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5004 - Securities Investment www.ephilipdavis.com
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EC
5004 Securities Investment Analysis Part 2: Financial analysis, institutional
investment and market behaviour
In this part
of the course, we will provide an overview of real world aspects of securities
investment, beginning with securities analysis before proceeding to assess
portfolio management and institutional investment and the relation between
information and securities prices.
More generally, this module has
three main aspects. ·
In Part 1: Securities analysis
we examine analysis against the background of security selection, includes an
assessment of financial statements and the role that a company’s annual report
and accounts might play in valuing its equity, as well as corporate governance. ·
In Part 2: Portfolio management
and institutional investment we seek to provide an overview of the nature of
institutional investment and portfolio management therein. Accordingly we look
at reasons for their growth, the main types, their liabilities and investment
approach. The core aspects of portfolio management are asset allocation
(including passive management) and security selection (including the active
management puzzle, techniques for securities selection and information needs).
These are addressed in turn, also in the light of the efficient markets
hypothesis. We cover both equity and bond management. ·
In Part 3: Capital market
dynamics and information we point out that an important part of any investment
strategy is the assumption made about how markets behave in the light of
information and incentives. Therefore we also examine the evidence on the extent
to which company and other information is impounded in price when it enters the
public domain, and the related anomalies that appear contrary to the efficient
markets hypothesis (including excess volatility of markets). · Throughout the second part, a particular focus is put on investment in equities, the role of information, incentives and the efficient markets hypothesis. More generally, we emphasise results of empirical work and current data as well as relevant theory. Learning Outcomes (i)
Interpret the evolving structure and activity of the asset management
industry (ii)
Explain the role of information either at a micro level (in valuing
firms) and/or at a macro level (affecting market behaviour) Course texts:
Bodie, Kane and
Marcus; Investments, 6th edition 2003, McGraw Hill (BKM) W Rees,
Financial Analysis, 2nd edition 1995, Prentice Hall Davis and Steil;
Institutional Investors, 2001, MIT Press (DS) Further points: - The handbook facilitates note taking during lectures. If you do not take notes you will not remember the important explanations and additional points that are made. - Refer frequently to this summary to understand where the current material fits into the overall subject. - Pay close attention to the common themes that recur throughout the course. - Course cannot be seen in parts but is an integrated subject, all of which is needed for a proper understanding across the course - Workshops are in the form of group presentations and will give valuable insights to all members of the course.
Relevant outcome (a) Lecture 1: Security selection and securities analysis (i) and (ii) · Macroeconomic and industry analysis (top down approach) · Introduction to financial analysis (bottom up approach) · Equity valuation · Use of the P/E ratio · Time series analysis and forecasting the market and stock returns · Financial statement analysis · Ratio analysis Reading: Bodie Kane and Marcus Chapters17, 18, 19 Rees Chapters 3 and 4
(b) Lecture 2: Takeovers and corporate governance (i) · What are the key issues in corporate governance? · Merger waves · What are the benefits and costs of takeovers · How have institutional investors reacted? · The “corporate governance” movement · How effective is institutional activism? · Corporate governance and European financial systems
Reading: Davis and Steil Chapter 6 Rees
Chapter 8 Davis E P (2002), "Institutional investors, corporate governance, and the performance of the corporate sector", Working Paper, The Pensions Institute, Birkbeck College, London and Economic Systems, 26, 203-229 Part 2: Portfolio management and institutional investors (a) Lecture 3: Introduction to portfolio management and institutional investors (i) · Why focus on institutional investors? · Features of institutional investors · The nature of institutional portfolio management · The size of institutional sectors · Types of institutional investor · Institutions, financial development and the functions of the financial system · Supply and demand factors underlying growth of institutional investors
Reading: Davis
and Steil Chapters 1 and 3 Merton R C and Bodie Z (1995):"A conceptual framework for analysing the financial environment", in eds D B Crane et al "The global financial system, a functional perspective", Harvard Business School Press 1995 (Library) Rybczynski T (1997), “A new look at the evolution of the financial system”, in ed. J Revell “The recent evolution of financial systems”, MacMillan, London. (Library)
(b) Lecture 4: The process of portfolio management and portfolio manager behaviour (i)
