Showing papers in "Journal of Economics and Finance in 2020"

Stock returns and investor sentiment: textual analysis and social media

Abstract: The behavioral finance literature has found that investor sentiment has predictive ability for equity returns. This differs from standard finance theory, which provides no role for investor sentiment. We examine the relationship between investor sentiment and stock returns by employing textual analysis on social media posts. We find that our investor sentiment measure has a positive and significant effect on abnormal stock returns. These findings are consistent across a number of different models and specifications, providing further evidence against non-behavioral theories.

Economic policy uncertainty spillover effects on sectoral equity returns of New Zealand

Abstract: In this paper, we introduce a weekly index of economic policy uncertainty (EPU) for New Zealand and examine the return and volatility spillovers from New Zealand (local) and US (foreign) EPU on aggregate (NZSE) and sectoral indices of New Zealand stock market. The multivariate VAR (1)-BEKK-GARCH model is employed for this purpose. Overall, our findings suggest that NZ equity sectors and NZSE receive much stronger and more pronounced spillover effects from US EPU compared to the local counterpart (NZ EPU). While the return spillovers from both EPUs are somewhat similar yet limited to just a few sectors, the effect of US EPU on NZ sectors’ volatility outstrips that of the NZ EPU. Furthermore, while the domestically oriented sectors are relatively more vulnerable to NZ EPU, those having export/import concentration with the US are mainly susceptible to US EPU. These findings may be useful to investors seeking sectoral diversification opportunities across New Zealand and the US.

International movements of money and men: impact on the informal economy

Abstract: Using panel data for a large cross-country sample, we consider the influences of FDI inflows, inward development aid, and immigration on the informal sector. Both FDI and immigration increase the informal sector, with the effect of immigration being relatively more robust. Aid inflows reduce the informal sector, but the statistical significance is low. Among the control variables, government size persistently increases the informal economy, while inflation sometimes lowers the informal sector. As a secondary exercise, we consider the effect of globalization and note the informality-increasing role of social and overall globalization, with economic and political globalization being statistically insignificant.

Banking Competition and Bank Size: Some Evidence from Italy

Abstract: This paper assesses the degree of competition of the Italian banking industry and investigates whether there are differences in the competitive behaviour related to the size of the intermediaries. Competition is measured using the Bresnahan-Lau model, estimated on a panel dataset of 125 observations over the period 1989-2013. Annual data are collected from the Bank of Italy, and are aggregated into dimensional categories: major, large, medium, small, and minor banks. The results suggest that the sector is rather competitive and that the level of competitiveness has increased over the observed period. Besides, the events occurred in the Nineties seem to have had a structural effect on banks’ market power, as well as the aftermath of the recent financial crisis. The estimates also point out that smaller banks enjoy a higher degree of market power, which is consistent with the relationship lending that characterizes the interaction between banks and borrowers in Italy.

Real estate prices and banking performance: evidence from Canada

Abstract: Using quarterly data from 1996 through 2018, this study explores the impact of real estate prices, real estate exuberance and real estate volatility on bank profits using a dynamic panel methodology with a unique sample of Canadian banks. The change in housing prices tends to result in a positive impact on profitability (ROA and ROE), but under risk-adjusted measures of profitability, this positive impact tends to dissipate. When exuberance exists in the real estate market, this also tends to result in a positive impact on non-risk adjusted measures of profitability. Finally, this study finds that the volatility of real estate prices has little impact on the riskiness of banking profits in Canada.

The effect of oil price shocks on economic activity: a local projections approach

Abstract: We examine the impact of oil price shocks on four U.S. macroeconomic variables over the period January 1974 to August 2016. We use local projections and consider different linear and nonlinear model specifications. The results suggest that oil price shocks have a large and significant effect not only on production, interest rates and unemployment, but also on credit spreads. The magnitude of these effects depends on the level of the oil price before the occurrence of the shock.

