Bank Work Experience Versus Political Connections: Which Matters for Bank Loan Financing?

This paper examines how bank lending decisions are affected either by executives’ connections with banks, through their former banking experience, or by their political connections with governments, using a sample of bank loans granted to Chinese listed non‐state‐owned enterprises (SOEs) from 2003 to 2010. We find that bank loans are more closely related to profitability for firms with bank connections, while firms’ political connections weaken this relationship. We further find that the influence of bank connections is more significant for firms from less supported industries or less developed regions. Furthermore, firms with bank connections are less likely to become financially distressed after the initiation of their bank loans and experience higher future stock returns, while firms with political connections experience the opposite outcome. Overall, our results indicate that in the context of a relationship‐based economy like China, firms’ connections with banks create value by alleviating information asymmetry and improving banks’ lending decisions, while political connections result in capital misallocation and subsequent deterioration in performance.     

Stock market liquidity,family ownership,and capital structure choices in an emerging country

This study examines the impact of equity liquidity and family ownership on capital structure decisions in an emerging market context. Using univariate analysis, I find a positive relationship between liquidity and leverage. Further, this study uses multivariate panel regression analysis with firm clustering, and controls for other variables. Contrary to studies on U.S. firms, I find insignificant empirical evidence that stock liquidity increases leverage for Egyptian firms. Moreover, evidence shows a significant positive relationship between family ownership and leverage. These results hold when employing the instrumental variables approach and estimating two-stage least Squares regressions to control for the endogeneity problem.     

Frequency and Motives for Stock Dividends in a Unique Environment

We investigate the possible differences in the information content of stock dividends between firms that distribute stock dividends frequently (frequent distributors) and firms that distribute stock dividends infrequently (infrequent distributors) using a unique data set from Oman where the market microstructure frictions are either absent or limited. We find that infrequent stock dividend distributors have higher postdistribution operating performance relative to frequent distributors. We also find that the illiquidity measure is significantly related to the announcement effect only for frequent stock dividend distributors, whereas short‐term performance is significantly related to the announcement effect only for infrequent distributors. Our findings indicate that infrequent stock dividends are used mainly to convey favorable private information about the firms’ future prospects, and frequent stock dividends are used to reduce stock price to an optimal trading range in order to improve trading liquidity. JEL classification: G14, G35.     

Liquidity,exchange listing,and common stock performance

The liquidity of securities—the relationship between volume of trading and changes in market price—has won increasing recognition as an element of investment strategy in recent years. Relatively high liquidity is deemed to be a desirable characteristic of a stock, especially for the institutional investor, who typically trades in large volume. Thus, firms can generally be expected to seek means of enhancing the liquidity of their shares. One of the supposed means of accomplishing this is by listing one's stock on a national securities exchange. This paper examines the relationship of common stock liquidity to both exchange listing and price behavior during major up and down movements in the market. Our conceptual and empirical analyses indicate that liquidity is linked to price behavior; and we suggest that the view held by at least some corporate officers—that exchange listing increases liquidity—may be erroneous. More specifically, it appears that when the amount of firm capitalization is taken into account, exchange listing does not result in greater stock liquidity.     

Moderating Effects of Firm Age on the Relationship between Debt and Stock Returns

This article investigates the moderating effects of firm age on the relationship between debt and stock returns. The system generalized method of moment’s results indicate that firm age has a positive moderating effect on the relationship between book debt and stock returns. The results are robust, as firm age positively moderates the relationship between market debt and stock returns. Moreover, firm age has a direct positive effect on stock returns. Results suggest that as firms grow older, they use their experience to make effective capital structure decisions (i.e., optimal debt-equity mix) to maximize debt interest-tax-shield and increase shareholders’ returns.     

The Stock Liquidity of Banks: A Comparison between Islamic and Conventional Banks in Emerging Economies

We explore the stock liquidity of Islamic banks (IBs) and matching conventional banks (CBs) in emerging economies. We find that IBs have higher stock liquidity than CBs, suggesting that investors prefer IBs' stocks and neglect what they consider to be “sin stocks” (i.e., CBs' stocks), which do not conform to their religious beliefs. We also find that the liquidity effects are particularly important for small IBs, and during the global financial crisis. This evidence is stronger in countries with less developed banking sectors and weaker bank supervision and regulation. Hence, faith-driven investors tend to value more norm-conforming stocks (i.e., IBs) during times of distress and uncertainty, and in weaker regulatory environments.     

The influence of oil price uncertainty on stock liquidity

Using high-frequency intraday data, this study provides strong empirical evidence that elevated oil price uncertainty has a significant and negative influence on stock liquidity. More specifically, the results suggest that large oil-related corporations are most affected, followed by small-listed firms more generally. Further analysis reveals that liquidity providers widen the bid-ask spreads to protect themselves during periods of high oil price uncertainty for large-listed firms, particularly those in the oil industry. These findings are robust to various measures of oil price uncertainty, different market conditions, structural break analysis and show the influence of oil price movements extends to stock liquidity.     

