Journal of Corporate Finance | 12/2020 | Forthcoming
This paper examines the impact of takeover law enforcement on corporate acquisitions. We use the European Takeover Directive as a natural experiment, which harmonizes takeover law across countries, while leaving its enforcement to the discretion of individual countries. We exploit this heterogeneity in enforcement quality across countries in a difference-in-differences-in-differences model, while employing an overall inductive research approach, following Karpoff and Whittry’s (2018) recommendation. We find that acquirer returns increase in countries with improvements in takeover law, driven by better target selection and lower cost of financing. The increase in acquirer returns is lower in weak enforcement jurisdictions, which we identify by developing a novel Takeover Law Enforcement Index (TLEI). The findings show that takeover law can mitigate agency conflicts, but its true value depends on its enforcement. Our results are strongly robust to alternative model specifications.

The effects of geopolitical risk and economic policy uncertainty on dry bulk shipping freight rates

Wolfgang Drobetz, Konstantinos Gavriilidis, Styliani-Iris Krokida, Dimitris Tsouknidis
Applied Economics | 12/2020 | Forthcoming
We examine the effects of geopolitical risk (GPR) and economic policy uncertainty (EPU) on shipping freight rates using a Bayesian VAR model. A positive shock to global GPR has an immediate positive, but gradually diminishing, effect on dry bulk shipping freight rates. This effect is driven by global rather than country-specific GPR shocks. Positive shocks to EPU indices for the U.S., Brazil, and China trigger a negative response of dry bulk shipping freight rates that builds gradually over several months. Historical cumulative effects of both GPR and EPU shocks on freight rates can be large and of different signs during different subperiods. Our results are important for both shipowners and charterers when fixing chartering strategies and prioritizing investments in newbuilding or second-hand vessels.

Policy uncertainty, investment, and the cost of capital

Wolfgang Drobetz, Sadok El Ghoul, Omrane Guedhami, Malte Janzen
Journal of Financial Stability | 11/2020
We examine the effect of economic policy uncertainty on the relation between investment and the cost of capital. Using the news-based index developed by Baker et al. (2016) for twenty-one countries, we find that the strength of the negative relation between investment and the cost of capital decreases during times of high economic policy uncertainty. An increase in policy uncertainty reduces the sensitivity of investment to the cost of capital most for firms operating in industries that depend strongly on government subsidies and government consumption as well as in countries with high state ownership. Consistent with the price informativeness channel, we find that an increase in policy uncertainty reduces the investment-cost of capital sensitivity for firms from more opaque countries, firms with low analyst coverage, firms with no credit rating, and small firms. We conclude that economic policy uncertainty distorts the fundamental relation between investment and the cost of capital.

Institutional investment horizons and firm valuation around the world

Wolfgang Drobetz, Simon Döring, Sadok El Ghoul, Omrane Guedhami, Henning Schröder
Journal of International Business Studies | 09/2020 | Forthcoming
Using a comprehensive dataset of firms from 34 countries, we study the effect of institutional investors’ investment horizons on firm valuation around the world. We find a positive relation between institutional ownership and firm value that is driven by short-horizon institutional investors. Accounting for the interaction between investors’ investment horizon and nationality, we show that foreign short-horizon institutions, which are more likely to discipline managers through the threat of exit rather than engaging in monitoring made costly by the liability of foreignness, are the investor group with the strongest effect on firm value. Reinforcing the threat of exit channel, we find that the value-enhancing effect of short-horizon investors is stronger in the presence of multiple short-horizon investors, who are more likely to engage in competitive trading. The positive valuation effect of short-horizon investors is stronger when stock liquidity is high, which makes the exit threat more credible, and in firms prone to free cash flow agency problems. Overall, our results are consistent with short-horizon institutional investors, especially foreign institutional owners, affecting firm value by disciplining managers through a credible threat of exit.

Cross-country determinants of institutional investors’ investment horizons

Wolfgang Drobetz, Simon Döring, Sadok El Ghoul, Omrane Guedhami, Henning Schröder
Finance Research Letters | 06/2020 | Forthcoming
Using a large dataset of firms from 35 countries, we study the country-level determinants of institutional investors’ investment horizons. We show that an equity investor-friendly institutional environment is more important for long-term investors, while short-term investors seem to be less concerned about the quality of the financial and legal environment. Beyond the financial and legal structure, the cultural environment and economic policy uncertainty in a country are other important determinants of investor horizons. These findings improve our understanding of cross-country differences in the corporate governance role, i.e., engagement vs. exit, of institutional investors.

Antitakeover provisions and firm value: New evidence from the M&A market

Wolfgang Drobetz, Paul P. Momtaz
Journal of Corporate Finance | 06/2020
New evidence from acquisition decisions suggests that antitakeover provisions (ATPs) may increase firm value when internal corporate governance is sufficiently strong. We document that, in Germany, firms with stronger ATPs, and particularly supermajority provisions, are better acquirers. Managers of high-ATP firms create value in acquisitions by making governance-improving deals. They are more likely to engage in acquisitions that reduce their own entrenchment level and less likely to invest in declining industries. The empirical evidence is consistent with a short-termist interpretation. Takeover threats can induce myopic investment decisions, which ATPs can mitigate. They lead managers to engage more often in value-creating long-term and innovative investing, and increase a firm's sensitivity to investment opportunities. Our findings contribute to a growing literature challenging conventional wisdom that the agency-increasing effect of ATPs empirically dominates the myopia-eliminating effect, suggesting that a more contextual view of the value implications of ATPs is necessary.

Competition policy and the profitability of corporate acquisitions

Gishan Dissanaike, Wolfgang Drobetz, Paul P. Momtaz
Journal of Corporate Finance | 06/2020
Merger control exists to help safeguard effective competition. However, findings from a natural experiment suggest that regulatory merger control reduces the profitability of corporate acquisitions. Uncertainty about merger control decisions reduces takeover threats from foreign and very large acquirers, therefore facilitating agency-motivated deals. Valuation effects are more pronounced in countries with stronger law enforcement and in more concentrated industries. Our results suggest that competition policy may impede the efficiency of the M&A market.

Data snooping in equity premium prediction

Hubert Dichtl, Wolfgang Drobetz, Andreas Neuhierl, Viktoria-Sophie Wendt
International Journal of Forecasting | 05/2020 | Forthcoming
We analyze the performance of a comprehensive set of equity premium forecasting strategies. All strategies were found to outperform the mean in previous academic publications. However, using a multiple testing framework to account for data snooping, our findings support Welch and Goyal (2008) in that almost all equity premium forecasts fail to beat the mean out-of-sample. Only few forecasting strategies that are based on Ferreira and Santa-Clara’s (2011) sum-of-the-parts approach generate robust and statistically significant economic gains relative to the historical mean even after controlling for data snooping and accounting for transaction costs.

Factor-based asset allocation: Is there a superior strategy?

