Showing papers on "Stock exchange published in 1999"

Do Investors Trade Too Much

Abstract: Trading volume on the world’s markets seems high, perhaps higher than can be explained by models of rational markets. For example, the average annual turnover rate on the New York Stock Exchange (NYSE) is currently greater than 75 percent and the daily trading volume of foreign-exchange transactions in all currencies (including forwards, swaps, and spot transactions) is roughly one-quarter of the total annual world trade and investment flow (James Dow and Gary Gorton, 1997). While this level of trade may seem disproportionate to investors’ rebalancing and hedging needs, we lack economic models that predict what trading volume in these market should be. In theoretical models trading volume ranges from zero (e.g., in rational expectation models without noise) to infinite (e.g., when traders dynamically hedge in the absence of trading costs). But without a model which predicts what trading volume should be in real markets, it is difficult to test whether observed volume is too high. If trading is excessive for a market as a whole, then it must be excessive for some groups of participants in that market. This paper demonstrates that the trading volume of a particular class of investors, those with discount brokerage accounts, is excessive. Alexandros V. Benos (1998) and Odean (1998a) propose that, due to their overconfidence, investors will trade too much. This paper tests that hypothesis. The trading of discount brokerage customers is good for testing the overconfidence theory of excessive trading because this trading is not complicated by agency relationships. Excessive trading in retail brokerage accounts could, on the other hand, result from either investors’ overconfidence or from brokers churning accounts to generate commissions. Excessive institutional trading, too, might result from overconfidence or from agency relationships. Dow and Gorton (1997) develop a model in which money managers, who would otherwise not trade, do so to signal to their employers that they are earning their fees and are not “simply doing nothing.” While the overconfidence theory is tested here with respect to a particular group of traders, other groups of traders are likely to be overconfident as well. Psychologists show that most people generally are overconfident about their abilities (Jerome D. Frank, 1935) and about the precision of their knowledge (Baruch Fischhoff et al., 1977; Marc Alpert and Howard Raiffa, 1982; Sarah Lichtenstein et al., 1982). Security selection can be a difficult task, and it is precisely in such difficult tasks that people exhibit the greatest overconfidence. Dale Griffin and Amos Tversky (1992) write that when predictability is very low, as in securities markets, experts may even be more prone to overconfidence than novices. It has been suggested that investors who behave nonrationally will not do well in financial markets and will not continue to trade in them. There are reasons, though, why we might expect those who actively trade in * Graduate School of Management, University of California, Davis, CA 95616. This paper is based on my dissertation at the University of California-Berkeley. I would like to thank Brad Barber, Hayne Leland, David Modest, Richard Roll, Mark Rubinstein, Paul Ruud, Richard Thaler, Brett Trueman, and the participants at the Berkeley Program in Finance, the National Bureau of Economic Research behavioral finance meetings, the Conference on Household Financial Decision Making and Asset Allocation at The Wharton School, the Western Finance Association meetings, and the Russell Sage Institute for Behavioral Economics, and seminar participants at the University of California-Berkeley, the Yale School of Management, the University of California-Davis, the University of Southern California, the University of North Carolina, Duke University, the University of Pennsylvania, Stanford University, the University of Oregon, Harvard University, the Massachusetts Institute of Technology, Dartmouth College, the University of Chicago, the University of British Columbia, Northwestern University, the University of Texas, UCLA, the University of Michigan, and Columbia University for helpful comments. I would also like to thank Jeremy Evnine and especially the discount brokerage house which provided the data necessary for this study. Financial support from the Nasdaq Foundation and the American Association of Individual Investors is gratefully acknowledged. 1 The NYSE website (http://www.nyse.com/public/ market/2c/2cix.htm) reports 1998 turnover at 76 percent.

