Three essays on portfolio management

This dissertation is constituted of three distinct chapters. The first two study the information role of sell-side analysts from two specific angles of attack. The first chapter focuses on the investment value of target prices. Based on a sample of more than 590’000 expected return revisions over the 1999-2011 period, I construct tercile portfolios that buy (sell) stocks with the highest (lowest) expected return revisions. The strategy initiated at the end of announcement day and held for a month that is long the highest tercile and short the lowest tercile yields a risk-adjusted performance of 0.48% per month. Similar results are obtained when the expected return revisions are industry or market adjusted. The risk-adjusted return remains significant if the position is initiated five days after the announcement (0.29% per month). Given the high number of target price revisions, I identify ex-ante likely valuable target prices. The risk-adjusted performance of the portfolio based on this subset increases to 0.81%. The downside exposures to SMB and MOM factors are negative and statistically significant at the 1% and 5% level, respectively. I demonstrate that more weight is given to pro cyclical (neutral) stocks when the expected probability of recession is low (high). Finally, we show that the results are not driven by firm specific events, post earnings announcement drift (PEAD), limited investors’ attention or illiquid stocks. <br>In the second chapter I analyze the information conveyed by analysts’ research and how it is perceived by investors. I introduce a methodology that disentangles the information conveyed through analysts’ target prices according to its availability and scope. The purpose is to investigate if investors correctly interpret analysts’ research by analyzing whether there is correspondence between investors’ reaction and the type of information conveyed through analysts. The empirical results provide evidence that investors duly process analysts’ research and appropriately incorporate this information into prices. Indeed, public information is not associated with any abnormal return, whereas private information is. Moreover, the reaction to firm-specific private information is confined to the firm analyzed, but industry-wide private information is associated with a reaction that spreads to the whole industry. The decomposition also shows that target prices are based on an equal amount of private and public information, and that private information is mostly firm-specific. <br>In the last chapter I turn my attention to hedge fund managers, a category of sophisticated users of analysts’ research. More specifically, I analyze how the remuneration structure of hedge funds affects the performance to investors to rationalize the persistent abnormal performance of hedge funds. I show that when managers expect to receive a performance fee payment, the commitment to deliver an absolute return, the decreasing returns to scale to which hedge fund strategies are subject, and the performance-linked remuneration combine with the income-maximizing behavior of managers to effectively align the interests of investors and managers. In consequence of the coexistence of these elements, managers have an incentive to control the size of the funds. Therefore, performance-diluting flows do not occur and abnormal performance persists. The model quantitatively reproduces many empirical facts about hedge funds.

Thèse de doctorat : Université de Neuchâtel, 2015 ; 2506