Revisionist Revisions at IBES!

Like many academics in the fields of finance and accounting, I regularly use the IBES (Institutional Brokers Estimate System) database of analyst forecasts (compiled by Thomson) in my research. So this next piece troubled me. It seems like restatements are not just limited to companies - IBES makes them too!

Ljungqvist, Malloy, and Marston have done a very interesting study of IBES forecasts titled Rewriting History. They find that the some "bad" analysts reports on IBES are subsequently removed from the database in later versions:

Comparing two snapshots of the entire I/B/E/S analyst stock recommendations database, taken in 2002 and 2004 but each covering the same time period 1993-2002, we identify nearly twenty thousand changes of an unusual nature: the selective removal of analyst names from historic recommendations ("“anonymizations"”). This practice turns out to be pervasive and non-random: Bolder recommendations are more likely to be anonymized, as are recommendations from more senior analysts, Institutional Investor "“all-stars,"” and those who remain in the industry beyond 2002. Abnormal stock returns following subsequently anonymized buy recommendations are significantly lower (by up to 11.0% p.a.) than those following buy recommendations that remain untouched, suggesting that particularly embarrassing recommendations are most likely to be anonymized. Analysts whose track records appear brighter due to anonymizations experience more favorable career outcomes over the 2003-2005 period than their track records and abilities would otherwise warrant.

It's reminiscent of the old Soviet style of rewriting history to suit current needs. In retrospect (no pun intended), it doesn't surprise me that this could happen. But it does make Thomson look pretty bad. It also might add some biases to the data that might make researchers less likely to trust results derived from this data.

I know it's got me thinking about how this affects my current IBES-based project.

HT: The New Economist

Update: I just received an email from a representative of Thomson (the company that puts IBES together). In the interest of fairness, I thought I'd post it here:

“The conclusions of the report are wrong. The integrity of Thomson Financial’s I/B/E/S database is without question and all analyst ID’s and their recommendations are maintained in the master I/B/E/S database. This particular report was based on an incomplete data set. The analyst data in question was however, available in other subfiles, which were accessible to the researchers. While we are disappointed the report was issued as is, we have reached out to the authors to ensure they both understand the data and alternate mechanisms to access the data they were originally looking for.”

I'm agnostic about the whole business, but time will tell which story holds more water.

But I must say, I'm impressed that the Thomson p.r. department understands enough about reputation and the internet to monitor the blogosphere.

Wednesday Link Dump

It's post-election hangover time, and it looks like the Democrats have taken the House (and possibly the Senate). So it's back to work. Here are today's links:

All it took was Tom Cruise, and Going Private is back! Once again EquityPrivate is talking about "Vegetable Capital". And it doesn't refer to this.

There are a couple of Carnivals to go to. City Girl is hosting The Carnival of Personal Finance (my personal favorite is 10 Ways To Save On Beer (with beer calculator ). And the Carnival of the Capitalists is up at Gill blog. Make sure to check out Dan Melson's post on Sellers Lending to Buyers and Selling the Note and Sox First on accountants pushing to get government protection from shareholders who might want to sue them for doing bad audits.

EconLog highlights research by Hausman on WalMart. He finds that Walmart is good for economic efficiency - it cuts suppliers' margins and passes the savings along to customers, thereby driving producers closer to marginal costs. And it benefits the poor more than the rich.

I learned about another financial instrument today The Financial Times discusses the how and why of CPDOs (Constant Proportion Debt Obligations). The new products and strategies created by financial engineers never cease to amaze me.

And for a chuckle, Dan Melson at Searchlight Crusade links to a way of dealing with telemarketers I wish I'd though of.

And now, it's time to do some research ( Maybe on IBES data...).

Prediction Markets and Elections - Updated

I'm a big fan of prediction markets. They're a very good way of illustrating how markets impound information into prices.

Since today is election day, I thought I'd put a link up to Tradesports. For those of you who've never heard of it, Tradesports runs a futures market that allows you to bet on various events. Since the contract pays $1 if the event occurs, some fairly basic algebra shows that its fair price is essentially the probability that the event will occur.

To illustrate this, let's look at the contracts for Republican Control of the House and Senate. They're trading at $0.17 and $0.698 at the time of this posting. This implies that the traders in these markets currently assess the probability of Republicans retaining control of the House at 17% and of the Senate at 69.8%.

To see how information affects the contracts' prices, assume a trader had information that led him to believe that the chance of Republicans retaining House control was actually much higher than 17% (let's say 45%, for example). If so, he'd consider the current price a real bargain, and would start buying contracts. This would drive the price up until his information was fully reflected in the price.

Like I've said before, they're not a perfect predictor. But I do trust them much more than polls. I have several friends who make it a point to answer incorrectly whenever a pollster calls -- just so the polls will be less useful. Granted, I have a pretty contrarian bunch of friends, but I doubt they're alone.

In contract, in a prrediction market, the traders' own personal ideologies wouldn't matter - if they thought the probabilities were off, they'd trade in the contracts to make money.

Any one trader could be wrong. But if there are enough players in the market, the prices would be pretty good aggregators of everyone's info.

So check into Tradesports throughout the day, and see how the prices (and hence, the probabilities) change.

Updated 11/8: As of 10:15 a.m., Tradesports gave the Republicans between a 10.5% and 12.5% chance of retaining control in the Senate (obviously, trading in the House Control contract has closed).