The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States

Abstract: Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis. THE GLOBALIZATION OF U.S. CAPITAL MARKETS has accelerated dramatically in the past decade. Increasing numbers of companies from overseas have chosen to either raise capital through global equity issues or prepare for future capital raising by way of cross-listings on U.S. exchanges. As of 1997, about 1,300 non-U.S. companies have listed their shares for trading on the New York Stock Exchange (NYSE), the American Exchange (AMEX), the National Association of Securities Dealers' Automation Quotation (Nasdaq) system, or

Stock markets, banks, and economic growth

Abstract: Using data on 49 countries from 1976 to 1993, the authors investigate whether measures of stock market liquidity, size, volatility, and integration in world capital markets predict future rates of economic growth, capital accumulation, productivity improvements, and private savings. They find that stock market liquidity-as measured by stock trading relative to the size of the market and economy - is positively and significantly correlated with current and future rates of economic growth, capital accumulation, productivity growth, even after controlling for economic and political factors. Stock market size, volatility, and integration are not robustly linked with growth. Nor are financial indicators closely associated with private savings rates. Significantly, banking development -as measured by bank loans to private enterprises divided by GDP -when combined with stock market liquidity predicts future rates of growth, capital accumulation, and productivity growth when entered together in regressions. The authors determine that these results are consistent with views that (1)financial markets and institutions provide important services for long-run growth, and (2)stock markets and banks provide different financial services.

Scaling of the distribution of price fluctuations of individual companies.

Abstract: We present a phenomenological study of stock price fluctuations of individual companies. We systematically analyze two different databases covering securities from the three major U.S. stock markets: ~a! the New York Stock Exchange, ~b! the American Stock Exchange, and ~c! the National Association of Securities Dealers Automated Quotation stock market. Specifically, we consider~i! the trades and quotes database, for which we analyze 40 million records for 1000 U.S. companies for the 2-yr period 1994‐95; and ~ii! the Center for Research and Security Prices database, for which we analyze 35 million daily records for approximately 16 000 companies in the 35-yr period 1962‐96. We study the probability distribution of returns over varying time scales Dt, where Dt varies by a factor of ’10 5 , from 5 min up to ’4 yr. For time scales from 5 min up to approximately 16 days, we find that the tails of the distributions can be well described by a power-law decay,

The London Stock Exchange : a history

Abstract: Introduction From Market to Exchange, 1693-1801 From Money to Capital, 1801-51 From Domestic to International, 1850-1914 Shattered Dominance: The First World War, 1914-18 Challenges and Opportunities, 1919-39 The Changing Marketplace between Wars New Beginnings: The Second World War Recovery and Crisis, 1945-9 Drifting towards Oblivion, 1950-9 Failing to Adjust, 1960-9 Prelude to Change, 1970-9 Big Bang Black Hole Conclusion

The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?

Abstract: Stock prices move together more in low-income economies than in high-income economies. This finding is clearly not due to market size differences, and is only partially explained by slightly higher fundamentals correlation in low-income economies. However, measures of a country?s institutionalized respect for property rights do appear to explain these differences. We conjecture that weak private property rights impede informed trading and increase systematic noise trader risk. We also conjecture that, in countries that protect public investors poorly from corporate insiders, intercorporate income shifting may make firm-specific information less useful to risk arbitrageurs and therefore impede its capitalization into stock prices. Although our tests support these conjectures to some extent, we invite other explanations of our main finding.

Financial information on the Internet: a survey of the homepages of Austrian companies

Abstract: This paper analyses the use of the Internet to present financial information by Austrian companies listed in the most liquid market segment of the Vienna Stock Exchange. The study covers two points in time, end of December 1997 and 1998, respectively. The scores of the companies are analysed across firms and over time, and Austrian firms' scores are compared to those of the German DAX 30 companies. Hypotheses related to the costs and benefits of information are tested. The results show for Austria that larger companies and companies with higher percentage of free float score higher.

Wishes, expectations and actions: a survey on price formation in election stock markets

Abstract: With error-prone and biased individual traders, can markets aggregate trader information and produce efficient outcomes? We review election stock market evidence that suggests this does happen. Individual traders appear biased and error-prone consistently, yet these markets prove quite efficient in predicting election outcomes. We also review work which documents comparable, but substantially different, phenomena in related laboratory markets. In addition, we report the results from a new laboratory session which shows how we can create particular biases that mirror those in election stock markets. Finally, we discuss how combined laboratory and field experiments can help us understand trader/market interactions.

