Showing papers on "Market capitalization published in 2004"
TL;DR: In this article, the authors used market valuations to assess the impact of security breaches on the market value of breached firms and found that the security developers in the sample realized an average abnormal return of 1.36 percent during the two-day period after the announcement.
Abstract: Assessing the value of information technology (IT) security is challenging because of the difficulty of measuring the cost of security breaches. An event-study analysis, using market valuations, was used to assess the impact of security breaches on the market value of breached firms. The information-transfer effect of security breaches (i.e., their effect on the market value of firms that develop security technology) was also studied. The results show that announcing an Internet security breach is negatively associated with the market value of the announcing firm. The breached firms in the sample lost, on average, 2.1 percent of their market value within two days of the announcement--an average loss in market capitalization of $1.65 billion per breach. Firm type, firm size, and the year the breach occurred help explain the cross-sectional variations in abnormal returns produced by security breaches. The effects of security breaches are not restricted to the breached firms. The market value of security developers is positively associated with the disclosure of security breaches by other firms. The security developers in the sample realized an average abnormal return of 1.36 percent during the two-day period after the announcement--an average gain of $1.06 billion in two days. The study suggests that the cost of poor security is very high for investors. rity, information technology security management, Internet security, security breach an-
628 citations
TL;DR: This article applied the three-factor model to A-shares in Chinese equity market, one of the fastest growing markets ever, and found that size was found to explain the cross-sectional differences in returns, but contrary to findings for the U.S. market, the book to market ratio was not helpful.
Abstract: This study applied the three-factor model to A-shares in the Chinese equity market, one of the fastest growing markets ever. The sample period is July 1996 through June 2002. Size was found to explain the cross-sectional differences in returns, but contrary to findings for the U.S. market, the book-to-market ratio was not helpful. As in the U.S. experience, beta did not account for return differences among individual stocks. Because of the speculative nature of Chinese capital markets, the large proportion of government-owned shares, and the low quality of the companies' accounting information, the free float (that is, the ratio of shares in a public company that are freely available to the investing public to total company shares) was added to the study to serve as a proxy for company fundamentals. The three-factor model that included proxies for size and free float significantly increased the explanatory power of the market model—from 81 percent to 90 percent.
430 citations
TL;DR: In this paper, the authors examined the market valuation of environmental capital expenditure investment related to pollution abatement in the pulp and paper industry and found that there are incremental economic benefits associated with environmental capital expenditures investment by low-polluting firms but not high polluting firms.
Abstract: The objective of this study is to examine the market valuation of environmental capital expenditure investment related to pollution abatement in the pulp and paper industry. The total environmental capital expenditure of $8.7 billion by our sample firms during 1989-2000 supports the focus on this industry. In order to be capitalized, an asset should be associated with future economic benefits. The existing environmental literature suggests that investors condition their evaluation of the future economic benefits arising from environmental capital expenditure on an assessment of the firms' environmental performance. This literature predicts the emergence of two environmental stereotypes: low-polluting firms that overcomply with existing environmental regulations, and high-polluting firms that just meet minimal environmental requirements. Our valuation evidence indicates that there are incremental economic benefits associated with environmental capital expenditure investment by low-polluting firms but not high-polluting firms. We also find that investors use environmental performance information to assess unbooked environmental liabilities, which we interpret to represent the future abatement spending obligations of high-polluting firms in the pulp and paper industry. We estimate average unbooked liabilities of $560 million for high-polluting firms, or 16.6 percent of market capitalization.
423 citations
TL;DR: The relationship between the stock markets of the GCC countries as an economic group and their links to the oil markets, despite the fact that the economies of these countries depend to a large extent on oil revenues and are thus susceptible to developments in the global oil market is very limited.
