Showing papers in "European Journal of Finance in 2012"
TL;DR: In this paper, the authors examine the characteristics of the sixth merger wave that started in 2003 and came to an end approximately in late 2007 and find that the market for corporate control was less competitive, acquirers were less acquisitive, managers displayed less overoptimism and offers involved significantly lower premiums, indicating more cautious and rational acquisition decisions.
Abstract: We examine the characteristics of the sixth merger wave that started in 2003 and came to an end approximately in late 2007. The drivers of this wave lie primarily in the availability of abundant liquidity, in line with neoclassical explanations of merger waves. Acquirers were less overvalued relative to targets, and merger proposals comprised higher cash elements. Moreover, the market for corporate control was less competitive, acquirers were less acquisitive, managers displayed less over-optimism and offers involved significantly lower premiums, indicating more cautious and rational acquisition decisions. Strikingly, however, deals destroyed at least as much value for acquiring shareholders as in the 1990s.
103 citations
TL;DR: In this article, the martingale hypothesis is tested for 15 European emerging stock markets located in Croatia, the Czech Republic, Estonia, Hungary, Iceland, Latvia, Lithuania, Malta, Poland, Romania, Russia, the Slovak Republic, Slovenia, Turkey and the Ukraine.
Abstract: The martingale hypothesis is tested for 15 European emerging stock markets located in Croatia, the Czech Republic, Estonia, Hungary, Iceland, Latvia, Lithuania, Malta, Poland, Romania, Russia, the Slovak Republic, Slovenia, Turkey and the Ukraine. For comparative purposes, the developed stock markets in Greece, Portugal and the UK are also included. Rolling window variance ratio tests based on returns and signs and with wild bootstrapped p-values are used with daily data over the period beginning in February 2000 and ending in December 2009. The fixed-length rolling sub-period window captures changes in efficiency and is used to identify events which coincide with departures from weak-form efficiency and to rank markets by relative efficiency. Overall, return predictability varies widely. The most efficient are the Turkish, UK, Hungarian and Polish markets; the least efficient are the Ukrainian, Maltese and Estonian stock markets. The global financial market crisis of 2007–2008 coincides with return predi...
86 citations
Abstract: We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage opportunities to have an impact on the return dynamics. We estimate the model using quote midpoints, and we modify the model to account for time-varying transaction costs. We find that (a) the futures market leads in the process of price discovery and (b) the presence of arbitrage opportunities has a strong impact on the dynamics of the price discovery process.
79 citations
TL;DR: In this article, the authors examine the value of board diversity in the US banking industry as a mechanism to enhance the decision-making capabilities of a board and find positive announcement returns to mergers approved by boards whose members are diverse in terms of their occupational background.
Abstract: We examine the value of board diversity in the US banking industry as a mechanism to enhance the decision-making capabilities of a board. We employ a sample of mergers to assess if measures of diversity as displayed by the bidding bank's board are linked to the market performance of acquisitions. We find positive announcement returns to mergers approved by boards whose members are diverse in terms of their occupational background. By contrast, age and tenure diversity are associated with wealth losses surrounding acquisition announcements, while gender diversity does not lead to measurable value effects. Interestingly, boards with more banking expertise are not more effective at monitoring bank managers. Our results do not support calls for more representation of industry-specific expertise on bank boards and, instead, show that occupational diversity may play an important role in protecting shareholder wealth.
76 citations
TL;DR: In this article, the authors examined the relationship between company and ownership characteristics and the disclosure level of compliance with Quoted Companies Alliance (QCA) recommendations on corporate governance in Alternative Investment Market (AIM) companies.
Abstract: This study examines the relationship between company and ownership characteristics and the disclosure level of compliance with Quoted Companies Alliance (QCA) recommendations on corporate governance in Alternative Investment Market (AIM) companies. We report clear evidence that compliance increases with company size, board size, the proportion of independent non-executive directors, the presence of turnover revenue, and being formerly listed on the Main Market. However, we find that shell and highly geared AIM companies disclose relatively lower levels of corporate governance than recommended under QCA guidelines. Our findings suggest that market regulators should review the potential impact of the quality of corporate governance in these companies on the future vibrancy of AIM. We find no evidence that ownership structure or the type of Nominated Advisor is related to disclosure of compliance with QCA guidelines. Overall, in a lightly regulated environment such as the AIM market, it seems that companies ...
