Showing papers on "Stock exchange published in 2000"

Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices

Abstract: A stock market liberalization is a decision by a country's government to allow foreigners to purchase shares in that country's stock market. On average, a country's aggregate equity price index experiences abnormal returns of 3.3 percent per month in real dollar terms during an eight-month window leading up to the implementation of its initial stock market liberalization. This result is consistent with the prediction of standard international asset pricing models that stock market liberalization may reduce the liberalizing country's cost of equity capital by allowing for risk sharing between domestic and foreign agents. A stock market liberalization is a decision by a country's government to allow foreigners to purchase shares in that country's stock market. Standard international asset pricing models (JAPMs) predict that stock market liberalization may reduce the liberalizing country's cost of equity capital by allowing for risk sharing between domestic and foreign agents (Stapleton and Subrahmanyan (1977), Errunza and Losq (1985), Eun and Janakiramanan (1986), Alexander, Eun, and Janakiramanan (1987), and Stulz (1999a, 1999b)). This prediction has two important empirical implications for those emerging countries that liberalized their stock markets in the late 1980s and early 1990s. First, if stock market liberalization reduces the aggregate cost of equity capital then, holding expected future cash flows constant, we should observe an increase in a country's equity price index when the market learns that a stock market liberalization is going to occur. The second implication is

Equity markets and growth: Cross-country evidence on timing and outcomes, 1980–1995

Abstract: The rapid expansion of organized equity exchanges in both emerging and developed markets has prompted policymakers to raise important questions about their macroeconomic impact, yet the need to focus on recent data poses implementation difficulties for econometric studies of dynamic interactions between stock markets and economic performance in individual countries. This paper overcomes some of these difficulties by applying recent developments in the analysis of panels with a small time dimension to estimate vector autoregressions for a set of 47 countries with annual data for 1980–1995. After describing recent theories on the role of stock markets in growth and considering a pure cross-sectional empirical approach, our panel VARs show leading roles for stock market liquidity and the intensity of activity in traditional financial intermediaries on per capita output. The findings underscore the potential gains associated with developing deep and liquid financial markets in an increasingly global economy.

Why Do Firms Repurchase Stock

Abstract: In this paper, I investigate the relations between stock repurchases and distribution, investment, capital structure, corporate control, and compensation policies over the 1977-96 period. I allow the significance of each motive to change over time to account for adjustments in the percentage of firms influenced by each motive. I find that, throughout the sample period, firms repurchase stock to take advantage of potential undervaluation and, in many periods, to distribute excess capital. However, firms also repurchase stock during certain periods to alter their leverage ratio, fend off takeovers, and counter the dilution effects of stock options.

Stock Market Wealth and Consumption

Abstract: This paper explores the link between changes in the aggregate value of corporate stock and changes in consumer spending. It presents data on the distribution of corporate stock ownership based on the 1998 Survey of Consumer Finances. It also uses time-series evidence on the comovement of stock market wealth and various categories of consumer spending to calibrate "the wealth effect." It concludes that in the year after a change in stock market values, consumer spending is likely to rise by between one and two cents for each dollar increase in the value of corporate stock.

Stock market openings: Experience of emerging economies

Abstract: This article is an exploratory examination of the benefits and risks associated with opening of stock markets. Specifically, we estimate changes in the level and volatility of stock returns, inflation, and exchange rates around market openings. We find that stock returns increase immediately after market opening without a concomitant increase in volatility. Stock markets become more efficient as determined by testing the random walk hypothesis. We find no evidence of an increase in inflation or an appreciation of exchange rates. If anything, inflation seems to decrease after market opening as do the volatility of inflation and volatility of exchange rates. Copyright 2000 by University of Chicago Press.

Focusing the Corporate Product: Securities Analysts and De-diversification

Abstract: The issue of corporate control is examined through an analysis of the de-diversification activity of publicly held American firms from 1985 to 1994. Prominent accounts of such behavior depict newly powerful shareholders as having demanded a dismantling of the inefficient, highly diversified corporate strategies that arose in the late 1950s and the 1960s. This paper highlights an additional factor that spurred such divestiture: the need to present a coherent product identity in the stock market. It is argued that because they straddle the industry categories that investors—and securities analysts, who specialize by industry—use to compare like assets, diversified firms hinder efforts at valuing their shares. As a result, managers of such firms face pressure from analysts to dediversify so that their stock is more easily understood. Results indicate that, in addition to such factors as weak economic performance, de-diversification is more likely when a firm's stock price is low and there is a significant mi...

