TAKING ADVANTAGE OF THE LOCAL ADVANTAGE? - Investment value of the analyst local advantage in the Finnish stock market in 2006–2014

An investor can either conduct independent analysis or rely on the analyses of others. Stock analysts provide markets with expectations regarding particular securities. However, analysts have different capabilities and resources, of which investors are seldom cognizant. The local advantage refers to the advantage stemming from cultural or geographical proximity to securities analyzed. The research has confirmed that local agents are generally more accurate or produce excess returns. This thesis tests the investment value of the local advantage regarding Finnish stocks via target price data. The empirical section investigates the local advantage from several aspects. It is discovered that local analysts were more focused on certain sectors generally located close to consumer markets. Market reactions to target price revisions were generally insignificant with the exception to local positive target prices. Both local and foreign target prices were overly optimistic and exhibited signs of herding. Neither group could be identified as a leader or follower of new information. Additionally, foreign price change expectations were more in line with the quantitative models and ideas such as beta or return mean reversion. The locals were more accurate than foreign analysts in 5 out of 9 sectors and vice versa in one. These sectors were somewhat in line with coverage decisions and buttressed the idea of local advantage stemming from proximity to markets, not to headquarters. The accuracy advantage was dependent on sample years and on the measure used. Local analysts ranked magnitudes of price changes more accurately in optimistic and foreign analysts in pessimistic target prices. Directional accuracy of both groups was under 50% and target prices held no linear predictive power. Investment value of target prices were tested by forming mean-variance efficient portfolios. Parallel to differing accuracies in the levels of expectations foreign portfolio performed better when short sales were allowed and local better when disallowed. Both local and non-local portfolios performed worse than a passive index fund, albeit not statistically significantly. This was in line with previously reported low overall accuracy and different accuracy profiles. Refraining from estimating individual stock returns altogether produced statistically significantly higher Sharpe ratios compared to local or foreign portfolios. The proposed method of testing the investment value of target prices of different groups suffered from some inconsistencies. Nevertheless, these results are of interest to investors seeking the advice of security analysts.

Crowdfunding as a new funding alternative for early stage start-ups

Attracting outside capital is a common problem for start-up companies. Capital markets define the funding options for companies and firms which suffer the most from these capital market imperfections are small start-up companies. Therefore it is important to study any new funding model which can offer a new solution to this inefficiency of capital markets. This study explains the traditional funding models for start-ups such as founders, friends & family, banks, business angels and venture capitalist. After giving background to traditional start-up funding this study delves into crowfunding (CF) and introduces it as a new funding method. The objective of the thesis is to answer one broad research question: Why and how should start-up companies use CF as an alternative funding method? To properly delve into this, this question has the following sub-questions: What kind of funding alternatives do start-up companies have? What are the pros and cons of CF compared to other funding options? How can start-ups benefit from CF? This study gives background on the rise of CF and the reasons why this new model is needed. Author will explain the different components of CF such as platforms, crowdfunders and projects. Also benefits and challenges of the crowdfunding model are investigated. As a new funding model CF has had to clear out many obstacles from its way. These are, for example, legal and regulatory issues as well education of crowd investors to understand this new investment option. . Start-up entrepreneurs can gain valuable insight from this study. The author has attempted to form best practices and guidelines of how to operate in the CF environment. This study was conducted by performing expert interviews, collecting data from previous studies and performing a content analysis of successful crowdfunding cases. Main findings from the study were that CF has huge potential in funding entrepreneurial projects. It is still a niche way for funding but growing rapidly. CF is earning its place among traditional funding options and has potential to fund projects which otherwise would struggle to find funding. With CF entrepreneur can tap into geographically diverse audience. It is a powerful validation tool for products and ideas and has the power to bring democratic elements to entrepreneurial funding.