Hubert Dichtl, Wolfgang Drobetz, Viktoria-Sophie Wendt
European Financial Management | 04/2020 | Forthcoming
Factor‐based allocation embraces the idea of factors, as opposed to asset classes, as the ultimate building blocks of investment portfolios. We examine whether there is a superior way of combining factors in a portfolio and provide a comparison of factor‐based allocation strategies within a multiple testing framework. Factor‐based allocation is profitable beyond exploiting genuine risk premia, even when applying multiple testing corrections. Investment portfolios can be efficiently diversified using factor‐based allocation strategies, as demonstrated by robust economic performance over various economic scenarios. The naïve equally weighted factor portfolio, albeit simple and cost‐efficient, cannot be outperformed by more sophisticated allocation strategies.

The role of catastrophe bonds in an international multi-asset portfolio: Diversifier, hedge, or safe haven?

Wolfgang Drobetz, Henning Schröder, Lars Tegtmeier
Finance Research Letters | 03/2020
We examine whether catastrophe bonds can serve as a hedge or a safe haven for global stock, bond, real estate, commodity, private equity, and infrastructure markets. Our findings indicate that catastrophe bonds are a poor hedge, but they act as an effective diversifier against other asset classes. Furthermore, catastrophe bonds serve as a strong safe haven against extreme price drops of the stock market only during the post-crisis period.

Active factor completion strategies

Hubert Dichtl, Wolfgang Drobetz, Harald Lohre, Carsten Rother
Journal of Portfolio Management | 02/2020 | Forthcoming
Embracing the concept of factor investing, we design a flexible framework for building out different factor completion strategies for traditional multi-asset allocations. Our notion of factor completion comprises a maximally diversified reference portfolio anchored in a multi-asset multi-factor risk model that acknowledges market factors such as equity, duration, and commodity, as well as style factors such as carry, value, momentum, and quality. The specific nature of a given factor completion strategy varies with investor preferences and constraints. We tailor a select set of factor completion strategies that include factor-based tail hedging, constrained factor completion, and a fully diversified multi-asset multi-factor proposition. Our framework is able to organically exploit tactical asset allocation signals while not sacrificing the notion of maximum diversification. To illustrate, we additionally embed the common trend style that permeates many asset classes, and we also include the notion of style factor momentum.

Corporate insider trading and return skewness

Wolfgang Drobetz, Emil Mussbach, Christian Westheide
Journal of Corporate Finance | 02/2020
Corporate insider trades predict idiosyncratic return skewness. CEO purchases are followed by an increase and CEO sales by a decrease in idiosyncratic skewness. The evidence suggests that this effect is driven by personal preferences rather than behavioral biases such as overconfidence. Our findings are consistent with the interpretation that CEOs, who are generally considered to be underdiversified, optimize their holdings by taking their preference for positive return skewness into account. We observe particularly robust results for CEO sales, which substantiates the less common notion that insider sales can be informative for investors.

Corporate governance convergence in the European M&A market

Wolfgang Drobetz, Paul P. Momtaz
Finance Research Letters | 01/2020
Cross-border acquisitions lead to improvements in shareholder rights and more dispersed ownership structures in a large sample of intra-European takeovers. These findings are evidence of corporate governance convergence toward the Anglo-Saxon system through cross-border takeovers. However, we find no support for the corporate governance motive hypothesis in cross-border acquisitions even after accounting for potential sample selectivity. Although acquirers have significantly better shareholder rights than their targets, there are no robust marginal bidder wealth effects for firms that acquire either weaker or stronger governance foreign targets. Instead, bidder wealth effects in cross-border acquisitions are better explained by acculturation costs.

Predictability and the cross section of expected returns: Evidence from the European stock market

Wolfgang Drobetz, Rebekka Haller, Christian Jasperneite, Tizian Otto
Journal of Asset Management | 11/2019
This paper examines the cross-sectional properties of stock return forecasts based on Fama–MacBeth regressions using all firms contained in the STOXX Europe 600 index during the September 1999–December 2018 period. Our estimation approach is strictly out of sample, mimicking an investor who exploits both historical and real-time information on multiple firm characteristics to predict returns. The models capture a substantial amount of the cross-sectional variation in true expected returns and generate predictive slopes close to one, i.e., the forecast dispersion mostly reflects cross-sectional variation in true expected returns. The return predictions translate into high value added for investors. For an active trading strategy, we find strong market outperformance net of transaction costs based on a variety of performance measures.

Optimal timing and tilting of equity factors

Hubert Dichtl, Wolfgang Drobetz, Harald Lohre, Carsten Rother, Patrick Vosskamp
Financial Analysts Journal | 09/2019
Aiming to optimally harvest global equity factor premiums, we investigated the benefits of parametric portfolio policies for timing factors conditioned on time-series predictors and tilting factors based on cross-sectional factor characteristics. We discovered that equity factors are predictably related to fundamental and technical time-series indicators and to such characteristics as factor momentum and crowding. We found that such predictability is hard to benefit from after transaction costs. Advancing the timing and tilting policies to smooth factor allocation turnover slightly improved the evidence for factor timing but not for factor tilting, which renders our analysis a cautionary tale on dynamic factor allocation.

The predictability of alternative UCITS fund returns

Michael Busack, Wolfgang Drobetz, Jan Tille
Journal of Alternative Investments | 07/2019
The authors study the out-of-sample predictability of the returns of pan-European harmonized mutual funds that follow hedge fund–like investment strategies (“alternative UCITS”) and allow retail investors to gain access to nontraditional investment strategies. Given these funds’ higher liquidity compared with hedge funds, investors could exploit relevant information more easily and use it for their asset allocation and risk management decisions. Using a large set of fundamental and technical variables, the authors estimate single predictor models, combination forecasts, and multivariate regression models. Forming hypothetical funds-of-funds portfolios based on predicted returns generates economic gains for investors, especially during crisis times. Combination approaches and multivariate models reduce estimation uncertainty and lead to economic gains across different market environments.

Investor sentiment and initial coin offerings

Wolfgang Drobetz, Paul P. Momtaz, Henning Schröder
Journal of Alternative Investments | 04/2019
The authors examine to what extent the market for initial coin offerings (ICOs) is driven by investor sentiment. Their results, based on a comprehensive set of sentiment and coin price data, suggest that the ICO market is driven by crypto-related sentiment, but is almost unrelated to general capital market sentiment. Among the crypto-related sentiment, social media channels, rather than traditional news channels, are the main source of investor sentiment. The authors find that ICO firms exploit “windows of opportunity” and avoid periods of negative sentiment. Coins listed during periods with negative investor sentiment generate negative returns in the short run. Moreover, returns to investors on the first day of trading predict long-run returns up to six months.

Capital allocation and ownership concentration in the shipping industry

Wolfgang Drobetz, Malte Janzen, Ignacio Requejo
Transportation Research Part E: Logistics and Transportation Review | 02/2019
We measure the sensitivity of investment to changes in investment opportunities in the shipping industry, and test whether this relation is moderated by ownership concentration. For a sample of 126 globally listed shipping firms, we find that investment in commercial shipping follows freight rates, a measure of the potential income stream from owning a vessel. Ownership concentration, measured as the ownership stake of the largest shareholder, reinforces the positive effect of freight rates on investment, indicating a higher relative efficiency of capital allocation. The positive impact ownership has on the investment-freight rate sensitivity also translates into higher firm value. An analysis of investor identity shows that our results are driven by the group of firms where the largest owner is a financial investor, who is usually more focused on shareholder value maximization.

