Stephen Foerster

• Dang, C. D.; Foerster, S. R.; Li, Z. F.; Tang, Z., 2021, "Analyst Talent, Information, and Insider Trading", Journal of Corporate Finance, April 67
  Abstract: We examine 1984-2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm’s information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-ability analysts contribute more firm-specific information. Firms covered by high-ability analysts experience significantly less insider trading prior to positive earnings news. Results only reside in opportunistic (not routine) trades. When an analyst initiates (terminates) coverage we find decreased (increased) subsequent insider trading. Both changes are primarily driven by analyst talent. Analyst ability also negatively relates to insider trading profitability.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.jcorpfin.2020.101803

• Foerster, S. R.; Linnainmaa, J.; Melzer, B.; Previtero, A., 2017, "Retail Financial Advice: Does One Size Fit All?", Journal of Finance, August 72(4): 1441 - 1482.
  Abstract: Using unique data on Canadian households, we assess the impact of financial advisors on their clients’ portfolios. We find that advisors induce their clients to take more risk, thereby raising expected returns. On the other hand, we find limited evidence of customization: advisors direct clients into similar portfolios independent of their clients’ risk preferences and stage in the life cycle. An advisor’s own portfolio is a good predictor of the client’s portfolio even after controlling for the client’s characteristics. This one-size-fits-all advice does not come cheap. The average client pays more than 2.7% each year in fees and thus gives up all of the equity premium gained through increased risk-taking.

  Link(s) to publication:

  http://dx.doi.org/10.1111/jofi.12514

• Foerster, S. R.; Tsagarelis, J.; Wang, G., 2017, "Are Cash Flows Better Stock Return Predictors Than Profits?", Financial Analysts Journal, February 73(1): 73 - 99.
  Abstract: While various income statement-based measures such as Novy-Marx’s (2013) gross profits-to-assets measure have the power to predict the cross section of stock returns, direct method cash flow measures have even stronger power. We transform indirect cash flow method statements into disaggregated and more direct estimates of cash flows from operations and other sources. We form portfolios based on these direct method cash flow measures. Stocks in the highest cash flow decile outperform those in the lowest decile by over 10% annually, risk-adjusted. Our results are robust to investment horizons, and across risk factors, including controlling for sector differences. We also show that, in addition to operating cash flow information, cash taxes and capital expenditures provide incremental predictive power.

  Link(s) to publication:

  http://dx.doi.org/10.2469/faj.v73.n1.2

• Foerster, S. R.; Sapp, S.; Shi, Y. N., 2014, "The Effect of Voluntary Disclosure on Firm Risk and Firm Value: Evidence from Management Earnings Forecasts", Advances in Quantitative Analysis of Finance and Accounting, October 12: 179 - 213.
  Abstract: This study investigates whether the voluntary disclosure of management earnings forecasts is associated with investors' assessment of firm risk and firm value. We find a significant negative relationship between the issuance of management earnings forecasts and a variety of measures of firm risk (idiosyncratic risk, stock return volatility, beta, and bid-ask spreads). Considering specific features of the management earnings forecasts, we find more frequent, more precise and more accurate earnings forecasts are associated with a larger decrease in firm risk. Our results therefore suggest that information quality is an important determinant of both diversifiable risk and nondiversifiable systematic risk. We also demonstrate that management earnings forecasts are positively associated with firm value as captured by Tobin's Q. More frequent, precise and accurate forecasts further enhance valuation premiums. Finally, we partition our sample into good news versus bad news forecasts, and show that the results are driven more by good news forecasts. Overall, releasing high-quality management earnings forecasts is associated with important capital market benefits.

  Link(s) to publication:

  https://www.airitilibrary.com/Common/Click_DOI?DOI=10.6293%2fAQAFA.2014.12.07

• Foerster, S. R.; Fogler, L.; Sapp, S., 2014, "Northern Exposure: How Canadian Micro-Cap Stock Investments Can Benefit Investors", Journal of Investment Consulting, August 15(1): 36 - 50.
  Abstract: Micro-cap stocks, a subset of small stocks, have the potential to provide additional diversification benefits and increased returns to investors. The ways that micro-cap stocks can contribute to investors’ actual portfolios have not been rigorously investigated. In this study, we examine micro-cap stocks in Canada and consider investability constraints and transaction costs that are overlooked in most other size-effect studies. We find that micro-cap stocks in Canada have relatively high returns and a low correlation to large stocks in Canada, the United States, and other developed markets. We conclude that these findings demonstrate that Canadian micro-cap stocks appear to represent a unique asset class and that investing in this unique asset class can improve the risk-return characteristics for global investors’ overall portfolios. We therefore suggest that global investors consider adding Canadian micro-cap stocks to their portfolios.

