Honors Projects in Finance

The Impact of New Product Announcements on Quick Service Restaurant Companies’ Stock Returns

Tim Drechsler-Martell — Tue, 18 Jun 2013 18:13:14 PDT

This study seeks to answer two main questions: 1) Do product announcements impact quick service restaurant stock returns? 2) Do economic conditions impact the degree which product announcements impact quick service restaurant stock returns? 159 total product announcements were collected for 6 quick service companies: McDonald’s Corp., YUM! Brands Inc., The Wendy’s Co., AFC Enterprises Inc., Jack in the Box Inc., and Sonic Corp. 84 of these announcements were from 2005-2007 (Labeled “Pre-Recession”), and 75 were from 2009-2011 (Labeled “Post-Recession”). Using historical stock price data, an analysis of the overall trends of the mean-adjusted excess returns was conducted to determine whether or not product announcements impact the stock returns. Further analysis was conducted to determine whether the “Pre-Recession” results had different results from the “Post-Recession” results, demonstrating a difference between two different economic periods. The results showed that on average, the day following the product announcement had negative excess returns. In addition, there was a noticeable difference between “Pre-Recession” and “Post-Recession” post-announcement returns behavior. “Pre-Recession” results, on average, had positive excess returns in the 10 days following the product announcement, while “Post-Recession” results had negative excess returns in the 10 days following the product announcement.

How One Trade Could Change the World: High Frequency Trading and the Flash Crash of 2010

Sarah Perlman — Thu, 28 Mar 2013 18:01:26 PDT

Financial markets are controlled directly by a small population of people, but have direct effects on almost every aspect of the global community. Financial markets are now flooded with computerized algorithms that have drastically changed the face of trading. As with any advances in technology, there are always unforeseen events that create new challenges, and adjustments that need to be made. In our increasingly global and technological world, one wrong click of the mouse in New York could affect the stock markets in London, Tokyo, and Brazil. On May 6th, 2010, such a situation occurred and caused the Dow Jones Industrial Average to drop 9.8 percent in a matter of minutes. The “Flash Crash”,as it has become known,is a perfect example of how removing the human element from trading can cause problems that ripple through the economy. This event brought to light the major impact that High Frequency Trading (HFT) has on financial markets, when such a large majority of trades occur without even a human click of the mouse. The value of the Dow Jones Industrial Average multiplied by over 47 times and the volume grew about 2975 times from 1928 to 2011. Therefore, the spike in volume and stock price in recent years is definitely a correlation to note due to the introduction of technology. A widely cited statistic by the TABB Group is that high frequency trading accounts for 65% of volume on the United States market (Russolillo, 2011). The study that is conducted in this research will examine statistical hypothesis tests of the data from May 6th, as well as five other days to demonstrate the negative effects that high frequency trading can have on the financial markets.

Cost of Winning: What contributing factors play the most significant roles in increasing the winning percentage of a major league baseball team?

Patrick Tartaro — Thu, 28 Mar 2013 17:22:46 PDT

Over the past decade, discussions of competition disparity in Major League Baseball have been brought to the forefront of many debates regarding the sport. The belief that "large market" teams such as the New York Yankees buy their championships through acquiring star talent at high prices has become a common belief of many followers of the game. This research will answer the pressing question, "What are the most significant factors that correlate to a Major League Baseball Team’s winning percentage?”. I used stepwise regression to identify factors significantly related to winning percentage. Interestingly enough, payroll is not a significant factor in the best model. Its high correlation with several other model variables may explain this.

The Evolution of the “Southwest Effect”

Daniel Webb — Sun, 24 Mar 2013 19:17:57 PDT

The “Southwest effect” - a large decrease in fares paired with an increase in traffic - has been discussed around the airline industry since the term was first coined in a government study in the early 1990s. But the airline industry has drastically changed since then - Southwest has become the largest domestic airline, and many of its competitors have had the chance to restructure through bankruptcy.