The Asymptotic Distribution of Extreme Stock Market Returns

Abstract: This article presents a study of extreme stock market price movements. According to extreme value theory, the form of the distribution of extreme returns is precisely known and independent of the process generating returns. Using data for an index of the most traded stocks on the New York Stock Exchange for the period 1885-1990, it is shown empirically that the extreme returns obey a Frechet distribution.

Financial packaging of IPO firms in China

Abstract: This paper examines the earnings patterns of initial public offering (IPO) firms in China to shed light on the role of earnings management in the "financial packaging" of Chinese state-owned enterprises (SOEs) for public listing.1 Our sample contains the entire population of 83 Chinese SOEs that issued to foreign investors B-Shares in Chinese domestic stock exchanges or H-Shares in the Hong Kong stock exchange during

Demand Curves for Stocks Do Slope Down: New Evidence from an Index Weights Adjustment

Abstract: Weights in the Toronto Stock Exchange 300 index are determined by the market values of the included stocks' public floats. In November 1996, the exchange implemented a previously announced revision of its definition of the public float. This revision, which increased the floats and the index weights of 31 stocks, conveyed no information and had no effect on the legal duties of shareholders. Affected stocks experienced statistically significant excess returns of 2.3 percent during the event week, and no price reversal occurred as trading volume returned to normal levels. These findings support downward sloping demand curves for stocks. An obvious event with which to examine the slope of demand curves for stocks is one that changes supply. In the absence of new information, a shift in supply should not affect stock prices if demand curves for stocks are flat. Scholes (1972), using a sample of secondary equity distributions, asks whether stocks are "unique works of art" or merely abstract claims to residual cash flows with many close substitutes, as is assumed in much of finance theory. Scholes finds that the negative price impact of secondary offerings depends on the seller's identity-implying the revelation of unfavorable informationand rules out a pure supply effect. Mikkelson and Partch (1985), also using a sample of registered and unregistered secondary offerings, find weak evidence of downward sloping demand curves, but are unable to cleanly distinguish this explanation from the alternative explanation based on unfavorable information. A different class of events-additions to widely followed stock market indexes-ostensibly provides a setting where information effects should not be present. Shleifer (1986) documents a permanent price increase for stocks

Stock Prices and Exchange Rate Dynamics

Abstract: We study the long-run and short-run dynamics between stock prices and exchange rates and the channels through which exogenous shocks impact on these markets. We apply the analysis to a group of Pacific Basin countries and examine whether foreign exchange controls and the Asian financial crisis of mid 1997 affected the links between the markets. The evidence shows that the US stock market acts as a conduit through which the foreign exchange market and the local stock markets are linked. It also provides support for a close relationship between financial and economic integration. Finally, the evidence shows that the financial crisis had a temporary effect on the long-run comovement between the various markets.

Shareholding structure and corporate performance of partially privatized firms: Evidence from listed Chinese companies

Abstract: Equity ownership in a listed Chinese firm can have as many as five different classes: state-owned shares, legal-person (LP) shares, tradable A-shares, employee shares, and shares only available to foreign investors, a phenomenon that is unique to the Chinese equity market. In this paper, we investigate whether and how the corporate performance of listed Chinese firms is affected by their shareholding structure. The sample consists of all firms listed in the Shanghai Stock Exchange (SHSE) from 1991 to 1996. It is found that firm performance is positively related to the proportion of LP shares but negatively related to the proportion of shares owned by the state. Additional analyses indicate that firm performance increases with the degree of relative dominance of LP shares over state shares. Moreover, for the subsample of firms that do not have both state and LP shares, the return on equity (ROE) of firms with LP shares but no state shares is higher than that of firms with state shares but no LP shares by 3.84%, and this difference is statistically significant. On the other hand, there is little evidence in support of a positive correlation between corporate performance and the proportion of tradable shares owned by either domestic or foreign investors. These findings suggest that the ownership structure composition and relative dominance by various classes of shareholders can affect the performance of state-owned enterprise (SOE)-transformed and listed firms.

Further Evidence on the Integration of REIT, Bond, and Stock Returns

Abstract: This study examines the integration of REIT, bond, and stock returns. Cointegration and vector autoregressive models are employed to explore the causality and long-run economic linkages among these securities. Our results show that REITs behave more like stocks and less like bonds after the structural changes in the early 1990s. Overall, results suggest that the benefits of diversification by including REITs in multiasset portfolios diminish after 1992.