Abstract: 1. INTRODUCTION The Gulf Cooperation Council (GCC) is a customs union that consists of six members, including four major oil-exporting countries, which are important decision makers in the Organization of Petroleum Exporting Countries (OPEC). (1) The six members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (UAE). The non-OPEC members among them are Bahrain and Oman. In January 2003, these countries collectively accounted for about 16% of the world's 76.5 million barrels a day of total production. They possess 47% of the world's 1018.8 billion barrels of oil proven reserves. (2) For these countries, oil exports largely determine foreign earnings and governments' budget revenues and expenditures; thus they are the primary determinant of aggregate demand. (3) The aggregate demand effect influences corporate output and domestic price levels, which eventually impacts corporate earnings and stock market share prices. This demand effect can also indirectly impact share prices through its influence on expected inflation, which in turn affects the expected discount rate. Such a strong oil influence on the national economy makes these countries primary targets for investigating the links between oil prices and the performance of their stock markets. There has been a large volume of work examining the relationships among international financial markets; a good deal of work has also been devoted to the links between spot and futures petroleum prices. In contrast, little work has been done on the relationships between oil spot/futures prices and stock markets. Virtually all of this work has concentrated on a few industrial countries, namely, Canada, Germany, Japan, the United Kingdom, and the United States. No work has been done on the relationship between the stock markets of the GCC countries as an economic group and their links to the oil markets, despite the fact that the economies of these countries depend to a large extent on oil revenues and are thus susceptible to developments in the global oil market. Moreover, because each GCC country depends on oil to a different degree, comparisons between them form an interesting subject for more investigation and analysis. Additionally, the Saudi stock market, which is 9th among emerging stock markets in terms of market capitalization in 2003, is the true leader of the GCC and is thus worthy of study on its own. Furthermore, these markets can provide an additional venue for international stock diversification and portfolio formation. For example, the total GCC market return increased by more than 9% in 2002; returns ranged from 32% for Qatar to less than 1% for Saudi Arabia. In contrast, the Standard & Poor's 500 (S & P 500) FTSE, and DAX declined by about 23%, 21% and 44%, respectively, in that down year (see Figure 1). Surprisingly, the overall literature on the links between oil markets and financial markets is very limited. Jones and Kaul (1996) investigated the reaction of the U.S., Canadian, Japanese and U.K. stock prices to oil price shocks using quarterly data. Utilizing a standard cash-flow dividend valuation model, they found that for the United States and Canada this reaction can be accounted for entirely by the impact of oil shocks on real cash flows. The results for Japan and the United Kingdom were not as strong. Huang et al. (1996) used an unrestricted vector autoregression (VAR) model to examine the relationship between daily oil futures returns and daily U.S. stock returns. They found that oil futures returns lead some individual oil company stock returns, but they do not have much impact on broad-based market indices, such as the S & P 500. In a more recent study, Sadorsky (1999), using monthly data (1947:1-1996:4), examined the links between the U.S. fuel oil prices and the S & P 500 in an unrestricted VAR model that also included the short-term interest rate and industrial production. In contrast with Huang et al. …
285 citations
TL;DR: The authors found no evidence that a bank holding company's market capitalization increases with its asset volatility prior to 1994, and showed a strong cross-sectional relation between capitalization and asset risk, indicating that most of the bank capital buildup over the sample period can be explained by greater bank risk exposures and the market's increased demand that large banks' default risk be priced.
Abstract: Large U.S. banks dramatically increased their capitalization during the 1990s, to the highest levels in more than 50 years. We document this buildup of capital and evaluate several potential motivations. Our results support the hypothesis that regulatory innovations in the early 1990s weakened conjectural government guarantees and enhanced the bank counterparties' incentive to monitor and price default risk. We find no evidence that a bank holding company's market capitalization increases with its asset volatility prior to 1994. Thereafter, the data display a strong cross-sectional relation between capitalization and asset risk. Our estimates indicate that most of the bank capital buildup over the sample period can be explained by greater bank risk exposures and the market's increased demand that large banks' default risk be priced.
281 citations
TL;DR: The authors examined the value relevance and reliability of brand assets recognized by 33 U.K. firms and the stock price reaction to the announcement of brand capitalization and found that brand assets are value relevant, i.e., associated with market values.