  Link(s) to publication:

  https://publications.investmentsandwealth.org/iwmonitor/library/item/vol__15__no__1__2014/4123183/?_gl=1*v8kpio*_gcl_au*Njk4MTAxNTU1LjE3Mjk2MDQwMTY.*_ga*MzE3NDA2MjI3LjE3Mjk2MDQwMTc.*_ga_CDLJEYZYTF*MTcyOTYwNDAxNi4xLjAuMTcyOTYwNDAxNi42MC4wLjA.

• Foerster, S. R.; Sapp, S., 2011, "Back to Fundamentals: The Role of Expected Cash Flows in Equity Valuation", North American Journal of Economics and Finance, December 22(3): 320 - 343.
  Abstract: To better understand how investors have historically valued equities, we compare monthly values of the S&P Index to our corresponding estimated fundamental values from 1871 to 2010, using ex ante available information. We find that the simple Gordon Growth Model performs better than other, more sophisticated valuation models. Based on the Gordon Growth Model, equities were undervalued prior to 1914, overvalued between 1914 and 1981, and fairly valued until 2010 after controlling for well-known economic and price-based factors. We also find the implied market risk premium over this period is around 5%.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.najef.2011.06.001

• Foerster, S. R., 2011, "Double Then Nothing: Why Stock Investments Relying on Simple Heuristics May Disappoint", Review of Behavioral Finance, November 3(2): 115 - 140.
  Abstract: Behavioral researchers argue that while individuals often rely on heuristics or rules of thumb that reduce the complexity involved in predicting values, such heuristics can lead to severe and systematic errors. I test this argument in an investment context by focusing on a simple heuristic whereby momentum traders are attracted to buying stocks that have recently doubled in price in anticipation of further gains. I show that such a strategy can lead to predictable disappointment for these investors and severe underperformance relative to the market (-28% over a four-year period), whereas investors who avoid relying on this simple heuristic are likely to perform as expected, on average similar to the overall market. I also find that underperformance is more severe for stocks that have doubled faster. The 'doubling' variable is a significant predictor of future price reversals in addition to past performance per se, as uncovered by DeBondt and Thaler (1985).

  Link(s) to publication:

