Showing papers on "Market capitalization published in 2002"

A Review of IPO Activity, Pricing, and Allocations

Abstract: We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from nonrational and agency conf lict explanations. We describe some promising such alternatives. From 1980 to 2001, the number of companies going public in the United States exceeded one per business day. The number of initial public offerings ~IPOs! has varied from year to year, however, with some years seeing fewer than 100 IPOs, and others seeing more than 400. These IPOs raised $488 billion ~in 2001 dollars! in gross proceeds, an average of $78 million per deal. At the end of the first day of trading, their shares traded on average at 18.8 percent above the price at which the company sold them. For an investor buying shares at the first-day closing price and holding them for three years, IPOs returned 22.6 percent. Still, over three years, the average IPO underperformed the CRSP value-weighted market index by 23.4 percent and underperformed seasoned companies with the same market capitalization and book-to-market ratio by 5.1 percent. In a nutshell, these numbers summarize the patterns in issuing activity, underpricing, and long-run underperformance, which have been the focus of a large theoretical and empirical literature. We survey this literature, focusing on recent papers. Space constraints force us to take a U.S.-centric point of view and to omit a description of the institutional aspects of going public. The interested reader can consult Ellis, Michaely, and O’Hara ~2000!,

The Relative Importance of Stock, Bond and Real Estate Factors in Explaining REIT Returns

Abstract: This papers offers a new approach to answering the question, "how much of a REIT's return is driven by real estate market influences, and how much by stock and bond factors?" Specifically, we develop a method that allows for the decomposition of the volatility of REIT returns into stock market, bond market, real estate market and idiosyncratic effects. Our results show that from 1978 to 1998, the REIT market has gone from being driven mostly by large cap stocks to being driven by both a small cap stock factor and a real estate factor. There is also a steady increase over time in the proportion of volatility not accounted for by any stock, bond or real estate factors. The analysis indicates that some of this this unaccounted for volatility is due to a REIT sector factor that is common to most REITs but independent of the stock, bond and real estate markets. Attempts to explain cross-sectional differences in the volatility determinants for different REITs meets with only limited success, although it seems that REITs with larger market capitalization are more like stocks.

Real Estate Investment Trusts: Structure, Performance, and Investment Opportunities

Abstract: The book provides the investing public, real estates practitioners, regulators, and real estate and finance academics with up-to-date information on what modern scholarly research tells us about Real Estate Investment Trusts (REITs). REITs are credited to allow institutional and individual investors to invest in real estate via a corporate entity. The increasing interest in REITs as indicated by their growth in market capitalisation and institutional holdings in the United States and around the world suggests that REITs are becoming an increasingly important part of investors' diversified portfolio.

The Long‐run Performance Following Dividend Initiations and Resumptions: Underreaction or Product of Chance?

Abstract: We examine the long-term stock performance following dividend initiations and resumptions from 1927 to 1998. We show that postannouncement abnormal returns are significantly positive for equally weighted calendar time portfolios, but become insignificant when the portfolios are value weighted. Moreover, the equally weighted results are not robust across subsamples. We also document postannouncement reductions in the risk factor loadings of underlying stocks. Crosssectionally, these reductions are negatively related to the contemporaneous price drifts, suggesting the price drifts may be a sample-specific result of chance. Our results underscore the importance of testing for changes in risk loadings in future long-term event studies. AN INCREASINGLY IMPORTANT ISSUE in the study of financial markets is to understand the causes of the apparent abnormal equity price drifts or anomalies that are shown to follow various types of corporate events. In this paper, we address this issue within the context of dividend policy. We examine the longterm stock performance following the initiation and resumption of cash dividends during the period from 1927 to 1998. Although Michaely, Thaler, and Womack ~1995! document a positive price drift for firms that initiate dividends during the 1964 to 1988 period, we can replicate their findings only for equally weighted portfolios and only for dividend events that occurred during the post-1964 period. This lack of intertemporal and methodological robustness suggests that the results of Michaely et al. may simply be due to chance. We find no evidence of any abnormal price drift for the period prior to 1964. In addition, when portfolios are value weighted by market capitalization, the price drift of the post-1964 period disappears. The discrepancy between equal and value weighting is due to the absence of any long-term abnormal returns for the largest size decile. When this decile is excluded from the value-weighted analysis, the abnormal returns are again signifi* Boehme and Sorescu are from the C.T. Bauer College of Business, University of Houston. This paper has benefited from the comments of Richard Green, an anonymous referee, Tom Berglund, Bartley Danielsen, Mark Flannery, Peter Hogfeldt, Jan Jindra, and Praveen Kumar. We thank Wanhai Liu for excellent research assistance. We also thank program participants at the 2000 meetings of the European Finance Association and the Financial Management Association, and seminar participants at the Stockholm School of Economics and the Swedish School of Economics and Business Administration.