Investment and financing decisions of private and public firms

Wolfgang Drobetz, Malte Janzen, Iwan Meier
Journal of Business Finance and Accounting | 12/2018
We examine differences in the allocation of cash flow between Western European private and public firms. Public firms have a higher investment‐cash flow sensitivity than comparable private firms. This difference is not attributable to more severe financing constraints of public firms. Instead, because differences in investment‐cash flow sensitivities are only observed for the unexpected portion of firms’ cash flow, the empirical evidence supports an agency‐based explanation. Similar patterns are observable for the expected and unexpected portion of firms’ shareholder distributions. Our results are driven by firms from countries with low ownership concentration and more liquid stock markets, where shareholders have lower incentives to monitor. The results are also more pronounced for public firms with low industry Tobin's q and high free cash flow, which are more prone to suffer from agency problems.

Investing in gold – Market timing or buy-and-hold?

Dirk Baur, Hubert Dichtl, Wolfgang Drobetz, Viktoria-Sophie Wendt
International Review of Financial Analysis | 11/2018
The literature on gold is dominated by empirical studies on its diversification, hedging, and safe haven properties. In contrast, the question “When to invest in gold?” is generally not analyzed in much detail. We test more than 4000 seasonal, technical, and fundamental timing strategies for gold and find evidence for some market timing ability and economic gains relative to a passive buy-and-hold benchmark. However, since the results are not robust to data-snooping biases and limited to specific evaluation periods, we conclude that our findings support the efficiency of the gold market.

Cyclicality of growth opportunities and the value of cash holdings

Meike Ahrends, Wolfgang Drobetz, Tatjana Xenia Puhan
Journal of Financial Stability | 08/2018
We show that business cycle dynamics and, in particular, the cyclicality of a firm’s growth opportunities, determine the value of corporate cash holdings. An additional dollar of cash is more valuable for firms with less procyclical expansion opportunities. This valuation effect is strongest for low leverage and high R&D firms, but is independent of their financial status. Corporate cash holdings provide the flexibility to invest for firms that have expansion opportunities during crisis times with business cycle downturns and supply-side financial constraints. Cash holdings in firms with less procyclical growth opportunities are associated with higher investment and better operating performance.

Industry expert directors

Wolfgang Drobetz, David Oesch, Markus Schmid, Felix von Meyerinck
Journal of Banking and Finance | 07/2018
We analyze the valuation effect of board industry experience and channels through which industry experience of outside directors relates to firm value. Our analysis shows that firms with more experienced outside directors are valued at a premium compared to firms with less experienced outside directors. Additional analyses, including a quasi-experimental setting based on director deaths, mitigate endogeneity concerns. The association between having directors with more industry experience and higher firm value is more pronounced for firms with larger investment programs, larger cash reserves, and during crises. In contrast, it is weaker in more dynamic industries, i.e., industries that rank high in terms of sales growth, R&D expenditures, merger activities, competitive threat, and product market changes, where the value of previously acquired experience is likely to be diminished. Overall, our findings are consistent with board industry experience being a valuable corporate governance mechanism.

Global cash flow sensitivities

Wolfgang Drobetz, Simon Döring, Malte Janzen, Iwan Meier
Finance Research Letters | 06/2018
We examine the role of a country's institutional framework for investment and financing activities. A country's financial structure, investor rights, and legal environment are important determinants of the relation between cash flow and firms’ investment and financing behavior. Firms from countries with a stronger institutional framework exhibit higher financing-cash flow sensitivities. These firms are more likely to substitute a cash flow shortfall with issuing equity. Conversely, investment-cash flow sensitivities are higher for firms in countries with a weaker institutional framework.

Corporate cash holdings in the shipping industry

Meike Ahrends, Wolfgang Drobetz, Nikos K. Nomikos
Transportation Research Part E: Logistics and Transportation Review | 04/2018
We examine the corporate cash holdings of listed shipping companies. Shipping firms hold more cash than similar firms in other asset-heavy industries. Higher cash holdings in the shipping industry are not attributable to firm- or country-level characteristics, but rather to the higher marginal value of cash. Shipping firms value an additional dollar of cash higher than matched manufacturing firms, regardless of their financial constraints status, but depending on their cultural background and the cyclicality of their expansion opportunities. Less procyclical shipping firms have a higher marginal value of cash, and this valuation effect is most pronounced in bad times of the business cycle when external capital supply tends to become scarce. Overall, it appears that shipping companies are more conservative than their peers in managing their cash positions.

Determinants of management earnings forecasts: The case of global shipping IPOs

Wolfgang Drobetz, Dimitrios Gounopoulos, Anna Merika, Andreas Merikas
European Financial Management | 11/2017
Firms that go public on global stock markets are not obliged to disclose earnings forecasts in their prospectuses. We use this fact to examine the shipping industry, where most firms voluntarily issue earnings forecasts during the IPO process, thus providing unique, international‐level evidence. We find overall pessimistic forecasts of ship owners, primarily because of the industry's uncertain and volatile environment. High ship owner participation after going public is associated with less accurate earnings forecasts. Our results further indicate that financial leverage, a listing in an emerging stock market, and global market conditions are other main factors responsible for inaccurate earnings forecasts.

Can investors benefit from the performance of alternative UCITS?

Michael Busack, Wolfgang Drobetz, Jan Tille
Financial Markets and Portfolio Management | 02/2017
We study the performance persistence of alternative UCITS funds, which are a hybrid between mutual funds and hedge funds. Persistence is gauged by alternative measures of performance and risk. Based on contingency tables, we find that performance persists for up to 2 years following ranking. However, persistence is stronger in the short run, and ranked portfolio tests indicate that investors can benefit from persistence for only up to 1 year. The evidence for persistence in risk is ambiguous. We link fund characteristics to performance persistence and find that offshore hedge fund experience enhances persistence. Our results are robust against survivorship bias and other potential database biases.

A bootstrap-based comparison of portfolio insurance strategies

Hubert Dichtl, Wolfgang Drobetz, Martin Wambach
European Journal of Finance | 01/2017
This study presents a systematic comparison of portfolio insurance strategies. We implement a bootstrap-based hypothesis test to assess statistical significance of the differences in a variety of downside-oriented risk and performance measures for pairs of portfolio insurance strategies. Our comparison of different strategies considers the following distinguishing characteristics: static versus dynamic protection; initial wealth versus cumulated wealth protection; model-based versus model-free protection; and strong floor compliance versus probabilistic floor compliance. Our results indicate that the classical portfolio insurance strategies synthetic put and constant proportion portfolio insurance (CPPI) provide superior downside protection compared to a simple stop-loss trading rule and also exhibit a higher risk-adjusted performance in many cases (dependent on the applied performance measure). Analyzing recently developed strategies, neither the TIPP strategy (as an ‘improved’ CPPI strategy) nor the dynamic VaR-strategy provides significant improvements over the more traditional portfolio insurance strategies.

