PhD, DBA, and MSc by research theses (SoM)
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Browsing PhD, DBA, and MSc by research theses (SoM) by Author "Agarwal, Vineet"
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Item Open Access Are fund managers skilled or lucky? Practitioners’ perspective(Cranfield University, 2021-06) Monin, Benjamin; Agarwal, Vineet; Poshakwale, SunilThe market share of the passive fund management industry has increased from 3% in 1995 to 41% in 2020 (Anadu et al., 2020). This study investigates whether fund managers are skilled, and if they are, can investors distinguish between skilled and lucky managers? The empirical research relies on the interviews of 20 fund managers. This sample covers various countries and different strategies and styles. I find that fund managers firmly believe they can beat their benchmark. They have clear rationales behind their investment decisions and believe the ability to go beyond conventional wisdom and to differentiate between short-term noise and long-term trends is the key skill. Hence, they believe they should be assessed over at least a 3-year horizon. My results contrast with the popular belief that the market has a short-term view. The fund managers also argue that the popular measure of their performance, the net alpha, is a poor proxy for measuring their skill for several reasons, the most important being that the management fee is not under their control. Further, skill can only be assessed through an intimate knowledge of their every trade, the degree of conviction, and the investment process. Hence, it is not possible to assess their skill using secondary data. I also show the investors value more than just the financial return from their investment, and fund managers try to build trust with the investors. Finally, I demonstrate that the fund managers are aware of the biases and have developed elaborate systems to reduce their impact and to handle the inherent randomness of their environment. These findings provide academics and practitioners with a framework to understand the complexities and challenges of the fund management industry, and why the performance is much more than simply net alpha. This research explores new topics which are fundamental to align investor and fund manager interest (e.g., relationship to information, portfolio management, etc.).Item Open Access Bankruptcy Risk Prediction and Pricing: Unravelling the Negative Distress Risk Premium(Cranfield University, 2012-04) Bauer, Julian; Agarwal, VineetIn sharp contrast to the basic risk-return assumption of theoretical finance, the empirical evidence shows that distressed firms underperform non-distressed firms (e.g. Dichev, 1998; Agarwal and Taffler, 2008b). Existing literature argues that a shareholder advantage effect (Garlappi and Yan, 2011), limits of arbitrage (Shleifer and Vishny, 1997) or gambling retail investor (Kumar, 2009) could drive the underperformance. Herein, I test these potential explanations and explore the drivers of distress risk. In order to do so, I require a clean measure of distress risk. Measures of distress risk have usually been accounting-based, market-based or hybrids using both information sources. I provide the first comprehensive study that employs a variety of performance tests on different prediction models. Cont/d.Item Open Access The consequences of financial regulation.(2017-10) Aghanya, Daniel Efe; Poshakwale, Sunil S.; Agarwal, VineetGiven the importance of the financial services for capital accumulation, financial stability, and global financial intermediaries, the last decade has witnessed widespread calls for vigilant regulation of the sector, especially since 2007 to 2009 financial crisis. This has reinvigorated the debates on the economic benefits and costs of regulating the financial services. In this work, I examine the impact of financial regulation on the financial sector to better understand its influence on compliance costs, quality of financial reporting, and risk-taking, as well as the wider impact on the stock market liquidity and price informativeness. I also examine the impact of the UK’s decision to leave the European Union (BREXIT) on the UK stock market and industry. In the first paper, I review the empirical evidence on the literature on financial regulation published over the past thirty-five years with the aim: (1) to extend my understanding of its impact on the financial sector, (2) evaluate whether the regulation achieves the purpose it was designed, and (3) provide insights and suggestions for future research. I find several useful insights have been generated over the past two decades. Despite this progress, I find that most empirical studies were done in the United States, research on other regulatory context is under-researched. Further, most empirical research on costs of regulation exclude the financial sector, and we know that this sector is highly regulated. There is a need for more empirical research to provide insight on the regulatory cost burden to the financial sector. In the second paper, I examine how the Statutory Audit and Corporate Reporting Directives (SACORD) affect the compliance costs, risk-taking and quality of financial reporting of the EU banks. Using a natural experiment, I find that post SACORD, compliance costs of the EU banks increase by 11 to 26 percent. Further, there is a significant increase in risk-taking and a decline in the reporting quality. I conclude that as far as the EU banks are concerned, these regulations do not appear to have the desired effects of improving the reporting quality and constraining risk-taking. In the third paper, I investigate the impact of the MiFID on stock price informativeness and liquidity in the European Union (EU). Using data from 28 EU countries and the Difference in Differences approach, I find that post-MiFID the stock