Efficient market hypothesis: a ruinous implication for Portugese stock market

Abstract: The advocates of the efficient market hypothesis recommend buying the market index for the long run, the implication for the Portuguese investors are to buy the PSI-20 index and hold it for at least 15 years In this paper, we compare two other strategies for PSI-20 over the period 1999 to 2020 The first strategy is based on moving average trading rules and the second strategy, Gold Momentum Strategy (GMS), is based on switching between gold and PSI-20 based on semi-annual performance Our findings suggest that the moving average trading rules beat the buy and hold strategy by more than 10% per year over the entire period and each sub-period considering both risk and transaction costs For the second strategy, GMS which is based on comparing the performance of the PSI-20 and the gold index on semi-annual basis and go with the best of two for the next 6 months, we find similar results as the moving average trading rules

Analyzing the impact of workers’ remittances on household consumption in Latin American and Caribbean Countries

Abstract: Increasing remittance flows to developing countries continue to stimulate analytical research. We apply a model, based on the “permanent income hypothesis”, to estimate the impact of remittances on consumption in eleven Latin American and Caribbean countries for the period of 2003–2013. The independent variables are: (a) real per capita national income (exclusive of remittances), the measure of “permanent income”, (b) remittances, the measure of “transitory income”, and (c) real interest rate, the indicator of intertemporal consumption substitution. The coefficient of remittances measures the consumption-augmentation and saving effects, while the correlation between remittances and per capita income indicates the consumption-smoothing effects. The results, based on the panel data methodology, indicate: (a) both permanent income and transitory income positively impact consumption, (b) consumption responds higher to permanent income than to transitory income, (c) transitory income has augmenting, stabilizing and countercyclical effects on consumption, and (d) the significant interest rate indicates the ability of recipients to make intertemporal consumption substitution. Evidence of significant “country effect” attests to heterogeneity among countries. Strategies to stabilize remittance flows and to leverage them for financial, economic and social development should be important policy considerations.

Do directional predictions of US gasoline prices reveal asymmetries

Abstract: This study employs a directional forecasting approach to re-examine the possible “rockets and feathers” effect, using monthly crude oil and US retail gasoline prices for 1986–2018. We show that, for 1986–1999 (2000–2018), changes in crude oil prices accurately predict directional change in gasoline prices under symmetric (asymmetric) loss. This means that our results lend support to the “rockets and feathers” effect only for 2000–2018. For this period, upward moves in oil prices predict upward moves in gasoline prices up to three months ahead with a reasonably high accuracy rate (ranging from 0.70 to 0.79), while downward moves in oil prices predict downward moves in gasoline prices with a low accuracy rate (ranging from 0.48 to 0.58). These predictions, while of value to a user who assigns high (low) cost to incorrect upward (downward) moves in gasoline prices, lend support to the “rockets and feathers” effect.

Is the flow-performance relationship really convex? - The impact of data treatment and model specification

Abstract: This paper challenges the convexity of the flow-performance relationship, according to which investors strongly chase top-performing funds, while fund flows exhibit little to no sensitivity to past performance within the segment of poorly performing funds Our results suggest that the flow-performance relationship is not convex, but rather linear In contrast to prior studies, we use reported (ie, exact) instead of approximated fund flow data, we trim (instead of winsorize) outliers, and we account for persistence in fund flows We find that each factor contributes to serious biases For example, investor reactions to poor performance only appear insignificant when outliers are winsorized instead of trimmed And it is even more evident that fund investors flee poorly performing funds when the model incorporates lagged flows to account for fund flow persistence Furthermore, our results provide evidence that the degree to which investors chase top-performing funds appears to be slightly upward biased if approximated fund flows are used Our findings have important implications for the potential moral hazard of fund managers

Real activities manipulation in stock-for-stock mergers

Abstract: This study examines whether firms that primarily use stock of their companies to pay for acquisitions manipulate real activities in the year preceding the merger announcement to inflate earnings. Using post-SOX data of mergers and acquisitions completed between 2003 and 2013, the findings of this study show that acquiring firms in stock-for-stock mergers inflate earnings by cutting discretionary expenses, manipulating sales to increase revenue, and overproducing goods to reduce the cost of goods sold.

