Showing papers in "Review of Pacific Basin Financial Markets and Policies in 2014"
TL;DR: In this paper, the authors applied a least square dummy variable (LSDV) model to estimate the effect of leverage on firm market values and examined how contextual variables influence this relationship.
Abstract: Using the financial data from 645 companies that were listed in the Taiwan Stock Exchange (TSE) between 2000 and 2009, this paper applied a least square dummy variable (LSDV) model to estimate the effect of leverage on firm market values and examine how contextual variables influence this relationship. The empirical results are as follows. First, the values of leveraged firms are greater than the values of unleveraged firms if we do not consider the probability of bankruptcy. If we simultaneously consider the benefits and costs of debt, we find that leverage is positively related to the firm value until a firm has issued sufficient debt to attain its optimal capital structure. Second, the positive influence of leverage on the firm value tends to be stronger for firms of higher financial quality (firms with greater Z-scores), firms with greater growth opportunities and firms with higher corporate tax rates. Third, the negative influence of leverage on firm value tends to be strengthened if increases occur ...
21 citations
TL;DR: In this paper, the authors examined how the investment horizon of the institutional shareholders of a firm affects the stock performance of private equity placements and found that firms with long-term institutional investors receive significantly positive abnormal returns around the offering announcement.
Abstract: This study examines how the investment horizon of the institutional shareholders of a firm affects the stock performance of private equity placements. The results show that firms with long-term institutional investors receive significantly positive abnormal returns around the offering announcement. Post-issue stock price underperformance is especially pronounced in firms held by short-term institutional investors. These findings suggest that private placement firms with long-term institutional investors acquire certification and monitoring-related benefits and thus reduce the information asymmetry and entrenchment costs between managers and external investors.
19 citations
TL;DR: In this paper, the impact of Asian banks' income structure on competitiveness, profitability, and risk over the period 2005-2011 was investigated, and the cross-sectional regression results reveal that higher exposure of net non-interest income in Asian banks increases market risk and asset risk but lowers insolvency risk, ROA and ROE.
Abstract: This paper investigates the impact of Asian banks' income structure on competitiveness, profitability, and risk over the period 2005–2011. Exchange-listed commercial banks of eight Asian countries are included in the study sample. The cross-sectional regression results reveal that higher exposure of net non-interest income in Asian banks increases market risk and asset risk but lowers insolvency risk, ROA and ROE. On the other hand, higher exposure of net fees and commissions reduces return volatility, market risk, and asset risk but increases insolvency risk, ROA, and ROE. Further, exposure to trading and derivatives, along with other securities, tends to decrease banks' competitiveness.
14 citations
TL;DR: In this paper, a conditional variance model, along with time series and cross-sectional analysis, is used to price Chinese IPOs, showing that the model captures both time-series and crosssectional correlations at the mean and variance levels.
Abstract: This paper investigates the monthly initial return and its conditional return volatility for Chinese IPOs. We find that the mean initial return (IR) and cross-sectional return volatility are highly auto- and cross-correlated, and time-varying. We propose a system of two simultaneous equations: a GARCH-in-mean (GARCH-M) process with an ARMA(1,1) adjustment in the residuals for the IR and an EGARCH process for the conditional return volatility, assuming that the IR and its conditional return volatility are linear functions of the same market, firm- and offer-specific characteristics. We find that the model captures both time-series and cross-sectional correlations at the mean and variance levels. Our findings suggest that the conditional return volatility affects the IR positively and significantly, in addition to the traditional market, firm- and offer-specific characteristics. IPOs with higher conditional return volatility, as a proxy for information asymmetry, tend to be underpriced more. The paper demonstrates the merit of using a conditional variance model, along with time series and cross-sectional analysis to price Chinese IPOs.
13 citations
TL;DR: Wang et al. as discussed by the authors examined the relation between daily institutional trading and past, contemporaneous, and future stock returns on the Shanghai Stock Exchange (SSE), and found strong evidence of the price pressure effect induced by institutional trading, causing price impacts of up to 2.12% per day for the most intensively bought stocks.