Is corporate governance important for regulated firms’ shareholders?: Evidence from Japanese mergers and acquisitions

This paper compares the reaction of bidders’ stock prices to acquisition announcements by regulated non-financial firms, banks, and unregulated companies in Japan. Results suggest that regulated non-financial firms do not experience a significant stock price response at merger and acquisition (M&A) announcements, although banks’ and unregulated firms’ M&A announcements are regarded favorably by the stock market. Furthermore, the effect of stock option usage and strict boards on the stock price response is weak for regulated non-financial bidders. The results provide additional evidence that regulation results in managerial decisions’ having less influence on shareholder wealth and thereby changes the firm's optimal governance structure. In contrast, the results provide no clear evidence that, for bank bidders, there is a significantly stronger or weaker relationship between governance and the stock price response to an M&A announcement than that of unregulated firms or regulated non-financial firms. The result does not support the view that regulatory monitoring weakens the effect of ordinary governance mechanisms.     

Dynamic Dependence Between Liquidity and the S&P 500 Index Futures‐Cash Basis

Roll, Schwartz, and Subrahmanyam (2007) investigate the linear relationship between stock market liquidity and index futures‐cash basis. We extend their work and examine nonlinear relationship between the two variables of interests, in particular, tail dependence. We find that the tail dependence is asymmetric and varies significantly over times. The lower tail dependence between changes in (il) liquidity measured by bid–ask spread of S&P 500 index and changes in absolute value of S&P 500 index futures‐cash basis is almost zero and the upper tail dependence is positive and significantly different from zero. The results suggest that an increase in liquidity is not always associated with a decrease in basis. However, a reduction in liquidity is significantly associated with an increase in basis. At the extreme situation, the link between changes in basis and changes in liquidity can break down. Arbitrage profits cannot be realized and hedging becomes less effective. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:327‐342, 2013     

Does the Euro affect the dynamic relation between stock market liquidity and the business cycle?

Does Eurozone equity market liquidity affect economic growth? If so, how does the Euro currency affect the dynamic relationship between growth and stock market liquidity (macro-liquidity relation) of the Eurozone? We address these questions using data from ten Eurozone countries and the UK. The findings document the predictability role of liquidity proxies on economic growth, suggesting that stock market liquidity influences economic growth. The results reveal that liquidity increases substantially after a structural break realized around the Euro's introduction in Europe, and in all countries except Portugal we find that liquidity improvement coincides with higher growth. During periods of high exchange-rate volatility between currencies (which tend to be periods of high uncertainty and economic convergence), growth becomes highly affected by stock market liquidity movements.     

Non‐Tradable Share Reform,Liquidity, and Stock Returns in China

This article studies the influence of the non‐tradable share reform in the cross‐section of stock returns in China. Prior research has generally neglected this important development in the Chinese stock market. We find that the firm‐specific illiquidity measures that reflect direct transaction costs, price impact and difficulties in trading immediacy, exhibit a positive and significant relationship with stock returns. These effects are particularly pronounced after the non‐tradable share reform. Furthermore, in the post‐reform era, portfolios with high illiquidity (i.e. high relative bid–ask spread, high Amihud illiquidity, low Amivest liquidity ratio) significantly outperform portfolios with low illiquidity, controlling for size, and book‐to‐market effects.     

Shareholder Engagement on Environmental,Social, and Governance Performance

We study behind-the-scenes investor activism promoting environmental, social, and governance (ESG) improvements by means of a proprietary dataset of a large international, socially responsible activist fund. We examine the activist’s target selection, forms of engagement, impact on ESG performance, drivers of success, and effects on the targets’ operations and value creation. Target firms are typically large and visible, perform well, and have high liquidity (stock turnover) and low ESG performance. Engagement induces ESG rating adjustments: firms with poor ex ante ESG ratings experience a ratings increase after complying with the activist’s demands, whereas firms with high ex ante ESG ratings experience a ratings decrease following the revelation of their ESG problems. Activism that is focused on environmental and social issues is more likely to succeed if targets are ESG-sensitive (i.e., they have a strong ex ante ESG profile). Successful engagements boost targets’ sales. Risk-adjusted excess stock returns (with four-factor adjustment and relative to a matched sample of non-engaged firms) of successful engagements outperform those of unsuccessful engagements by 2.7%. Results are especially strong for firms with low ex ante ESG scores. Specifically, targeted firms in the lowest ex ante ESG quartile outperform matched peers by 7.5% in the year after the end of the engagement. Our results thus suggest that the activism regarding corporate social responsibility generally improves ESG practices and corporate sales and is profitable to the activist. Taken together, we provide direct evidence that ethical investing and strong financial performance, both from the activist’s and the targeted firm’s perspective, can go hand-in-hand together.