67 citations
TL;DR: In this article, the dependence of foreign exchange rates on order flow is investigated for four major exchange rate pairs, across sampling frequencies ranging from 5min to 1week. And the predictive power of order flow for exchange rate changes, and it is shown that the order flow specifications reduce RMSEs relative to a random walk for all exchange rates at high-frequencies and for EUR/USD and USD/JPY at lower sampling frequencies.
Abstract: The dependence of foreign exchange rates on order flow is investigated for four major exchange rate pairs, EUR/USD, EUR/GBP, GBP/USD and USD/JPY, across sampling frequencies ranging from 5 min to 1 week. Strong explanatory power is discovered for all sampling frequencies. We also uncover cross-market order flow effects, e.g. GBP exchange rates are very strongly influenced by EUR/USD order flow. We proceed to investigate the predictive power of order flow for exchange rate changes, and it is shown that the order flow specifications reduce RMSEs relative to a random walk for all exchange rates at high-frequencies and for EUR/USD and USD/JPY at lower sampling frequencies.
58 citations
TL;DR: Li et al. as mentioned in this paper examine how state-ownership affects financial constraints on investment of Chinese-listed firms during 1999-2008 and find that although an average sample firm experiences some degree of financial constraints, state-owning firms do not lead to more borrowing from the Chinese banking sector, implying that state ownership does not necessarily reduce the firm's financial constraints via the state controlled banking sector.
Abstract: We examine how state-ownership affects financial constraints on investment of Chinese-listed firms during 1999–2008. We find that although an average sample firm experiences some degree of financial constraints, state-ownership does not necessarily help in reducing the firm's financial constraints on investment. Further evidence shows that state-ownership does not lead to more borrowing from the Chinese banking sector, implying that state-ownership does not necessarily reduce the firm's financial constraints via the state-controlled banking sector. We consider not only the standard factors in the investment equation, but also the firm's equity financing behaviour explicitly. The result is robust to both the conventional proxy for financial constraints, i.e. the investment–cash-flow sensitivity, and a recently developed proxy for financial constraints, i.e. the KZ index. Our results suggest that China's corporatisation movement is effective in that soft budget constraints once enjoyed by former state-owned...
53 citations
TL;DR: In this paper, the authors show empirically that institutional ownership and board entrenchment seem to significantly influence climate change and environmental impact mitigation policies of large U.S. firms.
Abstract: Strategic corporate responses to climate change and environmental challenges do not seem to be the primary domain of corporate management. In the short-run, such decisions are generally not consistent with executive incentives and often not seen as profit maximizing. Nevertheless, as some climate change responses may indeed be firm value maximizing, such decisions can be expected to reflect the nature of a firm’s corporate governance. Based on an analysis of 500 of the largest U.S. firms, we show empirically that this is indeed the case. Specifically, this study documents that institutional ownership and board entrenchment seem to significantly influence climate change and environmental impact mitigation policies of large firms.
50 citations
TL;DR: In this paper, the authors exploit full order level information from an electronic FX broking system to provide a comprehensive account of the determination of its liquidity, and find strong predictability in the arrival of liquidity supply/demand events.
Abstract: We exploit full order level information from an electronic FX broking system to provide a comprehensive account of the determination of its liquidity. We not only look at bid-ask spreads and trading volumes, but also study the determination of order entry rates and depth measures derived from the entire limit order book. We find strong predictability in the arrival of liquidity supply/demand events. Further, in times of low (high) liquidity, liquidity supply (demand) events are more common. In times of high trading activity and volatility, the ratio of limit to market order arrivals is high but order book spreads and depth deteriorate. These results are consistent with market order traders having better information than limit order traders.
44 citations
TL;DR: In this paper, the authors find that price and earnings momentum are pervasive features of international equity markets even when controlling for data-snooping biases, and they find that momentum profits are more pronounced for portfolios characterized by higher information uncertainty.
