Showing papers in "European Financial Management in 2016"
TL;DR: A strong co-movement of stock market indices' realized volatility and the search queries for their names is found and this finding helps to improve volatility forecasts in-sample and out-of-sample as well as for different forecasting horizons.
Abstract: This paper studies the dynamics of stock market volatility and retail investor attention measured by internet search queries. We nd a strong co-movement of stock market indices’ realized volatility and the search queries for their names. Furthermore, Granger causality is bi-directional: high searches follow high volatility, and high volatility follows high searches. Using the latter feedback eect to predict
297 citations
TL;DR: In this paper, the authors investigate whether ownership structure, accounting opacity, board structure & processes and managerial incentives attributes relate to future stock price crash risk, and find that they can explain between 13.1% and 23.0% of a one standard deviation in crash risk.
Abstract: We investigate whether ownership structure, accounting opacity, board structure & processes and managerial incentives attributes relate to future stock price crash risk. Principal component analysis on the 21 attributes that comprise these four corporate governance dimensions reveals that they can explain between 13.1% and 23.0% of a one standard deviation in crash risk. Transient institutional ownership, CEO stock option incentives and the proportion of directors that hold equity increase crash risk, whilst insiders' ownership, accounting conservatism, board size and the presence of a corporate governance policy mitigate crash risk. Overall these relationships are more pronounced in environments that accentuate agency risk.
150 citations
TL;DR: This article found that a mandatory 40% gender quota shifts the average fraction of independent directors from 46% to 67% because female directors are much more often independent than males are, and this shock to board independence via gender quotas is strongest in small, young, profitable, non-listed firms with powerful stockholders and few female directors.
Abstract: We find that forcing radical gender balance on corporate boards is associated with increased board independence and reduced firm value. A mandatory 40% gender quota shifts the average fraction of independent directors from 46% to 67% because female directors are much more often independent directors than males are. This shock to board independence via gender quotas is strongest in small, young, profitable, non-listed firms with powerful stockholders and few female directors. Such firms also lose the most value, presumably because they need advice from dependent directors the most and monitoring by independent directors the least.
120 citations
TL;DR: In this paper, the role of multiple large shareholders in corporate risk-taking was investigated in publicly listed French family firms over the period 2003−2012, and the presence, number and voting power of multiple shareholders were associated with higher risk taking.
Abstract: We investigate the role of multiple large shareholders (MLS) in corporate risk-taking. Using a sample of publicly listed French family firms over the period 2003−2012, we show that the presence, number and voting power of MLS are associated with higher risk-taking. Our results suggest that MLS help restrain the propensity of family owners to undertake low-risk investments. This effect is much stronger in firms that are more susceptible to agency conflicts. The results highlight the important governance role played by MLS in family firms and may explain why MLS are associated with higher firm performance.
61 citations
TL;DR: In this paper, the authors study the impact of the French Securities Transaction Tax (STT) on the French stock market and show that liquidity demand and supply significantly drop and that increased spreads and a declined order book depth resulting in additional transaction costs for market participants besides the tax.
Abstract: We study the French Securities Transaction Tax implementation of 1 August 2012. Although a similar tax is planned to be introduced across 11 European countries, consequences for market quality are yet to be thoroughly assessed. We show that liquidity demand and supply significantly drop. Even though the French proposal exempts professional liquidity provision, we find increased spreads and a declined order book depth resulting in additional transaction costs for market participants besides the tax. As all venues trading French stocks are affected, we further find that STT threatens inter-market information transmission by impairing price coordination among fragmented markets in Europe.
44 citations
TL;DR: In this paper, the authors examined the intertemporal relationship between downside risks and expected stock returns for five advanced markets using Value-at-Risk (VaR) as a measure of downside risk, and found a positive and significant relationship between VaR and the expected return before the world financial crisis (September 2008).
Abstract: This paper examines the intertemporal relationship between downside risks and expected stock returns for five advanced markets. Using Value-at-Risk (VaR) as a measure of downside risk, we find a positive and significant relationship between VaR and the expected return before the world financial crisis (September 2008). However, when we estimate the model using a sample after this date, the results show a negative risk–return relationship. Evidence from a two-state Markov regime-switching model indicates that as uncertainty rises, the sign of the risk–return relationship turns negative. Evidence suggests that the Markov regime-switching model helps to resolve the conflicting signs in the risk–return relationship.