Market fragmentation and post-earnings announcement drift

Abstract: This paper examines the effects of dark and lit market fragmentation around both earnings announcements and earnings surprises. Results indicate that both dark and lit market fragmentation increase around earnings announcements. Further, I test whether dark and lit fragmentation hinder the level of price discovery around the earnings announcement, resulting in greater post-earnings announcement drift, PEAD. The analysis reveals that lit fragmentation has no significant impact on PEAD while dark fragmentation reduces the level of PEAD for stocks with positive earnings surprises. This result is consistent with the notion that dark venues capture more uninformed trading around positive news events, resulting in greater informed trading and higher informational efficiency in the lit venue. However, the results also indicate that dark fragmentation leads to stronger PEAD for stocks with negative earnings surprises. This last finding suggests that informed traders migrate to dark venues around negative earnings surprises, consistent with previous research that argues informed traders follow passive trading strategies around negative news events.

An optimization model of retiree decisions under recursive utility with housing

Abstract: We investigate both of analytical and numerical solutions of retirees’ spending and investment decisions. We use a dynamic and realistic recursive utility setting which includes the standard expected utility setting as a special case. We find that recursive utility is superior to expected utility in terms of predicting retirees’ consumption data. In addition to stock and bond investment decisions, we explicitly include housing decision. Our setting includes the setting without housing as a special case. We estimate retiree decisions numerically through simulations. We provide both of analytical and numerical comparative analysis which shows that some of the analytical dependencies are found to be weak numerically. For example, although marginal propensity to consume depends on the parameter of intertemporal substitution analytically, this dependence is found to be weak numerically. These differences show the importance of providing both of analytical and the numerical solutions. Our analytical solution could be useful for future studies to estimate some model parameters, to evaluate different elderly related policies, to quantify the welfare effects of different decisions and to analyze the parameter related issues such as the interchangeability of some parameters.

Financial market risk and macroeconomic stability variables: dynamic interactions and feedback effects

Abstract: This study investigates dynamic interactions and feedback effects between financial market risk proxied by VIX and key macroeconomic stability variables that include the rate of unemployment, headline inflation and market-based inflation expectations reflected by the breakeven inflation. We argue that market risk should play a stronger role in macroeconomic modeling and forecasting than it has been recognized thus far in the literature. We employ vector autoregression with impulse response functions, as well as two-state Markov switching tests to examine these interactions on the longest available US monthly data. The empirical tests show that the association between market risk and macroeconomic fundamentals is predominantly neutral at normal, predictable economic conditions. It becomes very pronounced at times of financial distress, in the environment of elevated market risk coupled with uncertain expectations for macroeconomic variables. Shocks in VIX have a longer impact on macroeconomic stability than that generally claimed in the prior literature. The Markov switching tests for CPI and breakeven inflation indicate that households and businesses are concerned primarily about episodes of increasing inflation, while bond market participants worry mainly about declining inflation and deflation.

Price Volatility, the Maturity Effect, and Global Oil Prices: Evidence from Chinese Commodity Futures Markets

Abstract: We study the maturity effect using 41 major agricultural, industrial, and metal commodities traded in three Chinese futures exchanges between 2006 and 2015. After controlling for seasonality, year and product fixed effects, we find supportive evidence of the maturity effect in futures contracts for several agricultural products, but not for metal nor industrial products. To the best of our knowledge, this is the first comprehensive study to document the maturity effect of Chinese futures contracts.

