Portfolio Quality and Mutual Fund Performance*
David R. Gallagher(Macquarie Graduate School of Management)
Peter A. Gardner(Plato Investment Management)
Camille H. Schmidt(Macquarie Graduate School of Management)
Terry S. Walter(Discipline of Finance, The University of Sydney Business School)

This study investigates how the quality of stocks owned by mutual funds affects the performance of those funds during 2000–2009. The quality of a stock is positively related to its size, while quality is inversely related to volatility. Evidently, stocks in the lowest quality decile perform particularly poorly amidst volatile market conditions with a mean monthly Daniel, Grinblatt, Titman and Wermers (DGTW) alpha 1.93% [25.73% per annum (pa)] less than high-quality stocks. Furthermore, funds which hold the lowest quality stocks exhibit substantial underperformance, particularly during market downturns, with funds in the lowest decile of quality incurring a mean monthly DGTW alpha 0.96% (12.14% pa) lower than their higher quality counterparts. Interestingly, we discover a trend to funds investing in higher quality stocks over time.

*The authors gratefully acknowledge invaluable comments provided by an anonymous referee, Yaowen Shan, Stephen Taylor, Nick White, Andrew Ferguson, Jeff Coulton, and seminar participants at the University of Technology, Sydney and Macquarie University. The authors are also appreciative of the generous financial support provided by the Capital Markets Co-operative Research Centre and Mercer Investments.

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Good News and Bad News about Firm-Level Stock Returns of Internationally Exposed Firms*
Carmelo Giaccotto(Department of Finance, School of Business, University of Connecticut)
Alain Krapl(Haile/US Bank Collage of Business, Northern Kentucky University)

We examine stock returns of firms with international exposure. Our empirical work relies on Campbell’s variance decomposition framework. Not surprisingly, we find that the volatility of discount rate and cash flow news increase with the degree of international exposure. As firms globalize, the cash flow effect is good news, while the discount rate effect amounts to bad news. The surprising result is that the covariance between the news terms increases with international exposure. This finding provides indirect evidence for the proposition that foreign exchange (FX) risk is a priced factor in the cross-section of risk-adjusted expected returns.

*The authors would like to thank Sudipto Dasgupta (Editor), an anonymous referee, Assaf Eisdorfer, Tom O’Brien, and participants at the 2011 EFMA, the 2011 SFA, and the 2012 FMA annual meetings for helpful comments and suggestions. All remaining errors are our own.

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Off-Market Buybacks in Australia: Evidence of Abnormal Trading around Key Dates*
Hue Hwa Au Yong(Department of Banking and Finance, Monash University)
Christine Brown(Department of Banking and Finance, Monash University)
Chloe Choy Yeing Ho(Department of Banking and Finance, Monash University)

Off-market share buybacks in Australia are often structured with the buyback price comprising a large dividend component (which may carry imputation tax credits) and a small capital component. This unique structure has the consequence that institutions on low tax rates stand to benefit most from selling shares into the buyback. In this article, we explore evidence of abnormal trading activities around key dates in the conduct of off-market buybacks and investigate the drivers of these activities. We find evidence of abnormal trading activities around the initial announcement and the final announcement dates of the buyback. The significant differences in abnormal volumes between the buybacks with and without imputation tax credits highlight the importance of tax motivations in explaining abnormal trading activities in the shares of companies conducting off-market buybacks, and are consistent with observed buying pressure around the announcement of the buyback.

*This research was supported under the Australian Research Council’s Discovery Project funding scheme (project number DP0878537). We thank Anne Ritter for her excellent research assistance.

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The Interaction of Post-Acquisition Integration and Acquisition Focus in Relation to Long-Run Performance
Sorin Daniliuc(Research School of Accounting and Business Information Systems, The Australia University)
Chris Bilson(Research School of Finance, Actuarial Studies and Applied Statistics, The Australian National University)
Greg Shailer(Research School of Accounting and Business Information Systems, The Australia University)

We examine the joint influence of post-acquisition integration management and acquisition focus on long-run post-acquisition performance. We develop a financial measure related to integration that is based on changes in net purchases/disposals of physical assets. For a sample of acquisitions by Australian listed firms, we find that the main effects and the interaction of our integration measure and focus are related to performance in the direction suggested by theory. Our results suggest that inconsistencies in previous studies of the focus-performance relation are partly explained by the failure to consider the post-acquisition asset management strategies.

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