Showing papers on "Stock exchange published in 2004"

Talking Trash: Legitimacy, Impression Management, and Unsystematic Risk in the Context of the Natural Environment

Abstract: Applying institutional theory, we argue that environmentally legitimate firms incur less unsystematic stock market risk than illegitimate firms. Firms earn environmental legitimacy when their performance with respect to the natural environment conforms to stakeholders' expectations. This relationship was supported with the analysis of media reports and stock prices of 100 firms over a five-year period. The analysis also showed that firms with low environmental legitimacy can attenuate this effect by expressing commitment to the natural environment.

Market Valuation and Merger Waves

Abstract: Does valuation affect mergers? Data suggest that periods of stock merger activity are correlated with high market valuations. The naive explanation that overvalued bidders wish to use stock is incomplete because targets should not be eager to accept stock. However, we show that potential market value deviations from fundamental values on both sides of the transaction can rationally lead to a correlation between stock merger activity and market valuation. Merger waves and waves of cash and stock purchases can be rationally driven by periods of over- and undervaluation of the stock market. Thus, valuation fundamentally impacts mergers.

Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation

Abstract: We document a robust cross-sectional positive association across industries between a measure of the economic efficiency of corporate investment and the magnitude of firmspecific variation in stock returns This finding is interesting for two reasons, neither of which is a priori obvious First, it adds further support to the view that firm-specific return variation gauges the extent to which information about the firm is quickly and accurately reflected in share prices Second, it can be interpreted as evidence that more informative stock prices facilitate more efficient corporate investment CORPORATE CAPITAL INVESTMENT should be more efficient where stock prices are more informative Informed stock prices convey meaningful signals to management about the quality of their decisions They also convey meaningful signals to the financial markets about the need to intervene when management decisions are poor Corporate governance mechanisms, such as shareholder lawsuits, executive options, institutional investor pressure, and the market for corporate control, depend on stock prices Where stock prices are more informative, these mechanisms induce better corporate governance—which includes more efficient capital investment decisions Our objective in this paper is to examine empirically whether capital investment decisions are indeed more efficient where stock prices are more informative To do this, we require a measure of the efficiency of investment and a measure of the informativeness of stock prices

Informed Trading in Stock and Option Markets

Abstract: We investigate the contribution of option markets to price discovery, using a modification of Hasbrouck’s (1995) “information share” approach. Based on five years of stock and options data for 60 firms, we estimate the option market’s contribution to price discovery to be about 17% on average. Option market price discovery is related to trading volume and spreads in both markets, and stock volatility. Price discovery across option strike prices is related to leverage, trading volume, and spreads. Our results are consistent with theoretical arguments that informed investors trade in both stock and option markets, suggesting an important informational role for options. INVESTORS WHO HAVE ACCESS to private information can choose to trade in the stock market or in the options market. Given the high leverage achievable with options and the built-in downside protection, one might think the options market would be an ideal venue for informed trading. If informed traders do trade in the options market, we would expect to see price discovery in the options market. That is, we would expect at least some new information about the stock price to be reflected in option prices first. Establishing that price discovery straddles both the stock and options markets is important for several reasons. In a frictionless, dynamically complete market, options would be redundant securities. This paper contributes to the understanding of why options are relevant in actual markets, by providing the first unambiguous evidence that stock option trading contributes to price discovery in the underlying stock market. Further, we document that the level

The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices

Abstract: We investigate the extent to which the trading and trade-generating activities of three informed market participants -- financial analysts, institutional investors, and insiders -- influence the relative amount of firm-specific, industry-level and market-level information impounded into stock prices, as measured by stock return synchronicity. We find that stock return synchronicity is positively associated with analyst forecasting activities, consistent with analysts increasing the amount of industry-level information in prices through intra-industry information transfers. In contrast, stock return synchronicity is inversely related to insider trades, consistent with these transactions conveying firm-specific information. Supplemental tests show that insider and institutional trading accelerate the incorporation of the firm-specific component of future earnings news into prices alone, while analyst forecasting activity accelerates both the industry and firm-specific component of future earnings news. Our results suggest that all three parties influence the firm's information environment, but the type of price-relevant information conveyed by their activities depends on each party's relative information advantage.