Embeddedness, Social Identity and Mobility: Why Firms Leave the NASDAQ and Join the New York Stock Exchange:

Abstract: Organizations derive their social identity from membership in formal groups and strive to maintain a positive social identity. When their social identity is threatened and group boundaries are permeable, organizations defect to other groups. This paper suggests that organizations receive identity-discrepant cues when in-group members defect to an out-group, but how organizations respond to such cues hinges on their social affiliations to the in-group, out-group, and defectors. A study of organizations that migrated from the NASDAQ stock market to the New York Stock Exchange reveals that strong ties to in-group members (NASDAQ members) reduced the impact of identity-discrepant cues and diminished defections. Conversely, strong ties to out-group members (NYSE members) enhanced the impact of identity-discrepant cues and increased defection. Proximity to defectors increased cross-overs—organizations followed defectors to whom they had direct ties. Implications for the study of embeddedness are outlined.

Do Banking Shocks Affect Borrowing Firm Performance? An Analysis of the Japanese Experience

Abstract: From 1990 to 1993, the typical firm on the Tokyo Stock Exchange lost more than half of its value, and banks experienced severe adverse shocks. We show that firms whose debt had a higher fraction of bank loans in 1989 performed worse from 1990 to 1993 and also invested less than other firms did. This effect holds when we control for variables that affect firm performance. We show further that exogenous shocks to banks during the negotiations leading to the Basle Accord affected bank borrowers significantly. Copyright 2000 by University of Chicago Press.

Crossing Networks and Dealer Markets: Competition and Performance

Abstract: This paper studies the interaction between dealer markets and a relatively new form of exchange, passive crossing networks, where buyers and sellers trade directly with one another We find that the crossing network is characterized by both positive ~“liquidity”! and negative ~“crowding”! externalities, and we analyze the effects of its introduction on the dealer market Traders who use the dealer market as a “market of last resort” can induce dealers to widen their spread and can lead to more efficient subsequent prices, but traders who only use the crossing network can provide a counterbalancing effect by reducing adverse selection and inventory holding costs COMPETITION BETWEEN EXCHANGES for order f low is a growing phenomenon in financial markets From London to Paris to Tel Aviv, exchanges and trading systems are introducing new trading mechanisms that compete for order f low In the United States, the SEC promulgated new rules that redefine the regulation of Alternative Trading Systems and intensify the competition between existing exchanges and new electronic markets Indeed, new electronic trading venues are cited as the reason for a decline in the value of seats on major exchanges, even though trading volumes are growing rapidly What will be the impact of new trading mechanisms on market participants and on existing dealer markets ~DMs!? In this paper we study the effect of introducing a passive call market that competes with an existing traditional DM The DM is based on competing market makers as in Nasdaq, the London Stock Exchange, the Foreign Exchange market, and the US government securities market An important benefit provided by the DM is the assurance of immediate execution An important disadvantage is the cost: the bid-ask spread, which can be substantial Traders who do not place a high value on immediacy and assured execution can try to reduce their trading costs by searching for counterparties on their own As computing and communication costs have declined, electronic communication networks have been increasingly deployed to reduce search costs, making it less costly for traders to find one another and reducing the demand for DMs

Timeliness of corporate financial reporting in emerging capital markets: empirical evidence from the zimbabwe stock exchange

Abstract: This article reports on the results of an empirical investigation of the timeliness of annual reporting by 47 non-financial companies listed on the Zimbabwe Stock Exchange. It also reports on the factors that affect timely reporting by these companies. The results of a descriptive analysis indicate that 98% of the companies in the sample reported promptly to the public (i.e., submitted their audited annual reports to the Zimbabwe Stock Exchange by the regulatory deadline). A two-stage least squares regression identified company size, profitability and company age as statistically significant explanators of the differences in the timeliness of annual reports issued by the sample companies. No evidence was found to support the monitoring costs theory argument, which suggests that highly-geared companies are timely reporters. Furthermore, the empirical data indicate that audit reporting lead time is significantly associated with the timeliness with which sample companies release their preliminary an...

Stock Option Plans for Non-Executive Employees

Abstract: We examine determinants of non-executive employee stock options outstanding, grants, and exercises for 756 firms during 1994 to 1997. We find that firms use greater stock option compensation when facing capital requirements and financing constraints. Our results are also consistent with firms using options to attract certain types of employees, provide retention incentives, and create incentives to increase firm value. After controlling for economic determinants and stock returns, option exercises are greater (less) when the firm's stock price hits 52-week highs (lows), which confirms in a broad sample the psychological bias documented by Heath, Huddart, and Lang (1999).