Abstract: Using a unique dataset containing daily institutional ownership information, we examine the relation between daily institutional trading and past, contemporaneous, and future stock returns on the Shanghai Stock Exchange (SSE). We find strong evidence of the price pressure effect induced by institutional trading, causing price impacts of up to 2.12% per day for the most intensively bought stocks. We further find that institutions are informed and momentum traders when buying but not when selling, which may be due to short-selling restrictions in China. Finally, our findings suggest that institutions engage in order splitting and/or herding behavior, as the price pressure effect is observed up to five days before and after the intense trading date.
12 citations
TL;DR: Li et al. as mentioned in this paper tried to find the determinants of bankruptcy in Chinese firms and found that firms with liquidity problems and firms experiencing a decline in profits are more likely to file for bankruptcy.
Abstract: The global financial crisis in 2008 increased the number of business failures in the U.S. as well as in China. The Chinese economy has also been affected by the recent global financial crisis given the fact that the Chinese economy depends heavily on international trade. Our study tries to find the determinants of bankruptcy in Chinese firms. Both logit and survival model analyses provide consistent results on the determinants in predicting distressed firms in China. Our results suggest that firms with liquidity problems and firms experiencing a decline in profits are more likely to file for bankruptcy. In addition, we find that, compared to state-owned enterprises (SOEs), collectively-owned enterprises, private-owned enterprises, and foreign-owned businesses are more likely to file for bankruptcy. This conclusion is robust after controlling for regional differences. The findings of this study show that the financial variables developed by Altman [Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(3), 589–609] and Ohlson [Financial ratios and probabilistic prediction of bankruptcy. Journal of Accounting Research, 18(1), 109–131] perform reasonably well in determining business failures of Chinese firms even though SOEs and shadow financing exist in China.
12 citations
TL;DR: In this article, the authors examined empirically how a firm's profitability performance would impact its growth process and the inference for Gibrat's Law, showing that size and growth rate are independent.
Abstract: In this study, we intended to examine empirically how a firm's profitability performance would impact its growth process and the inference for Gibrat's Law. The basic study looks at small, medium and large firms' tendency to grow when their internally generated profits are high. The sample is 124 construction companies listed from years 2003 to 2010 at BURSA Malaysia. Data used is secondary data collected from BURSA Malaysia and annual reports. The result indicated that "growth" contributed significantly to profitability in both small and medium-sized construction companies, but was not significant in large companies. Thus, hypothesis two was supported. This study supports Gibrat's Law, showing that size and growth rate are independent.
11 citations
TL;DR: The authors found that rating upgrades also play a role in firms' leverage, and that the effect of rating downgrades on capital structure lasts for more than just one year, while adjusting for biases associated with the use of market debt ratio and controlling for simultaneity between credit ratings and leverage.
Abstract: Prior research has shown that credit downgrades affect firm's capital structure decision. However, after adjusting for biases associated with the use of market debt ratio and after controlling for simultaneity between credit ratings and leverage, we find that rating upgrades also play a role in firms' leverage. Contrary to previously reported findings, our evidence also indicates that the effect of rating downgrades on capital structure lasts for more than just one year.
10 citations
TL;DR: In this article, the authors examined the effect of the new closing mechanism on the behavior of attention securities and analyzed the role of each trader type in attention securities' behavior, and found that the closing prices of the attention securities are mainly influenced by large individual investors and by domestic institutions, showing the most intention to influence prices upward during the closing interval both before and after implementation of the five-minute call auction.
Abstract: On 1 July, 2002, the Taiwan Stock Exchange changed its closing mechanism to a five-minute call auction to limit market manipulation at day's end and enhance the fairness of the closing price. This paper examines the effect of the new closing mechanism on the behavior of attention securities and analyzes the role of each trader type in attention securities' behavior. After the new mechanism, market volatility improved, trading activity and order aggressiveness reduced, while liquidity deteriorated. The closing prices of attention securities are mainly influenced by large individual investors and by domestic institutions, with the large individual investors showing the most intention to influence prices upward during the closing interval both before and after implementation of the five-minute call auction. However, introduction of the five-minute call auction made it more difficult and costly to influence closing prices.