This study examines some of Southwest's latest city additions, as well as a few of the airline’s intra-California routes where it is now a dominant player. Using publically-available government data, the change in passengers and average fare was measured. The change in average fare was also evaluated with a two-sample t-test, while the difference in distribution of fares was evaluated with the Kolmogorov-Smirnov test. The results indicate that Southwest can stimulate traffic and lower fares, the effect of its entrance into a new market decreases over time. In addition, an analysis of some key intra-California routes indicates that the opposite of the “Southwest effect” can happen once Southwest becomes the dominant player on a route.

Given Credit Management Behavior, what effect does educational debt have on mortgage approval timetables?

Andrew McLeod — Thu, 21 Mar 2013 20:47:36 PDT

Educational debt in the United States is a major concern as many young people enroll in undergraduate institutions beyond their financial means and the gap between the cost of an education and family income widens. Research suggests that an individual’s level of educational debt will have an effect on their financial future, but measuring the extent of damage incurred is much more difficult and needs further examination. This paper analyzes the relationship between the level of educational debt at graduation and time between graduation and home mortgage approval. This paper also examines the relationship between credit management behavior and mortgage approval. This study finds that educational debt does not have a significant effect on mortgage approval timetables. This paper also reports that credit management behavior has a significant effect on a person’s approval timetable and that bad credit management behavior increases the period between graduation and mortgage approval.

Getting the Sharks to Bite in Your Ocean: A Look at Regional Differences in Funding Components in China and the United States

Jennifer Ashley Schwall — Mon, 07 Nov 2011 20:49:25 PST

This study explores the relationship between a venture capital firm’s geographic region and the investment traits that it values. This study’s results will help determine whether venture capital firms, by geographic region, emphasize certain investment traits over others when funding new companies.

The study examines three regions (the East Coast of the United States, the West Coast of the United States and China, specifically Beijing and Shanghai). By surveying available firms in each region, I collected data on which funding components, or investment traits, the sampled respondents valued. To increase the usefulness of my findings, I held constant the stage of funding for each surveyed firm. That is, when I compare firms across regions, I require that they have similar funding stages (e.g. seed stage or very early stage, start-up or early stage, late stage or pre-IPO stage, etc.).

In my research, I follow the MacMillan, Siegel and Narasimha (1985) model. That is, my investing traits, or funding components, include return on the investment (ROI), management team’s experience, defensible product, industry barriers to entry, current investment by entrepreneur, macroeconomic conditions, business plan analysis, current portfolio risks, etc. Once the data from the various firms from the West Coast, East Coast and China were compiled, I then determine the top ten funding components for each region from those surveys. I then statistically examined whether there were any significant geographical differences among the top ten funding components of the venture capital firms in each region.

The Effects of Natural Disasters on Donations to Non-profits

Megan McKenzie — Thu, 03 Nov 2011 17:11:52 PDT

This study analyzes the relationship between natural disasters and donations to non-profit organizations in disaster-affected regions. Using regression analysis, this study seeks to determine the relationship based on various factors including the number of deaths, total number of people affected, the economic damage costs, and media coverage of a given disaster. The purpose of this study is to examine whether disaster-affected regions truly receive increased donations following a natural disaster, the sources of these donations (government grants versus private donations), the question of whether donations are diverted away from other non-profits in industries not related to relief efforts, the longevity of donation increases following a natural disaster, and disaster-related factors that have a significant and material effect on donations to non-profits. Data sources utilized in this study include the National Center for Charitable Statistics (NCCS), EM-DAT: The International Disaster Database, U.S. Bureau of Labor Statistics, and Google News, all analyzed from 2000 through 2006.