· Asset management objectives and constraints · Steps in institutional investment · Alternative paradigms of asset management · The dichotomy of asset allocation and stock selection · Considerations for the differing institutional sectors · Equity investment
Reading : Bodie Kane and Marcus Chapter 26 Davis
and Steil Chapters 2 and 3
(c) Lecture 5: Passive
management, asset allocation and risk control
(i) · International investment · Asset allocation in active and passive strategies · Risk control by institutional investors · Link to portfolio objectives · The nature of passive management · Constructing an index fund · Day-to-day management
Reading: Bodie Kane and Marcus Chapters 25 and 27 Davis
and Steil Chapter 2
(d) Lecture 6: Performance of asset managers
(i) · The theory of active management · Objectives of active management · The Treynor-Black model · Performance evaluation for portfolio managers · Results in the literature on performance · Style management and performance
Reading: Bodie Kane and Marcus Chapter 24 Davis and Steil Chapter 2 (e) Lecture 7:
Aspects of bond portfolio management
(i) · Bond pricing concepts · The term structure · Interest rate risk, duration and convexity · Passive bond management techniques · Active bond management techniques
Reading: Bodie
Kane and Marcus Chapters 14-16 Part 3: Capital market dynamics and information (a) Lecture 8: Stock market reaction to accounting data (ii) · Why might use of accounting data to find misvalued shares be problematic? · Measuring the stock market impact of earnings disclosures · Abnormal returns and unexpected earnings · The anticipation of earnings disclosures · Other aspects of accounting disclosure · Earnings response coefficients and post earnings drift · Accounting manipulation · Abnormal returns and analysts forecasts · Inflation and market values · The issue of “short termism” · Theoretical views · Empirical views
Reading: Rees, ch 6 (Accounting, value and the capital market) Ball and Brown, 1968, An Empirical Evaluation of Accounting Income Numbers, Journal of Accounting Research, Autumn 159-178 (Library) Beaver, Lambert, Ryan, 1987, The Information Content of Security Prices Journal of Accounting & Economics, July, 139-157 (Library) Kothari & Sloan, 1992, Information in prices about future earnings, Journal of Accounting & Economics, 143-171.(Library) Miles D K, (1993), “Testing for short termism in the UK stock market” Economic Journal, 103, 1379-1396 (JSTOR)
(b) Lecture 9: Market anomalies and the Role of Analysts
(ii) · Difficulties of assessing veracity of EMH · Non random returns over different horizons · Small firm, neglected firm, time of year · Possible explanations for anomalies Common risk factors errors by analysts further behavioural explanations
Reading : Davis and Steil Chapter 5 Bodie Kane and Marcus Chapter 12 Rees Chapters 4 and 5 Shiller R J, (1981),“Do stock prices move too much to be justified by subsequent changes in dividends?”, American Economic Review, 71, 421-436 (JSTOR) Bulkley G and Tonks I, (1989), Are UK stock prices excessively volatile? Economic Journal, 99, 1083-1098 (JSTOR) Lakonishok J, Schleifer A and Vishny RW, (1994), “Contrarian investment, extrapolation and risk”, Journal of Finance, 49, 1541-1578 (JSTOR) Dimson E and Marsh , 1984, "An Analysis of Brokers' and Analysts' Unpublished Forecasts of UK Stock Returns", Journal of Finance, December. (JSTOR) De Bondt & Thaler, 1990, Do Security Analysts Overreact? American Economic Review, 80, Proceedings, 52-57 (JSTOR) Barberis N, Shleifer A and Vishny R, (1988), A model of investor sentiment, Journal of Financial Economics, 49, 307-343. (JSTOR) Daniel K, Hirschleifer D, and Subrahmanyam A, (1998) Investor psychology and security market under-over reaction, Journal of Finance, 53, 1839-1885 (Library)
(c) :Lecture 10: Herding behaviour and market psychology (ii) · Should we expect volatility to increase with institutionalization? · Some evidence in favour of the hypothesis · Potential implications · What is the role of incentives for portfolio managers? · Feasibility of contrarian strategies · Positive versus negative feedback trading · What are the wider implications of herding behaviour for financial stability? · Price volatility in deep markets · Market liquidity failure in shallow markets · Reasons for concern over market liquidity failures · The Russia/LTCM episode · Issues for emerging market economies
Reading: Davis and Steil Chapter 5 Scharfstein D S and Stein J C (1990), "Herd behavior and investment", American Economic Review, 80 465-479. (JSTOR) Froot K.A., Scharfstein D.S., and Stein J.C. (1992), “Herd on the street: informational inefficiencies in a market with short-term speculation”, The Journal of Finance, 47, 1461-84. (JSTOR) Devenow A and Welch I (1998), “Rational herding in financial economics”, European Economic Review, 40, 603-615 (Library) Supplementary topic Credit evaluation
(i) and (ii) · Importance of credit evaluation to both bond and equity investors · The functions of rating agencies · Information used in credit analysis · General problems of empirical studies · Univariate and multivariate approaches to failure prediction · Use of capital market data · Failure prediction at a macro level
Reading: Rees
Chapter 9 BKM Chapter 14 Davis “Debt, financial fragility and systemic risk” Chapters 2 and 10 (Library) Davis
E P (1993), "Bank credit risk", Working Paper No. 8, Bank of England,
London. |