Forming appropriate peer groups for bank research: a cluster analysis of bank financial statements

Abstract: Choosing appropriate peer groups for commercial banks is important to investors comparing bank performance, for regulators evaluating safety and soundness, for bank management looking at merger alternatives or relative performance, and for bank researchers testing hypotheses and making policy judgments about the banking system. We use commercial bank financial statements with common size variables as the inputs to a cluster analysis model to identify clusters or groups of banks with financial structures that are relatively homogeneous within groups and distinct across groups. Managerial strategies and idiosyncrasies, local and global economic conditions, and the regulatory environment shape bank financial statements, and financial statements should reflect the financial and operational differences across banks. Using year-end data from 2014, we cluster 6444 banks into several such groups. Our results show that bank clusters are formed largely around loan types, funding differences, and management’s strategic choices. We compare the ability of bank clusters and bank size to explain several widely used measures of bank performance and risk in additional years. These bank clusters are shown to have substantially greater explanatory power in regression models when compared to groupings based on bank size in several different years.

Remittances, market size, and foreign direct investment: a case of sub-Saharan Africa

Abstract: This study covers the period 1981–2014 and uses an unbalanced panel data set for 85 developing countries. It assesses the effect of remittances through per capita GDP on FDI inflows to Sub-Saharan Africa (SSA) and compares its performance in attracting FDI with the other developing regions. The results show a positive effect of remittances on FDI, but it depends on the level of per capita GDP of the host country. That is, an increase in remittances by one standard deviation, on average, increases FDI inflows by 0.09% a year. Remittances have a positive effect on FDI in 43 countries, and eight of them are in SSA. In addition, a SSA country receives about 0.8% more FDI than the average country in ASIA, but there is no difference between SSA and Latin America and the Caribbean, and SSA and the Middle East and North Africa. Further, the growth rate of the host country’s GDP has a positive effect on FDI, which supports the market size hypothesis.

Gold market price spillover between COMEX, LBMA and SGE

Abstract: In this paper, the author investigates spillover between the main markets from New York, London and Shanghai. Specific contract prices from the Commodity Exchange Inc. (COMEX), London Bullion Market Association (LBMA) and Shanghai Gold Exchange (SGE) were utilized. Results suggest that even with the increasing market influence of SGE, it still remains an isolated market, COMEX and LBMA maintain their dominant positions and act as the net spillover spreaders in the world gold market with almost equally strong market impacts.

Do more financing obstacles trigger tax avoidance behavior? Evidence from Indian SMEs

Abstract: Using the data from Enterprise Survey, this paper documents the following findings in India. Firstly, we show that firms experiencing higher obstacles in accessing finance are more likely to avoid taxes. We argue that firms try to overcome the cash shortage that results from higher obstacles in accessing finance by reducing taxes paid to the government. Our results are robust across various sub-samples and after controlling for endogeneity problem. Secondly, we show that, for any two firms with similar levels of obstacles in accessing finance, the firm that avoids taxes is more likely to invest than the firm that does not avoid taxes. Lastly, firms headquartered in states/provinces with better institutional infrastructure have weaker relationship between access to finance and tax avoidance.

Job Movement and Real Wage Flexibility in Eastern and Western Parts of Germany

Abstract: We use a unique microdata set that covers the 1984–2009 period to estimate real wage flexibility in Eastern and Western parts of Germany. Empirical analysis reveals that wages of male job stayers in the Eastern and Western parts of Germany are rigid, which leads to significant wage flexibility for internal and external movers. At the aggregate level, wages of the external movers are more flexible than the wages of job stayers in bust periods (when labour market is slack) and more rigid than the wages of job stayers in boom periods (when labour market is tight). In overall terms, the West German labour market is mature but conditions in the East German labour market are consistent with transition economies. Wage flexibility in Germany’s labour market can be attributed to relatively more flexible wages of the external and internal movers in a slack labour market.