Abstract: In this paper, we find that price and earnings momentum are pervasive features of international equity markets even when controlling for data-snooping biases. For Europe, we show price momentum to be subsumed by earnings momentum on an aggregate level. However, this rationale can hardly be sustained on a country level. Also, the above explanation is confined to certain time periods in the USA. Since we cannot establish a decent relation between momentum and macroeconomic risks, we suspect a behavior-based explanation to be at work. In fact, we find momentum profits to be more pronounced for portfolios characterized by higher information uncertainty. Hence, the momentum anomaly may well be rationalized in a model of investors underreacting to fundamental news. Finally, we find that momentum works better when limited to stocks with high idiosyncratic risk or higher illiquidity, suggesting that limits to arbitrage deter rational investors from exploiting the anomaly.
44 citations
TL;DR: In this article, the authors analyze how the market reacts when the presence of hidden volume in the limit order book is revealed by the trading process, and they show that just when hidden volume is detected, traders on the opposite side of the market become more aggressive, exploiting the opportunity to consume more than expected at the best quotes.
Abstract: This article deals with the informativeness of iceberg orders, also known as hidden limit orders (HLOs). Namely, we analyze how the market reacts when the presence of hidden volume in the limit order book is revealed by the trading process. We use high-frequency book and transaction data from the Spanish Stock Exchange, including a large sample of executed HLOs. We show that just when hidden volume is detected, traders on the opposite side of the market become more aggressive, exploiting the opportunity to consume more than expected at the best quotes. However, neither illiquidity nor volatility increases in the short term. Furthermore, the detection of hidden volume has no relevant price impact. Overall, our results suggest that market participants do not attribute any relevant information content to the hidden side of liquidity.
TL;DR: This paper analyzed 132 mergers and acquisitions and a multivariate regression identified the drivers of the change in shareholder value for acquirers. But their analysis was limited to transactions settled by cash rather than exchange of equity, and government-instigated M&A transactions.
Abstract: Following a global wave of consolidation in the banking industry, this study analyses 132 mergers and acquisitions (MA and a multivariate regression identifies the drivers of the change in shareholder value for acquirers. On average MA from transactions settled by cash rather than exchange of equity; and from government-instigated M&A transactions.
TL;DR: In this article, the authors examined the impact of including sustainability-related constraints in optimal portfolio decision-making and found that socially responsible screening gives rise to a small loss in terms of the Sharpe ratio even though it has a great impact on the market capitalization of the optimal portfolio.
Abstract: We examined the impact of including sustainability-related constraints in optimal portfolio decision-making. Our analysis covered an investment set containing the components of the S&P500 index from 1993 to 2008. Optimizations were performed according to the classic mean–variance approach, while sustainability constraints were introduced by eliminating, from the investment pool, those assets that do not comply with the given social responsibility criteria (screening). We compared the efficient frontiers with and without screening. The analysis focused on the three main dimensions of sustainability, namely the environmental, social and governance ones. We found that socially responsible screening gives rise to a small loss in terms of the Sharpe ratio even though it has a great impact on the market capitalization of the optimal portfolio. The spanning test showed that the ex-post differences between the two frontiers, when short selling is not allowed, are significant only in the case of environmental scre...
TL;DR: In this article, the theoretical illiquidity discounts for the restricted shares with long constraint horizon were solved, and the contradictions in the results of various theoretical models were reconciled by empirically testing the theories within the unique setting of China.
Abstract: Acting as the source of exogenous illiquidity, trading constraints prevent free trading of shares and discount their value relative to freely traded counterparts with identical dividends and voting rights. This paper numerically solves the theoretical illiquidity discounts for the restricted shares with long constraint horizon and then reconciles the contradictions in the results of various theoretical models. With control of leveraged positions, illiquidity discounts increase with the volatility, and their size is greatly diminished. We also empirically test the theories within the unique setting of China, which has the largest population of restricted shares worldwide. Large discounts are documented in two forms of occasional transactions in restricted shares: namely auctions and transfers. The results empirically verify the theoretical findings by showing that illiquidity discounts in auctions increase with both the volatility and constraint horizons. The results from transfers, however, are not always...
TL;DR: In this article, the authors analyse how certain subsidies and guarantees given to private firms in public-private partnerships should be optimally arranged to promote immediate investment in a real options framework.