Abstract: We examine the value relevance and reliability of brand assets recognized by 33 U.K. firms, and the stock price reaction to the announcement of brand capitalization. We find that brand assets are value relevant, i.e., associated with market values. However, the market capitalization rates of brands of firms with low contracting incentives are higher than those of firms with high contracting incentives to capitalize and overstate brand values. Thus, there could be substantial differences in the extent of bias or error in brand valuations of firms with different levels of contracting incentives, i.e., brand asset measures might not be reliable. The stock price reaction during the 21 days surrounding the first announcement of brand recognition is significantly positively associated with the recognized brand amount. However, the brand coefficient is only a small fraction of what would be expected if markets did not impute any value to brands before firms recognized them. Few previous value‐relevance studies h...
225 citations
TL;DR: In this article, the authors investigate the factors influencing the selection of stocks for option listing and find no evidence that volatility declines with option introduction, in contrast to previous studies that do not use control samples.
Abstract: We investigate the factors influencing the selection of stocks for option listing. Exchanges tend to list options on stocks with high trading volume, volatility, and market capitalization, but the relative effect of these factors has changed over time as markets have evolved. We observe a shift from volume toward volatility after the moratorium on new listings ended in 1980. Using control sample methodology designed to correct for the endogeneity of option listing, we find no evidence that volatility declines with option introduction, in contrast to previous studies that do not use control samples. BEGINNING WITH A HANDFUL of options listed on the Chicago Board Options Exchange (CBOE) in April 1973, the exchange-traded option market has since matured into a thriving industry. In the United States, options trade on five exchanges, with contracts on stock indices, exchange-traded funds, currencies, interest rates, and over 3,000 stocks. Total equities options volume traded on U.S. exchanges has risen from 5.7 million contracts in 1974 to over 722 million contracts in 2001 (Options Clearing Corporation, http://www.optionsclearing. com). Option markets have also thrived in Western Europe and other economies with well-developed capital markets. In this paper, we study the listing choices made by option exchanges in the United States, in an effort to better understand what determines the success of financial innovation, and how derivative markets develop. Understanding this process has important implications for the continuing development of new securities markets domestically and globally. In the new century, innovation
199 citations
TL;DR: In this article, the authors show that on expiration dates the closing prices of stocks with listed options cluster at option strike prices and provide evidence that hedge rebalancing by option market-makers and stock price manipulation by firm proprietary traders contribute to the clustering.
Abstract: This paper presents striking evidence that option trading changes the prices of underlying stocks. In particular, we show that on expiration dates the closing prices of stocks with listed options cluster at option strike prices. On each expiration date, the returns of optionable stocks are altered by an average of at least 16.5 basis points, which translates into aggregate market capitalization shifts on the order of $9 billion. We provide evidence that hedge re-balancing by option market-makers and stock price manipulation by firm proprietary traders contribute to the clustering.
144 citations
TL;DR: This article used variance ratio tests, robust to heteroskedasticity and employing a recently developed bootstrap technique to customize percentiles for inference purposes, found that Class A shares for Chinese stock exchanges and the Hong Kong equity markets are weak form efficient.
Abstract: This study tests the random walk hypothesis for China, Hong Kong and Singapore. Using variance ratio tests, robust to heteroskedasticity and employing a recently developed bootstrap technique to customize percentiles for inference purposes it is found that Class A shares for Chinese stock exchanges and the Hong Kong equity markets are weak form efficient. However, Singapore and Class B shares for Chinese stock exchanges do not follow the random walk hypothesis, which suggests that liquidity and market capitalization may play a role in explaining results of weak form efficiency tests.
120 citations
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TL;DR: In this paper, the authors investigate whether the level of foreign ownership in a firm is inversely related to information asymmetry between firm (managers) and market (outside investors), and show that foreign investors tend to avoid stocks with high cross-corporate holdings.
Abstract: Using a large sample of Japanese firms, we investigate whether the level of foreign ownership in a firm is inversely related to information asymmetry between firm (managers) and market (outside investors). Since information asymmetry is not directly observable and, thus, is difficult to measure empirically, our analysis focuses on the link between foreign shareholding and a measurable consequence of information asymmetry; that is, the timing and magnitude of intertemporal return-earnings associations. The empirical results support our hypothesis, and subsequent tests based on residual foreign ownership show that the relation between foreign ownership and information asymmetry is robust to the addition of various control variables such as market capitalization and cross-corporate holdings. We also show that foreign investors tend to avoid stocks with high cross-corporate holdings. Overall, our results suggest that foreign (institutional) investors are likely to be efficient processors of public information and are attracted to Japanese firms with low information asymmetry.