Cash flow sensitivities during normal and crisis times: Evidence from shipping

Wolfgang Drobetz, Rebekka Haller, Iwan Meier
Transportation Research Part A: Policy and Practice | 08/2016
Using a system of equations model, we analyze how cash flow shocks influence the investment and financing decisions of shipping firms in different economic environments. Even financially healthy shipping firms felt strong negative effects on their financing activities during the recent crisis. These firms were nevertheless able to increase long-term debt. Banks internalized the impact of foreclosure decisions on vessel prices and avoided an industry-wide collateral channel effect. Even during benign economic conditions, financially weak shipping firms underinvest because of their inability to raise sufficient external capital. The substitution between long- and short-term debt during the pre-2008 crisis periods shows that the composition of financing sources is more indicative of whether firms face financial constraints than the pure size of the financing-cash flow sensitivities. An analysis of firms’ excess cash holdings confirms the importance of financial flexibility.

Timing the stock market: Does it really make no sense?

Hubert Dichtl, Wolfgang Drobetz, Lawrence Kryzanowski
Journal of Behavioral and Experimental Finance | 06/2016
Many private and institutional investors attempt to time the market and generate abnormal returns by periodically switching their portfolio allocations between the stock market and the cash market based on their return predictions. However, most academic studies emphasize that a successful market timing strategy requires a prediction accuracy that is usually not observable in reality. While prior studies evaluate the outcomes based on traditional return and risk measures, we adopt both expected and non-expected utility models to compare market timing with common benchmarks. Our analyses are based on a “simulated market timer” that does not require a specific forecast model. Bootstrap-based simulations show that even with low hit ratios, investors with non-expected utility preferences can consider market timing as highly desirable. The attractiveness of market timing is also partly attributable to short-termism in performance evaluation.

Systematic risk behavior in cyclical industries: The case of shipping

Wolfgang Drobetz, Christina Menzel, Henning Schröder
Transportation Research Part E: Logistics and Transportation Review | 04/2016
This study explores macroeconomic and industry-level effects on corporate systematic risk (or beta) for the international shipping industry. We document the extent to which stock market betas fluctuate over time in this asset-intensive and cyclical industry. Moreover, we analyze the fundamental determinants of systematic risk. We find evidence for high levels of systematic risk in shipping stocks, which match the fundamental risk characteristics of the industry (such as high financial and operating leverage). Shipping firms exhibit distinct industry-specific beta dynamics compared to firms from benchmark sectors or the average firm in the S&P 500 index. Changes in both economic conditions and industry-specific risk factors explain large proportions of beta variation in the cross-section of firms and over time.

Corporate finance in Germany: Structural adjustments and current developments

Wolfgang Bessler, Wolfgang Drobetz
Journal of Applied Corporate Finance | 01/2016
For a very long time, the financing of German companies was dominated by German universal banks, which functioned as sources of both capital-as equity holders as well as providers of loans-and corporate governance. Although internal finance (retained earnings) has always been and will remain the most important source of finance, several recent developments have forced German companies to search for alternatives to their traditionally heavy dependence on bank lending. As a result, the composition of external finance has changed, with substantial net contributions of corporate bond and equity offerings. Furthermore, both the equity ratios and cash holdings of German companies have increased over the years. Thus, although the German financial system still exhibits many differences from those in the U.S. and U.K., the financing patterns of German companies have to some extent converged with those of their peers from Anglo-American market-based financial systems. The growth in recent years of German capital markets-and of German companies' reliance on them-has led to important changes in both German and European corporate governance, including the evolution of a common European market for corporate control that is still in its early stages.

Equity issues and stock repurchases of initial public offerings

Wolfgang Bessler, Wolfgang Drobetz, Martin Seim, Jan Zimmermann
European Financial Management | 01/2016
We investigate the financing strategies and valuation effects of 247 IPO firms at the ‘Neuer Markt’ in Germany that either issued additional equity (SEO) or repurchased shares (SRP) within five years after going public. IPOs issuing additional equity exhibit a temporary outperformance before the event, but negative announcement returns and a long‐run underperformance. In contrast, repurchasing IPOs experience positive announcement returns and no long‐run underperformance. Free cash flow problem resulting from mandatory equity issuance at the IPO explain the SRP decision. Our findings for SEOs are consistent with a staged financing strategy, while we find no evidence for market timing.

Heterogeneity in the speed of capital structure adjustment across countries and over the business cycle

Wolfgang Drobetz, Dirk C. Schilling, Henning Schröder
European Financial Management | 11/2015
This study analyses the heterogeneity in the speed of capital structure adjustment. Using a doubly‐censored Tobit estimator that accounts for mechanical mean reversion in leverage ratios, the speed of adjustment is 25% per year in a large international sample, supporting the economic relevance of the trade‐off theory. Differences in the adjustment speed across financial systems are attributable to differences in the costs of adjustment. Macroeconomic and micro‐level supply‐side constraints also affect the dynamics of leverage. Firms adjust more slowly during recessions, and the business cycle effect on adjustment speed is most pronounced for financially constrained firms in market‐based countries.

Testing rebalancing strategies for stock-bond portfolios across different asset allocations

Hubert Dichtl, Wolfgang Drobetz, Martin Wambach
Applied Economics | 09/2015
We compare the risk-adjusted performance of stock–bond portfolios between rebalancing and buy-and-hold across different asset allocations by reporting statistical significance levels. Our investigation is based on a 30-year dataset and incorporates the financial markets of the United States, the United Kingdom and Germany. To draw useful recommendations to investment management, we implement a history-based simulation approach which enables us to mimic realistic market conditions. Even if the portfolio weight of stocks is very low, our empirical results show that a frequent rebalancing significantly enhances risk-adjusted portfolio performance for all analysed countries and all risk-adjusted performance measures.

Sell in May and go away: Still good advice for investors?

Hubert Dichtl, Wolfgang Drobetz
International Review of Financial Analysis | 03/2015
This study examines whether the “Sell in May and Go Away” (or Halloween) trading strategy still offers an opportunity to earn abnormal returns. In contrast to prior studies, we consider sample periods during which adequate investment instruments were available for an effective implementation of the Halloween strategy. In addition, we account for when the first study confirming the Halloween effect was published in a top academic journal. To use the limited data in the most efficient way, and to avoid possible data-snooping biases, we implement a bootstrap simulation approach. We find that the Halloween effect strongly weakened or even disappeared in recent years. Our results are robust across different markets and against various parameter variations. Overall, our findings support the theory of efficient capital markets.

The returns to hedge fund activism in Germany

Wolfgang Bessler, Wolfgang Drobetz, Julian Holler
European Financial Management | 01/2015
Recent regulatory changes in the German financial system shifted corporate control activities from universal banks to other capital market participants. Particularly hedge funds took advantage of the resulting control vacuum by acquiring stakes in weakly governed and less profitable firms. We document that, on average, hedge funds increased shareholder value in the short‐ and long‐run. However, more aggressive hedge funds generated only initially higher returns and their outperformance quickly reversed, whereas non‐aggressive hedge funds ultimately outperformed their aggressive peers. These findings suggest that aggressive hedge funds attempt to expropriate the target firm's shareholders by exiting at temporarily increased share prices.