Imagery, Affect, and Financial Judgement

Abstract: Traditional theories of finance posit that the pricing of securities in financial markets should be done according to the quality of their underlying technical fundamentals. However, research on financial markets has tended to indicate that factors other than technical fundamentals are often used by market participants to gauge the value of securities. This phenomenon may be quite prevalent in markets for initial public offerings (IPSs), where securities lack a financial history. The imagery and affect associated with securities can be a powerful basis upon which to judge their worth. Advanced business students in a securities analysis course were asked to evaluate a number of industry groups represented on the New York Stock Exchange in terms of a set of judgmental variables. After providing imagery and affective evaluations for each industry group, the participants judged the likelihood that they would invest in companies associated with each industry. Imagery and affective ratings were highly correlated with one another and with the likelihood of investing. Judgments of performance correlated poorly to moderately with actual market performance as measured by weighted average returns for the industry groups studied. The results suggest that imagery and affect are part of a coherent psychological framework for evaluating classes of securities, but that framework may have low validity for predicting performance.

Imagery, Affect, and Financial Judgment

Abstract: Traditional theories of finance posit that the pricing of securities in financial markets should be done according to the quality of their underlying technical fundamentals. However, research on financial markets has tended to indicate that factors other than technical fundamentals are often used by market participants to gauge the value of securities. This phenomenon may be quite prevalent in markets for initial public offerings (IPOs), where securities lack a financial history. The imagery and affect associated with securities can be a powerful basis upon which to judge their worth. Advanced business students in a securities analysis course were asked to evaluate a number of industry groups represented on the New York Stock Exchange in terms of a set of judgmental variables. After providing imagery and affective evaluations for each industry group, the participants judged the likelihood that they would invest in companies associated with each industry. Imagery and affective ratings were highly correlate...

Investment Policy, Internal Financing and ownership Concentration in the UK

Abstract: This paper investigates whether investment spending of firms is sensitive to the availability of internal funds.Imperfect capital markets create a hierarchy for the different sources of funds such that investment and financial decisions are not independent.The relation between corporate investment and free cash flow is investigated using the Bond and Meghir (1994a) Euler-equation model for a panel of 240 companies listed on the London Stock Exchange over a 6 year period. This method allows for a direct test of the first-order condition of an intertemporal maximisation problem.It does not require the use of Tobin s q, which is subject to mis-measurement problems.Apart from past investment levels and generated cash flow, the model also includes a leverage factor which captures potential bankruptcy costs and the tax advantages of debt.More importantly, we investigate whether ownership concentration by class of shareholder creates or mitigates liquidity constraints.Control is expected to influence the investment financing relation for two reasons.First, due to asymmetric information, the link between liquidity and investment could be a symptom of underinvestment.Firms pass up some projects with positive net present values because of the inflated cost of external funds.Second, from an agency perspective, external funds may not be too expensive but internal funds (free cash flow) may be too inexpensive from the manager s perspective.Whereas high insider ownership concentration reduces the liquidity constraints induced by agency costs, high insider shareholding concentration increases the liquidity constraints in the case of asymmetric information.It is expected that the induced liquidity constraints due to insider ownership is substantially reduced when outside investors control a substantial share stake and have therefore an increased propensity to monitor management.When industrial companies control large shareholdings, there is evidence of increased overinvestment.This relation is strong when the relative voting power (measured by the Shapley values) of the combined equity stakes of families and industrial companies and the Herfindahl index of industrial ownership are high.This suggests that a small coalition of industrial companies is able to influence investment spending.In contrast, large institutional holdings reduce the positive link between investment spending and cash flow relation and hence suboptimal investing.Whereas there is no evidence of over- or underinvesting at low levels of insider shareholding, a high concentration of control in the hands of executive directors creates a positive investment-cash flow relation.

An Emerging Market's Reaction to Initial Modified Audit Opinions: Evidence from the Shanghai Stock Exchange*

Abstract: This study investigates the valuation effect of modified audit opinions (MAOs) on the emerging Chinese stock market. Here, the term MAO refers to both qualified opinions and unqualified opinions with explanatory notes. The latter can be considered an alternative form of a qualified opinion in China. The institutional setting in China enables us to find compelling evidence in support of the monitoring role of independent auditing as an institution. First, we find a significantly negative association between MAOs and cumulative abnormal returns after controlling for effects of other concurrent announcements. Further, results from a by-year analysis suggest that investors did not reach negative consensus about MAOs' valuation effect until the second year, exhibiting the learning process of a market without prior exposure to MAOs. Second, we do not observe significant differences between market reaction to non-GAAP- and GAAP-violation-related MAOs. Third, no significant difference is found between market reaction to qualified opinions and market reaction to unqualified opinions with explanatory notes.