112 citations
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TL;DR: In this article, the authors examined the dynamic linkages between the stock markets of Bangladesh, India, Pakistan and Sri Lanka using a temporal Granger causality approach by binding the relationship among the stock price indices within a multivariate cointegration framework.
Abstract: The present article examines the dynamic linkages between the stock markets of Bangladesh, India, Pakistan and Sri Lanka using a temporal Granger causality approach by binding the relationship among the stock price indices within a multivariate cointegration framework. We also examine the impulse response functions. Our main finding is that in the long run, stock prices in Bangladesh, India and Sri Lanka Granger-cause stock prices in Pakistan. In the short run there is unidirectional Granger causality running from stock prices in Pakistan to India, stock prices in Sri Lanka to India and from stock prices in Pakistan to Sri Lanka. Bangladesh is the most exogenous of the four markets, reflecting its small size and modest market capitalization.
TL;DR: In this paper, the authors investigate whether the level of foreign ownership in a firm is inversely related to information asymmetry between firm (managers) and market (outside investors), and show that foreign investors tend to avoid stocks with high cross-corporate holdings.
Abstract: Using a large sample of Japanese firms, we investigate whether the level of foreign ownership in a firm is inversely related to information asymmetry between firm (managers) and market (outside investors). Since information asymmetry is not directly observable and, thus, is difficult to measure empirically, our analysis focuses on the link between foreign shareholding and a measurable consequence of information asymmetry; that is, the timing and magnitude of intertemporal return-earnings associations. The empirical results support our hypothesis, and subsequent tests based on residual foreign ownership show that the relation between foreign ownership and information asymmetry is robust to the addition of various control variables such as market capitalization and cross-corporate holdings. We also show that foreign investors tend to avoid stocks with high cross-corporate holdings. Overall, our results suggest that foreign (institutional) investors are likely to be efficient processors of public information and are attracted to Japanese firms with low information asymmetry.
TL;DR: In this paper, the authors examined the dynamic linkages between the stock markets of Bangladesh, India, Pakistan and Sri Lanka using a temporal Granger causality approach by binding the relationship among the stock price indices within a multivariate cointegration framework.
Abstract: The present article examines the dynamic linkages between the stock markets of Bangladesh, India, Pakistan and Sri Lanka using a temporal Granger causality approach by binding the relationship among the stock price indices within a multivariate cointegration framework. We also examine the impulse response functions. Our main finding is that in the long run, stock prices in Bangladesh, India and Sri Lanka Granger-cause stock prices in Pakistan. In the short run there is unidirectional Granger causality running from stock prices in Pakistan to India, stock prices in Sri Lanka to India and from stock prices in Pakistan to Sri Lanka. Bangladesh is the most exogenous of the four markets, reflecting its small size and modest market capitalization.
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TL;DR: In this article, the authors used the Jeffords effect to demonstrate that changes in the political landscape have large effects on the market value of firms, by using a firm's soft money donations to the national parties as the measure of how the firm aligns itself politically.
Abstract: In May 2001, Senator Jim Jeffords left the Republican Party and tipped control of the U.S. Senate to the Democrats. This paper uses the surprise event to demonstrate what I term the Jeffords effect: changes in the political landscape have large effects on the market value of firms. I use a firm's soft money donations to the national parties as the measure of how the firm aligns itself politically. In this event, study of large public firms, a firm lost 0.8% of market capitalization the week of Jeffords' switch for every $250,000 it gave to the Republicans in the previous election cycle. Based on the point estimates, the stock price gain associated with Democratic donations is smaller than the loss associated with Republican donations, but the estimates are consistent with the coefficients being equal and opposite. The results withstand several robustness checks, and the effects appear to persist long after the event. The relationship between soft money and stock returns may or may not be causal: Soft money could be a proxy for how well each party's policies suit a firm, or donations might affect how much help politicians give to a firm.