prices reflect greater firm-specific information and the market becomes more liquid. Consistent with the ‘Hysteresis Hypothesis’ the evidence shows that the impact of MiFID regarding price informativeness is greater for countries that have superior quality of regulation. The results are robust with respect to the choice of price informativeness and liquidity proxies as well as the control variables. Finally, in the fourth paper, I analyse the impact of UK referendum outcome (Brexit) on stock prices, along three key arguments made by proponents. I document that restricting EU labour movement is associated with a decline in market value by 9.64% to 10.35% over a 10-day event window. Further, sectors with a majority of their business operations outside the EU fared better than sectors that requires a lot of workforce from the EU. I find evidence that highly regulated sectors benefit more from expected deregulation of EU-derived laws except for the financial institutions. Additionally, internationally focused companies’ performed better than domestically focused firms. In sum, my evidence shows that the market expectations about labour restrictions, streamlining regulation and trade policies significantly affect firm values.Item Metadata only Director prestige, firm performance, value, and risk.(Cranfield University, 2022-10) Khedar, Harsh; Poshakwale, Sunil S.; Agarwal, VineetThis thesis investigates the impact of director prestige on firm performance, value, and risk. The first essay, entitled, “Are prestigious directors mere attractive ornaments on the corporate Christmas tree?”, examines the impact of appointments of prestigious directors on both short- and long-term firm performance. Using the UK’s unique institutional setting of Queen’s honours to measure director prestige, I find that the market reacts positively to the appointment announcements of Prestigious Award-Winning Directors (PAWDs). Further, I show that firms appointing PAWDs show a significant improvement in performance than firms appointing Non-Award-Winning Directors (NAWDs). However, it is the first appointment of a PAWD to firms that are driving the significance implying that there is no incremental value in appointing more than one PAWD to the board. I attribute these findings to the monitoring, legitimacy, and preferential access to resources roles of prestigious directors. My results are robust to several checks controlling for endogeneity arising through omitted variable bias and self-selection bias. In the second essay, entitled, “Prestigious Directors, Firm Acquisitions, Financial Policies and Risk”, I investigate the impact of prestigious directors on the firm’s acquisition behaviour, financial policies such as cash holdings and net leverage and its risk and valuation. I find that firms undertake less acquisitions, especially, diversifying acquisitions, after appointing PAWDs. Moreover, they increase their cash holdings after appointing PAWDs, and hence, their net leverage decreases as firms need not borrow externally due to excess cash. Finally, I find that the firm risk declines and the value increases after the appointment of prestigious directors. I consider these findings to diligent monitoring performed by prestigious directors that reduce managerial private benefits. Overall, my findings are consistent with both the Agency Theory and the Resource Dependence Theory that suggest that prestige not only acts as an incentive to effectively monitor management but also signals higher human and social capital.Item Open Access Does the distress factor hypothesis explain the size and value effects in equity returns?(2002-08) Agarwal, Vineet; Taffler, RichardThe distress factor hypothesis says that value stocks and small stocks are distressed and therefore higher returns on such stocks are merely a compensation for higher risk. I test this hypothesis using z-scores, a cleaner proxy for bankruptcy risk than other proxies used in the literature such as dividend reductions or omissions. I find that unconditionally, distressed stocks earn significantly lower returns than non-distressed stocks and much underperformance is uninfluenced by size and B/M factors. I also find that z-score, size and B/M effects are stronger in different months suggesting little common variation between the three factors. The results show that size and B/M effects are unrelated to bankruptcy risk on an unconditional basis. Of crucial importance is a consideration of the time varying behaviour of bankruptcy risk premia and I consider explicitly the impact of changes in GDP growth rate and the impact of stock market movements on the pricing of distressed firms. I find that risk of bankruptcy is a systematic risk with distressed stocks registering strong underperformance during ‘bad’ states of the world. As with unconditional analysis, the results show there is no link between distress factor and size and B/M effects. Size and B/M effects are stronger in non-distressed stocks. To ensure that the empirical results are robust across different methodologies, I significantly expand on the work of Dichev (1998) by employing two different portfolio formation methods and individual securities in my analysis. My main results on z-scores are robust though size and B/M effects are sensitive to alternative trading rules. I also test the Fama & French (1993) three-factor model for the UK and find that it is unable to explain returns on negative z-score portfolios. A four-factor model that includes a factor mimicking the z-score effect is better specified. The primary contribution of this study is the direct evidence it provides on the distress factor hypothesis of higher returns on value stocks and small stocks and the four-factor model for stock returns. This research has important implications both for extant asset pricing theories and for practitioners especially in