Tuesday Link Dump

Since I'm teaching on a MWF schedule this fall, today is an off off day - no teaching. But tomorrow is also an off day. Unknown University has a very interesting approach to calendars and the days of the week. Since today is election day, we have it off (somebody must have done a great job in negotiating - we get days off for alomost every conceivable holiday, and a few that aren't).

But, it gets even stranger - since classes on Tuesday were skipped, tomorrow (which is Wednesday anywhere else) becomes Tuedsay and Wednesday disappears into some academic black hole. Other times, if we have a Monday off, Tuesday becomes Monday. It has something to do with making sure all days meet an equal amount of time, but it does get a bit surreal at times.

So, without further calendarial confusion, here's the Tuesday (or whatever it is this week) Link Dump:

In addition to being one of the smartest economists around, Kevin Murphy of the U of Chicago also had one of the more unusual goals in life - to be the "world's best coauthor." He's done that HT: Marginal Revolution

Barry Rehfeld of the NY Times online discusses the Long-term investment performance of spinoffs

Craig Newmark links to a list of 50 Things for professors to do on the first day of class. Maybe next semester.

Since I just linked to an interview of Eugene Fama yesterday, it's only fitting that I link today to a Wall Street Journal Article on Dimesionsl Fund Advisors. It's run by former Fama students who use a lot of his work, and Fama sits on the board.

There's a story in Marketwatch.com about a new search engine called Powerset. It's not publicly available yet, but it sounds very interesting - it allows "natural language" queries and seems to understand the context of a question.

Back to the world of research. I'll get back to teaching stuff on Wednesday (er, ah, Tuesday. Or whatever they call it this week).

Eugene Fama Speaks

It's the start of a new week at Unknown University. And what better way to get it started off right than with an interview of one of the "founding fathers" of modern finance, Eugene Fama . His dissertation (published whole in the Journal of Business in 1965) set the groundwork for the modern version of the theory of efficient markets, and he's played a big part in many of its subsequent developments.

Click here to read an interview of Fama by Nina Mehtais in Financial Engineeering News.

Fama does a great job of explaining the way the development of the CAPM affected the discussion of market efficiency:

Nobody realized before that if the market was working properly, you had to say something about what the market was doing in setting prices in terms of the relation between expected return and risk. Something like the Capital Asset Pricing Model was necessary before you could really test market efficiency. If you look back, you can see primitive statements about expected returns that were built into tests people were doing. But they didn’t realize they were making these statements.

FEN: What are you referring to?
EF: If you say autocorrelations must be close to zero, what you’re really saying is that expected returns are constant, so that’s a statement about equilibrium right there.

There's much, much more in the article. Read the whole thing -- it's short, and well worth it.

TGIF Link Dump

Yes, it's Friday at Unknown University (and everywhere else, for that matter). I've taught my classes, graded my exams, and even done a little research.

Unfortunately, I also had to fill out faculty evaluation forms for other faculty. Yes, that's right -- at Unknown University, ALL college members get to chime in on ALL tenure and promotion cases.

So, we end up in the ridiculous situation of a brand new untenured assistant professor filling out an evaluation of whether or not an Associate should be promoted to Full. And better yet - the associate professor can ask to see the untenured assistant professor's evaluations (after the fact, but still, it's a possibility).

Since I'm brand new, I decided not to fill out evaluations for anyone but the two assistant professors in my area that are going up for tenure, and a couple of other assistant professors who have regular annual reviews (I know their work, so it's pretty easy). Both should be shoo-ins for tenure, but stranger things have happened. As for the others, if I'm challenged for not having filled out an evaluation, I'll just say that I'm not comfortable with my ability to make a decision that carries so much importance.

In any event, here are some links to keep y'all busy while I go out for a Strongbow's Cider ( or two) with some colleagues (who aren't up for either tenure or full):

Ever wonder what GDP, CPI, and all those other acronyms mean? About Economis has a good primer on economic indicators.

The scheduled host of the Carnival of the Capitalists screwed up. So, the fine folks who run the Carnival have posted it here.

And last but not least, Seeking Alpha discusses ETFs with 12b-1 fees. Now THAT's an investment to avoid.

Enough blogging - pass the StrongBows.

ETFs That Don't Follow Indexes

Tuesday's Wall Street Journal carried a piece titled ETFs Redefine What is An 'Index', which reported on a new trend in ETFs. The first ETFs tracked known market benchmarks, like the S&P 500 or the Dow Jones average. However, since most of the well known indexes are taken, Amex has started offering ETFs that track "rules based portfolios".

What's a rule based portfolio? It's a portfolio constructed based on some rule, or algorithm. An example might be "the stocks in the lowest decile of Earnings-price ratios" or "all mid cap stocks that have had 5 years of greater than 10% annual revenue growth".

So what's the difference between a "rule based portfolio and an actively managed one? I can't see one, but the proponents of these funds say that the algorithm will be executed entirely by computer, so there's no human judgement or discretion involved.

It's an interesting concept, and one that might spark a lot of classroom discussion. Here are a few questions I'll be asking my investments class:

1) What's the difference between a rule-based ETF and an actively managed mutual fund?

2) What role might these funds play in an investment portfolio?

3) If these ETFs become more popular (and I bet they will), how will it change the nature of the investment process (for either individuals or professional money managers)?

4) Will these ETFs eliminate the need for security analysis?

As I said, interesting stuff. And they pay me to do this. Amazing.