Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies

We empirically analyze the pricing of political uncertainty, guided by a theo- retical model of government policy choice. After deriving the modelâ€™s predictions for option prices, we test those predictions in an international sample of national elections and global summits. We find that political uncertainty is priced in the option market in ways predicted by the theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the risk associated with political events, including not only price risk but also variance and tail risks. This protection is more valuable in a weaker economy as well as amid higher political uncertainty.Â

The Price of Political Uncertainty: Theory and Evidence from the Option Market

https://ira.lib.polyu.edu.hk/bitstream/10397/76099/1/a0801-n17_JFE_Political_Uncertainty_PolyU.pdf

The impacts of political uncertainty on asset prices: Evidence from the Bo scandal in China

Prior studies, such as Claessens, Djankov, Fan and Lang (2002), suggest that separation between ultimate control and ownership decreases firm value (due to the entrenchment effects of large shareholding). Using a sample of Canadian firms, we find that stocks with a greater deviation between ultimate control and ownership have a larger information asymmetry component of their bid-ask spread and a wider quoted bid-ask spread. Our results are consistent with the notion that the ultimate owners of these stocks may have a selfish agenda. To increase the probability of it being implemented, the firm may also have poor information disclosure, resulting in an illiquid stock.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=572761

Effects of Large Shareholding on Information Asymmetry and Stock Liquidity

Prior studies, such as Claessens et al.’s [Claessens, S., Djankov, S., Fan, J., Lang, L., 2002. Disentangling the incentive and entrenchment effects of large shareholding. Journal of Finance 57, 2741–2771], suggest that deviation between ultimate control and ownership decreases firm value (due to the entrenchment effects of large shareholding). Using a sample of Canadian firms, we study the relation of ultimate control and ownership with an important dimension of stock liquidity – bid–ask spread. We find that stocks with greater deviations between ultimate control and ownership have a larger information asymmetry component of their bid–ask spread and wider bid–ask spread. Our results are consistent with the notion that the ultimate owners of these stocks may have selfish agendas. To increase the probability of the agendas being implemented, the firms may have poor information disclosure, resulting in poor stock liquidity.

Effects of large shareholding on information asymmetry and stock liquidity

In this paper, we study the impact of political news on the stock market volatility in Hong Kong. Two indices are used: blue-chip shares are proxied by the Hang Seng Index, and China-related stocks are proxied by the Red-Chip Index. The results indicate that political news increases the stock volatility of both blue-chip and red-chip shares. Also, we find that favorable (unfavorable) political news is correlated to positive (negative) returns for the Hang Seng Index. In contrast, political news, good or bad, does not affect the returns of the red-chip shares. We employ a substitution effect to explain our findings and conclude that red-chip stocks can be considered a safe haven from political shocks for investors in Hong Kong.

Political risk and stock price volatility: The case of Hong Kong☆

Price informativeness and stock return synchronicity: Evidence from the pricing of seasoned equity offerings

This paper investigates the impact of salient political and economic news on the intraday trading activity, namely, the stock return volatility, the stock price volatility, the number of shares traded, and the trading frequency. Using transactions data on 33 constituent stocks of the Hang Seng Index in the Stock Exchange of Hong Kong (SEHK), we find that political news has a distinct impact on market activity when compared with economic news. We argue that the observed phenomenon is related to the precision of signals associated with these two types of news and investors' perceptual biases.

The impact of salient political and economic news on the trading activity

This paper examines the price and volume effects of underlying stocks around the announcement date of derivative warrants issued in Hong Kong. In general, the results indicate that underlying stocks are subject to extra buying pressure a few days before the new derivative warrant issuance, which is consistent with our hypothesis about the hedging effect created by the merchant banks that initiate the warrant issuance. Since the prices of underlying stocks peak on the first day after the warrant announcement and are stable thereafter, the information effect associated with the warrant issuance appears to be weak and does not last long. In addition, we find that underlying stocks have abnormal increases in price and volume during the last 5 minutes of trading on the warrant issuance day. This might be due to investors’ buying behavior precipitated by information leakage about the successful warrant issuance and/or to the price manipulation by merchant banks in order to attain a better payoff from the warrant issuing business.

Price and volume effects associated with derivative warrant issuance on the Stock Exchange of Hong Kong

Economic policy uncertainty (EPU) increases the cost of raising equity capital, especially when the economy is weak. A one standard deviation increase in the EPU index developed by Baker, Bloom, and Davis (2016) is associated with a 43 basis point increase in the price discount of seasoned equity offerings (SEOs) during the recent 2000-2014 period. The cross-sectional analysis shows that the EPU effect on SEO discounts is stronger for firms with greater dependence on government spending, less informative stock price, or a smaller EPU beta. Moreover, there are fewer SEO activities in periods when there is a high degree of policy uncertainty.

Yue-Cheong Chan

Papers

Political risk and stock price volatility: The case of Hong Kong☆

Price informativeness and stock return synchronicity: Evidence from the pricing of seasoned equity offerings

The impact of salient political and economic news on the trading activity

Price and volume effects associated with derivative warrant issuance on the Stock Exchange of Hong Kong

How Economic Policy Uncertainty Affects the Cost of Raising Equity Capital: Evidence from Seasoned Equity Offerings