Findings from this study indicate that the occurrence of a natural disaster in a given state generates an increase in donations to non-profit organizations, and hurricanes specifically, cause a greater increase in donations than other types of natural disasters. The increased levels of donations seen by non-profits were found to be sustained for two years following the occurrence of a disaster. Government grants actually decrease following the occurrence of a natural disaster, while public donations increase, indicating an inverse relationship. When considering specific factors that measure the destruction of a natural disaster, media coverage relative to state population elicits the greatest increase in donations among all factors measured. The study finds no evidence that donations to non-profit organizations operating in humanitarian-related industries experience increased donations following the occurrence of a natural disaster.

Professionalization of College Sports: The Case of College Basketball

Sean Kaukas — Thu, 03 Nov 2011 15:04:25 PDT

This study examines how major college basketball programs have become professionalized, and follow a professional model in terms of their revenues, expenses, and profits. “Professionalized” is defined as having a fundamental focus on profits and revenues. Revenue and expense data for the 2006-2007 season was selected from the six major conferences: Big East, Big Ten, Big 12, ACC, PAC 10, and SEC. Data was collected from the Office of Postsecondary Education, where revenues and expenses are reported for each school. These data were examined and used to gauge whether these programs or conferences are following a professional model. In addition, the study examined the marginal revenue product of acquiring one more premium player (a player that has been drafted into the NBA or WNBA). Data were collected from NBAdraft.net, where NBA and WNBA draft classes were be used to determine the number of premium players on each college team. OLS regression analysis was be used to indicate relationships between the data. These relationships indicate that men’s basketball programs follow a professional model and that the marginal revenue product of acquiring one more premium player is greater than their compensation through scholarship. Women’s basketball programs do not appear to follow a professional model, or acquire players that generate significant revenues greater than their compensation through scholarship.

Stock Exchanges in the Middle East: Risky Business or Smart Investing?

Jed A. Haddad — Wed, 02 Nov 2011 20:07:12 PDT

The goal of any investor is to obtain the highest possible return for his or her money. However for years, the debate has continued; stocks, bonds, mutual funds; which of these financial instruments will produce the greatest gain to give the investor the highest profit? Historically, stocks have been known to provide investors with high returns. With the world becoming increasingly globalized, international markets have proven to offer investors more options to help diversify their portfolios. The Middle East has been known as a region of recent economic growth and stability. Three prominent examples of such are Kuwait, Israel, and Jordan. With GDP growth steadily rising and purchasing power in the hundreds of billions, the Middle East has been seen as a region of growing economic stability and rapid development. For example, Egypt alone has grown by almost 7.2% in 2008, ranking among the fastest growing GDPs in the world; according to data gathered by the World Bank. Jordan also ranked high growing by over 7% in GDP each year since 2006 until 2009 (World Bank, 2011). Although these countries may not be in the list of top ten fastest growing economies, they still have shown recent leaps in overall economic stability and growth in comparison to years prior. Economists have speculated that financial stability and infrastructure follow a growing economy. With the rapid economic growth of such countries as Kuwait, Jordan, and Israel, it is only logical that investment opportunities present themselves. Although this is a logical conclusion, much research on the stock exchange of these countries is somewhat limited. These stock exchanges have the potential to give any investor the diversification he or she desires as well as a similar, if not a higher return than those of England, Japan, and the United States due to the similar coefficients of variation. The coefficient of variation, defined as the degree of variation from one series of data to another, can give an investor a more accurate idea of how much risk is assumed per unit of return. This calculated statistic is a more accurate indicator than return or standard deviation alone because it places the degree of variation in context to the data. In investment terms, the coefficient of variation measures how much risk is being assumed by the investor in relation to how much return he or she can possibly receive. The coefficient of variation for the Israeli, Jordanian, and Kuwaiti stock exchanges will allow them to rival the competitiveness of stock exchanges that are more well known.

