New investing insights can be found in the dozens of papers published every month by finance professors and researchers in peer-reviewed journals, such as the Journal of Finance, the Journal of Investing and many more. But readers usually need to first work their way through some heavy-duty math and jargon in these scholarly articles. Let’s take care of that for you and highlight some of their recent findings.
How to use social media to select stocks
Don’t spend a lot of time with the popular stocks on social media. Instead, seek out the ones that get little attention. They outperform their popular peers, write Meng Xiangtong and co-authors in their empirical study, Social Media Effect, Investor Recognition and the Cross-Section of Stock Returns.
Good investment managers are good writers
The quality of writing in a fund’s description of its investment strategy can be an indicator of how well it will perform, says Juha Joenvaara and three other academics in Text Sophistication and Sophisticated Investors. The text measures they developed show that well-developed vocabularies point to higher returns and lower volatility; convoluted sentences signal that managers may have something to hide and more regulatory violations.
What did two quadrillion simulations find?
The industrious researcher Svetlana Bryzgalova and associates ran 2.25 quadrillion simulations on a giant database to evaluate the 51 factors that finance literature has identified over the years as determinants of outperformance in asset returns. As said in Bayesian Solutions for the Factor Zoo: We Just Ran Two Quadrillion Models, only a few of the factors passed their tests to emerge as significant. One was valuation: Returns on low price-to-book stocks exceed high price-to-book stocks. Another was size: Returns on small-cap stocks exceed large-cap stocks.
These new ETFs are actually worthwhile
There is a surfeit of exchange-traded funds – more than 5,000 in the United States alone, according to Investopedia.com. But Rama Malladi, associate professor of finance at California State University, has outlined some new ETFs that actually look worthwhile. In KIDS Thematic Indices: Enabling Investors to Invest in Firms That Cater to Children, appearing in a recent edition of the Journal of Index Investing, he sets out three indexes tracking 39 companies that cater to children in some way. The idea is that ETFs tracking these indexes can be used to capture the interest of children and teach them about investing.
Politicians: Don’t restrict share buybacks
The Democrats want to restrict U.S. companies from repurchasing their shares because they believe buybacks divert corporate funds away from investments in projects that create long-term shareholder value and economic growth. This view is not supported by Alberto Manconi and fellow researchers in the Journal of Financial and Quantitative Analysis (published in October). In their paper, Are Buybacks Good for Long-Term Shareholder Value? Evidence from Buybacks around the World, they found, on average, that buybacks around the world from 1998 to 2010 did not lead to underinvestment, and were followed by excess equity returns in the short and long run.
Bankers on the board of directors can be intangible assets for companies
A company with independent bankers on the board of directors is one that should perform well, finds a study, Bankers on the Board and CEO Turnover, carried out by Jen Chang and two other contributors. Bankers’ lending experience gives them expertise in interpreting financial statements and assessing businesses, so it’s hard for company executives to mislead them or take extravagant risks. With bankers on board, underperforming executives face a higher likelihood of being replaced by more effective executives.