How Efficient are Africa's Emerging Stock Markets?

Abstract: The development of financial institutions has been viewed in recent years as critical to the economic development process. This research uses recent data from the eight largest African stock markets to test whether these markets meet the criterion of weak-form stock market efficiency with returns characterised by a random walk. Results are then compared with similar tests on emerging stock markets in South-east Asia and Latin America. Conclusions from the research indicate that test results for weak-form efficiency in the emerging African stock markets compare favourably with those performed on other emerging stock markets.

Explaining the migration of stocks from exchanges in emerging economies to international centers

Abstract: The authors study the determinants of the growing migration of stock market activity to international financial centers. They use a sample of 77 countries and document that higher economic growth and more macroeconomic stability help stock market development. Countries with higher income per capita, sounder macroeconomic policies, more efficient legal systems, better shareholder protection, and more open financial markets tend to have larger and more liquid stock markets. The authors show that these factors also drive the degree with which capital raising, listing, and trading have been migrating to international financial centers. As fundamentals improve and technology advances, this migration will likely increase and domestic stock market activity may become too little to support local markets. For many emerging economies, the best policy is to establish sound fundamentals but not necessarily the trading, or even listing of securities locally.

Company Stock in Pension Plans: How Costly Is It?

Abstract: Firms' matching contributions to employees' defined contribution pension plans are an important spur to employee retirement savings. Firms frequently match employees' defined contribution pension plan using company stock and prohibit employees from selling; employees sometimes voluntarily invest their own contributions in company stock. But their concomitant loss in diversification is extremely risky and costly. While one might reason that employees willing to take on the increased risk should do so, holding company stock is inefficient for all employees, even risk tolerant ones. This paper investigates the extent of company stock ownership and estimates its cost, finding that employee investors sacrifice an average 42% of their company stock's market value by taking on risk that could otherwise have been "diversified away." By matching with cash rather than stock, firms could reduce this lost value, making both employees and the firm better off. Indeed, with such savings, firms could afford to increase their matching contributions. Risk tolerant employees who want to "swing for the fences" would be better off by investing in a diversified portfolio and levering it to their desired risk levels. The findings in this paper call into question the wisdom of requiring or allowing company stock holding within retirement plans.

Determinants of Revenue‐Reporting Practices for Internet Firms*

Abstract: The financial press and accounting regulators (e.g., the Securities and Exchange Commission and Financial Accounting Standards Board) have expressed concern about pressures on Internet firms to report high levels of revenue. This study verifies the association between market capitalization and revenue, and examines economic factors that potentially influence Internet company managers' decisions to adopt allegedly aggressive revenue-recognition policies. Specifically, we examine factors hypothesized to influence the reporting of advertising barter revenue and grossed-up sales levels. We begin by providing descriptive evidence on the use of barter and grossed-up revenue across Internet sectors. Although common in some sectors, we find that the use of these accounting policies is not pervasive overall. We limit our empirical analyses to Internet companies that have the opportunity to report grossed-up or advertising barter revenue. Our cross-sectional predictions are based on both external and internal incentives to maximize revenues as well as constraints that may limit management's discretion. We predict that the following factors increase the likelihood that a firm will report grossed-up and/or barter revenue: shorter time before needing additional external financing, more active individual investor interest in the firm's stock, more active pursuit of growth via acquisitions, and greater use of stock options in employee compensation. We also posit that barter transactions might be an inexpensive way for firms to evaluate the viability of future marketing or content alliances with potential partners. Finally, we predict that constraints on management discretion are related to the reputation/quality of the firm's auditor and underwriter and the extent of management ownership. We find that firms with greater cash burn rates and higher levels of activity on Motley Fool message boards are consistently associated with barter and grossed-up revenue reporting.

