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MS in Finance students answer burning investment questions

Jennifer Anzaldi — Tue, 22 Oct 2024 17:08:48 +0000

MS in Finance students answer burning investment questions Jennifer Anzaldi Tue, 10/22/2024 - 13:08

In This Story

Derek Horstmeyer

�鶹��Ƶ Master of Science in Finance students have the rare opportunity to use their budding analytical skills to solve some of the mysteries of today’s financial markets. Moreover, their faculty-supervised research projects can land their names in the pages of The Wall Street Journal.

To date, these projects have spawned nearly 40 WSJ articles, not to mention dozens of write-ups in outlets such as MarketWatch, The Conversation, and the CFA Institute blog. They have also received television coverage on CNN and NewsNation.

SMIF officers Yashkaran Sidhu, Jonathan Pino, Matthew Rickard, Raheeg Joari, and Reema Hammad at the Chicago SMIFC conference.

As Costello College of Business finance professor Derek Horstmeyer tells it, the process started taking shape organically. “I had started writing for the CFA and The Wall Street Journal. In my talks with my students, some of them revealed they had research interests. It just kind of took off from there—I would bring it up in class and offer to supervise a research project that would last about a week.”

Student researchers are mainly recruited from Horstmeyer’s Montano Student Managed Investment Fund (SMIF) class, a hands-on exercise in security analysis and portfolio construction that serves as a capstone to the MS in finance degree.

While many student research projects originate with questions suggested by the students themselves, Horstmeyer helps the student teams devise their scope and direction.

“They might say, for example, that they’re interested in crypto. So I’ll show them previous articles on crypto and we kind of develop a new idea from there,” Horstmeyer says.

By the time they get to SMIF, students are usually comfortable getting their hands dirty with data. Finding the appropriate data-set for the question they’ve posed, however, can be a challenge. That’s another area where Horstmeyer’s support becomes critical. “The big bottleneck is they just don’t know where the data is,” he says. “We as faculty have access to these private databases. So I’ll guide them or set up the data.”

Horstmeyer also introduces the student teams to the best methods for parsing the data, while leaving students enough leeway to conduct independent follow-up analyses if needed.

Of the dozens of projects completed thus far, there are a few that, for Horstmeyer, typify the process at its best. For example, finance students Matthew Rickard and Camila Marín Builes investigated how stock-market trends fare once they have been familiarized enough to warrant a nickname. Among the eight named trends included in the study were FAANG (Facebook, Amazon, Apple, Netflix and Google), and “The Magnificent Seven” (Nvidia, Tesla, Meta, Apple, Alphabet, Amazon, and Microsoft).

“We did an extensive Google search to find the biggest named trends. Then we used the Wayback Machine to figure out when the trend was first coined, like the exact date. We did all sorts of tests to determine what kind of abnormal returns you can expect if you stick with that trend,” Horstmeyer explains.

The students found that newly christened trends experience an extended honeymoon period of about 12 months, amounting to an average of 13 percentage points in excess returns. But in their second year, trends start to go stale, underperforming the S&P 500 by an average of two points.

The Wall Street Journal published Horstmeyer’s article “Once a Hot Stock-Market Trend Has a Name, Its Best Days Are Likely Past”—published under his byline with the student researchers mentioned by name early on—in March 2024.

Horstmeyer says that participating in these projects helps students hone skills and techniques that enhance their careers and give them a competitive edge in the job market. “I get employers reaching out and saying, ‘I saw this line item on a candidate’s resume saying they did some pretty high-level data analysis for you. Is it true?’ They’re kind of surprised the student contributed to the CFA or a Wall Street Journal article.”

Melvin Jonathan Reyes Echeverria, who completed his MS in finance degree in May 2024, says, “I assisted Professor Horstmeyer with data analysis for the WSJ and the experience was amazing…I was able to leverage everything that I was taught in my MS in finance classes. It was a privilege to be published and something that was unexpected to receive at George �鶹��Ƶ.”

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Risky investment choices, not COVID, put U.S. hospitals in the red

Marianne Klinker — Thu, 02 Mar 2023 15:49:57 +0000

Risky investment choices, not COVID, put U.S. hospitals in the red Marianne Klinker Thu, 03/02/2023 - 10:49

Financially troubled U.S. hospitals are petitioning for more support from the federal government, but handouts won’t fix the underlying problem.

