Asset Pricing, Mutual Funds, ETFs, IPOs, SEOs, Mergers and Acquisitions, Private Equity, Time Series Econometrics, Risk Measurement

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1 TRAVIS R. A. SAPP Iowa State University Office: College of Business Dept: Department of Finance Fax: Gerdin Business Building Ames, IA EDUCATION Ph.D. in Finance, The University of Iowa, 2001 M.S. in Economics, Iowa State University, 1995 B.S. in Economics, Iowa State University, 1994 POSITIONS HELD Director of Graduate Education, Master of Finance Program, Iowa State University, 2013-present Dean s Fellow in, 2010-present Associate Professor, Department of, 2008-present Assistant Professor, Department of, EXPERTISE Asset Pricing, Mutual Funds, ETFs, IPOs, SEOs, Mergers and Acquisitions, Private Equity, Time Series Econometrics, Risk Measurement PUBLICATIONS Efficient Estimation of Distributional Tail Shape and the Extremal Index with Applications to Risk Management, 2016, Journal of Mathematical Finance 6, Why Do Firms Issue Private Equity Repeatedly? On the Motives and Information Content of Multiple PIPE Offerings (with Yianni Floros), 2012, Journal of Banking and Finance 36, Shell Games: On the Value of Shell Companies (with Yianni Floros), 2011, Journal of Corporate Finance 17, Characterizing the Risk of IPO Long-Run Returns: The Impact of Momentum, Liquidity, Skewness, and Investment (with Rick Carter, Rick Dark, and Yianni Floros), 2011, Financial Management 40, The 52-Week High, Momentum, and Predicting Mutual Fund Returns, 2011, Review of Quantitative Finance and Accounting 37, Received the Outstanding Paper Award in Investments at the 2010 Southern Finance Association Annual Meeting. Underwriter Reputation and IPO Issuer Alignment (with Rick Carter and Rick Dark), 2010, Quarterly Review of Economics and Finance 50, Estimating Continuous-Time Stochastic Volatility Models of the Short-Term Interest Rate: A Comparison of the Generalized Method of Moments and the Kalman Filter, 2009, Review of Quantitative Finance and Accounting 33, Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance? (with Sterling Yan), 2008, Financial Review 43, Article based on this paper published in BusinessWeek, August 14, 2008, written by Lewis Braham.

2 Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability (with Geoff Friesen), 2007, Journal of Banking and Finance 31, Emerald Citation of Excellence. This article was named in the top 50 from over 15,000 articles reviewed throughout Stock Return Momentum and Investor Fund Choice (with Ashish Tiwari), 2006, Journal of Investment Management 4, No. 3, Paper was invited by the editor. Money Funds or Markets? Valuing Intermediary Services (with Gary Koppenhaver), 2005, Journal of Financial Services Research 27, Does Stock Return Momentum Explain the Smart Money Effect? (with Ashish Tiwari), 2004, Journal of Finance 59, Article based on this paper published in the Fund Fiend column of The Wall Street Journal On-line, April 5, 2004, written by Ian McDonald. Summarized in the CFA Digest, May 2005, Vol. 35, No. 2: pp , by William H. Sackley. The Nasdaq-Amex Merger, Nasdaq Reforms, and the Liquidity of Small Firms (with Xuemin Sterling Yan), 2003, Journal of Financial Research 26, WORKING PAPERS Investor Timing and Fund Distribution Channels (with Mercer Bullard and Geoff Friesen) WORKS IN PROGRESS Testing the Waters or Looking for an Alternate Exit? Dark Filings Under the JOBS Act and the IPO/M&A/VC Triple Track (with Yianni Floros and Ann Sherman) Tail Risk and Financial Contagion (with Ashish Tiwari) Betting Against Beta in Mutual Funds GRADUATE TEACHING EXPERIENCE Financial Econometrics (MFin) Accounting and Finance (MBA), Iowa State University Advanced Corporate Finance (MBA/MFin), Iowa State University Financial Analysis and Valuation (MFin), Iowa State University Investments (MBA/MFin), Iowa State University Simulation and Risk Modeling in Finance (MBA), Iowa State University Venture Capital, Private Equity, and Mergers and Acquisitions (MBA/MFin), Iowa State University UNDERGRADUATE TEACHING EXPERIENCE Venture Capital, Private Equity, and Mergers and Acquisitions, Iowa State University Investments, Iowa State University Introductory Investments, University of Iowa, Introductory Finance, University of Iowa, Introductory Finance (Teaching Assistant), University of Iowa,