Abstract: In this paper, we analyse how certain subsidies and guarantees given to private firms in public–private partnerships should be optimally arranged to promote immediate investment in a real options framework. We show how an investment subsidy, a revenue subsidy, a minimum demand guarantee, and a rescue option could be optimally arranged to induce immediate investment, compensating for the value of the option to defer. These four types of incentives produce significantly different results when we compare the value of the project after the incentive structure is devised and also when we compare the timing of the resulting cash flows.
TL;DR: In this article, the authors examined whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail-specific metrics, for example, value at risk, to compare the hedge effectiveness of short and long hedgers.
Abstract: We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail-specific metrics, for example, value at risk, to compare the hedging effectiveness of short and long hedgers. Comparisons are applied to a number of hedging strategies including OLS and both symmetric and asymmetric generalised autoregressive conditional heteroskedastic models. We apply our analysis to a dataset consisting of S&P500 index cash and futures containing symmetric and asymmetric return distributions chosen ex post. Our findings show that asymmetry reduces out-of-sample hedging performance and that significant differences occur in hedging performance between short and long hedgers.
TL;DR: In this paper, the authors examine how high-frequency trading decisions of individual investors are influenced by past price changes and find that investors' future order flow is (significantly) driven by past prices and that these predictive patterns last up to several hours.
Abstract: This paper examines how high-frequency trading decisions of individual investors are influenced by past price changes. Specifically, we address the question as to whether decisions to open or close a position are different when investors already hold a position compared with when they do not. Based on a unique data set from an electronic foreign exchange trading platform, OANDA FXTrade, we find that investors’ future order flow is (significantly) driven by past price movements and that these predictive patterns last up to several hours. This observation clearly shows that for high-frequency trading, investors rely on previous price movements in making future investment decisions. We provide clear evidence that market and limit orders flows are much more predictable if those orders are submitted to close an existing position than if they are used to open one. We interpret this finding as evidence for the existence of a monitoring effect, which has implications for theoretical market microstructure models and behavioral finance phenomena, such as the endowment effect.
TL;DR: In this article, the determinants of equity ownership by outside directors as well as the relationship between ownership and operating performance were examined, using hand-collected data on firm-level policies requiring director ownership for SP.
Abstract: We examine the determinants of equity ownership by outside directors as well as the relationship between ownership and operating performance. Unlike previous studies of equity ownership by directors, we use hand-collected data on firm-level policies requiring director ownership for SP this is consistent with the theory that ownership requirements reflect optimal ownership levels. By contrast, voluntary holdings are positively and significantly related to future performance, suggesting that they perform an incentivizing role for management.
TL;DR: In this paper, the authors analyzed four years of transaction data for euro-area sovereign bonds traded on the MTS electronic platforms to measure the informational content of trading activity and estimate the permanent price response to trades.
Abstract: We analyse four years of transaction data for euro-area sovereign bonds traded on the MTS electronic platforms. In order to measure the informational content of trading activity, we estimate the permanent price response to trades. We not only find strong evidence of information asymmetry in sovereign bond markets, but also show the relevance of information asymmetry in explaining the cross-sectional variations of bond yields across a wide range of bond maturities and countries. Our results confirm that trades of more recently issued bonds and longer maturity bonds have a greater permanent effect on prices. We compare the price impact of trades for bonds across different maturity categories and find that trades of French and German bonds have the highest long-term price impact in the short maturity class, whereas trades of German bonds have the highest permanent price impact in the long maturity class. More importantly, we study the cross-section of bond yields and find that after controlling for conventio...
TL;DR: In this article, the optimal timing of investment for a high speed rail (HSR) project, in an uncertain environment, using a real options analysis (ROA) framework, is investigated.
Abstract: The present paper investigates the optimal timing of investment for a high speed rail (HSR) project, in an uncertain environment, using a real options analysis (ROA) framework. It develops a continuous time framework with stochastic demand that allows for the determination of the optimal timing of investment and the value of the option to defer in the overall valuation of the project. The modelling approach used is based on the differential utility provided to railway users by the HSR service.
TL;DR: In this paper, a statistically significant increase in out-of-sample effectiveness from the composite hedging of the Amex Oil Index using S&P500 and New York Mercantile Exchange crude oil futures was demonstrated.