Corporate governance and stock market performance in Central and Eastern Europe: a study of nine countries, 1994-2001

Abstract: This paper offers analysis of corporate governance issues behind the stock market performance (stock returns and activity) in nine Central and Eastern European (CEE) countries: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Over the period June 1994 - June 2001, on average the CEE stock markets have had lower returns and higher risk than developed markets. This is explained by the negative influence of the two crisis years (1995 and 1998), the 'flight to quality' effect. Among other reasons, there are cases when prices have been artificially kept down by the controlling owners in order to abuse the minority shareholders. The evidence shows that the enforcement of law matters more than the quality of law on the books, which is in line with previous research (Pistor et al, 2000). I find that the effectiveness (enforcement) of financial regulations has the highest explanatory power of stock market returns in the sample countries. The protection of minority shareholders (Legal index) has a significant impact on market activity, measured by market turnover to market capitalization ratio.

Wealth Effect of Drug Withdrawals on Firms and Their Competitors

Abstract: In this paper, we examine the impact of a drug withdrawal on shareholders of firms and their direct competitors. We find shareholders suffer significant wealth losses when there are reports of adverse drug reactions and when the firm actually withdraws a drug from the market. Additionally, shareholder wealth losses are inversely related to the firm’s market capitalization. Firms that withdraw drugs during advanced clinical investigations experience greater wealth loss than drugs withdrawn during post-marketing surveillance. Wealth losses are lower if many firms withdraw the same type of drug and if that drug has available substitutes.

Wealth Effect of Drug Withdrawals on Firms and Their Competitors

Abstract: In this paper, we examine the impact of a drug withdrawal on shareholders of firms and their direct competitors. We find shareholders suffer significant wealth losses when there are reports of adverse drug reactions and when the firm actually withdraws a drug from the market. Additionally, shareholder wealth losses are inversely related to the firm's market capitalization. Firms that withdraw drugs during advanced clinical investigations experience greater wealth loss than drugs withdrawn during post-marketing surveillance. Wealth losses are lower if many firms withdraw the same type of drug and if that drug has available substitutes.

S&P 500 Index Replacements

Abstract: Standard & Poor9s has become increasingly aggressive in deleting stocks from the S&P 500 index. Where once it made replacements in the index only when a particular stock had to be removed due to merger or acquisition, corporate restructuring, and bankruptcy filing, S&P now voluntarily removes a company for a variety of reasons, which may include low market capitalization, low share price, dwindling market share, or simply the need to find a spot for an up-and-comer. There are a variety of impacts on share price and trading volume for stocks added to and deleted from the S&P 500 during the period January 1996 through December 2001. For additions, abnormal returns and trading volumes are higher than ever. For deletions, share prices are dealt a crippling blow.

Non-capitalization weighted stock market index and index fund or funds

Abstract: A method for the construction of a new type of stock market index, and stock market index fund, or funds where the index is constructed based upon the fundamental realities of the companies contained within the index rather than on the price, or market capitalization of the companies contained with the index. This fundamental data may include items such as the relative size of a collection of company's profits or assets or any fundamental accounting data contained within a standard U.S. GAAP company annual report and accounts.