3 HONORS AND AWARDS Dean s Advisory Council College of Business 2016 Teaching Award nominee from the Department of Dean s Advisory Council College of Business 2014 Research Award nominee from the Department of Dean s Advisory Council College of Business 2013 Teaching Award nominee from the Department of Dean s Advisory Council College of Business 2012 Research Award nominee from the Department of Dean s Advisory Council College of Business 2011 Research Award nominee from the Department of The 52-Week High, Momentum, and Predicting Mutual Fund Returns received the Outstanding Paper Award in Investments at the 2010 Southern Finance Association Meeting in Asheville, North Carolina. Named Dean s Faculty Fellow in, 2010 College of Business $1,500 Research Grant for Shell Games: On the Value of Shell Companies, 2009, Iowa State University Dean s Advisory Council College of Business 2009 Research Award nominee from the Department of Dean s Advisory Council College of Business 2008 Research Award nominee from the Department of Zero Alpha Group $7,500 Research Grant for Investor Timing and Fund Distribution Channels, 2007 Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability was selected as one of the 50 best articles published in 2007 in management, winning an Emerald Management Reviews Citation of Excellence. Emerald Management Reviews covers every article in the top 400 business and management journals world-wide. This article was named in the top 50 from over 15,000 articles reviewed throughout Dean s Advisory Council College of Business 2007 Teaching Award nominee from the Department of Dean s Advisory Council College of Business 2004 Research Award nominee from the Department of College of Business 1997 Outstanding Teaching Assistant Award recipient, University of Iowa PROFESSIONAL CONFERENCES AND OTHER PRESENTATIONS 2017 Eastern Finance Association Annual Meeting, Jacksonville, presented Efficient Estimation of Distributional Tail Shape and the Extremal Index with Applications to Risk Management 2010 Southern Finance Association Annual Meeting, Asheville, presented On the Information Content of Repeated PIPE Offerings 2010 Southern Finance Association Annual Meeting, Asheville, presented The 52-Week High, Momentum, and Predicting Mutual Fund Returns 2010 Southern Finance Association Annual Meeting, Asheville, presented Shell Games: On the Value of Shell Companies 2010 Southern Finance Association Annual Meeting, Asheville, presented Characterizing the Risk of IPO Initial Returns: The Impact of Momentum, Liquidity, Skewness, and Investment 2010 Burridge Center for Securities Analysis Annual Conference at the University of Colorado, presented The 52-Week High, Momentum, and Predicting Mutual Fund Returns, by invitation 3

4 2010 European Financial Management Symposium on Entrepreneurial Finance & Venture Capital Markets in April 2010 at Cirano, Montreal, Canada, Shell Games: On the Value of Shell Companies accepted for presentation 2010 European Financial Management Symposium on Entrepreneurial Finance & Venture Capital Markets in April 2010 at Cirano, Montreal, Canada, On the Information Content of Repeated PIPE Offerings presented by coauthor 2010 Eastern Finance Association Annual Meeting, Miami Beach, presented On the Information Content of Repeated PIPE Offerings 2010 Eastern Finance Association Annual Meeting, Miami Beach, presented The 52-Week High, Momentum, and Predicting Mutual Fund Returns 2010 Eastern Finance Association Annual Meeting, Miami Beach, presented Shell Games: On the Value of Shell Companies 2010 Eastern Finance Association Annual Meeting, Miami Beach, presented Characterizing the Risk of IPO Initial Returns: The Impact of Momentum, Liquidity, Skewness, and Investment 2010 Stockholm School of Economics Finance Research Seminar, presented On the Information Content of Repeated PIPE Offerings, by invitation 2009 Paris Finance International Meeting, Paris, Shell Games: On the Value of Shell Companies, presented by coauthor th Annual Conference on Financial Economics and Accounting, Rutgers University, Characterizing the Risk of IPO Initial Returns: The Impact of Momentum, Liquidity, Skewness, and Investment, presented by coauthor 2009 Financial Management Association International Annual Meeting, Reno, Investor Timing and Fund Distribution Channels, presented by coauthor 2007 American Finance Association Annual Meeting, Chicago, participant 2006 Financial Management Association International Annual Meeting, Salt Lake City, Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability presented by coauthor. Identified among the top 10 percent of all accepted papers and featured in the FMA s Program in a Program of top ranked papers Financial Management Association International Annual Meeting, Chicago, participant 2004 Financial Management Association International Annual Meeting, New Orleans, Money Funds or Markets? Valuing Intermediary Services presented by coauthor 2003 American Finance Association Annual Meeting, Washington, D.C., participant 2002 Financial Management Association International Annual Meeting, San Antonio, presented Does Stock Return Momentum Explain the Smart Money Effect? 2002 Financial Management Association International Annual Meeting, San Antonio, presented The Nasdaq- Amex Merger, Nasdaq Reforms, and the Liquidity of Small Firms 2001 American Finance Association Annual Meeting, New Orleans, participant 2000 Financial Management Association International Annual Meeting, Seattle, participant 2000 Nasdaq-Notre Dame Microstructure Conference, South Bend, participant PROFESSIONAL SERVICE Referee for the American Economic Review Referee for European Financial Management Referee for Financial Analyst s Journal Referee for Financial Management Referee for the Financial Review 4