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TL;DR: In this paper, the authors investigated daily stock market anomalies in the Egyptian stock market using its major stock index, the Capital Market Authority Index (CMA), to shed some light on the degree of market efficiency in an emerging capital market with a four-day trading week.
Abstract: This study investigates daily stock market anomalies in the Egyptian stock market using its major stock index, the Capital Market Authority Index (CMA), to shed some light on the degree of market efficiency in an emerging capital market with a four-day trading week. The results indicate that Monday returns in the Egyptian stock market are positive and significant on average, but are not significantly different from returns of the rest of the week. Thus, no evidence was uncovered to support any daily seasonal patterns in the Egyptian stock market, indicating that stock market returns are consistent with the weak form of market efficiency. These results should be interpreted with caution since the Egyptian stock market has only a limited number of stocks that are actively traded.
TL;DR: In this article, the authors provide an up-to-data account of the Chinese stock exchange market and to test its efficiency, using the daily data of the Shanghai Stock Exchange index and eight shares listed in Shanghai Stock Exchanges.
Abstract: The Chinese stock market has developed rapidly since early 1990s, when the two stock exchanges, the Shanghai Securities Exchange and the Shenzhen Securities Exchange, were established. Until 2000, the number of listed domestic companies has reached over 1000, and market capitalization relative to GDP reached about 33.4%. As China joins WTO, the Chinese stock market will become a great concern of the global investors, and will play a more important role in the world economy. The purpose of this paper is to provide an up-to-data account of the Chinese stock exchange market and to test its efficiency. The daily data of the Shanghai Stock Exchange index and eight shares listed in the Shanghai Stock Exchanges are examined, for this purpose. The testing procedure involves three processes: (1) use the Durbin–Watson test, Durbin ‘h’ test, the Lagrange Multiplier test for autocorrelation to examine the assumption of the model that the successive occurrences are independent; (2) use the Dickey–Fuller tests for unit...
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TL;DR: In this article, the authors focused on those companies of the Prime Standard that were not included in one of the indices and analyzed the question if and to what extent each of the companies examined had reached the goals normally pursued for an IPO.
Abstract: The dramatic drop in prices on the German stock exchange in the period from 2000 to 2003 was one cause for the rising number of delistings in Germany. This development triggered the study on the aptitude of listed companies to remain listed although the authors were well aware that a negative conclusion would not necessarily imply a company's realistic chance of going private, in particular of obtaining the required financing for such a transaction. The study focused on those companies of the Prime Standard that were not included in one of the indices. Using selected indicators, the authors analyzed the question if and to what extent each of the companies examined had reached the goals normally pursued for an IPO. It was concluded that for the overwhelming majority of those companies studied, a listing on a stock exchange would not make sense (any more): in particular, due to the volume of their market capitalization and the liquidity of their stock, they wouldn't interest the analysts and investors nor would their stock prices adequately reflect their intrinsic values. And, especially during these difficult times, it would be very hard to raise additional capital on the markets.
TL;DR: In this paper, the effect on consensus earnings biases of a company's sector and country affiliation combined with a range of other fundamental characteristics has been investigated, including the number of analysts following a stock, the dispersion of their forecasts, the volatility of earnings, the sector classification of the covered company, and its market capitalization.
Abstract: Forecasting company earnings is a difficult and hazardous task. In an efficient market where analysts learn from past mistakes, there should be no persistent and systematic biases in consensus earnings accuracy. Previous research has already established how some (single) individual-company characteristics systematically influence forecast accuracy. So far, however, the effect on consensus earnings biases of a company's sector and country affiliation combined with a range of other fundamental characteristics has remained largely unexplored. Using data for 1993–2002, this article disentangles and quantifies for a broad universe of European stocks how the number of analysts following a stock, the dispersion of their forecasts, the volatility of earnings, the sector and country classification of the covered company, and its market capitalization influence the accuracy of the consensus earnings forecast.