Corporate Governance and Stock Market Performance in Central and Eastern Europe: A Study of Nine Countries, 1994-2001

Abstract: This paper offers analysis of corporate governance issues behind stock market performance (stock returns and activity) in nine Central and Eastern European (CEE) countries: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Over the period June 1994 - June 2001, the CEE stock markets have had lower returns and higher risk than developed markets. This is explained by the negative influence of two crisis years (1995 and 1998), the "flight to quality" effect. Among other reasons, there are cases when the controlling owners have artificially kept down prices in order to abuse minority shareholders. The evidence shows that the enforcement of law matters more than the quality of law on books, which is in line with previous research (Pistor, Raiser, and Gelfer, 2000). I find that the effectiveness (enforcement) of financial regulations has the highest explanatory power of stock market returns in the sample countries. The protection of minority shareholders (Legal index) has a significant impact on market activity, measured by market turnover to market capitalization ratio.

Exchange Rates, Equity Prices and Capital Flows

Abstract: We develop an equilibrium model in which exchange rates, stock prices and capital flows are jointly determined under incomplete forex risk trading Incomplete hedging of forex risk, documented for US global mutual funds, has three important implications: 1) exchange rates are almost as volatile as equity prices when the forex liquidity supply is not infinitely price elastic; 2) higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation; 3) net equity flows into the foreign market are positively correlated with a foreign currency appreciation The model predictions are strongly supported at daily, monthly and quarterly frequencies for 17 OECD countries vis-a-vis the US Moreover, correlations are strongest after 1990 and for countries with higher market capitalization relative to GDP, suggesting that the observed exchange rate dynamics is indeed related to equity market development

Tax-Loss Trading and Wash Sales

Abstract: An analysis of trades in the Finnish stock market around the turn of the year shows that Finnish investors tend to realize losses more than gains towards the end of December. They also buy back the same stocks they recently sold, with a repurchase rate that depends on the size of the capital loss and how close the sale is to the end of December. The resulting net buying pressure from these 'wash sale' repurchases is greater for stocks with small market capitalizations and has a calendar pattern that is similar to that of stock returns.

Stock market integration: evidence on price integration and return convergence

Abstract: This study evaluates stock market integration between the USA, UK, Germany, Japan and Finland from the point of view of the international investor. Several definitions of convergence were employed all of which yielded a slightly different inference on integration. First, evidence on long-run stock price convergence suggested that the UK and German stock markets accommodate to changes in US stock prices, whereas the Finnish and Japanese stock markets are considered to be segmented. Second, evidence of convergence of excess returns indicated that due to expectations on exchange rate changes expected stock returns may overestimate the benefits from portfolio diversification. Third, regarding the actual changes in the exchange rate the UK, German, Japanese and Finnish stock returns converged towards the returns in the US market in an extent which suggests the importance of a covariance over the variance as a measure of risk.

Transaction Costs and the Present Value “Puzzle” of Farmland Prices

Abstract: 1. Introduction Farmland is by far the dominant asset in the U.S. agricultural sector's balance sheet, accounting for about two-thirds of the value of all farm assets (USDA, various years). The value of U.S. farmland was estimated at $593 billion on December 31, 1994, or roughly 10% of total market capitalization for firms in the SP Clark, Fulton, and Scott 1993; Tegene and Kuchler 1993). This is a "puzzling" result because the CDR-PVM has been widely accepted and generally used for land appraisal purposes. Beyond this, however, there is surprisingly little consensus regarding the determinants of farmland prices (Pope et al. 1979; Robison and Koenig 1992; Stare 1995). A major reason for this lack of consensus may be the heterogeneity of the data sets used for empirical analysis. Different studies use different levels of aggregation, different time periods, and different land value and rent series. Hanson and Myers (1995), for example, use country-level data, whereas Tegene and Kuchler (1993) use regional data and Just and Miranowski (1993) use state-level data. Hanson and Myers (1995) use data from 1910 to 1990, Shiha and Chavas (1995) use data from 1949 to 1990, and Brown and Brown (1984) use data from 1968 to 1981. Falk (1991) examines farmland values and gross cash rents, whereas Hanson and Myers (1995) examine farm real estate values and residual returns to farm real estate. Another possible explanation for the lack of consensus about farmland pricing, and the focus of the present study, is the presence of market frictions. Our motivation for exploring the role that market frictions might play in determining farmland prices is both theoretical and empirical. On the theoretical level, market frictions drive a wedge between the price at which outsiders wish to buy land and that at which farmers wish to sell it. The market price can be anywhere within this wedge, and thus can easily deviate from its frictionless present value. One can interpret this wedge as a band of inaction [delta^sup L^, delta^supU^], inside which farmers neither buy nor sell land even in the face of changing expected returns. The band is centered on the price that would prevail in the absence of transaction costs, and its width is determined by the size of these costs. On the empirical level, a review of the literature reveals that the frictionless market assumption is not a realistic representation of how farmland is actually traded. Although the costs associated with trading many financial assets are small, costs incurred in transferring ownership of farmland typically exceed 7.5% of the purchase price. To explore the role of market frictions, we use the PVM recently used by Lence and Miller (1999), which explicitly incorporates proportional transaction costs. …

