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Csóka, Péter Phd and Pintér, Miklós Phd Rácz CORVINUS UNIVERSITY OF BUDAPEST ANOMALIES AROUND REPORTS OF STOCK EARNINGS AND OF FUND MANAGEMENT DOCTORAL DISSERTATION Supervisor: Csóka, Péter PhD and Pintér, Miklós PhD Rácz, Dávid Andor Budapest, 2019 Rácz, Dávid Andor ANOMALIES AROUND REPORTS OF STOCK EARNINGS AND OF FUND MANAGEMENT Department of Finance Supervisor: Csóka, Péter PhD and Pintér, Miklós PhD © Copyright – Rácz, Dávid Andor 2019 CORVINUS UNIVERSITY OF BUDAPEST DOCTORAL SCHOOL OF BUSINESS AND MANAGEMENT ANOMALIES AROUND REPORTS OF STOCK EARNINGS AND OF FUND MANAGEMENT DOCTORAL DISSERTATION Rácz, Dávid Andor Budapest, 2019 TABLE OF CONTENTS 1. LITERATURE AND METHODOLOGY SUMMARY ......................... 12 1.1. THEORY AND CRITIQUES OF MARKET EFFICIENCY ........ 18 1.1.1. The efficient market theory and the random walk of share prices .......................................................................................................... 19 1.1.2. Critiques of efficient markets and test of the semi-strong form of efficient market..................................................................................................... 20 1.1.3. Behavioural economics background of anomalies ...................... 21 1.1.4. Market efficiency and the existence of arbitrage returns .......... 23 1.2. THE METHODOLOGY OF EVENT STUDIES ............................ 25 1.2.1. Modelling of the expected returns ................................................ 26 1.2.2. Length of the event window and the estimation window ........... 27 1.2.3. Measuring and testing abnormal returns .................................... 29 1.3. LITERATURE OF INVESTMENT FUNDS’ PERFORMANCE EVALUATION ......................................................................................................... 33 1.3.1. The definition of absolute return investments funds .................. 36 1.3.2. Classic performance measures ...................................................... 37 1.3.3. Alpha Ratio ..................................................................................... 40 1.3.4. Manipulation-proof Performance Measures ............................... 46 1.3.5. Detecting the manipulated performance with the help of MPPMs .......................................................................................................... 53 1.3.6. Alternative ways of detecting manipulated performance, return smoothing: Bias Ratio, Discontinuity-analysis .................................................. 59 2. OWN CALCULATION RESULTS ......................................................... 62 2.1. ANALYSIS OF SURPRISE EFFECTS OF QUARTERLY REPORTS IN CASE OF S&P 500 EQUTIES ...................................................... 64 2.1.1. Analysis of EPS data ...................................................................... 69 5 2.1.4. Price reactions caused by quarterly reports ................................ 77 2.1.5. Differences in the effect of the EPS surprise ............................... 83 2.2. ANALYSING THE RETURNS OF HUNGARIAN ABSOLUTE RETURN MUTUAL FUNDS WITH THE HELP OF MPPM AND DETECTION OF TRACES OF RETURN MANIPULATION ................................................... 86 2.2.1. Treatment of items needed to perform analysis .......................... 87 2.2.2. Comparison of the ranking of the Sharpe-ratio and of the Ingersoll et al. (2007) version MPPM ................................................................. 91 2.2.3. Detection of traces of return manipulation and smoothing by different methods ................................................................................................. 95 2.2.4. Comparison of the Ingersoll et al. (2007) and Brown et al. (2010) MPPM values and ranking ................................................................................ 113 2.2.5. Comparison of the Ingersoll et al. (2007) and the Brown et al. (2010) method based on practical applicability and the complexity of their implementation, proposal for the preferred method ...................................... 119 3. SUMMARY .............................................................................................. 120 REFERENCES ................................................................................................. 124 RELEVANT PUBLICATIONS OF THE AUTHOR .................................... 132 6 TABLE OF FIGURES Figure 1.: Timeline of an event study (MacKinlay, 1997, p. 20). ............................. 28 Figure 2: The distribution of EPS-surprise frequencies in case of observations taken from the S&P 500 and S&P 500 IT indexes. ................................................... 70 Figure 3: The cumulative average abnormal returns of the five groups for the period around the event for the sample taken from the two stock indices for the very good, good, neutral, bad and very bad news groups. ....................................... 76 Figure 4: Comparison of the ranking of the Sharpe-ratio and the MPPM with different risk aversion factors. .................................................................................... 92 Figure 5: Analysis of funds with the highest Doubt Ratio. ....................................... 96 Figure 6: Distribution of the Bias Ratio for the investment funds under investigation. ................................................................................................................. 98 Figure 7: Comparison of the Bias Ratio and the Doubt Ratio. ................................ 99 Figure 8: Discontinuity analysis of Citadella Származtatott fund returns around 0 .................................................................................................................................... 102 Figure 9: Discontinuity analysis of the returns around 0 in case of Aegon Ózonmaxx fund. ............................................................................................................................. 104 Figure 10: Discontinuity analysis of the returns around 0 in case of Platina Alfa. ............................................................................................................................. 106 Figure 11: Discontinuity analysis of the returns around 0 in case of Erste DPM fund. ............................................................................................................................. 107 7 TABLE OF TABLES Table 1: Alpha and Beta returns in case of two foreign exchange investors based on Pojarliev and Levich, 2013 p. 100. .............................................................................. 43 Table 2: The performance of the individual foreign exchange investors between 2001-2006 based on Pojarliev és Levich (2008) p. 25. In own edition in bold highlighting those occasions, where the Information Ratio changes from positive value to negative when calculating the beta-rates corrected values of Alpha Ratio .............................................................................................................................. 46 Table 3: The Manipulation-proof Performance Measure based on Ingersoll et al. (2007) p. 1532. ............................................................................................................... 52 Table 4: Rank-correlations between classic and manipulation-proof performance measures (tested on original returns) based on Brown et al. (2010) p. 49. ............. 54 Table 5 : Rank-correlations between classic and manipulation-proof performance measures (tested on replicated returns) based on Brown et al. (2010) p. 50. ......... 55 Table 6: Rank-correlation between the Sharpe-ratio and MPPM grouped by investment style based on Brown et al. (2010) p. 56. ................................................. 56 Table 7.: Comparison of the Doubt Ratios grouped by the manipulation signals of the different alternative methods based on Brown et al. (2010) p. 57. .................... 57 Table 8: Funds with extremely high Doubt Ratios based on Brown et al. (2010) p. 58. ................................................................................................................................... 58 Table 9.: The analysed equities of S&P500 and S&P 500 IT, that have the highest market capitalization and for which we have the necessary data ........................... 68 Table 10.: The average and cumulative average abnormal returns of the five surprise categories in the period around the event in case of the sample taken from the two indexes. ............................................................................................................ 73 Table 11: Cumulative average abnormal returns on a sample from the S&P 500 index and standard deviations of these returns, test statistics, critical values, and p values in case of the five newsgroups and various time intervals. ........................... 79 8 Table 12: Cumulative average abnormal returns of the S&P 500 IT index, standard deviations of these returns, test statistics, critical values, and p values for the five newsgroups and for different time intervals. ............................................................. 81 Table 13: Difference between cumulative average abnormal returns on samples from the S&P 500 and S&P 500 IT index and t-statistics for the five newsgroups in the interval (-10,10) ...................................................................................................... 84 Table 14: Selected Absolute Return Funds. ............................................................... 88 Table 15: Rang-correlations between the Sharpe-ratio and the MPPM for
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