The Informational Role of Stock and Option Volume

Abstract: This paper analyzes the intraday interdependence of price movements and order flows for actively traded NYSE stocks and their CBOE-traded options. Stock net-buy volume (buyer-initiated volume minus seller-initiated volume)has strong predictive ability for subsequent stock and option returns, but call or put net-buy volume has little predictive ability. Furthermore, stock returns lead option returns more than they lag even after controlling for net-buy volume. Therefore, our results indicate that order flows in the stock market are informative but order flows in the option market are not, and suggest that informed investors submit trades primarily in the stock market rather than in the option market. There is also some evidence for the non-informational linkage between the two markets. Stock net-buy volume is positively (negatively) related to lagged call (put) returns, suggesting that option dealers dynamically hedge their outstanding short option positions when the option deltas change. However, call or put net-buy volume is not correlated with stock net-buy volume or lagged stock returns, suggesting that option traders do not use options for hedging or at least do not readjust their hedged positions frequently.

The Information-Technology Revolution and the Stock Market

Abstract: Technological progress comes in waves. The British Industrial Revolution ( 1760 – 1850) ushered in Cort’s puddling and rolling process for making iron, Crompton’s mule for spinning cotton, and the Watt steam engine. The Second Industrial Revolution ( 1890 – 1930) witnessed the rise of electricity, the internal-combustion engine, and the chemical industry. The birth of information technology (IT) may herald the start of a Third Industrial Revolution. A new technology or product is often developed by the single entrepreneur who initially finds it hard to get funds, develop the product, and find customers. But if the product is good, customers eventually line up, and investors flock in. Other firms then move in to make the product and may drive the innovator out or acquire him. Whether he reaches the initial public offering (IPO) stage or is acquired by a listed firm, though, it takes time for the innovator to add value to the stock market. Indeed, the innovation may, at first, reduce the market’s value because some firms, usually large or old, will cling to old technologies that have lost their momentum. Figure 1 plots the market value of U.S. equity relative to GDP. This paper argues that (a) the market declined in the late 1960’s because it felt that the old technologies either had lost their momentum or would give way to IT, and that (b) IT innovators boosted the stock market’s value only in the 1980’s. If the stock market provides a forecast of future events, then the recent dramatic upswing represents a rosy estimate about growth in future profits for the economy. This translates into a forecast of higher output and productivity growth, holding other things equal (such as capital’s share

Number of Shareholders and Stock Prices: Evidence from Japan

Abstract: Merton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unitthe number of shares in a "round lot"-which facilitates trading in the stock by small investors. We find that a reduction in the minimum trading unit greatly increases a firm's base of individual investors and its stock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an increase in the number of shareholders.

Is Accounting Information Value Relevant in the Emerging Chinese Stock Market

Abstract: This study provides an empirical examination of whether domestic investors in the Chinese stock market perceive accounting information based on Chinese GAAP to be useful in stock valuation. The study is motivated by the market-based value relevance literature in the U.S. and by the recent development of accounting and stock markets in China. Using a sample of all listed firms in the Shanghai and Shenzhen Stock Exchanges from 1991 to 1997 with available data, we obtain evidence of value relevance of accounting information in China based on a return and a price model. Specifically, we address three research questions in this study. First, we document that accounting information is value relevant in the Chinese market according to either the pooled cross-section and time-series regressions or the year-by-year regressions. Secondly, we further examine whether value relevance changes in a predictable manner with respect to four factors including positive vs. negative earnings, firm size, earnings persistence, and percentage of public holding. Finally, this study finds that the Chinese stock market perceives accounting information to be more value relevant for firms issuing both A- and B-shares than for firms issuing only A-share. Collectively, in this study, we report fairly convincing evidence that accounting information is value relevant to investors in the Chinese market despite the young age of the market and the perception of inadequate accounting and financial reporting in China. The implications of our results are discussed in the paper.