Real Estate Investment Trusts: Structure: Structure, Performance, and Investment Opportunities

Abstract: The book provides the investing public, real estates practitioners, regulators, and real estate and finance academics with up-to-date information on what modern scholarly research tells us about Real Estate Investment Trusts (REITs). REITs are credited to allow institutional and individual investors to invest in real estate via a corporate entity. The increasing interest in REITs as indicated by their growth in market capitalisation and institutional holdings in the United States and around the world suggests that REITs are becoming an increasingly important part of investors' diversified portfolio.

Learning from High-Tech Deals

Abstract: MA then we studied the transaction activity of each group--some 5,000 deals in all. Our analysis established that while the average merger or acquisition destroys value for the acquirer, deals carried out by companies that undertake them strategically and often actually do create value. Our analysis of alliances produced similar results. (1) How then do top performers manage their transactions? For a deeper look at this question, we used 30 case studies and interviews with 30 senior practitioners--including chief executive officers, chief financial officers, business-development executives, senior investment bankers, and academics--to augment our research. Although there is no single best way to carry out these transactions, our study does suggest that there are patterns and principles that separate top performers from the pack. In high tech, you must be good at transactions For two reasons, the stars of high technology consider deal making to be as inevitable and perennial as product development or marketing. First, the pace of technological change in the industry, as seen during both the boom and the recent slowdown, is extraordinary and thus forces companies to manage their assets aggressively. In 1993, for example, the typical company in the high-tech top 100 (as measured by market value) stayed there for seven years; by the end of the decade, the average tenure had dropped to three years. At the peak of the Internet market, in 1998 and 1999, 32 of the top 100 companies fell off the list. A similar turnover in market leadership continues today. In markets that move more rapidly than most companies can, many players--laggards and leaders alike--become fodder for deals. In 1982, for example, few would have imagined that industry leader Digital Equipment would one day be acquired by Compaq Computer, which was founded that same year. Second, high technology is a "winner-takes-all" industry. Just 2 percent of the companies in the software sector, for instance, have contributed 63 percent of the appreciation in market capitalization since 1989 (Exhibit 1). Transactions and consolidations can often fill holes in a product line, open new markets, and create new capabilities in less time than it would take to build businesses internally. Such moves may be prerequisites to achieving a dominant position--the best assurance of survival. So it is no coincidence that most "gold-standard" companies in our survey--those averaging more than 39 percent annual growth in total returns to shareholders since 1989--undertake almost twice as many acquisitions and form up to ten times as many alliances as do their competitors (Exhibit 2, on the next page). The sheer volume of deals gold-standard companies undertake has made them as good as they are at extracting value from these transactions. Like good surgeons, the best are the busiest, and the busiest are often the best. …

Simplification of equity capital structure and market value

Abstract: Since the new Swiss Stock Corporation Law came into effect in 1992, most listed Swiss companies have reduced the number of share classes outstanding by exchanging some classes for an already existing one. Overall, the simplifications have had no significant influence on market capitalisation. However, this can be explained by two compensating effects. Firstly, holders of nonvoting participation certificates (PC) achieve considerable gains, whereas the larger group of shareholders suffer minor losses. Secondly, the change in market value is dependent on the change in the bid-ask spread. The more liquidity is improved, the more share prices increase. For the in-crease in market capitalisation to be statistically significant, the reduction in the bid-ask spread must be not only statistically significant but also reach around 0.5 percentage points.

