Abstracts - Financial Services Review

Abstracts:

Financial Services Review
Volume 4 Number 2, 1995 (Index Issue)

Fund Closings as a Signal to Investors: Investment Performance of Open-End Mutual Fund That Close to New Shareholders
(pp. 71-80) DOWNLOAD FULL-TEXT ARTICLE
Timothy R. Smaby, John L. Fizel

ABSTRACT
This article examines the growing phenomenon of mutual fund closings by analyzing the investment performance of open-end funds that close to new investors. We find that: (1) the average excess return (estimated by Jensen's alpha) was positive in the 24 months prior to closing, (2) the average excess return was not significantly different from zero in the 24 months after closing, and (3) the funds in the sample on average exhibited a significant decline in investment performance after closing. These findings suggest that the fund managers' strategic decision to close the fund in order to slow down the growth in net assets does not prevent investment performance from declining. For the individual investor, an impending fund closing is a signal not to invest in the fund. It is also a signal that current shareholders consider alternative investments.

Commission-Motivated Trading Patterns Of Brokers Across the Production Month
(pp. 81-95) DOWNLOAD FULL-TEXT ARTICLE
Earl D. Benson, David S. Rystrom, Greg T. Smersh

ABSTRACT
The intramonth pattern of broker commission earnings is examined for a sample of one hundred brokers from a national brokerage firm. It is hypothesized that the structure of broker commissions leads to distortions in trading. The evidence shows that in the last five days of the production month, more than one-fourth of the brokers earned a significantly higher proportion of their monthly commissions than would be expected if trading were uniform across the month. This suggests that the structure of the commission system may lead some brokers to encourage individual investors to unnecessarily trade securities near the end of the production month to boost their commission income.

Optimal Holding Period for Assets That Must Be Liquidated: A Certainty Equivalent Wealth Approach
(pp. 97-108) DOWNLOAD FULL-TEXT ARTICLE
John R. Knight, Lewis Mandell

ABSTRACT
Consumers often invest with a specific goal in mind and often know with some precision when the investment proceeds will be needed to achieve that goal. Because different investors have different attitudes toward risk and because different asset types exhibit different risk characteristics, there is often confusion as to the appropriate investment asset for a particular investor with a known investment horizon. It is also frequently unclear as to whether investments should be switched to a less risky asset as time to liquidation becomes short. This paper addresses the issues of initial asset choice and the advisability of switching among assets when the investment goal date is known, employing the methodology of certainty equivalent wealth. In addition to suggesting optimal investment strategies for individuals based upon holding period and degree of risk aversion, it shows that switching investment assets produces suboptimal results.

The Market Pricing of Disability Income Insurance for Individuals
(pp. 109-122) DOWNLOAD FULL-TEXT ARTICLE
Larry A. Cox, Sandra G. Gustavson

ABSTRACT
Individuals' needs for disability income insurance dominate those for life insurance, yet relatively few buyers and sellers enter into disability contracts compared to life contracts. This phenomenon appears contradictory to the existence of a workably competitive market. This study examines the relation of disability income insurance prices to underlying contractual and insurer characteristics. Our results are supportive of a competitive market scenario. We observe a strong relation between prices and elimination periods, which is consistent with the presence of adverse selection. Our results have implications for how individuals should choose some policy and insurer characteristics, but they also suggest that buyer may need to be better informed about other pricing factors.

Credit Cards and the Option to Default
(pp. 123-136) DOWNLOAD FULL-TEXT ARTICLE
A. Charlene Sullivan, Debra Drecnik Worden

ABSTRACT
The value of the option to default on unsecured credit contracts is estimated and found to be significantly impacted by state and federal laws governing creditors' collection practices and bankruptcy. The data suggest that the expected value of the option to default influences debtors' choices in default and is correlated with their use of their credit cards before default. Cardholders who use their lines of credit very intensely before default are significantly more likely to make choices in default which allow them to realize a greater benefit from default. Furthermore, these results offer a possible explanation for consumers' seeming insensitivity to interest rates charged on revolving lines of credit.

Household Insolvency: A Review of Household Dept Repayment, Delinquency, and Bankruptcy
(pp. 137-156) DOWNLOAD FULL-TEXT ARTICLE
Sharon A. DeVaney, Ruth H. Lytton

ABSTRACT
This review paper explores the issues related to the meaning and measurement of insolvency within the domain of household finances. Conceptual and empirical evidence to explain the onset of insolvency is reviewed. Predictive models and financial ratios are presented as techniques for identifying insolvent households. Implications for monitoring of solvency by households and responses to insolvency are presented.