Corporate social responsibility disclosure: The case of international shipping

Wolfgang Drobetz, Anna Merika, Andreas Merikas, Mike G. Tsionas
Transportation Research Part E: Logistics and Transportation Review | 11/2014
Based on practices and legislation in the shipping industry, we construct a corporate social responsibility (CSR) disclosure index for listed shipping companies. We use Markov Chain Monte Carlo (MCMC) techniques for Bayesian inference, and we estimate the marginal effects of firm characteristics on CSR disclosure for each firm. Our results show a positive relationship between CSR disclosure and financial performance for each firm in our international sample. Firm size, financial leverage, and ownership structure are also associated with CSR disclosure. Our findings suggest that a majority of listed shipping companies have integrated CSR practices into their strategic planning and operations.

Where is the value added of rebalancing? A systematic comparison of alternative rebalancing strategies

Hubert Dichtl, Wolfgang Drobetz, Martin Wambach
Financial Markets and Portfolio Management | 08/2014
This study compares the performance of different rebalancing strategies under realistic market conditions by reporting statistical significance levels. Our analysis is based on historical data from the United States, the United Kingdom, and Germany and comprises three different classes of rebalancing (periodic, threshold, and range rebalancing). Despite cross-country differences, our history-based simulation results show that all rebalancing strategies outperform a buy-and-hold strategy in terms of Sharpe ratios, Sortino ratios, and Omega measures. The differences in risk-adjusted performance are not only statistically significant, but also economically relevant. However, the choice of a particular rebalancing strategy is of only minor economic importance.

Are stock markets really so inefficient? The case of the “Halloween Indicator”

Hubert Dichtl, Wolfgang Drobetz
Finance Research Letters | 06/2014
The old and simple investment strategy “Sell in May and Go Away” (also referred to as the “Halloween effect”) enjoys an unbroken popularity. Recent studies suggest that the Halloween effect even strengthened rather than weakened since its first publication by Bouman and Jacobsen (2002). We implement regression models as well as Hansen’s (2005) “Superior Predictive Ability” test to analyze whether stock markets are really so inefficient. In line with the predictions of market efficiency, our results reject the hypothesis that a trading strategy based on the Halloween effect significantly outperforms.

Do alternative UCITS deliver what they promise? A comparison of alternative UCITS and hedge funds

Michael Busack, Wolfgang Drobetz, Jan Tille
Applied Financial Economics | 05/2014
We study the performance of alternative UCITS funds and account for potential survivorship biases in our sample in the best possible manner. Alternative UCITS funds offer similar raw returns but a lower volatility compared to offshore hedge funds. Single-index models show that alternative UCITS funds provide only marginal exposure to variations in hedge fund returns. Multifactor models indicate that the most important risk factors for both alternative UCITS funds and their matched hedge funds strategies are related to stock market risks, but alternative UCITS funds exhibit a lower exposure to these factors than hedge funds. Moreover, we find factor loadings on different risk factors, suggesting that alternative UCITS and hedge funds pursue different strategies. Finally, we assess the degree of the value added for an investor in terms of enhanced diversification benefits by implementing a spanning test and find that both groups are different asset classes with time-varying diversification properties.

Share repurchases of initial public offerings: Motives, valuation effects, and the impact of market regulation

Wolfgang Bessler, Wolfgang Drobetz, Martin Seim
European Journal of Finance | 01/2014
This study investigates the motives and valuation effects of share repurchase announcements of German firms during the 1998–2008 period, addressing the question why initial public offering (IPO) firms repurchase shares soon after going public. While our focus is on IPO firms, we also examine the impact of firm size by differentiating between IPO and established DAX/MDAX firms and by analyzing the source of surplus cash holdings, that is, either from equity issuances or from operating cash flows. We further explore the impact of the regulatory environment. Our empirical analysis reveals significant differences between the IPO and DAX/MDAX subsamples regarding their repurchase motives, stock price performance, and explanatory factors. Standard corporate payout theories are essential in explaining the different valuation effects. Our empirical analysis suggests agency costs of free cash flow as the main reason for the observed valuation effects of both IPO and DAX/MDAX firms, yet for different reasons. While DAX/MDAX firms continuously generate high operating cash flows before and after repurchasing shares, IPO firms exhibit low operating cash flows during the entire period but large surplus cash holdings due to the mandatory equity issuance at their public offering. Overall, the repurchase decisions of IPO firms are best explained by the agency costs of cash holdings and the unique rules and regulations of the German stock exchange.

The international zero-leverage phenomenon

Wolfgang Bessler, Wolfgang Drobetz, Rebekka Haller, Iwan Meier
Journal of Corporate Finance | 12/2013
We analyze the zero-leverage phenomenon around the world. Countries with a common law system, high creditor protection, and a dividend imputation or dividend relief tax system exhibit the highest percentage of zero-leverage firms. The increasing prevalence of zero-leverage firms in all sample countries is related to market-wide forces during our sample period, such as IPO waves, shifts in industry composition, increasing asset volatility, and decreasing corporate tax rates. Firm-level comparisons reveal that only a small number of firms deliberately maintain zero-leverage. Most zero-leverage firms are constrained by their debt capacity. Analyzing the time-series dynamics of leverage and investment behavior, we further show that firms which pursue a zero-leverage policy only for a short period of time seek financial flexibility.

Capital structure decisions of globally-listed shipping companies

Wolfgang Drobetz, Dimitrios Gounopoulos, Andreas Merikas, Henning Schröder
Transportation Research Part E: Logistics and Transportation Review | 06/2013
Debt capital has traditionally been the most important source of external finance in the shipping industry. The access that shipping companies nowadays have to the capital markets provides them with a broader range of financing instruments. As such, this study investigates the determinants of capital structure decisions using a sample of 115 exchange-listed shipping companies. We test whether listed shipping companies follow a target capital structure, and we analyze their adjustment dynamics after deviations from this target leverage ratio. When compared with industrial firms from the G7 countries, shipping companies exhibit higher leverage ratios and higher financial risk. Standard capital structure variables exert a significant impact on the cross-sectional variation of leverage ratios in the shipping industry. Asset tangibility is positively related to corporate leverage, and its economic impact is more pronounced than in other industries. Profitability, asset risk, and operating leverage are all inversely related to leverage. There is only weak evidence for market-timing behavior of shipping companies. Because demand and supply in the maritime industry are closely related to the macroeconomic environment, leverage behaves counter-cyclically. Using different dynamic panel estimators, we further document that the speed of adjustment after deviations from the target leverage ratio is lower during economic recessions. On average, however, the capital structure adjustment speed in the maritime industry is higher compared with the G7 benchmark sample. These findings indicate that there are substantial costs of deviation from the target leverage ratio due to high expected costs of financial distress. Our results have implications for shipping companies’ risk management activities.

The development of a performance index for KG funds and a comparison with other shipping-related indices

Wolfgang Drobetz, Lars Tegtmeier
Maritime Economics and Logistics | 02/2013
Despite their high economic importance, academic research has granted KG funds only marginal attention. A main reason is the lack of reliable performance data due to non-observable market prices during the lifetime of a KG fund. In order to measure the performance of KG funds, we construct an index using a database of more than 300 German one-ship companies during the sample period from December 1996 to December 2007. Looking at the distributional characteristics and the correlation structures, we analyse the co-movement of the KG index with a broad set of other shipping-related indices. The variation of our index is more dependent on vessel prices than on charter rates. Moreover, we use principal component analysis (PCA) in order to examine whether there are common structures and linkages between the different indices. On the basis of the resulting factor loadings, the KG index exhibits peculiar risk-return characteristics. PCA identifies one statistical factor that is specific to KG funds in the sense that only the KG index loads significantly on this particular factor. Our index does not merely represent a linear combination of vessel prices and freight rates, and it also does not stand in direct relationship with all other shipping-related indices. Instead, it constitutes a new index concept measuring the development of the market value of equity and distributions in the form of a performance index and incorporates specific information that is primarily of importance for one-ship companies. The availability of a performance index will likely increase transparency in the market for closed-end ship funds.