Monetary policy, social capital, and corporate investment

Abstract: We study the effect of monetary policy and social capital on the efficiency of corporate investments among the public US firms. We use social capital of CEOs at the peer- and non-peer levels to build proxies for the CEO networking and the effective federal funds rate and the spread between the rate and the 10-years US Treasury note as our proxies for monetary policy. We capture investment inefficiency from the residuals of Richardson (2006)‘s investment efficiency model. Our results show that both innovations in monetary policy and social capital of CEOs influence corporate investment inefficiency significantly. Stronger social ties amongst CEOs and their peers lead to greater inefficiency in investments while stronger social ties between CEOs and their non-peer directors lead to lower inefficiency in investments. The results strengthen our belief on social capital’s spillover influence on investment decision at the firm level. Our evidence indicates that CEO social ties function as another channel that affects their investment decision and that the influence of social ties also depends on the role of the other parties CEOs are affiliated with—whether they have titles of CEOs or titles of directors.

Structural change in Asia, the real effective exchange rate, and agricultural productivity

Abstract: It is argued in this paper that agriculture plays a here-to-for unrecognized role in the process of structural change. In very poor countries agriculture is the key sector in the economy and agricultural prices greatly influence the overall price level in such an economy. It is hypothesized that if agricultural productivity grows faster than manufacturing productivity this will, under certain conditions, cause the price of the former to fall relative to the latter which in turn implies that the overall price level in the economy should fall, ceteris paribus. This results in a fall in the real effective exchange rate, ceteris paribus. This decline increases the competitiveness of producing tradable goods, in particular manufactured goods. Thus the process of structural change (shifting employment and resources out of agriculture) becomes easier. These hypotheses are empirically analyzed utilizing a data set for twelve Asian countries for an extended time period.

Risk factors explaining returns anomaly in emerging market banks – study on Indian banking system

Abstract: The article provides evidence about the risk factors influence the pricing of banking stocks in the context of emerging economies like India. We use 10 years of data comprising of public and private banks for empirical evidence of abnormal returns. We deploy Fama-French 3-Factor and Carhart 4 Factor model, with and without innovations, to explain the presence of abnormal returns. Comprehending the limitation of the firm specific factors (size and value) accounting for the risk-based returns, we develop a parallel model based on conditioning information like the banks’ profitability, asset quality, capacity to leverage, operating margin and loss assets provisioning. We find that on inclusion of the bank-led performance parameters the explanatory power of the alternate model has significantly improved to 52.21 as compared against a value of 44.28 reported in case of Indian Banks using the Carhart 4-Factor Model (1997). We observe that our findings add-up to indicate significant propositions in estimating the bank specific risk factors that influence the prices and in-turn the returns of banking stocks in emerging markets.

U.S. Small Business Administration loans and U.S. state-level employment

Abstract: This study examines the relationship between the U.S. Small Business Administration’s (SBA) lending programs and state-level employment from the early 1990s to 2013 using quarterly panel data for U.S. states with fixed effects. The results show a positive statistical relationship between the growth in SBA lending per capita and the change in the state’s civilian employment rates. Despite these statistically significant relationships, the coefficient sizes are small. An analysis of high and low personal income states shows no meaningful differences in the relationship between SBA lending and employment across these groups. These findings support the idea that SBA lending programs may help with the public policy goal of assisting small businesses and may contribute to the finance–growth nexus.

Firm size proxies and the value relevance of predictive stock return models

Abstract: This paper investigates differences in value relevance of predictive stock return models depending on which firm size proxy (or proxies) is used, these being market value (MV), total book assets (TBA) and market value of total book assets (MVTA). Over the 27 year period of 1989–2015, MV provides higher value relevance in predicting future returns, while TBA provides higher value relevance when limited to large firms. Moreover, results reveal incremental explanatory power of approximately 27% when TBA are added to a one-year-ahead returns model already containing MV. The increase is 60% when examining only the last 10 years of the sample period. The findings of this study will help future accounting and finance research that uses predictive return models and potentially allow investors to make better resource allocation decisions leading to higher risk adjusted returns. In addition, the findings related to TBA will add to the debate on whether standard setters should place more emphasis on the valuation of assets and liabilities relative to earnings.