Do Stock Price Bubbles Influence Corporate Investment

Abstract: Building on recent developments in behavioral asset pricing, we develop a model in which an increase in the dispersion of investor beliefs under short-selling constraints predicts a bubble, or a rise in a stock's price above its fundamental value. Our model predicts that managers respond to bubbles by issuing new equity and increasing capital expenditures. We test these predictions, as well as others, using the variance of analysts' earnings forecasts - a proxy for the dispersion of investor beliefs - to identify the bubble component in Tobin's Q. When comparing firms traded on the New York Stock Exchange with those traded on NASDAQ, we find that our model successfully captures key features of the technology boom of the 1990s. We obtain further evidence supporting our model by using a panel-data VAR framework. We find that orthogonalized shocks to dispersion have positive and statistically significant effects on Tobin's Q, net equity issuance, and real investment - results that are consistent with the model's predictions.

Measuring the Information Content of Stock Trades

Abstract: This paper examine empirically the relation between trades and quote changes for stocks trades in order-driven marketEstimates for samples of Shanghai Stock Exchange and Shenzhen Stock Exchange issues suggest:the price impact of trades is positive and persistent,this means the information content of trades is substantial;Large trades convey more information than small trades;Information asymmetries are more significant for small firms

The Cross-Section of Expected Trading Activity

Abstract: This paper studies cross-sectional variations in stock trading activity for a comprehensive sample of NYSE/AMEX and Nasdaq stocks over a period of thirty-six years. Our theoretical framework indicates that trading activity depends on the extent of liquidity trading, the mass of informed agents, and dispersion of opinion about the stock's fundamental value. We further postulate that liquidity or noise trading depends both on a stock's visibility and on portfolio rebalancing needs triggered by past stock price performance. We use size, firm age, price, and the book-to-market ratio as proxies for a firm's visibility. The mass of informed agents is proxied by the number of analysts following the stock, while analyst forecast dispersion, systematic risk, and firm leverage proxy for divergence of opinion. Past return is by far the most significant predictor of stock turnover. Forecast dispersion and systematic risk also play important roles in predicting the cross-section of expected trading activity. Stocks that have performed well in a given year experience aggressive buying pressure in the subsequent year, which points to the presence of momentum investing. Overall, the results support theories of trading based on differences of opinion and stock visibility.

Options and the Bubble

Abstract: Many believe that a bubble was behind the high prices of Internet stocks in 1999-2000, and that short-sale restrictions prevented rational investors from driving Internet stock prices to reasonable levels. Using intraday options data from the peak of the Internet bubble, we find no evidence that short-sale restrictions affected Internet stock prices. Investors could also cheaply short synthetically using options. Option strategies could also permit investors to mitigate synchronization risk. During this time, information was discovered in the options market and transmitted to the stock market, suggesting that the bubble could have been burst by options trading.

Public information arrival and volatility of intraday stock returns

Abstract: This study employs firm-specific announcements as a proxy for information flows and investigates the information–volatility relation using high-frequency data from the Australian Stock Exchange. Our analysis reveals a positive and significant impact of the arrival rate of the selected news variable on the conditional variance of stock returns, even after controlling for the potential effects of trading volume and high opening volatility. Furthermore, the inclusion of the news variable in the conditional variance equation of the generalized autoregressive conditional heteroscedastic model also reduces volatility persistence, especially with intraday data. Combined with the evidence that news arrivals display a very strong pattern of autocorrelation, our results are consistent with the Mixture of Distribution Hypothesis, which attributes conditional heteroscedasticity of stock returns to time-dependence in the news arrival process.

International Convergence of Accounting Practices: Choosing between IAS and US GAAP

Abstract: This study examines reporting practices of a sample of foreign listed and domestic-only listed companies from the United Kingdom, France, Germany, Japan and Australia to determine the extent to which companies voluntarily use “international” standards. Two types of use of non-national standards in the consolidated accounts presented to the public are considered: adoption of “international” standards instead of national standards, and supplementary use where “international” standards are used in conjunction with national standards. “International” standards are defined as US GAAP or IAS (now IFRS). The study tests for a preference for either set of standards and considers the relationship of choice of regime with firm attributes. The results show significant voluntary use of “international” standards in all five countries and among foreign listed and domestic-only listed companies. Companies using “international” standards are likely to be larger, have more foreign revenue and to be listed on one or more foreign stock exchanges. US GAAP is the predominant choice, but IAS are used by many firms in Germany and some in Japan. Firms listed in the United States' regulated markets (NYSE and NASDAQ) are more likely to choose US GAAP, but companies traded in the OTC market often select IAS. The study demonstrates for managers and regulators that there is considerable support for “international” standards, and that choice of IAS or US GAAP relates to specific firm characteristics which differ according to a firm's country of origin. Most use of “international” standards reflects individual countries' institutional frameworks, confirming the key role of national regulators and standard setters in assisting companies to achieve more comparable international reporting.