Efficient hedge fund style allocations: A rules-based model

Wolfgang Drobetz, Dieter Kaiser, Jasper Zimbehl
Journal of Derivatives & Hedge Funds | 11/2012
The hedge fund literature has predominantly focused on the return and risk characteristics as well as the portfolio properties of different hedge fund styles. However, relatively little is known about how hedge fund investors should allocate their capital across various hedge fund styles. The aim of this study is to develop a rules-based framework that can be used by investors to optimize their hedge fund style allocation. We construct four hedge fund style indices using a sample of 6088 hedge funds from the Lipper TASS Hedge Fund Database over the January 1995–September 2010 time period. We also develop technical and fundamental indicators on the basis of the style return drivers from earlier hedge fund studies. We use these indicators to generate trading recommendations through a style allocation model that systematically over- and underweights the four major hedge fund styles. The empirical results indicate that our hedge fund style allocation model delivers an outperformance of up to 1 per cent per year over an equally weighted portfolio.

Dynamics of time-varying volatility in the dry bulk and tanker freight markets

Wolfgang Drobetz, Tim Richter, Martin Wambach
Applied Financial Economics | 04/2012
This study examines whether shocks from macroeconomic variables or asymmetric effects are more suitable for explaining the time-varying volatility in the dry bulk and tanker freight markets or whether both effects should be incorporated simultaneously. Using Baltic Exchange indices during the sample period from March 1999 to October 2011 on a daily basis, we separately analyse the impact of macroeconomic shocks and asymmetric effects on the conditional volatility of freight rates by using a GARCH-X model and an EGARCH model, respectively. Furthermore, we simultaneously investigate both effects by specifying an EGARCH-X model. Assuming not only a normal distribution but also a t-distribution in order to better capture the fat tails of error terms, three important conclusions emerge for modelling the conditional volatility of freight rates: (i) The assumption of a t-distribution is better suited than a normal distribution is. (ii) Macroeconomic factors should be incorporated into the conditional variance equation rather than into the conditional mean equation. In addition, the number of macroeconomic factors that exhibit explanatory power decreases under a t-distribution. (iii) While there seem to be no asymmetric effects in the dry bulk freight market, these effects are strongly pronounced in the tanker freight market. Our empirical findings have important implications for freight rate risk management.

Financing shipping companies and shipping operations: A risk‐management perspective

Stefan Albertijn, Wolfgang Bessler, Wolfgang Drobetz
Journal of Applied Corporate Finance | 12/2011
Shipping has always been a volatile and cyclical business. The extreme changes in revenues, operating cash flows, and asset values during the recent financial crises have upset the usual means of financing shipping companies. While bank debt will remain important in the future, the new regulatory environment has been forcing shipping banks to shift these risks from their balance sheets to capital markets through instruments such as loan securitization. As a result, the shipping industry will increasingly look to capital markets for external funds. And shipping banks are likely to change from being commercial bank lending institutions to becoming more like investment banks that arrange a variety of financing solutions, including high yield bonds or public equity. Risk management will be central to shipping companies in this new environment. Shipping companies can manage their own risks by modifying operations, employing freight and vessel price derivatives, or adjusting their capital structures. To arrive at the value‐maximizing combination of these three basic methods, they must decide which risks to bear, which to manage internally, and which to transfer to the capital markets. These decisions require shipping financial managers to assess the effect of each risk on firm value, understand how each contributes to total risk, and determine the most cost‐effective way to limit that risk to an acceptable level.

Portfolio insurance and prospect theory investors: Popularity and optimal design of capital protected financial products

Hubert Dichtl, Wolfgang Drobetz
Journal of Banking and Finance | 07/2011
Portfolio insurance strategies are used on both the institutional and the retail side of the asset management industry. While standard utility theory struggles to provide an explanation, this study justifies the popularity of portfolio insurance strategies in a behavioral finance context. We run Monte Carlo simulations as well as historical simulations for popular portfolio insurance strategies and benchmark strategies in order to evaluate the outcomes using cumulative prospect theory. Our simulation results indicate that most portfolio insurance strategies are the preferred investment strategy for a prospect theory investor. Moreover, the analysis provides insights into how portfolio insurance products should be designed and structured to meet the preferences of prospect theory investors as accurately as possible.

Dollar-cost averaging and prospect theory investors: An explanation for a popular investment strategy

Hubert Dichtl, Wolfgang Drobetz
Journal of Behavioral Finance | 03/2011
Dollar-cost averaging requires investing equal amounts of an investment sum step-by-step in regular time intervals. Previous studies that assume expected utility investors were unable to explain the popularity of dollar-cost averaging. Statman [1995] argues that dollar-cost averaging is consistent with the positive framework of behavioral finance. We assume a prospect theory investor who implements a strategic asset allocation plan and has the choice to shift the portfolio immediately (comparable to a lump sum) or on a step-by-step basis (dollar-cost averaging). Our simulation results support Statman's [1995] notion that dollar-cost averaging may not be rational but a perfectly normal behavior.

Information asymmetry and financing decisions

Wolfgang Bessler, Wolfgang Drobetz, Matthias C. Grüninger
International Review of Finance | 03/2011
This study conducts tests of the pecking order theory using an international sample with more than 6000 firms over the period from 1995 to 2005. The high correlation between net equity issuances and the financing deficit discredits the static pecking order theory. Rather than analyzing the predictions of the theory, we test its core assumption that information asymmetry is an important determinant of capital structure decisions. Our empirical results support the dynamic pecking order theory and its two testable implications. First, the probability of issuing equity increases with less pronounced firm‐level information asymmetry. Second, firms exploit windows of opportunity by making relatively larger equity issuances and build up cash reserves (slack) after declines in firm‐level information asymmetry. Firms from common law countries use parts of their proceeds from an equity issuance to redeem debt and to rebalance their capital structure. These findings are consistent with a time‐varying adverse selection explanation of firms' financing decisions.

Information asymmetry and the value of cash

Wolfgang Drobetz, Matthias C. Grüninger, Simone Hirschvogl
Journal of Banking and Finance | 09/2010
This study investigates the market value of corporate cash holdings in connection with firm-specific and time-varying information asymmetry. Analyzing a large international sample, we test two opposing hypotheses. According to the pecking order theory, adverse selection problems make external financing costly and imply a higher market value of a marginal dollar of cash in states with higher information asymmetry. In contrast, the free cash flow theory predicts that excessive cash holdings bundled with higher information asymmetry generate moral hazard problems and lead to a lower market value of a marginal dollar of cash. We use the dispersion of analysts’ earnings per share forecasts as our main measure of firm-specific and time-varying information asymmetry. Extending the valuation regressions of Fama and French [Fama, E.F., French, K.R., 1998. Taxes, financing decisions, and firm value. Journal of Finance 53, 819–843], our results support the free cash flow theory and indicate that the value of corporate cash holdings is lower in states with a higher degree of information asymmetry.

