The Journal of Finance

The Selection and Termination of Investment Management Firms by Plan Sponsors

Published: 07/19/2008   |   DOI: 10.1111/j.1540-6261.2008.01375.x

AMIT GOYAL, SUNIL WAHAL

We examine the selection and termination of investment management firms by 3,400 plan sponsors between 1994 and 2003. Plan sponsors hire investment managers after large positive excess returns but this return‐chasing behavior does not deliver positive excess returns thereafter. Investment managers are terminated for a variety of reasons, including but not limited to underperformance. Excess returns after terminations are typically indistinguishable from zero but in some cases positive. In a sample of round‐trip firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be no different from those delivered by newly hired managers. We uncover significant variation in pre‐ and post‐hiring and firing returns that is related to plan sponsor characteristics.

Idiosyncratic Risk Matters!

Published: 05/06/2003   |   DOI: 10.1111/1540-6261.00555

Amit Goyal, Pedro Santa‐Clara

This paper takes a new look at the predictability of stock market returns with risk measures. We find a significant positive relation between average stock variance (largely idiosyncratic) and the return on the market. In contrast, the variance of the market has no forecasting power for the market return. These relations persist after we control for macroeconomic variables known to forecast the stock market. The evidence is consistent with models of time‐varying risk premia based on background risk and investor heterogeneity. Alternatively, our findings can be justified by the option value of equity in the capital structure of the firms.

Equity Misvaluation and Default Options

Published: 12/18/2018   |   DOI: 10.1111/jofi.12748

ASSAF EISDORFER, AMIT GOYAL, ALEXEI ZHDANOV

We study whether default options are mispriced in equity values by employing a structural equity valuation model that explicitly takes into account the value of the option to default (or abandon the firm) and uses firm‐specific inputs. We implement our model on the entire cross section of stocks and identify both over‐ and underpriced equities. An investment strategy that buys undervalued stocks and shorts overvalued stocks generates an annual four‐factor alpha of about 11% for U.S. stocks. The model's performance is stronger for stocks with a higher value of the default option, such as distressed or highly volatile stocks.

Liquidity and Autocorrelations in Individual Stock Returns

Published: 09/19/2006   |   DOI: 10.1111/j.1540-6261.2006.01060.x

DORON AVRAMOV, TARUN CHORDIA, AMIT GOYAL

This paper documents a strong relationship between short‐run reversals and stock illiquidity, even after controlling for trading volume. The largest reversals and the potential contrarian trading strategy profits occur in high turnover, low liquidity stocks, as the price pressures caused by non‐informational demands for immediacy are accommodated. However, the contrarian trading strategy profits are smaller than the likely transactions costs. This lack of profitability and the fact that the overall findings are consistent with rational equilibrium paradigms suggest that the violation of the efficient market hypothesis due to short‐term reversals is not so egregious after all.

Performance and Persistence in Institutional Investment Management

Published: 03/19/2010   |   DOI: 10.1111/j.1540-6261.2009.01550.x

JEFFREY A. BUSSE, AMIT GOYAL, SUNIL WAHAL

Using new, survivorship bias‐free data, we examine the performance and persistence in performance of 4,617 active domestic equity institutional products managed by 1,448 investment management firms between 1991 and 2008. Controlling for the Fama–French (1993) three factors and momentum, aggregate and average estimates of alphas are statistically indistinguishable from zero. Even though there is considerable heterogeneity in performance, there is only modest evidence of persistence in three‐factor models and little to none in four‐factor models.