32 citations
TL;DR: This article examined the spillover effect of Eurozone sovereign rating changes on domestic bank share prices in the period 2002-2012 and found that bank share price losses following sovereign downgrades increase as bank leverage, efficiency, and equity performance increase, and they decrease as bank systematic risk and payout ratio increase.
Abstract: This paper examines the spillover effect of Eurozone sovereign rating changes announced by Standard and Poor's, Moody's, and Fitch on domestic bank share prices in the period 2002–2012. This spillover effect appears negative in the case of downgrades, but insignificant for upgrades. Surprisingly, announcement of sovereign negative credit watches results in increased bank stock returns. Bank share price losses following sovereign downgrades increase as bank leverage, efficiency, and equity performance increase, and they decrease as bank systematic risk and payout ratio increase. On the contrary, bank share prices rise following sovereign negative credit watches, as leverage and bank size decrease and as bank systematic risk increases.
21 citations
TL;DR: In this article, trading volume drops sharply before CSR rating announcements and increases afterwards, showing that trading volume depends mainly on prior private information and the content of the announcement, and that some topics like business behaviour, human resources and human rights significantly influence investor trades.
Abstract: This paper investigates trading around Corporate Social Responsibility (CSR) rating announcements. Focusing on CSR rating announcements made by Vigeo on European markets, we use Euronext intraday data to prove that trading volume drops sharply before announcements and increases afterwards. Willingness to trade depends mainly on prior private information and the content of the announcement. Our results show effects from disaggregated scores, but not from overall scores. More specifically, we find that some topics like business behaviour, human resources and human rights significantly influence investor trades. Environmental risk does not have an impact on trading behaviour.
21 citations
TL;DR: In this paper, the authors investigate the financing strategies and valuation effects of 247 IPO firms at the "Neuer Markt" in Germany that either issued additional equity (SEO) or repurchased shares (SRP) within five years after going public.
Abstract: We investigate the financing strategies and valuation effects of 247 IPO firms at the ‘Neuer Markt’ in Germany that either issued additional equity (SEO) or repurchased shares (SRP) within five years after going public. IPOs issuing additional equity exhibit a temporary outperformance before the event, but negative announcement returns and a long-run underperformance. In contrast, repurchasing IPOs experience positive announcement returns and no long-run underperformance. Free cash flow problem resulting from mandatory equity issuance at the IPO explain the SRP decision. Our findings for SEOs are consistent with a staged financing strategy, while we find no evidence for market timing.
21 citations
TL;DR: In this article, a seasonal mean-reverting model for energy commodity prices with jumps and Heston-type stochastic volatility, and three nested models for comparison are considered.
Abstract: We consider a seasonal mean-reverting model for energy commodity prices with jumps and Heston-type stochastic volatility, and three nested models for comparison. By exploiting the affine form of the log-spot models, we develop a general valuation framework for futures and discrete arithmetic Asian options. We investigate five major petroleum commodities from Europe (Brent crude oil, gasoil) and US (light sweet crude oil, gasoline, heating oil) and analyse the effects of the competing fitted spot models in futures pricing, Asian options pricing and hedging. We find evidence that price jumps and stochastic volatility are important features of the petroleum price dynamics.
19 citations
TL;DR: This article investigated the risk effects of bank acquisitions of insurance companies and securities firms between 1991 and 2012 using a newly constructed dataset of M&A deals and found that bank combinations with securities firms yield higher risks than combinations with insurance companies.
Abstract: We investigate the risk effects of bank acquisitions of insurance companies and securities firms between 1991 and 2012 using a newly constructed dataset of M&A deals. We examine risk changes before and after deal announcements by decomposing risk into systematic and idiosyncratic components. Subsequently, we investigate the relationship between risk and diversification by modelling the determinants of risks. We find that bank combinations with securities firms yield higher risks than combinations with insurance companies. Bank size is an important and consistent determinant of risk whereas diversification is not. Our results inform the continuing debate on diversification versus functional separation of bank activities.
TL;DR: In this paper, the authors used a unique testing ground on the effect of price limits on IPO pricing and initial returns, and found that effective price limits reduce underpricing in all market segments, without visible diminution of IPO activity.