Journal Article•
TL;DR: The number of firms going private is increasing at an unprecedented rate in the current decade as discussed by the authors, which relates directly to the passage of the Sarbanes-Oxley Act in 2002.
Abstract: The number of firms going private is increasing at an unprecedented rate in the current decade. The ratio of companies going private to IPOs is in the 20%-30% range. My survey includes 110 of the 236 that went private between January 2001 and July 2003 (a 46.6 percent response rate). The cost of being public is the number one reason for going private by smaller firms. This relates directly to the passage of the Sarbanes-Oxley Act in 2002. A null hypothesis of no relationship between market capitalization and going private because of cost could be rejected at an alpha level of 0.01. Of significance is that a number of smaller firms actually went private under a Form 15 deregistration by reducing their number of shareholders to under 300, but without buying in the other shares outstanding. We now have a number of private companies with public shareholders holding the majority of the shares.
TL;DR: In this article, the authors test for important determinants of why some employers provide matching contributions for 401(k) plans in company stock and find that firms that match in company stocks have lower stock price volatility and lower bankruptcy risk and are also more likely to offer a defined benefit plan, consistent with a recognition that imposing a concentrated portfolio can be costly for employees.
TL;DR: In this article, the authors examined the overreaction effect in Chinese stock markets over a six-year period and found that the over reaction effect is most pronounced in the market for A shares, suggesting that the normal impression of greater efficiency in the pricing of Chinese owned equities may be open to further challenge and debate.
Abstract: Several recent studies have examined whether the main Chinese stock markets in Shanghai and Shenzhen are weak-form efficient. A consistent feature of the findings is that the pricing of foreign-owned B shares is more predictable than domestically-owned A shares. However, none of the earlier investigations examine the overreaction effect, one of the most commonly-employed tests of weak-form efficiency in developed stock markets. The present study therefore reports the results of such an analysis for a sample of more than 300 Chinese shares over a six-year period beginning in August 1994. In contrast to earlier evidence, the article finds that the overreaction effect is most pronounced in the market for A shares, suggesting that the normal impression of greater efficiency in the pricing of Chinese-owned equities may be open to further challenge and debate.
TL;DR: In this paper, the authors examine the evolution of stock market efficiency in the Bucharest Stock Exchange from mid-1997 to September 2002 and find that the level of inefficiency appears to diminish over time and that the lagged stock price index is a significant predictor of the current price index.
Abstract: In this paper we demonstrate that the measurement of stock market efficiency is an important activity in establishing whether eastern European countries satisfy the Copenhagen Criteria for EU membership. Specifically, we argue that developing an efficient stock market should be an important policy focus for countries with aspirations to join the EU as it helps to demonstrate the existence of a functioning market economy. We illustrate this issue by examining the evolution of stock market efficiency in the Bucharest Stock Exchange from mid-1997 to September 2002. We use a GARCH model on daily price data and model the disturbances using the Student-t distribution to allow for ‘fat-tails’. We find strong evidence of inefficiency in the Bucharest Stock Exchange in that the lagged stock price index is a significant predictor of the current price index. This result is robust to the inclusion of variables controlling for calendar effects of the sort that have been observed in more developed stock markets. The level of inefficiency appears to diminish over time and we find evidence consistent with stock market efficiency in Romania after January 2000.
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TL;DR: In this paper, the authors examined the location choices of cross-border Mergers and Acquisitions (M&A) between OECD members´ firms in the 1990's and found that the supply of target firms (captured by market capitalization and privatization activity) constrains the location of M&A.
Abstract: This article examines the location choices of cross-border Mergers and Acquisitions (M&A) between OECD members´ firms in the 1990`s In addition to traditional determinants of FDI, we estimate the impact of specific factors affecting the M&A location pattern Two distinct econometric methods are implemented: the conditional logit and the count model (Poisson or negative binomial model) In spite of the use of alternative econometric methods, we find that the supply of target firms (captured by market capitalization and privatization activity) constrains the location of M&A However, is it not the only determinant of location: market size, labor costs, market access and financial openness play a positive and significant role on the M&A location A bandwagon effect is also observed In the opposite, the corporate tax rate and the productivity decrease the probability to attract M&A Cultural and geographic distances and differences in legal rules also exert a negative significant impact on M&A strategies Only the ownership structure has contrasted results
TL;DR: In this article, the authors provide evidence that employees underestimate the risk of owning company stock, while employers overestimate the benefits associated with employee stock ownership relative to its costs and make suggestions that would increase employees' freedom of choice and improve their welfare, but without imposing significant costs on well-meaning but ill-informed employers.