As the United States takes steps to move past the pandemic, its health care system is in a fragile financial state. At the end of 2022, about half of U.S. hospitals were in the red—making it the worst year for the industry since the start of the pandemic. No wonder, then, that hospitals are petitioning Congress for help and protesting the pending cessation of COVID funding from the federal government.

At first glance, the industry’s pleas appear justified. After all, COVID hit hospitals like a tidal wave, filling beds with patients requiring arduous, expensive care. At the same time, hospitals suffered from the same supply chain and workforce issues as virtually every other public-facing facility. And since the vaccine rollout, COVID’s waning lethality has produced an influx of patients who had delayed seeking treatment during the height of the pandemic—and whose health problems may have worsened in the interim.

Seb Demirkan

However, Sebahattin Demirkan, an associate professor of accounting at �鶹��Ƶ, says that the true source of the industry’s financial woes may lie beyond COVID. For Health Affairs Forefront, Demirkan and co-authors Ge Bai of Johns Hopkins University and Christopher M. Whaley of RAND Corporation took a deep dive into the most recent financial reports issued by ten of the U.S.’s largest nonprofit health care systems.

Contrary to the COVID-caused-it narrative, they found that, on average, revenue from patient care actually increased (albeit by less than 1 percent) between 2021 and 2022. Investment revenue, on the other hand, declined by a disastrous 185 percent over the same period. These are heavy but not totally surprising losses, seeing as how 2022 was the worst year for financial markets since the Great Recession. However, they cast doubt on the contention that hospitals’ financial struggles are primarily due to operational challenges brought on by the pandemic.

Without understanding the primary driver of hospitals’ financial strain, policymakers cannot make evidence-based decisions that benefit hospitals and patients in the long run.

For Demirkan, getting the origin story right is critical for policymakers weighing the current situation. As the article states, “Without understanding the primary driver of hospitals’ financial strain, policymakers cannot make evidence-based decisions that benefit hospitals and patients in the long run.” Clearly, if the health care system’s exposure to downside risk is to blame, more federal funding alone wouldn’t resolve the issue. Even if federal bailout money were restored to 2020 levels, hospitals would be in danger of yet further losses via their investment portfolio.

Demarkan’s main concern is for the taxpayers who may be stuck with the bill, through increased taxes and/or rising patient fees and insurance premiums. “While hospitals are critical for patients and communities, resources used to pay for hospital care come from those same patients and communities,” the article states.

He points to a possible contradiction between the non-profit status of these institutions and their investment strategy, which he says resembles that of a hedge fund. Such an approach is likely to reap outsized gains in bull markets—in bear markets (as in 2022), above-average losses. “If they behave like any other for-profit company or financial company, then it is not going to serve the entire nation, the taxpayers or people. All stakeholders will be hurt, basically,” Demirkan says.

As one possible remedy, he suggests regulators could insist that non-profit hospitals limit risk exposure across their portfolio as a precondition for public assistance. “They may say, ‘if you want to invest extra cash, invest in ETFs or mutual funds. FedEx, Amazon etc.—less volatile and less risky financial instruments and stocks.” Still, Demirkan acknowledges that attempts to ratchet up oversight or accountability would run afoul of the influential health care lobby.

At the very least, therefore, he advises the government not to “with blind eyes, give away money to these hospitals, and just look at how they use that money if they are nonprofit hospitals. And basically, use your judgment accordingly.”

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How Tax Uncertainty Threatens Economic Recovery

Marianne Klinker — Tue, 07 Dec 2021 16:37:59 +0000

How Tax Uncertainty Threatens Economic Recovery Marianne Klinker Tue, 12/07/2021 - 11:37

In This Story

Kelly Wentland

It’s often said that taxes are one of only two iron-clad certainties in life. But the degree of certainty attached to our tax-based expectations is by no means fixed.

As of this writing, for example, the Biden administration reportedly plans to hike the top long-term capital-gains tax rate from 20% to 39.6% – an increase which may apply retroactively. Commentators are currently debating whether and how the tax uncertainty thus generated may impact investment and saving.

We live in a world where uncertainty is advancing on many fronts, from the increasingly fractious political arena to the inscrutable future of international travel. This climate of generalized rising uncertainty has been linked to fiscal conservatism in the corporate sphere and the post-2008 decline of investment as a share of corporate profit.