5 Referee for the International Review of Economics and Finance Referee for the Journal of Banking and Finance Referee for the Journal of Business Research Referee for the Journal of Corporate Finance Referee for the Journal of Empirical Finance Referee for the Journal of Finance Referee for the Journal of International Money and Finance Referee for the Journal of Mathematical Finance Referee for Managerial Finance Referee for the North American Journal of Economics and Finance Referee for Quantitative Finance Referee for the Quarterly Review of Economics and Finance Referee for the Review of Financial Economics Referee for the Review of Quantitative Finance and Accounting Program Committee, Eastern Finance Association Annual Meeting, Jacksonville, 2017 Program Committee, Midwest Finance Association Annual Meeting, Chicago, 2017 Program Committee, Southern Finance Association Annual Meeting, Asheville, 2010 Program Committee, Eastern Finance Association Annual Meeting, Miami Beach, 2010 Program Committee, Midwest Finance Association Annual Meeting, St. Louis, 2003 INSTITUTIONAL SERVICE Taskforce to establish ISU Actuarial Science Program, 2016-present Search Committee (Chair) for Joint Finance/Ag Economics Faculty, Faculty Senate Committee on Appeals, Iowa State University, Director of Graduate Education, Master of Finance Program, Iowa State University, 2013-present Search Committee for both College of Business Associate Deans, Iowa State University, 2012 Promotion and Tenure Committee (Chair), College of Business, Iowa State University, Promotion and Tenure Committee, College of Business, Iowa State University, University Business and Finance Advisory Committee, Iowa State University, Faculty Senate Executive Board, Iowa State University, 2009 Faculty Senate, Iowa State University, Council on Resource Policies and Allocations, Iowa State University, Faculty Executive Committee, College of Business, Iowa State University, Department of Finance Promotion and Tenure Committee Chair, Iowa State University, Curriculum Committee, College of Business, Iowa State University, , 2013-present, as Chair 2016-present Computer Advisory Committee, College of Business, Iowa State University, Finance Scholarship Award Committee, Iowa State University,

6 Coordinator of the Accounting and Finance Research Seminar Series, Iowa State University, present Curriculum Taskforce for Statistics 326, Advanced Statistics for Business Undergraduates, Iowa State University, 2002 Finance Faculty Search Committee, Iowa State University, PROFESSIONAL AFFILIATIONS Financial Management Association, 1996-present American Finance Association, 1996-present Society for Financial Studies, 1996-present 6