Does what happen in Vegas stay in Vegas? Football gambling and stock market activity

Abstract: We examine whether lagged football betting payoffs result in changes in retail investing in lottery-like stocks. We show that lagged, low betting imbalances are associated with increases in retail stock participation, particularly for lottery-like stocks. This finding implies support for the “break-even” hypothesis that following negative sentiment and losses from football gambling, investors use lottery-like stocks to offset losses or break-even. This result holds for lottery-like stocks defined based on high idiosyncratic volatility and skewness as well as stocks that trade in over-the-counter (OTC) markets. Finally, we address whether the reverse relation exists, finding that only OTC market activity leads to increases in football betting activity but not football betting imbalances. Overall, our paper contributes to the literature investigating the relation between gambling sentiment and stock market activity.

Corporate governance and employee treatment: evidence from takeover defenses

Abstract: In this study, we use a unique hand-collected dataset of employee lawsuits to understand the effect of litigation on CEO turnover. We gather 28,258 employee disputes (after initial court hearing) dating between the years 2000 and 2014 to test the relationship between executive turnover following employee allegations. We find increased turnover of CEOs following labor lawsuits. Additional analysis suggests that, following the lawsuits, CEO compensation decreases and becomes more sensitive to cash holding. Our results show that employee lawsuits have an impact on CEO turnover, regardless of the case outcome or motivation. Overall, we document the importance of employee treatment in the workplace. We conclude employee treatment may impact both the tenure and future job prospects of a CEO.

Manufacturing as a Growth Escalator in Low and Middle Income Countries

Abstract: Two competing explanations are offered for the recent structural dynamics in developing countries. For traditionalists, structural transformation implies an inverted U-shaped trajectory for manufacturing share. However, this is not the case in the new view where a knowledge driven economy can bypass the intermediate stage of manufacturing. The empirical evidence from 52 countries covering 1990 to 2013, seems to favor the old view. The increasing share of services decreases the growth rate of per capita national income. In contrast, manufacturing acts as a growth escalator. Though the magnitude of elasticity of per capita income with respect to both manufacturing and services is less than unity the influences are statistically significant. These findings withstand the usual robustness tests and do not seem to reflect reverse causality. Together these findings help explain the phenomena of jobless growth experienced by many countries.

The U.S. term structure and return volatility in emerging stock markets

Abstract: This paper examines the predictive power of the U.S. term structure over return volatility in emerging stock markets. Decomposing the term structure of U.S. Treasury yields into two components, the expectations factor and the maturity premium, we show that the U.S. term structure indeed contains predictive information over emerging stock market volatility, even after controlling for country specific factors including turnover and market size. While we observe heterogeneous patterns across emerging markets in terms of their predictability with respect to the U.S. term structure, we find that the market’s expectation of future short term rates, implied by the expectations factor, serves as a stronger predictor of stock market volatility compared to the maturity premium component of the yield spread. We also find that the U.S. term structure has gained further predictive value following the global financial crisis, particularly for the BRICS nations of China, Russia, and S. Africa. Overall, our findings suggest that policymakers and investors can utilize interest rate signals from the U.S. Treasury yields to make projections over stock market volatility in their local markets, however, distinguishing between the two components of the yield curve could provide additional forecasting power depending on the country of focus.

Correction to: Corporate governance and employee treatment: Evidence from takeover defenses

Abstract: This study investigates if antitakeover provisions are a value-enhancing indicator of corporate governance by estimating the effect of takeover susceptibility to labor litigations. Using a unique hand-collected dataset of employee lawsuits, we find a positive relationship between employee litigation and takeover protection. We document that employee lawsuits increase a firm’s susceptibility to a hostile takeover. In addition, we document that higher costs of litigation, measured by fees and case duration, increase the firms’ suitability to takeover. Our results indicate that takeover protections may decrease corporate attention to employees. This effect may be because entrenched managers may avoid long-term investment in stakeholders and enjoy “the quiet life” following the reduced threat of a hostile takeover.