Abstract: This paper uses a unique testing ground on the effect of price limits upon IPO pricing and initial returns. The Athens Stock Exchange offers the opportunity for this new experiment, as three substantial changes in limit regulations were implemented in a short period of eight years. The results indicate significant differences in initial returns. Effective price limits reduce underpricing in all market segments, without visible diminution of IPO activity. The introduction of mandatory book-building after price limits were phased out in Athens also led to reduced underpricing in the main market segment. Nevertheless, the existence of an independent effect of price limits explains why some regulators continue to use them to the present day.
TL;DR: Using a proxy of investors' speculative demand constructed from online search interest in investment concepts, this article examined how speculative demand affects the returns of Chinese stocks and found that speculative demand increases following high market returns and predicts subsequent return reversals.
Abstract: Using a novel proxy of investors' speculative demand constructed from online search interest in investment concepts, we examine how speculative demand affects the returns of Chinese stocks We find that speculative demand increases following high market returns and predicts subsequent return reversals Moreover, the speculative demand explains more variation in subsequent returns of A shares (more populated by retail investors) than B shares (less populated by retail investors) Our findings support the recently developed attention theory
TL;DR: In this article, the authors find cross-sectional evidence that a financially constrained firm with patentable innovation opportunities can use discretionary accruals to reveal information about the firm's prospects and facilitate its financing activities.
Abstract: We find cross-sectional evidence that a financially constrained firm with patentable innovation opportunities can use discretionary accruals to reveal information about the firm's prospects and facilitate its financing activities. Specifically, using firms with patents in the National Bureau of Economic Research (NBER) patent database, we find that among financially constrained firms, higher discretionary accruals are associated with more capital being raised, greater research and development (R&D) expenditures, more patents, more patent citations, and better operating performance in the future. These positive relationships are driven by firms that raise equity capital, especially those that raise equity capital from employees.
TL;DR: In this article, the authors provide an in-depth analysis of the effect of overlapping bias in a broad sample of European stocks and find that the overlapping bias is non-negligible.
Abstract: In the standard approach of the three-factor model of Fama and French (1993), both the test portfolios and the SMB and HML factor portfolios are formed on the basis of size and the book-to-market ratio. Thus, a potential overlapping bias in time-series regressions arises. Based on a resampling method and a split-sample approach, we provide an in-depth analysis of the effect of overlapping for a broad sample of European stocks. We find that the overlapping bias is non-negligible, contrary to what seems to be the general opinion.
TL;DR: In this article, the authors apply parametric and non-parametric estimates to test market and style timing ability of individual German equity and bond mutual funds using a sample of over 500 equity and 350 bond funds, over the period 1990-2009.
Abstract: We apply parametric and non-parametric estimates to test market and style timing ability of individual German equity and bond mutual funds using a sample of over 500 equity and 350 bond funds, over the period 1990-2009. For equity funds, both approaches indicate no successful market timers in the 1990-1999 or 2000-2009 periods, but in 2000-2009 the non-parametric approach gives fewer unsuccessful market timers than the parametric approach. There is evidence of successful style timing using the parametric approach, and unsuccessful style timing, particularly in the 2000-2009 period. There is evidence of positive and negative bond timing in the 2000-09 period.
TL;DR: In this article, the authors apply a model designed for modelling high-frequency and irregularly spaced data, the autoregressive conditional multinomial-autoregressive Conditional Conditional Duration (ACM-ACD) model.
Abstract: Predictability of exchange rate movement is of great interest to both practitioners and regulators. We examine the predictability of exchange rate movement in the high-frequency domain. To this end, we apply a model designed for modelling high-frequency and irregularly spaced data, the autoregressive conditional multinomial–autoregressive conditional duration (ACM–ACD) model. Studying three pairs of currencies, we find strong predictability in the high-frequency quote change data, with the rate of correct predictions varying from 54 to 70%. We demonstrate that filtering the data, by increasing the threshold of mid-quote price change, in combination with dynamic learning, can improve forecasting performance.
TL;DR: In this paper, the authors explored the link between a firm's non-cancellable operating lease commitments and stock returns and found that firms with more operating lease commitment earn a significant premium over firms with fewer commitments, and this premium is countercyclical.