Abstract: Unless a direct hedge is available, cross hedging must be used. In such circumstances portfolio theory implies that a composite hedge (the use of two or more hedging instruments to hedge a single spot position) will be beneficial. The study and use of composite hedging has been neglected; possibly because it requires the estimation of two or more hedge ratios. This paper demonstrates a statistically significant increase in out-of-sample effectiveness from the composite hedging of the Amex Oil Index using S&P500 and New York Mercantile Exchange crude oil futures. This conclusion is robust to the technique used to estimate the hedge ratios, and to allowance for transactions costs, dividends and the maturity of the futures contracts.
TL;DR: In this paper, the authors used a panel survival approach to analyze the trading behavior of foreign exchange traders, focusing on a detailed characterization of the shape of the disposition effect over the entire profit and loss regions.
Abstract: This article uses a panel survival approach to analyze the trading behavior of foreign exchange traders. We concentrate on a detailed characterization of the shape of the disposition effect over the entire profit and loss regions. In doing so, we investigate the influence of a number of trading characteristics on the impact of the disposition effect. These trading characteristics include: special limit order strategies, trading success, size and the experience of our investors. Our main findings are that (i) the disposition effect has a nonlinear shape. For small profits and losses we find an inverted disposition effect, while for larger ones, the usual positive disposition effect emerges. (ii) The inverted disposition effect is driven to a great extend by patient and cautious investors closing their positions with special limit orders (take-profit and stop-loss). The normal positive disposition effect is found to be intensified for impatient investors closing their positions actively with market orders. (iii) We show that unsuccessful investors reveal a stronger inverse disposition effect. (iv) Evidence that bigger investors are less prone to the disposition effect than smaller investors is also found.
TL;DR: In this paper, a vector autoregressive model was used to simulate the effect of a large liquidity shock, measured by a very aggressive market order, and it was shown that, despite the absence of market makers, the market is resilient.
Abstract: This article investigates resiliency in an order-driven market. On basis of a vector autoregressive model capturing various dimensions of liquidity and their interactions, I simulate the effect of a large liquidity shock, measured by a very aggressive market order. I show that, despite the absence of market makers, the market is resilient. All dimensions of liquidity (spread, depth at the best prices and order book imbalances) revert to their steady-state values within 15 orders after the shock. For prices, a long run effect is found. Furthermore, different dimensions of liquidity interact. Immediately after a liquidity shock, the spread becomes wider than in the steady state, implying that one dimension of liquidity deteriorates, while at the same time, depth at the best prices increases, meaning an improvement of another liquidity dimension. In subsequent periods, the spread reverts back to the steady-state level but also depth decreases. Also, I find evidence for asymmetries in the impact of shocks on ...
TL;DR: In this article, the conditional distribution of high-frequency financial returns is modeled by means of a two-component quantile regression model, which is able to provide good risk assessments and to outperform GARCH-based Value at Risk evaluations.
Abstract: We model the conditional distribution of high-frequency financial returns by means of a two-component quantile regression model. Using three years of 30 minute returns, we show that the conditional distribution depends on past returns and on the time of the day. Two practical applications illustrate the usefulness of the model. First, we provide quantile-based measures of conditional volatility, asymmetry and kurtosis that do not depend on the existence of moments. We find seasonal patterns and time dependencies beyond volatility. Second, we estimate and forecast intraday Value at Risk. The two-component model is able to provide good-risk assessments and to outperform GARCH-based Value at Risk evaluations.
TL;DR: In this article, the authors examined the effect of the turn of the month (TOM) and turn of year (TOY) effects in 50 international stock indices, for the period 1994-2006, characterising the degree that the effects are influenced by the gross domestic product of the economy, the sign of the return on the prior day (called the prior effect), a temporal indicator and the Monday effect.
Abstract: This examination of the turn of the month (TOM) and turn of the year (TOY) effects in 50 international stock indices, for the period 1994–2006, characterises the degree that the effects are influenced by: (i) the gross domestic product of the economy, (ii) the sign of the return on the prior day (called the prior day effect), (iii) a temporal indicator and (iv) the Monday effect These effects are assessed by the use of an estimated generalised least squares (EGLS) panel regression model incorporating panel-corrected standard errors Three important results relating to the TOM and TOY effects are observed When the prior day effect on control days is used as the reference and controls are made for market development and year, we find that: (i) there is a relatively enhanced return on all TOM days, (ii) there is a relatively enhanced return on good TOY days and (iii) returns of bad TOY days are not remarkable
TL;DR: In this paper, the authors examined the association between cash dividends and the shareholders balancing mechanism (SBM) using the exogeneity and endogeneity assumptions of corporate ownership structure and found that cash dividends are used as a manner of tunneling by the controlling shareholders.