On the popularity of the CPPI strategy: A behavioral-finance-based explanation and design recommendations

Hubert Dichtl, Wolfgang Drobetz
Journal of Wealth Management | 07/2010
The constant proportion portfolio insurance (CPPI) strategy is frequently used on both the institutional and the retail sides of the asset management industry. While standard finance theory struggles to justify its popularity, this article attempts to explain the widespread use of the CPPI strategy by referring to elements of behavioral finance. We run bootstrap as well as Monte Carlo simulations for the CPPI strategy and for simple benchmark strategies in order to evaluate the outcomes using cumulative prospect theory. Our simulation results indicate that the CPPI strategy is the preferred strategy for a prospect theory investor. The analysis provides hints at how a CPPI-based investment product should be designed in order to meet the preferences of a prospect theory investor as well as possible.

Common risk factors in the returns of shipping stocks

Wolfgang Drobetz, Dirk C. Schilling, Lars Tegtmeier
Maritime Policy and Management | 03/2010
The knowledge of risk factors that determine an industry's expected stock returns is important to assess whether this industry serves as a separate asset class. This study analyses the macroeconomic risk factors that drive expected stock returns in the shipping industry and its three sectors: container, tanker, and bulker shipping. Our sample consists of the monthly returns of 48 publicly-listed shipping companies over the period from January 1999 to December 2007. We use shipping stocks together with a set of country or other industry indices to estimate the macroeconomic risk profiles and the corresponding factor risk premiums. Using a Seemingly Unrelated Regressions (SUR) model to estimate factor sensitivities, we document that shipping stocks exhibit remarkably low stock market betas. We also provide evidence that a multidimensional definition of risk is necessary to capture the risk-return spectrum of shipping stocks. A one-factor model produces large pricing errors, and hence it must be rejected based on tests of the model's orthogonality conditions using the Generalized Method of Moments (GMM). In contrast, when the change in the trade-weighted value of the US$, the change in G-7 industrial production, and the change in the oil price are added as additional risk factors, the resulting multifactor model is able to explain the cross-section of expected stock returns. The risk-return profile of shipping stocks differs from country and other industry indices. However, the sensitivities to global systematic risk factors are similar across all three sectors of the shipping industry. Overall, our results suggest that shipping stocks have the potential to serve as a separate asset class. Our findings also have important implications for computing the cost of equity capital in the shipping industry.

Does tactical asset allocation work? Another look at the fundamental law of active management

Hubert Dichtl, Wolfgang Drobetz
Journal of Asset Management | 09/2009
The performance potential of forecasting-based tactical asset allocation strategies is difficult to assess. The fundamental law of active management suggests that the value added through active investment decisions depends on the forecasting quality and the number of independent forecasts. Although easy to use, the law depends on several specific assumptions that are not fulfilled in practice. Therefore, it is not clear ex ante whether the actual performance of tactical asset allocation is close to what the fundamental law predicts. Using a simulation approach, we quantify the entire distribution of information ratios, active returns and tracking errors under realistic conditions (for example, with transaction costs and tactical bounds rather than a simple mean-variance optimisation). Our results reveal that the fundamental law systematically underestimates the required forecasting quality to reach a very good information ratio. While all other assumptions of the law seem innocuous, transaction costs are responsible for most of the wedge between the law's prediction and the performance of tactical asset allocation in a realistic setup. Our results are robust for stock and bond market data from different countries.

Fixed-income portfolio allocation including hedge fund strategies: A copula opinion pooling approach

Wolfgang Drobetz, Roland Füss, Michael Stein
Journal of Fixed Income | 03/2009
This paper adapts Meucci's [2006a, 2006b] copula opinion pooling (COP) framework to examine whether fixed income hedge fund strategies enhance the risk-return spectrum of traditional bond portfolios. In contrast to the Black-Litterman setup, the COP approach does not rely on linear dependencies, and avoids the problems associated with the assumption of normally distributed asset returns. We analyze three scenarios that represent investor expectations about the performance of fixed income portfolios, and we add fixed income hedge fund strategies such as fixed income arbitrage, convertible bond arbitrage, and distressed securities, given expected shortfall constraints. Our results suggest that investor market expectations and attitudes toward potential losses are both important in determining the relative weight of hedge funds in the optimal portfolio. Depending on the model parameters, the allocation to hedge funds can vary greatly, from 0% to 85%.

Conditional performance evaluation for German equity mutual funds

Wolfgang Bessler, Wolfgang Drobetz, Heinz Zimmermann
European Journal of Finance | 03/2009
We investigate the conditional performance of a sample of German equity mutual funds over the period from 1994 to 2003 using both the beta-pricing approach and the stochastic discount factor (SDF) framework. On average, mutual funds cannot generate excess returns relative to their benchmark that are large enough to cover their total expenses. Compared to unconditional alphas, fund performance sharply deteriorates when we measure conditional alphas. Given that stock returns are to some extent predictable based on publicly available information, conditional performance evaluation raises the benchmark for active fund managers because it gives them no credit for exploiting readily available information. Underperformance is more pronounced in the SDF framework than in beta-pricing models. The fund performance measures derived from alternative model specifications differ depending on the number of primitive assets taken to calibrate the SDF as well as the number of instrument variables used to scale assets and/or factors.

Heterogeneity in asset allocation decisions: Empirical evidence from Switzerland

Wolfgang Drobetz, Peter Kugler, Gabrielle Wanzenried, Heinz Zimmermann
International Review of Financial Analysis | 03/2009
We analyze the heterogeneity in asset allocation decisions of different investor groups in response to changes in the macroeconomic environment. Using a new data set that includes the monthly portfolio holdings of private, commercial, and institutional investors deposited with Swiss banks, we estimate the relationship between equity and bond holdings and common business cycle indicators. Regression analysis indicates that private investors do not systematically move from stocks into bonds by selling stocks to institutional investors and purchasing bonds from them in adverse macroeconomic states. A VAR-error correction framework including cointegration and error correction restrictions suggests that the investment behavior of commercial investors leads and private investors follow in their investment decisions only slowly over time. The asset allocation decisions of institutional investors are not affected by the actions of private and commercial investors. Our results refute a principle of “institutional irrelevance”.

Ship funds as a new asset class: An empirical analysis of the relationship between spot and forward prices in freight markets

Wolfgang Bessler, Wolfgang Drobetz, Jörg Seidel
Journal of Asset Management | 07/2008
Over the last decade, various new asset classes have emerged as alternatives to the more traditional investments. Although they appear attractive at a first glance, there exists hardly any historical performance track record, and experience with the return generating variables is limited. For ship funds and the valuation of shipping projects, the prevailing freight rates are important price-determining factors. Therefore, knowledge about the time series properties of spot and forward freight rates is essential for a better understanding of the return generating process of ship funds. There are, however, several peculiarities. Because shipping is a nonstorable service, forward prices need not to be linked to spot prices by any direct arbitrage relationship. We test the implications of this notion by using data for Panamax size bulk carriers and find that even in informationally efficient markets spot freight rates are highly autocorrelated. In addition, spot and forward freight rates are cointegrated, and the equilibrium is established by spot rates converging to forward rates. An extension of the standard vector error correction model reveals time-variation in the adjustment speed. Overall, our empirical findings suggest that the time series properties of freight rates need to be well understood before investing in ship funds. Another important aspect is whether ship funds should hedge their freight rate exposure in the forward market to reduce the return volatility or whether investors can achieve the same outcome by holding ship funds in a portfolio context.