Abstract: Some eleven million 401(k) plan participants take a concentrated equity position in their retirement savings account, investing more than 20% of the balance in their employer's common stock. Yet investing in the stock of one's employer is a risky investment on two counts: single securities are riskier than diversified portfolios (such as mutual funds), and the employee's human capital is typically positively correlated with the performance of the company. In the worst-case scenario, illustrated by the Enron bankruptcy, workers can lose their jobs and much of their retirement wealth simultaneously. For workers who expect to work for the company for many years, a dollar of company stock can be valued at less than 50 cents to the worker after accounting for the risks. But employees still invest voluntarily in their employers' stock, and many employers insist on making matching contributions in stock, despite the fact that a dollar of investment or contribution may be worth only 50 cents on the dollar. How can competitive labor markets sustain a situation in which employers and employees make such a fundamental miscalculation? We provide evidence that employees underestimate the risk of owning company stock, while employers overestimate the benefits associated with employee stock ownership relative to its costs. This evidence provides strong reasons to consider legal reforms in this domain. We make suggestions that would increase employees' freedom of choice and improve their welfare, but without imposing significant costs on well-meaning but ill-informed employers.
TL;DR: In this article, a systematic analysis of bilateral, source and host factors driving portfolio equity investment across countries, using newly-released data on international equity holdings at the end of 2001, is presented.
Abstract: The paper provides a systematic analysis of bilateral, source and host factors driving portfolio equity investment across countries, using newly-released data on international equity holdings at the end of 2001. It develops a model that links bilateral equity holdings to bilateral trade in goods and services and finds that the data strongly support such a correlation. Larger bilateral positions are also associated with proxies for informational proximity. It further documents that the scale of aggregate foreign equity asset and liability holdings is larger for richer countries and countries with more developed stock markets.
TL;DR: In this paper, the problem of calibrating the CreditMetricsTM correlation concept for a portfolio of loans to medium-sized, non-listed German firms has been addressed and the solution to this estimation problem offered in CreditManagerTM, which basically relates the weight of the idiosyncratic component to company size, can be adapted to meet the needs of their application.
Abstract: This paper deals with the problems associated with empirically calibrating the CreditMetricsTM correlation concept for a portfolio of loans to medium-sized, non-listed German firms. Using this framework to determine the probabilities of joint default events, requires an estimation of the portion of the obligors' asset return volatility that is firm-specific (idiosyncratic). We analyze if and how the solution to this estimation problem offered in CreditManagerTM, which basically relates the weight of the idiosyncratic component to company size, can be adapted to meet the needs of our application. Using a random sample of 250 German stocks, we show that there is indeed a significant positive relationship between R-squared and market capitalization (book value of total assets). However, this relationship appears to hold only for stocks with considerable index weights. For "smaller" firms, both size proxies perform very poorly. We also test the explanatory power of four different versions of the CreditMetricsTM index model to predict asset correlations. While the use of the book value of total assets as a proxy for size does not contribute to explaining obligors' pairwise asset correlations beyond the correlations of their corresponding CDAX(R) industry indices at all, the use of market capitalization does - but only with respect to "bigger" companies.
22 Dec 2004
TL;DR: Short sale constraints can prevent negative information or opinions from being expressed in stock prices, as in Miller (1977) as discussed by the authors, but they are not sufficient to explain why a rational investor fails to short a stock, but not why anyone buys the overpriced security.