10 citations
TL;DR: The authors found that the idiosyncratic return volatility reflects the stock price informativeness in China, however, such a relationship does not exist in a monotonic fashion, and therefore, it must be used with caution.
Abstract: This study attempts to address two research questions on the idiosyncratic return volatility and stock price informativeness. First, whether idiosyncratic return volatility is a valid proxy for stock price informativeness in emerging markets, and if it is, whether there exists a monotonic relationship between the idiosyncratic return volatility and stock price informativeness throughout the whole sample. We find that the idiosyncratic return volatility reflects the stock price informativeness in China. However, such a relationship does not exist in a monotonic fashion. These results indicate that idiosyncratic return volatility serves as an information measure, but must be used with caution.
10 citations
TL;DR: In this article, the effectiveness of certain return predictors in Taiwan Stock Exchange (TWSE) from January 1990 to December 2011 by employing both portfolio method and cross-sectional regressions was analyzed.
Abstract: This paper provides an analysis of the effectiveness of certain return predictors in Taiwan Stock Exchange (TWSE) from January 1990 to December 2011 by employing both portfolio method and cross-sectional regressions While we found no statistically significant predictive power of beta, total volatility, and idiosyncratic volatility the two cheapness variables, book-to-market (BKMT) and cash-flow-to-price (FPR) ratios showed strong consistent economically and statistically significant predictive powers In addition, our multiple regressions found predictive power in total volatility, short-term reversal (STREV), and market capitalization in the set of small stocks, while our all stock set showed predictive power only in total volatility and STREV
TL;DR: In this article, the authors explore how the fearful market-based sentiment indicators affect investor trading behavior and market liquidity and show that a high degree of fearful marketbased sentiment induces more sell orders along with a reduction in market liquidity, and vice versa.
Abstract: This paper explores how the fearful market-based sentiment indicators affect investor trading behavior and market liquidity. Our results show that a high degree of fearful market-based sentiment induces more sell orders along with a reduction in market liquidity, and vice versa. In addition, most of our findings suggest that the fear sentiment, in the case of extremely high implied volatility, decreases net buying volume more significantly. As for the interaction between fearful market-based sentiment and institutional investor expectation, we show that net buying volume and market liquidity decrease (increase) more significantly than they normally do when the fearful market-based sentiment increases (decreases) in the state of bearish institutional investor expectation. The results provide support to the myopic loss aversion of investors.
TL;DR: This paper applied the Kalman filter method to estimate nine Asian markets and found evidence that stock return dispersions decline as markets experience stress conditions, supporting the existence of herding, and found that herding behavior is time-varying and comoving across markets.
Abstract: We apply the Kalman filter method to estimate nine Asian markets and find evidence that stock return dispersions decline as markets experience stress conditions, supporting the existence of herding This paper finds that herding behavior is time-varying and comoving across markets Both linear and nonlinear Granger causality tests conclude that there is strong bilateral causality between herding and returns for all nine Asian markets For markets in Japan, South Korea, and Thailand, we consistently find strong two-way causality exists in pairwise variables among herding, stock returns, and illiquidity No consistent evidence can be drawn from other markets for other pairwise variables
TL;DR: In this article, the authors investigated the differences in opportunistic behavior between managers of BBB and BB-rated firms as measured by earnings management and accounting conservatism, and found that BB-graded firms exhibit a higher degree of conservatism than BBB-ranked firms.