evaluation of portfolio performance and computation of abnormal returns.Item Open Access Modelling Credit Risk for SMEs in Saudi Arabia(2017-07) Albaz, Naif; Zhao, Huainan; Agarwal, VineetThe Saudi Government’s 2030 Vision directs local banks to increase and improve credit for the Small and Medium Enterprises (SMEs) of the economy (Jadwa, 2017). Banks are, however, still finding it difficult to provide credit for small businesses that meet Basel’s capital requirements. Most of the current credit-risk models only apply to large corporations with little constructed for SMEs applications (Altman and Sabato, 2007). This study fills this gap by focusing on the Saudi SMEs perspective. My empirical work constructs a bankruptcy prediction model based on logistic regressions that cover 14,727 firm-year observations for an 11-year period between 2001 and 2011. I use the first eight years data (2001-2008) to build the model and use it to predict the last three years (2009-2011) of the sample, i.e. conducting an out-of-sample test. This approach yields a highly accurate model with great prediction power, though the results are partially influenced by the external economic and geopolitical volatilities that took place during the period of 2009-2010 (the world financial crisis). To avoid making predictions in such a volatile period, I rebuild the model based on 2003-2010 data, and use it to predict the default events for 2011. The new model is highly consistent and accurate. My model suggests that, from an academic perspective, some key quantitative variables, such as gross profit margin, days inventory, revenues, days payable and age of the entity, have a significant power in predicting the default probability of an entity. I further price the risks of the SMEs by using a credit-risk pricing model similar to Bauer and Agarwal (2014), which enables us to determine the risk-return tradeoffs on Saudi’s SMEs.Item Open Access Modelling credit risk for SMES in Saudi Arabia.(2017-07) Al Baz, Naif A.; Zhao, Huainan; Agarwal, VineetThe Saudi Government’s 2030 Vision directs local banks to increase and improve credit for the Small and Medium Enterprises (SMEs) of the economy (Jadwa, 2017). Banks are, however, still finding it difficult to provide credit for small businesses that meet Basel’s capital requirements. Most of the current credit-risk models only apply to large corporations with little constructed for SMEs applications (Altman and Sabato, 2007). This study fills this gap by focusing on the Saudi SMEs perspective. My empirical work constructs a bankruptcy prediction model based on logistic regressions that cover 14,727 firm-year observations for an 11-year period between 2001 and 2011. I use the first eight years data (2001-2008) to build the model and use it to predict the last three years (2009-2011) of the sample, i.e. conducting an out-of-sample test. This approach yields a highly accurate model with great prediction power, though the results are partially influenced by the external economic and geopolitical volatilities that took place during the period of 2009-2010 (the world financial crisis). To avoid making predictions in such a volatile period, I rebuild the model based on 2003-2010 data, and use it to predict the default events for 2011. The new model is highly consistent and accurate. My model suggests that, from an academic perspective, some key quantitative variables, such as gross profit margin, days inventory, revenues, days payable and age of the entity, have a significant power in predicting the default probability of an entity. I further price the risks of the SMEs by using a credit-risk pricing model similar to Bauer and Agarwal (2014), which enables us to determine the risk-return tradeoffs on Saudi’s SMEs.Item Open Access Quality-at-reasonable-price: developing a UK equity portfolio(Cranfield University, 2019-03) Bissat, Mohamad Ali; Agarwal, VineetEquity investing has evolved significantly since its formalisation during the early twentieth century. Two major recent evolutions are Quality investing and Value investing. Asness et al. (2019) demonstrate fundamentally strong stocks have higher expected returns. Solt and Statman (1989) show that strong companies can be bad investments. Therefore, it is important that investors do not overpay for quality. In this research, I demonstrate that a quality-at-reasonableprice equity portfolio outperforms on an absolute and risk-adjusted basis. Using the non-financial FTSE 350 constituents at the end of December of each year from 2000 to 2016, I develop a multidimensional approach using Quality and Value variables that generate a significant outperformance. Before risk adjustment, the portfolio produces an average monthly return of 0.99% with an annualised Sharpe ratio of 0.73. This compares with an average monthly return of 0.46% and an annualised Sharpe ratio of 0.30 for the remaining stocks in the benchmark. Regression analysis demonstrates that the investment approach produces statistically significant Alpha. Adjusting for risk using the Fama and French (1993) and Carhart (1997) four-factor model, the portfolio earns a statistically highly significant (t = 4.4) abnormal return of 0.56% per month. This compares with a weakly significant (t = 1.5) abnormal return of 0.16% per month for the remaining stocks in the benchmark. In this project, I propose an optimised approach to equity investing relative to passive indexing and traditional active stock selection. Unlike most academic research which works with all stocks including small and micro stocks (e.g. Fama and French (1992, 1993, 1996), Piotroski (2000) and Bartram and Grinblatt (2018)), I consider only the larger stocks in the UK by restricting my sample to the non-financial members of the FTSE 350 index. Since I use only large and more liquid stocks, my strategy can be easily implemented by investors.