Abstract: Short sale constraints--including various costs and risks of shorting, as well as legal and institutional restrictions--can allow stocks to be overpriced. If these impediments prevent investors from shorting certain stocks, then these stocks can be overpriced and thus have low future returns until the overpricing is corrected. By identifying stocks with particularly high short sale constraints, one identifies stocks with particularly low future returns. Consider a stock whose fundamental value is $100 (that is, $100 would be the share price in a frictionless world). If it costs $1 to short the stock, then arbitrageurs cannot prevent the stock from rising to $101. If the $1 is a holding cost that must be paid every day that the short position is held, then selling the stock short becomes a gamble that the stock will fall by at least $1 a day. In such a market, a stock could be very overpriced, yet if there is no way for arbitrageurs to earn excess returns, the market is still in some sense efficient. If frictions are large, "efficient" prices may be far from frictionless prices. Short Sale Constraints To be able to sell a stock short, one must borrow it, and because borrowing shares is not done in a centralized market, finding shares sometimes can be difficult or impossible. In order to borrow shares, an investor needs to find an owner willing to lend them. These lenders receive a fee in the form of interest payments generated by the short-sale proceeds, minus any interest rebate that the lenders return to the borrowers. This rebate acts as a price that equilibrates supply and demand in the securities lending market. In extreme cases, the rebate can be negative, meaning investors who sell short have to make a daily payment to the lender for the right to borrow the stock (instead of receiving a daily payment from the lender as interest payments on the short sale proceeds). This rebate only partially equilibrates supply and demand, because the securities lending market is not a centralized market with a market-clearing price. Once a short seller has initiated a position by borrowing stock, the borrowed stock may be recalled at any time by the lender. If the short seller is unable to find another lender, he is forced to close his position. This possibility leads to recall risk, one of many risks that short sellers face. Generally, it is easy and cheap to borrow most large cap stocks, but it can be difficult to borrow stocks that are small, have low institutional ownership, or are in high demand for borrowing. In addition to the problems in the stock lending market, there are a variety of other short sale constraints. U.S. equity markets are not set up to make shorting easy. Regulations and procedures administered by the SEC, the Federal Reserve, the various stock exchanges, underwriters, and individual brokerage firms can mechanically impede short selling. Legal and institutional constraints inhibit or prevent investors from selling short (most mutual funds are long only). We have many institutions set up to encourage individuals to buy stocks, but few institutions set up to encourage them to short. In addition to regulations, short sellers also face hostility from society at large. Policymakers and the general public seem to have an instinctive reaction that short selling is morally wrong. Short sellers face periodic waves of harassment from governments and society, usually in times of crisis or following major price declines, as short sellers are blamed. The Overpricing Hypothesis Short sale constraints can prevent negative information or opinions from being expressed in stock prices, as in Miller (1977). (1) Although constraints are necessary in order for mispricing to occur, they are not sufficient. Constraints can explain why a rational investor fails to short the overpriced security, but not why anyone buys the overpriced security. To explain that, one needs investors who are willing to buy overpriced stocks. …
TL;DR: In this paper, the authors investigate whether the adoption of network strategies by stock exchanges creates additional value in the provision of trading services, and they show that adopting a network strategy is associated with higher market capitalization, lower transaction costs, higher growth, and enhanced international stock market integration.
TL;DR: In this article, the authors investigated interactions between Chinese A shares and B shares traded on the Shanghai stock exchange and the Shenzhen stock exchange using an asymmetric multivariate time-varying volatility model and found that there is a causal relation from B share markets to A share markets in the second moment but no such relation is present in the first moment, suggesting B shares contain more prior information than A shares about risk but not return.
TL;DR: In this paper, the authors examined the relationship between selected company characteristics and common stock returns and found that there is a strong size effect in the Indian stock market using both market-based as well as non-market based measures of company size.
Abstract: The paper examines the relationship between selected company characteristics and common stock returns. The empirical results suggest that there is a strong size effect in the Indian stock market using both market-based as well as non-market based measures of company size. We also detect a weak value effect on stock returns, especially when E/P ratio is employed as a relative distress proxy. The study further finds that the present stock classification system in India fails to differentiate in returns on different categories of stocks. We recommend an alternative stock classification system based on company size and relative distress. The proposed classification procedure will provide better insights to investors about the risk-return characteristics of common stocks.