Abstract: This paper explores the link between a firm's non-cancellable operating lease commitments and stock returns Firms with more operating lease commitments earn a significant premium over firms with fewer commitments, and this premium is countercyclical Non-cancellable operating lease payments represent a major claim on a firm's cash flows Firms with high levels of operating leases have higher cash flow sensitivity to aggregate shocks and hence higher operating leverage The relationship between operating leases and stock returns is stronger in small firms than in big firms
TL;DR: In this paper, the authors investigate and evaluate factor investing in the US and Europe for equities and bonds, and show that factor-based portfolios generally produce comparable or better portfolios than market indices.
Abstract: In this paper we investigate and evaluate factor investing in the US and Europe for equities and bonds. We show that factor-based portfolios generally produce comparable or better portfolios than market indices. We expand the analysis to other asset classes and factors, work with other optimisation methods and add a basic liability structure. The results do not depend on adding other asset classes or on the removal of a specific factor. Finally, we study the results for a worldwide investor who invests beyond the US and Europe. Over the longer term and with consistently applied factor diversification, factor investing appears to be advantageous.
[...]
TL;DR: In this article, a comprehensive study of the characteristics and performance of target risk and target date mutual funds is performed and compared to target date funds as an investment, and the results show that target risk funds have better performance than target date fund.
Abstract: There is a vast literature which shows that investors don't make rational decisions in allocating resources among different investments. Target risk funds and target date funds are two types of mutual funds primarily organised as fund of funds that make the asset allocation decision for an investor. Both are used as options in 401(k) plans and Individual Retirement Accounts. However they control for risk in very different ways. Target risk funds have not been studied. This article is the first comprehensive study of their characteristics and performance and how they compare to target date funds as an investment.
TL;DR: This article examined whether investors' decisions are influenced by the word content of newspaper reports of new product announcements and found that announcements of new products covered by financial newspapers with positive word content earn significant abnormal returns.
Abstract: This paper examines whether investors' decisions are influenced by the word content of newspaper reports of new product announcements. Using textual analysis we find that announcements of new products covered by financial newspapers with positive word content earn significant abnormal returns. These returns are 270 basis points higher than new products without positive word coverage, and such announcements bring negative impact to their rival firms' value. Our results suggest that the market reacts to the linguistic content of the new product announcement rather than to the announcement itself.
TL;DR: In this paper, the authors investigate two potential explanations: (1) each cohort adopts and retains operating innovations that are associated with higher risks, and (2) increasing numbers of younger and less-experienced firms are represented in each new cohort.
Abstract: Prior studies show that the risk level of each new cohort of listed firms is higher than its predecessor's. We find that these risk differences are persistent and investigate two potential explanations: (1) Each cohort adopts and retains operating innovations that are associated with higher risks, and (2) increasing numbers of younger and less-experienced firms are represented in each new cohort. Our results support the first explanation. Each new cohort uses riskier production technologies and operates in more competitive product markets than its predecessor.
TL;DR: In this article, the authors present a systematic comparison of six different implied beta estimators and identify explanatory factors for the predictive performance of implied estimators both in the cross section of stocks and over time.
Abstract: Option-implied betas are a promising alternative to historical beta estimators, because they are inherently forward-looking and can incorporate new information immediately and fully. Recently, different implied beta estimators have been developed, but very little is known about their properties and information content. This paper presents a first systematic comparison between six different implied beta estimators, providing guidance for applications and identifying directions for further improvement. The analysis identifies explanatory factors for the predictive performance of implied estimators both in the cross section of stocks and over time. Furthermore, the analysis reveals patterns in the term structure of implied betas.
TL;DR: In this paper, the authors examine whether performance persistence is suspicious and find that top quintile portfolios formed on the Sharpe ratio, alpha, and information ratio persistently outperform similarly constructed mediocre third quintile portfolio.
Abstract: We examine whether performance persistence is suspicious. Top quintile portfolios formed on the Sharpe ratio, alpha, and information ratio persistently outperform similarly constructed mediocre third quintile portfolios throughout our sample period, but performance is more modest and less persistent when portfolios are formed on the excess manipulation-proof performance measure (EMPPM). By selecting funds formed on ranking by Sharpe and information ratios, investors also select funds that have persistently doubtful performance according to the doubt ratio. In contrast, portfolios formed on alphas and especially the EMPPM have much less excess and persistent doubt.