Investment Styles, Fees, & Returns Among Individually Managed & Team Managed Mutual Funds

Kendal Cehanowicz — Tue, 01 Nov 2011 19:00:46 PDT

Identifying a successful mutual fund investment involves a crucial analysis of alternatives, all of which influence the true benefit of the investment. Major considerations must include performance, management and fees; which ultimately determine investment returns. Studies have shown that team managed mutual funds exhibit similar risk adjusted performance to individually managed mutual funds, however studies lack this comparison of performance based on fund fees and investment objective. This gap in research implies that there is an opportunity to examine how fund management, investment objective, and fund fees affect overall returns to the investor. Using the 2010 Center for Research in Security Prices (CRSP) database, this study provides an examination of team managed and individually managed mutual funds with given investment styles on the basis of fees and overall returns. This study finds empirical evidence that team management has a significant negative effect on equity objective mutual funds, while having a positive impact on Debt and Equity combination funds. In addition, our research concludes that team management has no significant effect on funds whose primary focus is debt. Across the majority of fund objectives, the added benefit of team management in the mutual fund industry continues to be outweighed by the increased cost of a team managed operating structure.

Financial Literacy: The Impact of Financial Training in High School on the Credit Behavior of College Students

Lisa Tenaglia — Wed, 13 Apr 2011 20:22:45 PDT

Managing credit is increasingly important not only for adults, but for college students. In recent years with sky rocketing tuition and easily available credit, college students find themselves with increasing debt burdens that result in serious and lasting financial problems. In response, financial literacy programs are emerging in hopes that better educated people will make healthy financial decisions, as well as responsibly manage credit. Research suggests that financial education should begin in high school so that young adults can effectively manage credit during the college years. This study assesses both college students’ financial knowledge and their credit management practices. Specifically, it examines whether Bryant University students retain and use the financial training from high school when making financial decisions and managing credit. The findings from this study illustrate that almost 75% of the 345 students that manage their own credit in college received financial training in high school and that although this training is negatively correlated with poor credit management behavior in college, the association is weak. This study further suggests that even with additional financial literacy training available in college, almost 60% of these students demonstrate poor credit management behavior. As a result, this study suggests that young people need to improve their credit management skills by setting budgets and employing good credit management techniques.

Does the ‘Ease of Doing Business’ In a Country Influence its Foreign Direct Investment Inflows?

Katherine Piwonski — Mon, 11 Apr 2011 20:56:25 PDT

Foreign direct investment has been studied for years. It is generally accepted as a positive influence on the domestic market and governments have begun actively seeking it out. This study is meant to possibly connect government actions, for which the World Bank’s ‘Doing Business Index’ was used as a proxy, to an increase in foreign direct investment inflows. The goal of this study is to help governments make more informed decisions about if and how to attract foreign direct investment. The research was done by running a regression model to find a connection between changes in foreign direct investment inflows and the Doing Business rank of each country. The results of the regression show that by increasing their country’s Doing Business rank one level, a government can bring in over $44 million USD. Thus, the model has proven that there is a connection between government actions and foreign direct investment; countries can actively pursue foreign investment dollars successfully. The Doing Business Index points to practical areas which are important to multinational companies, such as the time it takes to compute and pay taxes, which the government can control. Therefore, this study not only proves that it is worthwhile for governments to change in order to attract foreign investment but gives the beginning of a blueprint for what government actions bring in the most investments.

A New Stock Index to Better Predict the United States' Real GDP

William Nette — Mon, 11 Apr 2011 20:01:54 PDT

The relationship between the United States’ real GDP and the overall stock market has been acknowledged by researchers and investors alike. This research paper will document a newly created composite index that will try to more accurately predict the overall U.S. economy through the proxy of GDP than the current S&P 500 index. Success will be determined if the composite index representing the addition of a service sector component to the S&P 500 is more correlated to U.S. real GDP than the S&P 500 alone. The results suggest that the service sector is not quite adequately in the S&P 500. A stronger service component in the S&P 500 would allow the index to be more statistically correlated to U.S. real GDP during the period of 1995-2009. The model will allow decision-makers to produce better choices based on a more accurate understanding of current economic conditions.