Does Risk Seeking drive Asset Prices

Abstract: textWe investigate whether risk seeking or non-concave utility functions can help to explain the cross-sectional pattern0 of stock returns. For this purpose, we analyze the stochastic dominance efficiency classification of the value-weighted market portfolio relative to benchmark portfolios based on market capitalization, book-to-market equity ratio and momentum. We use various existing and novel stochastic dominance criteria that account for the possibility that investors exhibit local risk seeking behavior. Our results suggest that Markowitz type utility functions, with risk aversion for losses and risk seeking for gains, can capture the cross-sectional pattern of stock returns. The low average yield on big caps, growth stocks and past losers may reflect investors' twin desire for downside protection in bear markets and upside potential in bull markets.

Stock Market Quality in the Presence of a Traded Option

Abstract: We use a controlled economic experiment to examine the implications of asymmetric information for informational linkages between a stock market and a traded call option on that stock. The setting is based on the Kyle model and Back (1993). We find that an insider trades aggressively in both the stock and the option, and that this leads to important feedback effects between the two markets: price discovery in the stock market also occurs in the option market and vice versa. The time series properties of the stock price depend directly on the intrinsic value of the option: when the intrinsic value of the option is positive, informational efficiency is higher in the market for the stock, and volatility is lower. We argue that this provides new insights into how the introduction of a traded option improves the market quality of the underlying asset.

Stock returns and volatility under market segmentation: The case of Chinese A and B shares

Abstract: In most countries where firms list separate shares for trading by foreign and domestic investors, the prices of the foreign shares tend to be higher. In China, the reverse tends to be true. In this paper, we would like to focus on the information content in lagged premiums of Chinese A over B traded shares. The lagged premiums are found to have certain predictive power over the future returns and volatility of both A and B shares, with some interesting patterns. Specifically, an increase in the premium ratio of A shares will be followed by a rise in the return of A shares and a fall in the return of B shares. It is found that both of the investors in Chinese A- and B-share markets reveal positive feedback trading behavior. Moreover, the liquidity and information availability will affect the magnitude of such behavior especially in B-share markets. By using multivariate GARCH model, it is also demonstrated that the unexpected changes in the premium ratio of A-share price over B-share price contribute to the return volatility of both A shares and B shares. These patterns may provide foundations for the development of pricing models for equity shares under market segmentation.

The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence from International Equity Returns

Abstract: Using a GARCH approach, we estimate a time-varying two-factor international asset pricing model for the weekly equity index returns of 16 OECD countries. We find significant time-variation in the exposure (beta) of country equity index returns to the world market index and in the risk-adjusted excess returns (alpha). We then explain these world market betas and alphas using a number of country-specific macroeconomic and financial variables with a panel approach. We find that several variables including imports, exports, inflation, market capitalisation, dividend yields and price-to-book ratios significantly affect a country’s exposure to world market risk. Similar conclusions are obtained by using lagged explanatory variables, and thus these variables may be useful as predictors of world market risks. Several variables also significantly impact the risk-adjusted excess returns over this time period. Our results are robust to a number of alternative specifications. We further discuss some economic hypotheses that may explain these relationships.

The Role of Company Stock in 401(K) Plans

Abstract: The Enron situation has caused the retirement income policy community to focus increased attention on the desirability of current law and practices regarding company stock in 401(k) plans. Several proposals have been advanced to limit the exposure of 401(k) participants to company stock. I suggest that, contrary to conventional wisdom, the introduction of company stock into 401(k) plans is not simply more risk for no additional (expected) return. Rather, the introduction of this asset class into the 401(k) participant's portfolio may have beneficial influences via the differential asset allocation. I create a model to simulate the likely financial impact of prospectively eliminating company stock from 401(k) plans and find that average balances are expected to be between 4.0 and 7.8 percent larger if company stock is retained.