  http://dx.doi.org/10.1002/rbf.18

• Brown, J.; Crocker, D.; Foerster, S. R., 2009, "Trading Volume and Stock Investments", Financial Analysts Journal, April 65(2): 67 - 84.
  Abstract: Previous studies suggest trading volume measures may proxy for a number of factors including liquidity, momentum and information content. For relatively illiquid (typically smaller) stocks, investors may demand a liquidity premium resulting in a negative relationship between trading volume (as a proxy for liquidity) and stock returns. However, for more liquid (typically larger) stocks which are the focus of our study, we conjecture that momentum and information effects may dominate and result in a positive relationship between trading volume and stock returns. We find that portfolios of S&P 500 and large cap stocks sorted on higher trading volume and turnover tend to have higher subsequent returns (1 through 12-month holding periods) than those with lower trading volume.
• Dunbar, C. G.; Foerster, S. R., 2008, "Second Time Lucky? Withdrawn IPOs that Return to the Market", Journal of Financial Economics, March 87(3): 610 - 635.
  Abstract: We investigate issuers withdrawing an IPO (after security regulation filings) that return later for a successful offering. Venture capital backing and reputation of the lead underwriter are key factors in predicting successful return. The possibility of returning has a significant impact on the choice to withdraw and the pricing of offerings that succeed. Our sample of returning IPOs also provides a unique setting to investigate underwriter switching after a withdrawal but before a successful IPO. We find that switching occurs in response to poor bank performance and when switching firms 'graduate' to banks that have high industry market shares.
• Foerster, S. R.; Sapp, S., 2006, "The Changing Role of Dividends: A Firm-Level Study From the Nineteenth to the Twenty-First Century", Canadian Journal of Economics, November 39(4): 1316 - 1344.
  Abstract: We investigate the changes in dividend policy for one of North America's oldest banks (and Canada's first bank), Bank of Montreal, over time by considering the relationships between dividends, prices and earnings for this prominent firm. In the early part of the sample we find that annual dividend and earnings changes are highly variable with dividend changes following changes in earnings, and a larger portion of investors' returns coming from dividends. Since World War II dividend policy is characterized by more stable and gradual increases in dividends with more of investors' returns coming from capital gains. Overall our results suggest that investors' perception of dividends has changed over time allowing management to pay smaller dividends and re-invest funds in the firm.
• Foerster, S. R.; Sapp, S., 2005, "The Dividend Discount Model in the Long-Run: A Clinical Study", Journal of Applied Finance, October 15(2): 55 - 75.
  Abstract: Finance professionals frequently value assets using fundamental valuation methods which discount the expected cash flows received by investors. Using information on the share price, dividend payments, and earnings for a single firm over a period of more than 120 years, we compare the actual share price to the expected price-calculated using several of the most commonly used fundamental valuation methods. Since these methods depend on the estimation of inputs-such as the discount rate and growth rate-we discuss the sensitivity of the expected prices to different estimation techniques and the relevant assumptions across various economic conditions. Over our entire sample period, we find that dividend-based models perform well at explaining actual prices they perform better than commonly used earnings-based models (such as the Fed Model).
• Foerster, S. R.; Sapp, S., 2005, "Valuation of Financial Versus Non-Financial Firms: A Global Perspective", Journal of International Financial Markets, Institutions & Money, January 15(1): 1 - 20.
  Abstract: It is common practice in many empirical studies in finance to exclude financial services firms from the samples used in different stages of the analysis. In this paper we analyze the impact of this exclusion on common asset pricing tests by comparing the results using data both including and excluding financial sector firms in the countries with the largest financial sectors (the G7 countries plus the Netherlands and Switzerland) over the 1973 to 2000 period. We find that excluding financial service firms from empirical asset pricing tests can impact the corresponding inferences. It may influence both the identification of the number of risk factors found to be significant and the corresponding betas. For example, the estimated coefficients on some factors are significantly negative for the financials and significantly positive for many of the non-financials. We also show that, using a Fama-MacBeth (1973) test procedure, we fail to reject some models when financial firms are included in tests, but reject the same models when financials are excluded. Consequently we suggest researchers recognize the possible impact of the industry composition of the portfolios used in empirical studies.
• Foerster, S. R.; Sapp, S., 2003, "How Do Interest Rate Changes Affect Equities?", Canadian Investment Review, January 16(1): 26 - 34.
  Abstract: This article address two important issues related to Canadian stock prices and interest rates. First, if interest rate changes drive stock prices, which is the most important type of interest rate? Second, after controlling for market risk, how do stocks in various industries react to interest rate changes? These questions are important for sector rotators and for hedge fund managers who might be attempting to develop a 'market neutral' position while unaware of the resulting interest rate exposure of their strategy. Although interest rate changes should impact on all stocks to some extent, interest-sensitive stocks should be more greatly affected by changing rates than other stocks. Because of this, the investigation is focused on interest-sensitive stocks, primarily financial institution stocks.
• Foerster, S. R.; Karolyi, G. A., 2000, "The Long Run Performance of Global Equity Offerings", Journal of Financial and Quantitative Analysis, January 35(4): 499 - 528.
  Abstract: We investigate the long-run return performance of non-US firms that raise equity capital in U.S. markets. Overall, between 1982 and 1996, our sample of 333 global equity offerings with U.S. depositary receipt (ADR) tranches from 35 countries in Asia, Latin America, and Europe under-perform local market benchmarks of comparable firms by 8%-15% over the three years following issuance. We show that differences in long-run returns are related to the scope and magnitude of investment barriers that induce segmentation of capital markets around the world. While companies from markets with significant investment barriers for foreigners that issue equity on major U.S. exchanges outperform their benchmarks, those from segmented markets that issue equity in the U.S. by way of Rule 144A private placements significantly under-perform. We also show that inter-market competition for order flow in the post isuance pursued affects long-run performance. Post-issuance buy-and-hold abnormal returns are most significantly and positively related to the offering's ability to generate a larger share of U.S. trading volume.
• Foerster, S. R.; Karolyi, G. A., 1999, "The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence From Foreign Stock Listings in the United States", Journal of Finance, January 54(3): 981 - 1013.
  Abstract: Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis.

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