Major League Baseball: America’s Recession-Proof Pastime

Mark McDonnell — Sun, 10 Apr 2011 20:54:27 PDT

This project is a study which examines how attendance levels in Major League Baseball stadiums have been impacted by the current recession in the United States which began in October 2007. Research on attendance during past recessions has shown a strong relationship that during downtrends in the economy, baseball attendance levels generally do not suffer. Using an ordinary least squares regression, independent variables including; percent change in ticket price from previous season, distance to closest competitor, percent change in ticket price of the closest competitor, winning percentage during previous year, winning percentage during current year, unemployment rate during current year, per capita income during current year, and a dummy variable were run against the dependent variable of season attendance totals for 29 of the 30 MLB teams (Those located within the US). The data used is from the years 2008 and 2009, the first and second years of the current recession. Results were analyzed to find if there were any relationships that proved to be significant, with a t-Stat score > 2 or a P-value < .10. The variables of team’s current year winning percentage and presence of a new stadium are the only variables that prove to be significant during both seasons, with a positive correlation for both years. Unemployment becomes significant during the 2009 season, and also changes from being negatively correlated to positively correlated with attendance levels from one year to the next. Overall, the league as a whole had a drop in attendance of 1.09% and 6.59% during the 2008 and 2009 seasons, which were the first and second seasons following the start of the recession. Based on the trend of attendance during past recessions, one would expect that for the upcoming year attendance numbers would jump back up to their 2007 levels. However, due to the length and severity of the recent recession, as well as the growing amount of substitutes available, attendance may suffer more and for longer than it ever has before.

Non-Profit Organizations in a Down Economy: The Financial Performance of Higher Education Institutions in the New England Area

Yuanjun Li — Sun, 10 Apr 2011 20:14:08 PDT

An economic recession affects an entire economy, including the non-profit sector. The impact could result from changes in government support, a decrease in donations, investment income, service fees or a combination. Many private universities and colleges, which rely on tuition and endowment, have been affected by a dip in enrollments, while their endowments shrink because of the recession and declining stock values. This study will examine how an economic recession can affect non-profit organizations, focusing on private, four-year higher education institutions in New England. Different types and sizes of schools will be affected differently. Since the large, well-known schools have more diverse income sources than small, less-recognized ones, the former will be less affected during an economic recession. This study will identify and define the main income sources for higher education institutions and conclude with some recommendations for ways these schools can weather the economic storm.

Possible Solutions to the Rhode Island State Government’s Unfunded Pension Liability

Derek Blunt — Sun, 03 Apr 2011 20:05:37 PDT

This paper examines the possible causes of the nationwide unfunded public pension liability problem in the U.S., and what solutions are being proposed to combat the issue. After examining the general problems associated with multiple states’ pension systems, a specific analysis of the Rhode Island public pension system will be conducted. Through this investigation, the factors that led to the crisis in Rhode Island will be unveiled, and possible solutions to the state-specific problem will be developed. In order to arrive at a set of final recommendations for the government, a model will be used to evaluate the effects of different recommendations on their ability to decrease the unfunded liability’s outstanding sum. This model will have both qualitative and quantitative factors included. The qualitative section will evaluate the possible positive and negative effects of the proposals, while the quantitative section will try to predict the possible monetary and fiscal effects the solutions will have on the outstanding liability. Finally I conclude with a set of solid analytical and statistical recommendations that can be taken to the government of Rhode Island in hopes of being considered for future implementation.