THE JOURNAL OF INDIVIDUAL FINANCIAL MANAGEMENT
*Abstracts:* Financial Services Review Volume 4 Number 2, 1995 (Index Issue) Fund Closings as a Signal to Investors: Investment Performance of Open-End Mutual Fund That Close to New Shareholders (pp. 71-80) DOWNLOAD FULL-TEXT ARTICLE Timothy R. Smaby, John L. Fizel ABSTRACT This article examines the growing phenomenon of mutual fund closings by analyzing the investment performance of open-end funds that close to new investors. We find that: (1) the average excess return (estimated by Jensen's alpha) was positive in the 24 months prior to closing, (2) the average excess return was not significantly different from zero in the 24 months after closing, and (3) the funds in the sample on average exhibited a significant decline in investment performance after closing. These findings suggest that the fund managers' strategic decision to close the fund in order to slow down the growth in net assets does not prevent investment performance from declining. For the individual investor, an impending fund closing is a signal not to invest in the fund. It is also a signal that current shareholders consider alternative investments. Commission-Motivated Trading Patterns Of Brokers Across the Production Month (pp. 81-95) DOWNLOAD FULL-TEXT ARTICLE Earl D. Benson, David S. Rystrom, Greg T. Smersh ABSTRACT The intramonth pattern of broker commission earnings is examined for a sample of one hundred brokers from a national brokerage firm. It is hypothesized that the structure of broker commissions leads to distortions in trading. The evidence shows that in the last five days of the production month, more than one-fourth of the brokers earned a significantly higher proportion of their monthly commissions than would be expected if trading were uniform across the month. This suggests that the structure of the commission system may lead some brokers to encourage individual investors to unnecessarily trade securities near the end of the production month to boost their commission income. Optimal Holding Period for Assets That Must Be Liquidated: A Certainty Equivalent Wealth Approach (pp. 97-108) DOWNLOAD FULL-TEXT ARTICLE John R. Knight, Lewis Mandell ABSTRACT Consumers often invest with a specific goal in mind and often know with some precision when the investment proceeds will be needed to achieve that goal. Because different investors have different attitudes toward risk and because different asset types exhibit different risk characteristics, there is often confusion as to the appropriate investment asset for a particular investor with a known investment horizon. It is also frequently unclear as to whether investments should be switched to a less risky asset as time to liquidation becomes short. This paper addresses the issues of initial asset choice and the advisability of switching among assets when the investment goal date is known, employing the methodology of certainty equivalent wealth. In addition to suggesting optimal investment strategies for individuals based upon holding period and degree of risk aversion, it shows that switching investment assets produces suboptimal results. The Market Pricing of Disability Income Insurance for Individuals (pp. 109-122) DOWNLOAD FULL-TEXT ARTICLE Larry A. Cox, Sandra G. Gustavson ABSTRACT Individuals' needs for disability income insurance dominate those for life insurance, yet relatively few buyers and sellers enter into disability contracts compared to life contracts. This phenomenon appears contradictory to the existence of a workably competitive market. This study examines the relation of disability income insurance prices to underlying contractual and insurer characteristics. Our results are supportive of a competitive market scenario. We observe a strong relation between prices and elimination periods, which is consistent with the presence of adverse selection. Our results have implications for how individuals should choose some policy and insurer characteristics, but they also suggest that buyer may need to be better informed about other pricing factors. Credit Cards and the Option to Default (pp. 123-136) DOWNLOAD FULL-TEXT ARTICLE A. Charlene Sullivan, Debra Drecnik Worden ABSTRACT The value of the option to default on unsecured credit contracts is estimated and found to be significantly impacted by state and federal laws governing creditors' collection practices and bankruptcy. The data suggest that the expected value of the option to default influences debtors' choices in default and is correlated with their use of their credit cards before default. Cardholders who use their lines of credit very intensely before default are significantly more likely to make choices in default which allow them to realize a greater benefit from default. Furthermore, these results offer a possible explanation for consumers' seeming insensitivity to interest rates charged on revolving lines of credit. Household Insolvency: A Review of Household Dept Repayment, Delinquency, and Bankruptcy (pp. 137-156) DOWNLOAD FULL-TEXT ARTICLE Sharon A. DeVaney, Ruth H. Lytton ABSTRACT This review paper explores the issues related to the meaning and measurement of insolvency within the domain of household finances. Conceptual and empirical evidence to explain the onset of insolvency is reviewed. Predictive models and financial ratios are presented as techniques for identifying insolvent households. Implications for monitoring of solvency by households and responses to insolvency are presented.