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This paper complements the literature on style migration by examining value and size premiums throughout Europe. Information from more than 25 European markets indicates an average value premium of 9.58% per year. The primary determinants of the persistent value outperformance are: 1) value firms migrating to a neutral or growth portfolio, and 2) growth stocks migrating to neutral or value portfolios. The financial health metric F_SCORE helps uncover outperforming stocks ex ante, and provides preliminary evidence on the probability of migration, but only for small stocks.

Purpose The purpose of this paper is to study how the target fund in mutual fund mergers performed compared to the acquiring funds had they not been merged but continued on their own as buy-and-hold portfolios. Design/methodology/approach The authors develop a novel approach to examine post-merger wealth effects. The authors’ study how the target portfolios would have performed compared to the funds acquiring them had they not been merged but continued on their own as passive portfolios. The data set consists of 793 merging US equity funds from January 2003 to December 2014. Findings The authors find that the target portfolio shareholders would have been better off if the target fund had been converted from an actively managed fund to a passively managed fund that maintained their current holdings. Research limitations/implications The findings are the opposite to many previous studies who view target fund shareholders as the major beneficiaries in mutual fund mergers. Practical implications Investors receiving notification of their fund merging should reconsider their investment strategy. If they wish to maintain the original strategy of their fund, they should oppose the merger. Alternatively they may withdraw their money from the (soon-to-be) merged fund, replicate the latest portfolio of their fund, and buy-and-hold that portfolio. Originality/value The authors develop a novel approach to examine post-merger wealth effects.

Tracking the changes in the ownership base of Nokia Corporation in 1993–2013, we find that Finnish investors, on average, tended to be contrarians and, as a result, were able to benefit at the expense of the foreign investors in the long run. In total, Finnish investors gained €39 billion at the cost of foreign investors. The domestic institutional investors were least prone to disposition effect and thus gained the biggest profits.

We develop two new methods for calibrating subjective expectations regarding the return generating process (RGP) of financial assets without resorting to noisy realized returns. Using finance professionals’ expectations of average and extreme returns, volatilities, and probabilities of stocks beating bonds, we investigate what these expectations imply of other key aspects of the RGP, namely stock-bond correlation, stock mean-reversion, and tails of the return distribution. We find a high degree of confidence in stocks beating bonds, with moderate returns and volatility, and no extreme returns. For most subjects these expectations imply implausible RGP’s given established empirical facts, or else, a miracle.

When managers get to trade in options received as compensation, their trading prices reveal several aspects of subjective option pricing and risk preferences. Two subjective pricing models are fitted to show that executive stock option prices incorporate a subjective discount. It depends positively on implied volatility and negatively on option moneyness. Further, risk preferences are estimated using the semiparametric model of Ait-Sahalia and Lo (2000). The results suggest that relative risk aversion is just above 1 for a certain stock price range. This level of risk aversion is low but reasonable, and it may be explained by the typical manager being wealthy and having low marginal utility. Related to risk aversion, it is found that marginal rate of substitution increases considerably in states with low stock prices.

Using a design involving a between-subjects experimental manipulation, this study surveyed 742 Finnish financial advisers about requiring a risk premium in one mode and about expected returns in the other mode. Company-level risk factors (e.g., leverage) caused an increased return requirement in the first mode but led to lower return expectations in the second mode. Sensitivity to the form of the question revealed an inconsistency in the advisers’ perception of risk and return. Advisers seemed to associate safe stocks with relatively lower discount rates (and thus higher valuations) but also with higher return expectations. This inconsistency may contribute to the overpricing and subsequent inferior performance of glamour stocks. Giving consistent advice is a necessary condition for providing valuable client service.

We use data from surveys involving 300 Scandinavian financial market professionals and 213 university students to conduct three controlled experiments in which we manipulate the background information given to subjects. We find a very large anchoring effect in the students' long-term stock return expectations, that is, their estimates are influenced by an initial starting value. Professionals show a much smaller anchoring effect, but it nevertheless remains statistically and economically significant, even when we restrict the sample to more experienced professionals. We also find that the professionals are not conscious of the impact of historical returns on their expectations.

Using data on all real estate transactions in the greater Helsinki area during 1987–2003 (about 80,000 apartment transactions with capital gains available), we find substantial support for loss realization aversion. Further, a disproportionate number of sales occurred exactly at the original purchase price. Reluctance to realize losses is weaker with pricier apartments, seasoned sellers, and apartments that are likely bought for investment purposes. Mortgage down payment requirements are unlikely to fully explain the results. On the whole the results are consistent with loss aversion and mental accounting.

According to the Capital Asset Pricing Model (CAPM), a capitalisation-weighted market portfolio is mean-variance optimal. From this, one could conclude that an average investor could not do better than just hold a market portfolio. Arnott et al. (2005) demonstrate that investors can do much better than capitalisation-weighted market indexes. Their paper provides evidence on fundamental equity market indexes that deliver superior mean-variance performance. The study was conducted with US companies and the returns were compared to the SP superior market portfolio construction, price inefficiency, additional exposure to distress risk, or a combination of the three1.