7 PUBLISHED PAPER ABSTRACTS The Nasdaq-Amex Merger, Nasdaq Reforms, and the Liquidity of Small Firms After the Nasdaq and AMEX merged in 1998, officials of the new entity argued that some smaller, harder to trade companies on Nasdaq should switch to AMEX to improve liquidity. This recommendation is based on the traditional view among academics and practitioners alike that a substantial trading cost reduction should be realized when a company switches from the multi-dealer Nasdaq system to the AMEX specialist system. However, in light of the 1997 Nasdaq reforms, this study re-examines the validity of these arguments using data from on firms that switch from the Nasdaq to AMEX or NYSE. Evidence from transaction costs, volatility, and stock returns shows declining benefits to switching over the sample period. Our findings indicate that the liquidity improvement from exchange listing is very limited in the wake of the Nasdaq reforms of Does Stock Return Momentum Explain the Smart Money Effect? Does the smart money effect documented by Gruber (1996) and Zheng (1999) reflect fund selection ability of mutual fund investors? We examine the finding that investors are able to predict mutual fund performance and invest accordingly. We show the smart money effect is explained by the stock return momentum phenomenon documented by Jegadeesh and Titman (1993). Further evidence suggests investors do not select funds based on a momentum investing style, but rather simply chase funds that were recent winners. Our finding that a common factor in stock returns explains the smart money effect offers no affirmation of investor fund selection ability. Money Funds or Markets? Valuing Intermediary Services Recent market developments, such as on-line trading of Treasury securities and the reduction of the minimum Treasury bill denomination to $1,000, facilitate creation of a viable alternative to U.S. Treasury money funds for investors. Comparison of a direct investment in Treasury bills to U.S. Treasury money funds shows that money fund intermediary services such as check writing, telephone exchange privileges, payroll and automatic transfers, retirement plans, and minimum initial and subsequent purchases are worth an estimated 43 basis points per year, and investors pay an additional 11 basis points for active portfolio management. An analysis of fund net cash flows shows evidence consistent with arbitrage activity between money funds and the direct investment in Treasury bills, especially for investors with few ties to the money fund manager. Stock Return Momentum and Investor Fund Choice Recent research finds that investors are able to predict mutual fund performance and invest accordingly. This phenomenon has been dubbed the smart money effect. We show that the smart money effect is explained by stock return momentum at the one year horizon. This finding then begs the question of what exactly investors seem to be chasing momentum styles or recent large returns? Further evidence suggests investors do not select funds based on a momentum investing style, but rather simply chase funds that were recent winners. Thus, our finding that a common factor in stock returns explains the smart money effect offers no affirmation of investor fund selection ability. We also investigate the profitability of a pure momentum style strategy that invests solely in no-load equity mutual funds. We show that a quarterly fund selection strategy of investing in the top decile portfolio of no-load funds ranked by their historical momentum exposure yields an annualized 3- factor alpha of 3.72% over the period Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability We examine the timing ability of mutual fund investors using cash flow data at the individual fund level. Over equity fund investor timing decisions reduce fund investor average returns by 1.56% annually. Under-performance due to poor timing is greater in load funds and funds with relatively large risk-adjusted returns. In particular, the magnitude of investor underperformance due to poor timing largely offsets the riskadjusted alpha gains offered by good-performing funds. Investors in both actively managed funds and index funds exhibit poor investment timing. We demonstrate that our empirical results are consistent with investor return-chasing behavior. Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance? We examine gross fund returns based on the number of securities held and find no evidence that focused funds outperform diversified funds. After deducting expenses, focused funds significantly underperform. Controlling for various fund characteristics, fund performance is positively related to the fund s number of holdings both before and after expenses. We find evidence linking focused fund underperformance to agency and liquidity problems. Finally, the attrition rate of focused funds is higher than that of diversified funds. These results do 7