Abstract: This paper examines the association between cash dividends and the shareholders balancing mechanism (SBM) using the exogeneity and endogeneity assumptions of corporate ownership structure. This paper identifies, in the case of China, whether paying cash dividends is a means of protection or expropriation of minority shareholders’ interests. With 4810 observations from companies listed on the Shanghai Stock Exchange over the period 2004–2008, the authors find significant negative associations between cash dividend payments and the SBM of non-controlling large shareholders under the exogeneity assumption and the SBM of tradable shareholders under the endogeneity assumption. The findings suggest that cash dividends are used as a manner of tunneling by the controlling shareholder. This paper also shows that the SBM of non-controlling shareholders has a significant positive effect on cash dividends, especially for companies paying high and abnormal dividends. The results imply that in China's capital market, c...
TL;DR: In this article, the authors studied the importance of information asymmetry in limit order book (LOB) markets, where market participants can switch roles and freely choose to immediately demand or patiently supply liquidity by submitting either market or limit orders.
Abstract: In the microstructure literature, information asymmetry is an important determinant of market liquidity. The classic setting is that uninformed dedicated liquidity suppliers charge price concessions when incoming market orders are likely to be informationally motivated. In limit order book (LOB) markets, however, this relationship is less clear, as market participants can switch roles, and freely choose to immediately demand or patiently supply liquidity by submitting either market or limit orders. We study the importance of information asymmetry in LOBs based on a recent sample of 30 German Deutscher Aktienindex (DAX) stocks. We find that Hasbrouck's (1991) measure of trade informativeness Granger causes book liquidity, in particular that required to fill large market orders. Picking-off risk due to public news-induced volatility is more important for top-of-the book liquidity supply. In our multivariate analysis, we control for volatility, trading volume, trading intensity and order imbalance to isolate...
TL;DR: In this article, the authors analyzed leveraged exchange-traded funds (ETFs) with a particular focus on some of the early Norwegian ETFs and found that the positions taken in the futures markets are too small to obtain the pictured returns.
Abstract: This paper analyzes leveraged exchange-traded funds (ETFs) with a particular focus on some of the early Norwegian ETFs. The funds use the futures markets to provide investors with 2 and−2 times the daily returns on the OBX index. First, we found that positive risk-free interest rates make the fund returns deviate from what is pictured by the providers. Secondly, we found that volatility can harm the investor returns. Thirdly, we found that the funds have fallen somewhat short of providing the pictured returns. Finally, we found that the positions taken in the futures markets are too small to obtain the pictured returns.
TL;DR: In this article, the authors consider the problem of how to establish compensation for a portfolio manager who is required to restrict the investment set, for example, because of socially responsible screening, and compute the optimal bonus as a function of the manager's risk aversion and expertise.
Abstract: We consider the problem of how to establish compensation for a portfolio manager who is required to restrict the investment set, for example, because of socially responsible screening. This is a problem of delegated portfolio management, where the reduction of investment opportunities to the subset of sustainable assets involves a loss in expected earnings for the portfolio manager, compensated by the investor through an extra bonus on the realized return. Under simple assumptions on the investor, manager and market, we compute the optimal bonus as a function of the manager's risk aversion and expertise, and of the impact of portfolio restriction on the mean-variance efficient frontier.
TL;DR: In this article, a contingent claims model is used to study the impact of debt-financing constraints on firm value, optimal capital structure, the timing of investment and other variables, such as credit spreads.
Abstract: A contingent claims model is used to study the impact of debt-financing constraints on firm value, optimal capital structure, the timing of investment and other variables, such as credit spreads. The optimal investment trigger follows a U shape as a function of exogenously imposed constraint. Risky, equity-financed R&D growth options increase firm value by increasing the option value on unlevered assets, while their impact on the net benefits of debt is small.