Debt-Equity Hybrid Securities

Abstract: Trust preferred stock, first issued in 1993, was engineered to be treated as preferred stock for financial statement purposes and as debt for tax purposes (i.e., payments on trust preferred stock are deductible by the issuer). Our analyses exploit the features of trust preferred stock to shed light on three issues: 1) the extent to which firms incur costs to manage the balance sheet classification of a security; ii) the magnitude of tax benefits, if any, associated with leverage increasing capital structure decisions, and iii) the extent to which investor-level taxation inmposes implicit taxes on securities.

External reporting of accounting and financial information via the Internet in Spain

Abstract: This paper describes the current (July 1998) level of usage of Internet communication technologies by Spanish quoted companies for communication of financial and other information to interested parties. First, in order to place the communication activity in context, the current extent of Internet access in Spain is described. Second, a study of the websites which have been established by Spanish companies quoted on the Madrid Stock Exchange is reported. Finally, the paper discusses the actual and potential development of the Internet as a means of establishing ‘corporate dialogue’ (Spaul, 1997) with stakeholders.

Neural networks for technical analysis: a study on klci

Abstract: This paper presents a study of artificial neural nets for use in stock index forecasting. The data from a major emerging market, Kuala Lumpur Stock Exchange, are applied as a case study. Based on the rescaled range analysis, a backpropagation neural network is used to capture the relationship between the technical indicators and the levels of the index in the market under study over time. Using different trading strategies, a significant paper profit can be achieved by purchasing the indexed stocks in the respective proportions. The results show that the neural network model can get better returns compared with conventional ARIMA models. The experiment also shows that useful predictions can be made without the use of extensive market data or knowledge. The paper, however, also discusses the problems associated with technical forecasting using neural networks, such as the choice of "time frames" and the "recency" problems.

Contrarian and Momentum Strategies in Germany

Abstract: Two traditional methods of managing equity portfolios are investing based on price momentum and value-based contrarian investing. These strategies may be motivated by a behavioral theory of under- and overreaction to news or by empirical research, mostly for the NYSE, that has found persistence in price movements over short horizons and reversion to the mean over longer horizons. However, the apparent success of these strategies may be due to institutional factors and the mismeasurement of risk, or it may result from data mining. For these reasons, we studied all major German companies listed on the Frankfurt Stock Exchange for the three decades between 1961 and 1991. The dynamics of stock prices in Frankfurt are remarkably similar to New York. The data suggest that equity prices reflect investor forecasts of company profits that are predictably wrong.

The usefulness of earnings and book value for equity valuation in emerging capital markets : evidence from listed companies in the people's republic of China

Abstract: This paper examines the relative value relevance in equity valuation of two sets of accounting information of listed Chinese companies which issued the so-called B shares to foreign investors on the Chinese stock exchanges. These firms are required to prepare two sets of financial statements: one based on China's accounting regulations (domestic GAAPs) and the other based on International Accounting Standards (IASs). The study adopted the Ohlson (1995) model and used the Davidson-MacKinnon J-test to assess which one of these two competing sets of accounting information is more closely associated with the share prices. The results showed that earnings and book value reported based on IASs have greater information content than those based on domestic GAAPs. The results of yearly regression analysis generally suggested that the explanatory power of these earnings and book values for share prices increased over time.

Monetary environments and international stock returns

Abstract: Previous research documents that US stock returns are related to the US monetary environment. The focus of this paper is to determine whether stock returns in foreign markets are associated with both local and US monetary environments. Consistent with the US market results, we find that foreign stock returns are generally higher in expansive US and local monetary environments than they are in restrictive environments. Further, these higher returns are generally not accompanied by increases in risk. Interestingly, several of the stock markets are more strongly related to the US monetary environment than to local monetary conditions. For seven of the 15 foreign countries examined, the local and US monetary environment explain 4% or more of the variation in monthly stock returns.