Estimating the cost of executive stock options: Evidence from Switzerland

Wolfgang Drobetz, Pascal Pensa, Markus Schmid
Corporate Governance | 09/2007
It is often argued that Black‐Scholes (1973) values overstate the subjective value of stock options granted to risk‐averse and under‐diversified executives. We construct a “representative” Swiss executive and extend the certainty‐equivalence approach presented by Hall and Murphy (2002) to assess the value‐cost wedge of executive stock options. Even with low coefficients of relative risk aversion, the discount can be above 50 per cent compared to the Black‐Scholes values. Regression analysis reveals that the equilibrium level of executive compensation is explained by economic determinant variables such as firm size and growth opportunities, whereas the pay‐for‐performance sensitivity remains largely unexplained. Firms with larger boards of directors pay higher wages, indicating potentially unresolved agency conflicts. We reject the hypothesis that cross‐sectional differences in the amount of executive pay vanish when risk‐adjusted values are used as the dependent variable.

Corporate cash holdings: Evidence from Switzerland

Wolfgang Drobetz, Matthias C. Grüninger
Financial Markets and Portfolio Management | 09/2007
This paper investigates the determinants of cash holdings for a comprehensive sample of Swiss non-financial firms between 1995 and 2004. The median Swiss firm holds almost twice as much cash and cash equivalents as the median US or UK firm. Our results indicate that asset tangibility and firm size are both negatively related to corporate cash holdings, and that there is a non-linear relationship between the leverage ratio and liquidity. Dividend payments and operating cash flows are positively related to cash reserves, but we cannot detect a significant relationship between growth opportunities and cash holdings. Most of these empirical findings, but not all of them, can be explained by the transaction costs motive and/or the precautionary motive. Analyzing the corporate governance structures of Swiss firms, we document a non-linear relationship between managerial ownership and cash holdings, indicating an incentive alignment effect and an opposing effect related to increasing risk aversion. Finally, our results suggest that firms in which the CEO simultaneously serves as the COB hold significantly more cash.

What determines the speed of adjustment to the target capital structure?

Wolfgang Drobetz, Gabrielle Wanzenried
Applied Financial Economics | 09/2006
A dynamic adjustment model and panel methodology are used to investigate the determinants of a time varying target capital structure. Because firms may temporarily deviate from their target capital structure in the presence of adjustment costs, the adjustment process is also endogenized. Specifically, we analyse the impact of firm-specific characteristics as well as macroeconomic factors on the speed of adjustment to the target debt ratio. The sample comprises a panel of 90 Swiss firms over the years from 1991 to 2001. We document that faster growing firms and those that are further away from their optimal capital structure adjust more readily. The results also reveal interesting interrelations between the adjustment speed and well-known business cycle variables. Most important, the speed of adjustment is higher when the term spread is higher and when economic prospects are good.

An integrated framework of corporate governance and firm valuation

Stefan Beiner, Wolfgang Drobetz, Markus Schmid, Heinz Zimmermann
European Financial Management | 02/2006
Recent empirical research shows evidence of a positive relationship between the quality of firm‐specific corporate governance and firm valuation. Instead of looking at one single corporate governance mechanism in isolation, we construct a broad corporate governance index and apply five additional variables related to ownership structure, board characteristics, and leverage to provide a comprehensive description of firm‐level corporate governance for a representative sample of Swiss firms. To control for potential endogeneity of these six governance mechanisms, we develop a system of simultaneous equations and apply three‐stage least squares (3SLS). Our results support the widespread hypothesis of a positive relationship between corporate governance and firm valuation.

Long-run performance of initial public offerings: The evidence from Switzerland

Wolfgang Drobetz, Matthias Kammermann, Urs Wälchli
Schmalenbach Business Review | 07/2005
We examine the underpricing and long-term performance of a broad set of Swiss IPOs from 1983 to 2000. The average market adjusted initial return is 34.97%. Our results support the ex ante uncertainty hypothesis, the signalling hypothesis and, to some extent, the market cyclicality hypothesis as possible explanations for the underpricing phenomenon on the Swiss IPO market. We also find evidence for lower initial returns under increased competition among investment banks, and more accurate pricing when book-building is used. To accurately measure the long-term performance of Swiss IPOs, we use a variety of different methods and adjust for possible biases. In contrast to previous findings for the U.S., we do not find a significant drop or strong continuous underperformance of Swiss IPO stock prices in the aftermarket. If there was any evidence for underperformance at all, Swiss IPOs show poor returns only in the very long-run after 48 months of trading.

Corporate governance and expected stock returns: Evidence from Germany

Wolfgang Drobetz, Andreas Schillhofer, Heinz Zimmermann
European Financial Management | 06/2004
Recent empirical work shows evidence for higher valuation of firms in countries with a better legal environment. We investigate whether differences in the quality of firm‐level corporate governance also help to explain firm performance in a cross‐section of companies within a single jurisdiction. Constructing a broad corporate governance rating (CGR) for German public firms, we document a positive relationship between governance practices and firm valuation. There is also evidence that expected stock returns are negatively correlated with firm‐level corporate governance, if dividend yields are used as proxies for the cost of capital. An investment strategy that bought high‐CGR firms and shorted low‐CGR firms earned abnormal returns of around 12% on an annual basis during the sample period.

The contribution of asset allocation policy to portfolio performance

Wolfgang Drobetz, Friederike Köhler
Financial Markets and Portfolio Management | 06/2002
It is well known that asset allocation policy is the major determinant of fund performance. We apply the technique introduced by Ibbotson and Kaplan (2000) to German and Swiss mutual fund data. Our results show that more than 80 percent of the variability in returns of a typical fund over time is explained by asset allocation policy, roughly 60 percent of the variation among funds is explained by policy, and more than 130 percent of the return level is explained, on average, by the policy return level.

How to avoid the pitfalls in portfolio optimization? Putting the Black-Litterman approach at work

Wolfgang Drobetz
Financial Markets and Portfolio Management | 03/2001
In this article we have demonstrated the intuition behind the portfolio optimization model presented by BLACK and LITTERMAN (1992). Their approach helps to alleviate many of the problems associated with the implementation of traditional MARKOWITZ (1952) approach. Their advice is intuitive and consistent with a normal investment behavior of an average investor. The asset manager starts from the market portfolio (or some strategic weighting scheme), which constitutes a neutral point of reference. Starting from all positive weights, he or she should then deviate toward the most favoured asset classes by taking appropriate long and short positions. The technique allows to distinguish between strong views and vague assumptions, which is reflected by the optimal amount of deviation from the equilibrium weighting scheme. This technique reduces the problem associated with estimation errors, and leads to more intuitive and less sensitive portfolio compositions. In addition, the BLACK-LITTERMAN approach is very flexible with regards to expressing a variety of possible views.