Abstract: The purpose of this paper is to inform investors of differences in opportunistic behavior between managers of BBB- and BB-graded firms as measured by earnings management and accounting conservatism. Previous studies investigate the gaps between grades and between investment and speculative grades by grouping together the various characteristics of investment and speculative firms, assuming that the incentives to make significant economic changes are homogeneously the same. However, this study demonstrates that this is not the case. Using 1,225 Korean firm-year observations, we identify noteworthy features distinguishing BBB- and BB-graded firms. More specifically, in BBB-graded firms, discretionary accruals (DACC) (a proxy used to represent earnings management) are larger than those in BB-graded firms. As for accounting conservatism, BB-graded firms exhibit a higher degree of conservatism than BBB-graded firms. According to the conventional credit rating scenario, higher-graded firms have fewer DACC and a...
TL;DR: In this article, the authors used the Kolmogorov-Smirnov (KS) test to determine the randomness of Chinese equity returns and measure the scaling property of volatility over time.
Abstract: China has taken important steps to reform its economy and capital markets in the past 20 years. Despite these efforts there is a lack of quantitative evidence on how these measures have impacted price returns in the stock exchanges. The purpose of this research was to determine the randomness of Chinese equity returns and to measure the scaling property of volatility over time. The main assumption of the Efficient Market Hypothesis is that security returns follow the path of a random walk and that volatility scales with the square root of time. This notion was tested by analyzing daily stock returns of the Shanghai- and Shenzhen Composite Indexes between 1990 and 2013. The Kolmogorov–Smirnov (KS) test rejected the log-normal distribution and random walk hypothesis. The measured Hurst exponents revealed a multiscaling property of fractal Brownian motion and indicated the presence of long-range dependence. The findings also showed that the degree of persistence and cycle length has reduced over time.
TL;DR: This article examined the exante performance of 1185 firms that filed for bankruptcy between 1992 and 2009 and found that firm specific poor operating performance and industry wide distress are the principal causes of corporate distress.
Abstract: We examine the ex-ante performance of 1185 firms that filed for bankruptcy between 1992 and 2009. Evidence suggests that firm specific poor operating performance and industry wide distress are the principal causes (contributing 42% each for cash flow shortfall) of corporate distress. We observe vitiating investment, operating, and financing performance of the sample firms starting from four years prior to their bankruptcy. Further, we report less severe decline in capital expenditure in the case of state controlled firms and business group affiliated firms, indicating the presence of "soft budget constraints" among the sample firms. Logistic regression, estimating firm level distress probabilities offer indirect evidence for "risk sharing argument" among business group affiliates.
TL;DR: In this paper, the role of speculators and informed trading in Taiwan's futures market using intraday data during the five-day pre-expiration period was analyzed, indicating that speculators may dominate arbitrageurs.
Abstract: This paper investigates basis spreads on index futures listed on the Taiwan Futures Exchange. We analyze the role of speculators and of informed trading in Taiwan's futures market using intraday data during the five-day pre-expiration period. We demonstrate that liquidity, volatility, and informed trading are each significantly positively related to spread magnitude, indicating that speculators may dominate arbitrageurs. While spreads have narrowed as the market has matured, liquidity and informed trading continue to widen spreads despite the fact that a naive arbitrage strategy outperforms the market.
TL;DR: In this paper, the authors examine co-movements of nine Asian equity markets with both the US and Japan with special interest in distinguishing comovements during periods of positive returns from those during negative returns.
Abstract: We examine co-movements of nine Asian equity markets with both the US and Japan with special interest in distinguishing co-movements during periods of positive returns from those during periods of negative returns. A discrete asymmetric piecewise linear conditional mean returns specification is adopted to generate asymmetric co-movement parameters for periods of positive and negative returns. Conditional heteroskedasticity is modeled using GARCH and EGARCH specifications. Predicted conditional volatilities are used to generate alternative estimates of asymmetric and time-varying co-movement parameters. Conditional mean returns from asymmetric and symmetric conditional mean return models along with GARCH and EGARCH volatilities are used to generate estimates of asymmetric and symmetric conditional (ex-ante) Sharpe ratios. Asian markets returns and volatilities show a clear tendency to move more with the US than with Japan; and their co-movements with negative US returns far exceed their co-movements with positive US returns, thereby suggesting that any diversification benefits into Asian equities are likely to manifest themselves more during periods of positive than negative US returns. Conditional asymmetric Sharpe ratios exceed conditional symmetric Sharpe ratios; however, and more importantly, performance-ranking differs depending on whether asymmetric versus symmetric conditional Sharpe ratios are used. Asymmetric conditional Sharpe ratios suggest that India (followed by Malaysia) offers the best return/risk tradeoff, with the least favorable market is South Korea (using GARCH) and Philippines (using EGARCH).