Random matrix theory analysis of cross correlations in financial markets.

Abstract: We confirm universal behaviors such as eigenvalue distribution and spacings predicted by random matrix theory (RMT) for the cross correlation matrix of the daily stock prices of Tokyo Stock Exchange from 1993 to 2001, which have been reported for New York Stock Exchange in previous studies. It is shown that the random part of the eigenvalue distribution of the cross correlation matrix is stable even when deterministic correlations are present. Some deviations in the small eigenvalue statistics outside the bounds of the universality class of RMT are not completely explained with the deterministic correlations as proposed in previous studies. We study the effect of randomness on deterministic correlations and find that randomness causes a repulsion between deterministic eigenvalues and the random eigenvalues. This is interpreted as a reminiscent of "level repulsion" in RMT and explains some deviations from the previous studies observed in the market data. We also study correlated groups of issues in these markets and propose a refined method to identify correlated groups based on RMT. Some characteristic differences between properties of Tokyo Stock Exchange and New York Stock Exchange are found.

Contagion in financial markets after september 11: myth or reality?

Abstract: Major global events can lead to a change in the cross-country correlation of assets. Using stock prices from 25 economies, we test whether the terrorist attack in the United States on September 11, 2001, resulted in a contagion—an increase in correlation across global financial markets. Unlike prior works on contagion, we model the intrinsic heteroskedasticity. Our results indicate that international stock markets, particularly in Europe, responded more closely to U.S. stock market shocks in the three to six months after the crisis than before. Our evidence suggests that the benefits of international diversification in times of crisis are substantially diminished.

The adoption of “Western” management accounting/controls in China's state-owned enterprises during economic transition

Abstract: This study explores the influences on the adoption of ‘‘Western’’ management accounting/control practices by China’s state-owned enterprises (SOEs). This topic is important given the potential for such practices to affect SOE operations in the midst of China’s continued privatization programme, and the continued opening of its markets to competition. In-depth interviews were conducted with managers at four SOEs and two of their joint ventures. These interviews indicated increased use of a range of Western management accounting/controls in the SOEs. They also shed light on the factors that influenced the level of adoption. These findings were used to refine a survey instrument for data collection from 82 other SOEs. The survey indicated significant and predicted influences from use of limited-term employment contracts, joint venture experience, stock exchange listing, and the availability of training. # 2003 Elsevier Ltd. All rights reserved.

Governance and performance revisited

Abstract: Using rich and accurate data from Oslo Stock Exchange firms, we find that corporate governance matters for economic performance, insider ownership matters the most, outside ownership concentration destroys market value, direct ownership is superior to indirect, and that performance decreases with increasing board size, leverage, dividend payout, and the fraction of non‐voting shares These results persist across a wide range of single‐equation models, suggesting that governance mechanisms are independent and may be analyzed one by one rather than a bundle In contrast, our findings depend on the performance measure used and on the choice of instruments in simultaneous equations The lack of significant relationships in tests allowing for endogeneity may not reflect optimal governance, but rather an underdeveloped theory of how governance and performance interact

Herding in the Italian Stock Market: A Case of Behavioral Finance

Abstract: This article studies the herding effect in the capital markets. Using data from the Italian Stock Exchange, the authors test for the presence of herding as described in Christie and Huang [1995], Chang, Cheng, and Khorana [2000], and Hwang and Salmon [2001]. The tests support Christie and Huang's conclusions that herding is present in extreme market conditions.