Performance of Major League Baseball Players during Their “Free Agency” Season

Evan Konstantatos — Sat, 09 May 2009 14:40:50 PDT

Do pro athletes try harder and perform better during their free agency year? Each year this question is asked in many professional sports. The purpose and objective of this project is to discover whether Major League Baseball players actually have better statistics during their free agency year. The result will add creditability to one side of the issue at hand. Data collected consists of offensive statistics in the year prior to their free agency year, their free agency year itself and the year after their free agency season. A simple paired T-test was applied for six major offensive categories: HR/AB, RBI/AB, AVG, OBP, SLG, and OPS. Two analyses were taken. The first analysis was between the year before their free agency season and their contract year and the second was between their free agency season and the year after. All data was compiled into spreadsheets and T-tests were conducted. Analysis confirmed that athletes showed an increase in their numbers from the year before the free agency year to their free agency year in all six categories, but only a significant increase in one category, RBI/AB. Data also showed that from their free agent year to the following year there was a significant drop off in statistics in all six categories. As a result, on average, athletes do tend to perform better during their free agency season. However, since there were only two significant increases in statistics, motivation to get a bigger contract cannot be the only reason for the increase in statistics. There were other reasons that affected an athlete’s performance from year to year independent of whether it was their free agent year or not. These reasons are explored in more detail within the paper.

Measuring Effectiveness of Quantitative Equity Portfolio Management Methods

Andrew J. Mesale — Sat, 17 Jan 2009 08:51:30 PST

In this paper, I use quantitative computer models to measure the effectiveness of Quantitative Equity Portfolio Management in predicting future stock returns using commonly accepted industry valuation factors. Industry knowledge and practices are first examined in order to determine strengths and weaknesses, as well as to build a foundation for the modeling. In order to assess the accuracy of the model and its inherent concepts, I employ up to ten years of historical data for a sample of stocks. The analysis examines the historical data to determine if there is any correlation between returns and the valuation factors. Results suggest that the price to cash flow and price to EBITDA exhibited significant predictors of future returns, while the price to earnings ratio is an insignificant predictor.

The Subprime Crisis: An Analysis of New England in 2006

Matthew Holt — Tue, 07 Oct 2008 18:31:29 PDT

This paper examines the potential causes of the subprime loan crisis and discusses its impact in the United States. The root causes of the crisis include unethical practices by brokers and lenders, a lack of corrective action by credit rating agencies, lax regulation by the Federal Government of independent mortgage companies and the role of Wall Street. First, I examine the lax lending practices over this time period by comparing the performance of mortgage pools by three well known high-priced lenders over a two year period (2005 – 2006). I find strong evidence of poorer underwriting in the latter year. Second, using the 2006 Home Mortgage Disclosure Data (HMDA), I further analyze the lending patterns and the prevalence of higher priced loans in New England to assess the extent of potential problems. I find that in 2006 African Americans and Hispanics were significantly more likely to get a higher cost loan compared to white individuals in New England despite similar income and loan amounts. Finally, I conclude by summarizing existing flaws in the system and proposing some solutions to help better educate mortgage consumers.

Funds of Funds: A Closer Look at Age-Based Investing

Benjamin Ledger — Tue, 07 Oct 2008 18:08:52 PDT

Over the next 20 years, 76 million Americans born between 1946 and 1964 will hit the half-century mark. For most, this means facing up to the hard questions of how, or even if, they will be able to afford retirement. Only 40% of Americans feel as if their retirement investment vehicles are adequately funded. A major problem with the inadequate funding of the other 60% of these individuals’ portfolios is the fact that they are not capturing potential returns due to their failure to properly diversify among different asset classes. Over the last decade, mutual fund companies have recognized this significant business opportunity and have begun to tailor funds that target retirees specifically. Companies now offer products that give clients a one ticket diversification solution providing retirement income at a later date, usually indicated by the funds name; for example, Target Retirement 2040. These mutual funds are inherently funds of funds that pursue their investment objective by investing in other mutual funds rather than individually picking stocks and bonds. Life-cycle funds, primarily sold through 401(k)s, are designed to offer a riskier asset allocation in early years and then become more conservative as the investor’s target retirement date comes closer. The retirement funds industry has been growing rapidly with assets under management increasing exponentially. This growth is partly explained by the Pension Protection Act, passed this past year, which automatically helps employers to enroll employees in retirement plans. The law also makes it easier to designate life-cycle funds as default investments in retirement plans.