Online auctions

Abstract: Auctions on the Internet can involve not only consumers, but also businesses. They can form dynamically and enable the exchange of goods much as stock exchanges manage the buying and selling of securities. But because auctions have a wide scope and a short lifetime, the opportunistic behavior needed for successful interaction requires agents to both participate in and manage auctions. The article focuses on the use of software agents in such Internet based auctions.

Equity ownership structure, risk taking, and performance : an empirical investigation in Turkish listed companies

Abstract: The paper describes the main characteristics of ownership structure of the Turkish nonfinancial firms listed on the Istanbul Stock Exchange (ISE) and examines the impact of ownership structure on performance and risk-taking behavior of Turkish firms. Turkish corporations can be characterized as highly concentrated, family owned firms attached to a group of companies generally owned by the same family or a group of families. Ownership structure is defined along two attributes: concentration and identity of the owner(s). We conclude that there is a significant impact of ownership structure -ownership concentration and ownership mix- on both performance and risk-taking behavior of Turkish firms. Higher concentration leads to better market performance. Family owned firms seem to have lower performance with lower risk. While firms with foreign ownership display better performance, government owned firms have lower accounting, but higher market performance with high risk.

The relationship between stock prices and exchange rates: Evidence from Canada

Abstract: This paper examines the relationship between stock prices and exchange rates in Canada. Although there have been many empirical studies, there is neither a theoretical nor an empirical consensus on the relationship between the two variables. This paper uses the monthly Toronto Stock Exchange 300 Index and the monthly bilateral exchange rates of the Canadian dollar to the U.S. dollar for the period from 1973:1 to 1996:12. It is found that two financial variables are cointegrated by the EngleGranger two-step cointegration test. The results show that stock prices do not have great influence on exchange rates either in the long run or in the short run. However, domestic currency devaluation has a significant positive effect on stock prices in the long run but has an insignificant negative effect on stock prices in the short run. In other words, depreciation of the Canadian dollar increases the competitiveness of export markets, thus increases share prices of firms in the long run. Therefore, it can be said that there is one-way interaction from exchange rates to stock prices in the long run but insignificant interaction between exchange rates and stock prices in the short run in the case of Canada.

Government share ownership, investment opportunity set and corporate policy choices in China

Abstract: This study, using pooled cross-sectional observations of companies listed on the Shanghai Stock Exchange from 1990 to 1995, examines the relationship between government ownership of shares, growth opportunities measured in terms of the investment opportunity set (IOS) and corporate policy decisions. IOS is measured in terms of three ratios; market value of the firm to book value of assets, market value of equity to book value of equity and the earnings price ratio. Corporate policy choices are defined in terms of leverage and dividend policies. Government ownership is found to be positively associated with debt financing and dividend policy. Consistent with prior studies, IOS is found to be negatively associated with debt financing and dividend payments.

Did the Asian Financial Crisis Scare Foreign Investors Out of Japan

Abstract: Foreigners became net sellers of Japanese equities during the Asian financial crisis in 1997. In this study, I examine whether this shift in aggregate foreign portfolio investment activity in Japan exacerbated the effect of the crisis on markets, or whether it simply reflected positive feedback trading behavior. The data draws from weekly reports to the Tokyo Stock Exchange of aggregate purchases and sales of Japanese equities by foreigners and local institutional and individual investors. I find evidence of consistent positive-feedback trading before and during the Asian crisis among foreign investors, while Japanese banks, financial institutions, investment trusts and companies were aggressive contrarian investors. There is no evidence that this trading activity by foreigners destabilized the markets during the crisis.

Leverage Ratios, Industry Norms, and Stock Price Reaction: An Empirical Investigation of Stock-for-Debt Transactions

Abstract: In this paper, I extend the stock-for-debt research by investigating whether stock value is influenced by how a firm changes its leverage ratio in relationship to its industry leverage ratio norm. I find that announcement-period stock returns for firms moving "away from" industry debt-to-equity norms are significantly more negative than returns for firms moving "closer to" these norms. This finding is consistent with optimal capital structure theory if industry debt-to-equity norms are reasonable approximations of wealth maximizing leverage ratios.