Kelly Wentland

Kelly Wentland, an accounting professor at the �鶹��Ƶ School of Business, recently published a paper in Management Science (co-authored by Martin Jacob of WHU – Otto Beisheim School of Management and Scott Wentland of the Bureau of Economic Analysis) that further specifies and quantifies firm response to tax uncertainty. Its main analysis focuses on exceptional or “lumpy” investments as analogous to constructing a new chemical plant or expanding factory equipment. The researchers surmise that because tax uncertainty exposes firms to greater financing costs, it would affect large investments more than, say, incremental R&D or hiring. Lumpy investments are also of particular economic import, representing up to 40 percent of a firm’s total capital expenditure over a 16 year period.

The paper hinges on the Internal Revenue Service’s phased rollout of Schedule UTP from 2010-2014. The new policy requires firms to list their uncertain tax positions – i.e. claimed tax liability adjustments that often fall into gray areas in the tax code – on their annual return. Taxpayer firms subject to the policy would therefore be in a situation where their uncertainty was expected to be more salient, compared to those beyond reach of the rule. Indeed, articles published at the time reported that corporations were concerned that Schedule UTP would lead to more audits and higher compliance costs. While ex post evaluations of Schedule UTP suggest it may not have been as revealing as originally anticipated, Wentland and her colleagues’ work shows that initial expectations matter in terms of investment. An analogous point would be how buyers continued to allow beliefs of a strong housing market influence their offer prices right up until the housing market tumbled during the financial crisis.

The largest firms, with assets of $100 million or more, were the IRS’s guinea pigs, receiving the Schedule UTP requirement in 2010. The threshold was lowered in the following years to cover all firms with at least $10 million in assets.

Over the course of the phased rollout, the researchers compared investment activity of firms (harvested from the financial database Compustat) that barely made the cutoff for Schedule UTP to those whose assets fell slightly short of the requirement. For firms subject to Schedule UTP, the researchers also made before-and-after investment comparisons using historical data going back to 2005.

They found that the onset of Schedule UTP eligibility was associated with lumpy-investment delays of 4.5 months on average. But even this non-trivial number understates the chilling effect of tax uncertainty. When Wentland and co-authors compared firms that were never affected by the new policy to those that were, the relative delay rose to 18 months. Recall that the Schedule UTP rollout coincided with crucial years of economic recovery. This research shows that smaller firms who never made the $10 million cutoff ramped up investment more readily as part of their rebound from the Great Recession. (Note that the researchers controlled for firm size, so the difference here wasn’t due to a disparity in investment behavior between large and small companies.)

The policy change had implications for the size of investments as well as their timing. Post-Schedule UTP, lumpy investments shrank by 0.27% of total assets, which translates to an overall 5.3% decline in investment activity.

The other main types of corporate investment – acquisitions, R&D, and employment – were surprisingly not impacted at all by the new policy. This is perhaps most unexpected in the case of acquisitions, which technically qualify as lumpy (i.e. a one-off, unusually large expenditure). Unlike classic capital expenditure, though, acquisitions are usually carried out by firms that are flush with cash. Financially constrained firms normally pursue growth through the more conservative route of enhancing or adding to existing resources. For obvious reasons, tax uncertainty looms larger for the latter group of firms than the former.

Companies’ response to tax uncertainty is an especially pertinent issue at the moment. The recent history revisited in Wentland’s paper is repeating itself; the global economy is in tentative recovery mode once again, this time because of a pandemic rather than a once-in-a-lifetime recession. The positive and negative ripple effects of governmental positions and policies should be weighed very carefully. Wentland’s analysis can help policymakers better understand the potential trade-offs involved.

If President Biden’s infrastructure agenda is implemented, a corresponding tax rate hike has been proposed to fund it. But in calculating costs and benefits of legislation such as the American Families Plan, policymakers should take into account the drag on investment that could come with how the process itself may alter economic prospects. In particular, they may want to be aware that extended deliberations about policy can have unintended consequences if the possibilities under consideration stir up tax uncertainty among the public. In sum, the success of a given policy depends not only on its direct effects but also on the indirect effects surrounding its creation.

The net real economic impact of such policy may only become clear in the fullness of time.

Source: Martin Jacob, Kelly Wentland, Scott A. Wentland (2021). Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments

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