TL;DR: In this paper, a deductive multi-period analytical decision model based on the capital market theory is presented to explain the influence of income smoothing on firms' hedging strategy, where principal-agent relations between a firm's investors and managers (decision makers) are assumed.
Abstract: In practice, it is observable that firms tend to smooth periodical earnings because periodical earnings are considered by capital markets as a proxy for firms' success, and therefore, are often operationalized by the respective compensation plans for managers. Considering financial hedging strategies such as purchasing financial derivatives, income smoothing can lead to a restricted use of financial derivatives even if it decreases firm value because the periodical changes of the value of financial derivatives possibly cause undesired volatilities in periodical earnings. In this paper, a deductive multi-period analytical decision model based on the capital market theory is presented to explain the influence of income smoothing on firms' hedging strategy. Thereby, principal-agent relations between a firm's investors and managers (decision makers) are assumed. Moreover, the decision model is applied to a real data set by conducting a sensitivity analysis. To our knowledge, this is the first paper to operationalize accounting constraints to determine how much a firm should hedge its risk exposure.
TL;DR: Wang et al. as mentioned in this paper compare the market quality of the newly established, second board of the China stock market, the Growth Enterprise Market (GEM) with the Main Board, and examine its impact on the main board from the market microstructure perspective.
Abstract: We compare the market quality of the newly established, second board of the China stock market, the Growth Enterprise Market (GEM) with the Main Board, and examine its impact on the Main Board from the market microstructure perspective. Using the newly available transaction level data, several findings emerge. First, trading activities of the Main Board stocks increase after the introduction of GEM Board, suggesting that the establishment of GEM is not at the expense of the Main Board but instead enhance the overall trading activities in China. Pricing error variances are not different in the two Boards, while GEM stocks have larger adverse selection cost component of bid-ask spread and higher probability of information-based trading which indicate a larger information asymmetry among traders, on average in GEM stocks than those in the Main Board. Interestingly, we find that the 15 min returns of Main Board stocks strongly lead that of GEM stocks but the GEM board only weakly leads Main Board, evidencing information transmission from the Main Board to the GEM. Overall, our findings suggest that the market quality of the GEM is sufficiently good to provide an important, alternative listing venue for high potential firms in China.
TL;DR: In this article, the authors draw on classical conditioning to explain how investors react to short sale-related measures and reveal that measures related to the capital cost of short sellers cause a conditioned response among investors.
Abstract: This study draws on classical conditioning to explain how investors react to short sale-related measures. Our results reveal that measures related to the capital cost of short sellers cause a conditioned response among investors. This explains how investors actually perceive and relate to short sale-related measures and shows that many measures fail to achieve the expected results. Additionally, the conditioned response to measures related to the capital cost of short sellers reveals investor sentiment about the adjustment of short sale margin requirements.
TL;DR: In this article, the authors construct the float adjusted measure of home bias and explore the determinants of bond home bias by employing the International Monetary Fund's high quality dataset (2001 to 2009) on cross-border bond investment.
Abstract: This paper constructs the float adjusted measure of home bias and explores the determinants of bond home bias by employing the International Monetary Fund's high quality dataset (2001 to 2009) on cross-border bond investment. The paper finds that Australian investors' prefer investing in countries with higher economic development and more developed bond markets. Exchange rate volatility appears to be an impediment for cross-border bond investment. Investors prefer investing in countries with stronger quality of institutions including bureaucratic quality, government effectiveness, regulatory quality, rule of law, efficiency of judicial system, risk of contract repudiation, and rating of accounting standards.