PurposeThe paper aims to examine the effect of advertising on mutual fund cash flows in the Finnish fund market.Design/methodology/approachThe paper's unique data set allows the observation of the effects of monetary advertising spending and the choice of advertising media.FindingsThe paper finds that neither past year's performance nor advertising alone is sufficient to produce increased cash flows. However, advertising together with past performance is found to significantly affect cash flows. The positive effect of advertising is limited to the use of non‐perishable advertising media. Additionally, it is found that fund families spending proportionately more on advertising receive higher asset flows.Originality/valueThe data are unique in that they can identify fund families that advertise, and also how much they spent on advertising in a given year and the dollar amount spent on five different media types. Obviously, having also fund level data available would enable more thorough analysis.

The Morningstar fund rating has been reported to affect mutual fund flows in the US markets. This paper finds that flow patterns in Finnish bank-managed funds are significantly different from the patterns in the US. Specifically, non-bank funds attract flows in a manner similar to the US markets, that is Morningstar ratings affect fund flows. In contrast, Finnish bank-managed funds do not exhibit the same relationship between star ratings and flows. The results suggest that in Finland, five-star Morningstar ratings are not regarded as highly as in the US, where good performance attracts significantly higher flows. More significantly, our findings demonstrate the importance of banks' distribution channels in the Finnish financial market.

The value of a firm can be thought of as the net present value of all expected cash flows. Keywords: foreign exchange management

We compare the market values of executive stock option (ESO) trades with their Black & Scholes (1973) model values calculated following the major accounting standards, SFAS No. 123r and IFRS2. Our results show major underpricing compared to the traditional B&S method values. This should be considered while applying SFAS No. 123r and IFRS2 for estimating fair values. Especially time to expiration has a major influence on the undervaluation suggesting that the possibility of a change in corporate structure lowers the cost of ESOs to shareholders.

This paper employs a new set of variables in examining the determinants of fund expenses. The Finnish Association of Mutual Funds requires the industry to disclose new variables such as turnover and tracking error from 2002. Using this information the authors examine whether bank-managed funds are managed more actively than their non-bank competitors, which would explain their higher management fees. Equity and balanced funds distributed through bank offices charge higher expense ratios than funds distributed through independent fund management companies. The results suggest that existing customer relationship, bank cross-selling and convenience rather than operational expenses contribute to fund selection of bank mutual fund customers.

This paper empirically examines the strategic asset allocation and the asset/liability issues in the Finnish defined benefit pension funds. The results indicate that there is a relationship between the liability structure and the asset allocation. While pension funds with younger participants have more equity exposure, more mature pension funds have more fixed income investments.Wide dispersion in asset allocations is also found between the funds. One fund holds its entire portfolio in fixed income securities, whereas other funds have none or only few fixed income holdings. Equity investments also vary dramatically, ranging from 0% to over 70% of the asset allocation. The same applies to investments in a sponsor, real estate investment, and money market investments. A portion of these different asset allocations is explained by the liability structure, but another part remains unexplained. The other variables affecting strategic asset allocation of a pension fund are not obvious, but they could include factors such as regulatory environment, historical reasons, mean-variance optimization instead of ALM, sponsor's own preferences or pension fund's irrationality. Analyzing these factors would be a fruitful topic for further research. Additionally, international comparisons would be a fruitful topic for further investigation.

This study employs questionnaire survey and financial accounting data to extend earlier empirical work on the foreign exchange (FX) exposure management practices of Finnish industrial firms. The paper concentrates on: (i) the form that FX corporate hedging policy takes; (ii) the control of FX procedures and trading; and, (iii) our respondents' perceptions about their ability to predict FX rate changes for hedging decisions. Our results indicate that the extent to which firms hedge FX exposure depends on the type of exposure and the form that FX hedging policy takes. Also, a significant number of the firms pursue FX hedging strategies on the expectation of attaining trading profits and this strategy appears to be accommodated within their FX policies. This feature is not explicitly demonstrated in previous studies. Finnish firms hedge a much higher proportion of both transaction and translation exposures compared to economic exposure. We partly attribute this emphasis to the requirements of the Finnish Accounting Act, which came into effect in 1993. The organisational, historical and financial settings of the firms also have significant impacts on exposure management practices. The overall implication of those results is that firms respond to changes in the financial, economic and regulatory environments in which they operate.

The interest rate policies of Finnish firms appear risk aversive, but hedging decisions are influenced by market view. Managers find they can forecast trends in interest rate development, and employ the forecasts in the choice of debt and hedging instruments. The use of risk assessment methods and hedging instruments are related to firm size but not to leverage. Most frequently employed hedging instruments are interest rate swaps and forward rate agreements. The respondents find their firms' interest rate risk management is successful, but performance is seldom measured against an explicitly defined benchmark.