Ownership, managerial control and the governance of companies listed on the Brussels stock exchange

Abstract: This paper examines how corporate control is exerted in companies listed on the Brussels Stock Exchange. There are several alternative corporate governance mechanisms which may play a role in disciplining poorly performing management: blockholders (holding companies, industrial companies, families and institutions), the market for partial control, debt policy, and board composition. Even if there is redundancy of substitute forms of discipline, some mechanisms may dominate. We find that top managerial turnover is strongly related to poor performance measured by stock returns, accounting earnings in relation to industry peers and dividend cuts and omissions. Tobit models reveal that there is little relation between ownership and managerial replacement, although industrial companies resort to disciplinary actions when performance is poor. When industrial companies increase their share stake or acquire a new stake in a poorly performing company, there is evidence of an increase in executive board turnover, which suggests a partial market for control. There is little relation between changes in ownership concentration held by institutions and holding companies, and disciplining. Still, high leverage and decreasing solvency and liquidity variables are also followed by increased disciplining, as are a high proportion of non-executive directors and the separation of the functions of CEO and chairman.

The Causal Relationship Between Real Estate and Stock Markets

Abstract: This paper examines the dynamic relationship that exists between the US real estate and S&P 500 stock markets between the years of 1972 to 1998. This is achieved by conducting both linear and nonlinear causality tests. The results from these tests provide a number of interesting observations which primarily show linear relationships to be spuriously affected by structural shifts which are inherent within the data. Linear test results generally show a uni-directional relationship to exist from the real estate market to the stock market. However, these results are not consistent with financial theory and for all sub-samples of the data. In contrast, the nonlinear causality test shows a strong unidirectional relationship running from the stock market to the real estate market, and is consistent in the presence of any structural breaks.

Executive Stock Option Exercises and Inside Information

Abstract: This paper examines whether corporate insiders use private information to time the exercises of their executive stock options. Prior to May 1991, insiders had to hold the stock they acquired through option exercise for six months. We find that exercises from this regulatory regime precede significantly positive abnormal stock returns. This suggests that insiders timed exercises so that the subsequent forced investment in the stock coincidedwith favorable price performance. By contrast, we find little evidence of the use of inside information totime exercises since the removal of the holding restriction in May 1991. When insiders can sell the acquired shares immediately, the use of private information should manifest itself as negative abnormal stock price performance following option exercise. However, only in the subsample of exercises by top managers at small firms, a tiny fraction of the full sample, do we find significantly negative post-exercise stock price performance after May 1991. Weconclude that, in most cases, insiders' potential information advantage in timing exercises is not an important issue in valuing executive stock options.

An Investigation of the Initial Voluntary Environmental Disclosures Made in Korean Semi-Annual Financial Reports

Abstract: In 1997, a group of Korean companies listed on the Korean Stock Exchange disclosed environmental information in their 1997 semi-annual financial reports, which was the first incidence of corporate social and environmental disclosure made in financial reports in Korea. The purpose of this study is to examine these initial environmental disclosures in terms of their quality and quantity and to test for possible relationships between the propensity to disclose and a variety of corporate characteristics. Content analysis is conducted to evaluate the overall standards of disclosure and then a variety of association tests are performed to determine whether the propensity to disclose is associated with selected corporate characteristics. Using a sample of disclosing and non-disclosing firms, I find that industry type and firm size are significantly associated with the propensity to disclose. When the analysis is confined within the discloser group only, financial leverage emerges as a significant explanatory variable for the level of disclosure especially in high-profile industries.

Business Creation and the Stock Market

Abstract: We claim that the stock market encourages business creation, innovation, and growth by allowing the recycling of ‘informed capital’. Due to incentive and information problems, start-ups face larger costs of going public than mature firms. Sustaining a tight relationship with a monitor (bank, venture capitalist) allows them to postpone their going public decision until profitability prospects are clearer or incentive problems are less severe. However, the earlier young firms go public, the quicker monitors’ informed capital is redirected towards new start-ups. Hence, when informed capital is in limited supply, factors that accelerate firms’ access to the stock market encourage business creation. Technological spill-overs associated with business creation and thick market externalities in the young firms segment of the stock market provide prima facie cases for encouraging young firms to go public.