Order Imbalances and Market Efficiency: Evidence from the Taiwan Stock Exchange

Abstract: Data from the Taiwan Stock Exchange identify the originator of each submitted order, and there are no designated dealers or specialists. We study marketable order imbalances, i.e., the net order flow resulting from trades that demand immediacy. We distinguish imbalances by trader type (individuals, domestic institutions, foreign institutions) and by the usual size of each trader's order. Day-to-day persistence in order imbalance is strongest for small foreign institutions and weakest for large individual traders. Such persistence emanates both from splitting orders over time and from herding, and there is little evidence that aggregate price pressures from such persistence last beyond a trading day, indicating that de facto market making is quite effective. We attempt to discern which types of traders are de facto liquidity providers, which are likely to be informed, and which trade for liquidity reasons. The evidence indicates that all trader classes are successful market makers, large domestic institutions conduct the most informed trades, and large individuals are noise or liquidity traders.

What really causes large price changes

Abstract: We study the cause of large fluctuations in prices in the London Stock Exchange This is done at the microscopic level of individual events, where an event is the placement or cancellation of an order to buy or sell We show that price fluctuations caused by individual market orders are essentially independent of the volume of orders Instead, large price fluctuations are driven by liquidity fluctuations, variations in the market's ability to absorb new orders Even for the most liquid stocks there can be substantial gaps in the order book, corresponding to a block of adjacent price levels containing no quotes When such a gap exists next to the best price, a new order can remove the best quote, triggering a large midpoint price change Thus, the distribution of large price changes merely reflects the distribution of gaps in the limit order book This is a finite size effect, caused by the granularity of order flow: In a market where participants placed many small orders uniformly across prices, such large price fluctuations would not happen We show that this explains price fluctuations on longer timescales In addition, we present results suggesting that the risk profile varies from stock to stock, and is not universal: lightly traded stocks tend to have more extreme risks

Portfolio optimization with Markov-modulated stock prices and interest rates

Abstract: A financial market with one bond and one stock is considered where the risk free interest rate, the appreciation rate of the stock and the volatility of the stock depend on an external finite state Markov chain. We investigate the problem of maximizing the expected utility from terminal wealth and solve it by stochastic control methods for different utility functions. Due to explicit solutions it is possible to compare the value function of the problem to one where we have constant (average) market data. The case of benchmark optimization is also considered.

Tests of the random walk hypothesis for equity markets: evidence from China, Hong Kong and Singapore

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.

Demographics, Stock Market Flows, and Stock Returns

Abstract: This paper studies the link between population age structure, net outflows (dividends plus repurchases less net issues) from the stock market, and stock market returns in an overlapping generations framework. I find support for the traditional lifecycle models—the outflows from the stock market are positively correlated with the changes in the fraction of old people (65 and over) and negatively correlated with the changes in the fraction of middle-aged people (45 to 64). Changes in population age structure also add significant explanatory power to equity premium regressions. The population structure adds to the predictive power of regressions involving the investment/savings rate for the U.S. economy. Finally, international demographic changes have some power in explaining international capital flows.

The Timeliness of Income Recognition by European Companies: An Analysis of Institutional and Market Complexity

Abstract: This study examines international differences in the asymmetric timeliness of accounting earnings by modelling international exposure to different jurisdictions as a firm-specific effect, using an index of regulatory complexity that relates to conditions in each of the capital markets in which the firm's equity is listed. The companies investigated are those with shares cross-listed on European stock exchanges, some of which are also listed in New York. Variation across jurisdictions and markets with respect to earnings timeliness and conservatism can be explained in part as an interaction of market effects and regulatory effects, with some evidence of opposition between the two, and the sensitivity of earnings to stock price changes shows a common, converging trend towards greater accounting conservatism in Europe.

Investor herding during financial crisis: A clinical study of the Jakarta Stock Exchange

Abstract: Jakarta Stock Exchange (JSX) data is used to analyse the investment patterns of foreign and domestic investors for evidence of herding and positive feedback trading before, during, and after the 1997 Asian crisis. Results indicate that both investor classes herd, foreigners herd more than locals, and foreign herding increases following the onset of the crisis. Domestic herding does not increase during the crisis, and has diminished subsequently. Domestic herding appears positively related to firm size, but there is very little evidence of size-conditioned foreign herding. There is no evidence of positive feedback trading among either class of investor, either at the market or the individual stock level. Overall, the evidence suggests that investor behaviour was not inherently destabilizing and positive feedback trading did not exacerbate stock market movements in Indonesia at the time of the 1997 Asian crisis.