TL;DR: In this paper, the authors investigate the motivations for security issuances in hot and cold markets, and show that security issuing in certain periods with lower adverse selection costs are motivated by fundamentals such as capital expenditures and financial constraints, and that these issuances can create shareholder wealth.
Abstract: Overwhelming evidence indicates that firms time market conditions to issue equity. I investigate the motivations for security issuances in hot and cold markets. While it is commonly believed that firms tend to exploit overvaluations to issue equity and overinvest in so-called 'hot' markets, which often results in lower future returns, I show that security issuances in certain periods with lower adverse selection costs are motivated by fundamentals such as capital expenditures and financial constraints, and that these issuances can create shareholder wealth. In contrast, firms that issue equity during periods of high sentiment experience a decline in future returns.
TL;DR: In this article, the authors compared the operating performance of a case telecom company in Taiwan by comparing the entire region, urban and rural operating areas, and analyzed the correlation between the accounts receivable collection and the overall operating performance.
Abstract: This study aims to discuss the operating performance of a case telecom company in Taiwan by comparing the entire region, urban and rural operating areas. The data envelopment analysis (DEA) and Tobit model are employed and performed on 23 operating divisions from 2008 to 2010 to analyze the correlation between the accounts receivable collection and the overall operating performance. The results show that the average technical efficiency (TE) of all operating divisions is 84.2%. The urban operating divisions have a higher efficiency value than the rural ones. Evidence implies that the collection of accounts receivables and the operating performance are positively correlated.
TL;DR: In this paper, the authors theoretically and empirically investigated the relationship between the intensity of product market competition and the fraction of firms that use stock-based compensation in an industry and showed that there is more heterogeneity in firms' stockbased compensation policies in the more competitive industry.
Abstract: This paper theoretically and empirically investigates the relationship between the intensity of product market competition and the fraction of firms that use stock-based compensation in an industry. By employing the relationship between a firm's risk-taking behavior and the use of stock-based compensation, we theoretically show that when the fraction of firms using stock-based compensation is less (more) than one-half, there is a positive (negative) relationship between the fraction and the intensity of product market competition and further provide some supportive empirical evidence. Our results imply that there is more heterogeneity in firms' stock-based compensation policies in the more competitive industry.
TL;DR: In this paper, the authors assess the explanatory power of disclosure-derived financial statement adjustments and find that the information in a subset of adjustments should be used along with reported numbers to produce more accurate valuations.
Abstract: In this paper, we assess the equity value relevance of disclosure-derived financial statement adjustments. In price levels and returns tests, we find that reported financial numbers have relatively superior explanatory power over adjusted numbers. Only when adjustments are included along with reported numbers in pricing regressions do adjustments retain significant explanatory power. Our results suggest that for summary valuation inputs like operating profitability, assets, and liabilities, analysts should not substitute adjusted numbers for reported numbers; rather, the information in a subset of adjustments should be used along with reported numbers to produce more accurate valuations.
TL;DR: In this article, the authors examined the relationship between a firm's characteristics and stock returns and found that adjusted order imbalance enhances the impacts of the value and size variables, and employed the panel regression model to find a significantly positive relationship with individual stock returns.
Abstract: Unlike previous studies that adopted price as the reference point in this paper we employ the adjusted order imbalance that relates to volume as a reference. We examine the relationship between a firm's characteristics and stock returns. Adjusted order imbalance, including trading direction of stock index and trading volume of individual stock and stock index, is freely and easily obtained by investors in Taiwan. Employing the panel regression model, this paper found prior adjusted order imbalance has a significantly positive relationship with individual stock returns. Additionally, empirical results show that adjusted order imbalance enhances the impacts of the value and size variables.