TL;DR: This article examined the contemporaneous and lead-lag relationship between economic variables and implied volatility smiles for three major European currency options and found that cross economic determinants are at least as important as own economic variables in explaining the dynamics of implied volatility smile.
Abstract: This paper examines the contemporaneous and lead–lag relationships between economic variables and implied volatility smiles for three major European currency options. We find that cross economic determinants are at least as important as own economic variables in explaining the dynamics of implied volatility smiles. Out‐of‐sample tests also suggest that cross economic variables are important in predicting an economy's currency option smile. These findings suggest that the price impact from cross economic determinants may help fill the gap between the theoretical and the practical implied volatility skews.
TL;DR: This article examined whether top managerial executive envy plays an important role in merger waves and found that merger waves are motivated by envy-pay, since managerial benefits always increase with firm size, the envy hypothesis conjectures that top executive officers rush into acquisitions due to their envious psychology once other executives initiate them.
Abstract: This study examines whether top managerial executive envy plays an important role in merger waves. Since managerial benefits, especially compensation, always increase with firm size, the envy hypothesis conjectures that top executive officers rush into acquisitions due to their envious psychology once other executives initiate them. Six empirical predictions of the envy hypothesis concerning – bidder (target) size, transaction size, value creation for bidders, compensation increases for top managers, likelihood of bidding, as well as total gains (synergies) from mergers – are tested in the context of the banking industry and find that merger waves are motivated by envy-pay.
TL;DR: In this article, the authors examined the effect of the 2011 short-selling ban on Spanish stocks on the financial sector's risk level and found that short positions were positive and significantly related to several indicators of bank default risk.
Abstract: We examine the effect of the 2011 short-selling ban on Spanish stocks on the financial sector's risk level. Before the ban, short positions were positive and significantly related to several indicators of bank default risk. Subsequently, the ban moderated the risk of banking institutions, especially those more exposed to short-seller activity, which, on average, showed higher levels of maturity mismatch, uncertainty about their fundamentals, and exposure to sovereign risk. The ban also caused a side effect on non-financial firms, since it led to an increase in their exposure to short sales, reflecting the existence of a common aggregate risk factor.
TL;DR: In this paper, the authors investigate whether distribution costs embedded into the expense ratio can be held responsible for the differences of expense ratios of mutual funds in different countries, and confirm the existence of relevant country effects in the pricing of mutual fund management services.
Abstract: Using data on more than 5,000 mutual funds domiciled in four European countries in 2006, we investigate whether distribution costs embedded into the expense ratio can be held responsible for the differences of expense ratios of mutual funds in different countries. We confirm the existence of relevant country effects in the pricing of mutual fund management services. Comparing load and no-load funds and using survey data on fee retrocession to the distribution channel, we provide evidence that these effects are heavily influenced by the cost of the distribution embedded in the expense ratio.
TL;DR: In this paper, the authors found that institutional traders are more sensitive and responsive to changes in market conditions, and that their limit orders have a lower price impact at the intra-day level in the 2012 subsample period.
Abstract: The liquidity provision strategies by institutional traders on the ASX have changed over the period 2006 to 2012. Besides using smaller-sized orders more frequently than their retail counterparts, they have increased the use of passive limit orders. Institutional traders are found to be more sensitive and responsive to changes in market conditions. Analyses on order placement and price impact suggest that institutional traders are better informed. However, their limit orders are found to have a lower price impact at the intra-day level in the 2012 subsample period. We show evidence this is associated with the proliferation of algorithmic and high frequency trading.
TL;DR: In this paper, the authors complemented the literature on style migration by examining value and size premiums throughout Europe and found that the primary determinants of the persistent value outperformance are: 1) value firms migrating to a neutral or growth portfolio, and 2) growth stocks migrating to neutral or value portfolios.
Abstract: This paper complements the literature on style migration by examining value and size premiums throughout Europe. Information from more than 25 European markets indicates an average value premium of 9.58% per year. The primary determinants of the persistent value outperformance are: 1) value firms migrating to a neutral or growth portfolio, and 2) growth stocks migrating to neutral or value portfolios. The financial health metric F_SCORE helps uncover outperforming stocks ex ante, and provides preliminary evidence on the probability of migration, but only for small stocks.