NEWS ARCHIVE Office of Communications 470C Wohlers Hall College of Business

College of Business News

October 31, 2002 -- News Brief

Bernhardt Research Cited in New York Times

Economics Professor Daniel Bernhardt's research into stock purchases and the significance of timing was recently highlighted in a New York Times article by Mark Hulbert. The October 6 article entitled "Why Dec. 31 is a Good Day to Stay Out of the Market" cites Bernhardt's research with colleagues Ryan Davies of the University of Reading in the UK and Harvey Westbrook, Jr. of the Security and Exchange Commission's Office of Economic Analysis. (The Times article is available for a fee on their website.)

Hulbert's article discusses research into trading conducted on the last day of each quarter and at the end of the year. Fund managers who execute buy orders in the last minutes of a quarter before the close of the market articficially push prices for their chosen stocks up and thus improve the fund performance. This research, conducted by Mark Carhardt at Goldman Sachs Asset Management and finance faculty at three universities, also noted a ripple effect: other funds that hold the same stocks also showed improved performance.

Bernhardt's research, building with the conclusions reached by Carhardt and his colleagues, explains why top performing funds take a dive in the next quarter. His research shows that the outperformance rarely exceeds a couple of months and that underperformace is likely within six months. Through the attempt to influence funds, Bernhardt and his colleagues argue that the managers are borrowing against future earnings.

According to the Times article:

"The funds begin the subsequent quarter with a handicap: the artificially inflated prices of the stocks they own.
The top funds' reversals are not immediate, however, because the funds benefit from the new cash they receive after investors read the quarterly fund rankings. Because the funds invest at least some of their new cash in the stocks they already own, these stocks tend to outperform the market for several more weeks.
'Eventually the distortion will catch up and lead to a reversal in fund performance,' the theorists say."

Hulbert concluded the article with two suggestions for mutual fund investors:

1. avoid investing in equities on the last day of a quarter to prevent buying at "artificially inflated" prices.
2. investors who select a fund based on the most recent quarterly performance will likely have to switch often to avoid the underperformance Bernhardt and his colllegues documented in their research.

Earlier this year, Bernhardt, IBE Distinguished Professor of Economics, also released another study of timing that showed that there is a significantly higher probability for a company to beat the consensus forecast for earnings if the forecast was lowered two weeks prior to the announcement.