8 not support the view that managers holding focused portfolios have superior stock-picking skills or that focused funds provide value to investors. Estimating Continuous-Time Stochastic Volatility Models of the Short-Term Interest Rate: A Comparison of the Generalized Method of Moments and the Kalman Filter This paper examines a model of short-term interest rates that incorporates stochastic volatility as an independent latent factor into the popular continuous-time mean-reverting model of Chan et al. (1992). I demonstrate that this two-factor specification can be efficiently estimated within a generalized method of moments (GMM) framework using a judicious choice of moment conditions. The GMM procedure is compared to a Kalman filter estimation approach. Empirical estimation is implemented on US Treasury bill yields using both techniques. A Monte Carlo study of the finite sample performance of the estimators shows that GMM produces more heavily biased estimates than does the Kalman filter, and with generally larger mean squared errors. Underwriter Reputation and IPO Issuer Alignment We examine the long-term performance of firms that went public from We find that the IPOs marketed by the more reputable underwriters were more likely to fail or be failing in the post-1980s period, but were still better than those of less reputable counterparts. The characteristics of the firms marketed by the more reputable underwriters did not appear to change substantially from decade to decade. We conclude that external market forces rather than conscious changes by underwriters caused the shift in the relation between failure rates and underwriter reputation from the 1980s to the subsequent period. The 52-Week High, Momentum, and Predicting Mutual Fund Returns The 52-week high share price has been shown by George and Hwang (2004) to carry significant predictive ability for individual stock returns, dominating other common momentum-based trading strategies. This study examines the performance of trading strategies for mutual funds based on (1) an analogous 1-year high measure for the net asset value of fund shares, (2) prior extreme returns, and (3) fund sensitivity to stock return momentum. All three measures have significant, independent, predictive ability for fund returns. Further, each produces a distinctive pattern in momentum profits, whether measured in raw or risk-adjusted returns, with profits from momentum loading being the least transitory. Nearness to the 1-year high and recent extreme returns are significant predictors of fund monthly cash flows, whereas fund momentum loading is not. Characterizing the Risk of IPO Long-Run Returns: The Impact of Momentum, Liquidity, Skewness, and Investment We study 6,686 IPOs spanning the period and find that the new issues puzzle disappears in a Fama- French three-factor framework. IPOs do not underperform in the aftermarket on a risk-adjusted basis and do not underperform a matched sample of non-issuers. IPO underperformance is concentrated in the 1980 s and early 1990 s, and IPO s either perform the same as the market, or outperform on a risk-adjusted basis, during We find that outperformance in the later period is driven by large firms. Factors for momentum, investment, liquidity, and skewness help to explain aftermarket returns, although size and book-to-market tend to proxy for skewness. IPO investors receive smaller expected returns due to negative momentum and investment exposure and in exchange for higher liquidity. Shell Games: On the Value of Shell Companies A reverse merger allows a private company to assume the current reporting status of another company that is public. This can be done quickly, without fundraising, road show, underwriter, substantial ownership dilution, or great expense. Private firms that go public via reverse merger are often motivated by the need to quickly secure financing through privately placed stock (PIPEs) and the desire to make acquisitions using stock as payment. In each of the last eight years reverse mergers have outnumbered traditional IPOs as a mechanism for going public, and reporting shell companies are providing fuel for much of this growth. We study 585 trading shell companies over the period The purpose of most of these shell firms is to find a suitor for a reverse merger agreement. These companies have no systematic risk, operations, or assets, and their share price tends to decline over time. Yet, these firms have investors. When a takeover agreement is consummated, shell company three-month abnormal returns are 48.1%. We argue that this exceptional return is compensation to investors for shell stock illiquidity and the uncertainty of finding a reverse merger suitor. We show that shell company returns are much greater at the consummation of a merger than those of a similar entity that in dollar terms is more popular among investors Special Purpose Acquisition Companies (SPACs). 8

9 Why Do Firms Issue Private Equity Repeatedly? On the Motives and Information Content of Multiple PIPE Offerings This study examines why private equity issues tend to be a repeated source of financing for public firms. We test the recent operational needs theory of public equity issuance within the context of repeated private equity issues. We find that repeated PIPE issuers burn through cash quickly and do not reach the standards of information transparency or profitability needed for a successful public equity offering. This has implications for investor composition and the market response to a PIPE. Initial PIPE offerings are characterized by substantial diversity in investor type. In successive transactions firms increasingly rely upon hedge funds, who extract greater price discounts and more often require cash flow rights as opposed to control rights. As firms select a path of repeated PIPEs to raise funds, successive issues become uninformative to the market. We conclude that, for small public firms, the same motive underlies public equity offerings and repeated private equity offerings an acute need for cash. Efficient Estimation of Distributional Tail Shape and the Extremal Index with Applications to Risk Management Abundant evidence indicates that financial asset returns are thicker-tailed than a normal distribution would suggest. The most negative outcomes which carry the potential to wreak financial disaster also tend to be the most rare and may fall outside the scope of empirical observation. The difficulty of modelling these rare but extreme events has been greatly reduced by recent advances in extreme value theory (EVT). The tail shape parameter and the extremal index are the fundamental parameters governing the extreme behavior of the distribution, and the effectiveness of EVT in forecasting depends upon their reliable, accurate estimation. This study provides a comprehensive analysis of the performance of estimators of both key parameters. Five tail shape estimators are examined within a Monte Carlo setting along the dimensions of bias, variability, and probability prediction performance. Five estimators of the extremal index are also examined using Monte Carlo simulation. A recommended best estimator is selected in each case and applied within a Value at Risk context to the Wilshire 5000 index to illustrate its usefulness for risk measurement. 9