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It is hard to believe that rewarding opportunities in a liberalised market are left unexploited by acquisitive market participants or even by proficient institutional investors. Notwithstanding this, the sources of momentum profits have been puzzling academics for many years. Therefore, the incentives for these rewarding opportunities remain an unresolved mystery long after the momentum phenomenon has been identified. The significance of the momentum phenomenon is reflected in the voluminous studies that investigate it. This thesis aims to investigate a number of issues surrounding the debate on the momentum phenomenon in order to provide a broader understanding of the profitability of momentum strategies and its sources by using alternative as well as some new methods. Furthermore, this study investigates momentum strategies in the UK market by controlling for several market microstructure effects and finds that momentum profits tend to disappear after the six months holding period, from the year 2000, providing evidence of fading momentum profits. While market states fail to explain fading momentum profits, this study argues that it is the result of gradual market awareness. Seasonal effects on momentum returns after 1998 show evidence of continuing tax-loss selling activity, and hence, draw impactions on the effectiveness of the governmental 1998 Tax-Act. This thesis also supports the presence of an industry effect on the cross-section of momentum returns; however, this effect is small and is confined to the stocks that have performed well in the past and increases with liquidity. Empirical evidence suggests that momentum profits exist among the highly liquid stocks that are weekly traded. The findings also suggest that market frictions such as short sales constraints and trading costs cannot eliminate momentum profits among optioned or non-optioned (comparable) stocks using a new technique to measure transaction costs. The overall evidence implies that the observed momentum profits are not fully attributed to the argued trading obstacles but mainly driven by biased investment decisions and that momentum profits are significant even after controlling for uncertainty, ambiguity and trading costs

One major issue in studying payout policy concerns the information implicit in payout announcements. It is becoming increasingly difficult to ignore why the firms make substantial cash distributions by dividends or share repurchases under the scenario of information asymmetry. Of particular interest, this thesis aims to clarify 1) whether the wealth effect of dividend announcements exists while earnings and dividends are announced simultaneously, 2) whether current or future earnings are the information conveyed by dividend announcements, and 3) whether share repurchase announcements signal, and if they do, whether they signal the same information as dividend announcements. The evidence of this thesis suggests that dividend effect exists even when dividend and earnings are announced simultaneously. Dividend changes appear to play a confirmative role for the earnings increase announcements which alone are not reliable enough to earn investors' trust. By comparison, earnings decline announcements per se are informative for investors and possess prominent effect on the market reactions. Moreover, the evidence, after controlling mean reversion and autocorrelation in earnings process, shows that current but not future earnings changes are the information which dividend changes convey. When making dividend decisions, managers are also found to take account of current rather than future earnings performance. With respect to share repurchase announcements, the evidence indicates that share repurchase announcements signal good news to the market and are likely made after a long-term drop in share prices. More specifically, comparing the managerial motives for different payout decisions reveals that share repurchase announcements mainly signal for the undervaluation of the firm value while dividends are announced to signal for the firms' superior operating performance.

This thesis consists of three self-contained studies, one study on the mispricing of accruals and cash flows and two studies on accounting-based measures of risk. In the first study. we use insights from the literature on accounting conservatism and the literature on econometrics to improve previous applications of the Mishkin (1983) test (MT). a test of rational expectations, in accounting. We find that the specification of linear accrual forecasting models in the MT ignores the asymmetric timeliness in gain and loss recognition and understates the ability of accruals to predict future earnings components. When we incorporate timely loss recognition in the MT, we provide evidence that investors rationally anticipate the lower persistence of accruals in years of economic losses. A re-specification of the MT shows that investors respond differently to accrual and cash flow surprises, which is inconsistent with investors fixating on earnings. Furthermore, clustering the standard errors in the MT by both the firm and the year dimension significantly alters market efficiency inferences and the results no longer support the mispricing of accruals and cash flows. In the second study, we build on the literature on fundamental risk and propose two new accounting-related risk measures - the systematic risk and the total risk in analysts' earnings forecasts. We find that both risk measures are significant determinants of the implied risk premium, beyond the risk in annual reported earnings and the Fama and French (1993) factors - market beta, book-to-market and size. Furthermore, we show that our risk measures are related to the risk captured by book-ta-market and that they explain largely the higher expected returns of high book-ta-market stocks relative to low book-ta-market stocks. Our study demonstrates the usefulness of analysts' earnings forecasts in assessing equity risk and allows the estimation of fundamental risk when the time-series of annual reported earnings is limited. In the third study, we focus on forecasting the shape of the distribution of future earnings, aiming at predicting the risk associated with future earnings outcomes. First, we show that current earnings changes are a significant determinant of the shape of the distribution of future earnings changes and hence, of the risk in future earnings. Second, we find that accruals are incrementally informative in predicting the distribution of future earnings changes, significantly enhancing in-sample and out-of-sample forecasting performance. Third, pricing tests show that the expected earnings of firms with more extreme predicted losses and higher predicted earnings uncertainty, defined as the distance between predicted extreme quantiles, have lower valuation multiples. Our results suggest that fundamentals-based risk forecasts are priced by the stock market.

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This thesis attempts to provide a comparative and comprehensive understanding of corporate dividend policy in European Countries. I examine the dividend policy of the firm in the UK, Germany, France and Italy. The thesis is motivated by the importance of dividend policy theory in the area of finance, the mixed theoretical and empirical evidence, the predominately US based literature and by the financial, institutional and corporate governance differences between European countries. The thesis examines the "big three imperfections" of the dividend policy: taxation, asymmetric information and agency costs. The uniqueness of the thesis is its European character. The main argument is that differences in taxation and corporate governance systems between European countries can prove a useful tool for providing some answers to the dividend puzzle. With respect to dividend taxation systems the UK operates a partial imputation system while Germany, France and Italy operate full imputation systems. With respect to the corporate governance systems the UK is characterised as a market-based country while Germany, France and Italy are characterised as bank-based systems. In general results show that there are significant differences between dividend taxation systems in European countries that result in variations of the tax discrimination variable. In all countries ex-day returns are positive and significant suggesting that ex-day prices fall by less than the amount of dividends. Results confirm that in countries where the differential taxation between dividends and capital gains is high, ex-day returns are high. Also, I find that changes in the tax systems that affect taxes on dividend and/or capital gains alter significantly ex-day returns. Furthermore, the corporate governance differences between market-based and bank-based countries result in different levels of information asymmetries and/or agency conflicts. Results in all the countries show significant share price reaction on the dividend announcement days. Evidence provides support to the information content of dividend hypothesis. Moreover, I do not find evidence to reject the signalling hypothesis over the over investment hypothesis.

Bibliography: leaves 309-323. / xii, 326 leaves ; 30 cm. / Title page, contents and abstract only. The complete thesis in print form is available from the University Library. / Thesis (Ph.D.)--University of Adelaide, Adelaide Graduate Business School, 1996