     

Financial disclosure by SMEs listed on a semi-regulated market: evidence from the Euronext Free Market

This study investigates the financial disclosure policy of small and medium-sized enterprises listed on a stock market with very low disclosure requirements: the Free Market of the Euronext Stock Exchange. In contrast to firms listed on a regulated stock market, firms on the Free Market do not have any obligation to disclose periodic or price-sensitive information. We investigate the determinants of voluntary financial disclosure and its influence on stock liquidity. Our results suggest that firms disclose more financial information when they are likely to benefit from disclosure. Firms especially disclose when they issue equity. Voluntary disclosure also has a significant positive effect on stock liquidity, consistent with disclosure reducing information asymmetry.     

Supply Chains,Global Financial Shocks and Firm Behaviour towards Liquidity Needs

Driven by the increasingly important role of supply chains in global production, this paper studies empirical association between global credit‐market shocks and firm behaviour towards liquidity needs across countries and industries. Focusing on the adjustment of working‐capital financing, we find two pieces of supporting evidence from international firm‐level panel data covering the period 2002:I–2012:IV. First, for industries where specific investment in the input supplier–customer relationship is large, firms are more exposed to credit‐market shocks. We find that measures of global credit‐market shocks are negatively associated with trade receivables, trade payables and inventories, conditional on the level of contract intensity in the industries where firms operate. Second, firms in emerging markets are more vulnerable to credit‐market shocks than are firms in developed countries. We are also able to verify the economic significance of sales growth, operating cash flows, cash stock and firm size in the overall adjustment. Our findings highlight the importance of balance‐sheet contagion along supply chains during the 2007–09 global financial crisis.     

Stock Price Informativeness and Corporate Governance: An International Study

This study investigates the cross‐country relationship between firm‐level corporate governance and stock price informativeness. Using firm‐level data from 22 developed countries, we find that stock price informativeness, as measured by firm‐specific stock return variation and future earnings response coefficients, increases with the quality of a firm's corporate governance. Further analyses show that all mechanisms except board‐related governance relate positively to stock price informativeness. Finally, firm‐level corporate governance plays a more significant role in strengthening the stock return–earnings associations for firms in countries with strong institutional environments. This evidence highlights the role of country‐level legal investor protections in shaping the relationship between firm‐level corporate governance and stock price informativeness.     

How does FX liquidity affect the relationship between foreign ownership and stock liquidity?

This study investigates the roles foreign investors play in a representative emerging market, focusing on the relationship between foreign ownership and stock market liquidity as well as this relationship's response to foreign exchange (FX) liquidity. Our analyses yield three main results. First, the bid–ask spread and price impact of stock trades decrease along with foreign ownership, supporting the view that foreign investors tend to improve stock liquidity. Second, foreign ownership decreases along with a decline in FX liquidity, suggesting that foreign investors care about FX liquidity when determining their stock holdings. Third, stock liquidity increases continuously along with foreign ownership as FX liquidity decreases. Overall, this study's evidence indicates that foreign investors, as liquidity providers, can play a positive role in an emerging economy even when FX liquidity declines.     

More shareholders,higher liquidity? Evidence from an emerging stock market

Using data assembled from all non-financial firms traded on the Malaysian stock exchange, we provide evidence of a nonlinear relationship between the number of shareholders and liquidity. While more shareholders are associated with higher liquidity, the negative effect of wider spreads kicks in when shareholder base exceeds a threshold level due to higher volatility induced by noise trading. However, the threshold level is considerably higher than the number of shareholders of most Malaysian public listed firms, suggesting much room for shareholder expansion in the local market. Our findings call for corporate managers to actively manage and expand their shareholder bases.     

Debt source choices and stock market performance of Russian firms during the financial crisis

This paper examines the relationship between stock returns and the sources of corporate debt during the financial crisis of 2008. In particular, using data on large-capitalization Russian firms, we investigate whether dependence on either bank debt or bonds affected stock returns during the credit crunch. Our results indicate that the firms which rely entirely on bank debt significantly outperformed the firms with public debt amidst the crisis. This finding suggests that bank debt may be particularly valuable in harsh times. However, we also document that the stock prices of the bank dependent firms recovered more slowly in the post-crisis period.     

When Do Local Firms Benefit from Inward Foreign Direct Investment? A Longitudinal Study of China's Manufacturing Sector Covering 1998–2007

Using comprehensive panel data on manufacturing firms in China during the 1998–2007 period, this study examines whether and when recipient local firms benefit from foreign direct investment (FDI). Local firms’ productivity improvements by the presence of foreign entrants are estimated, and according to the results, the relationship between FDI and local firms’ productivity shows an inverted U‐shaped pattern, with productivity increasing up to a certain point beyond which a higher level of FDI reduces local firms’ productivity. More importantly, the U‐shaped pattern is found for FDI from both non‐HMT foreign firms and overseas Chinese HMT (Hong Kong, Macao, and Taiwan) firms. In addition, the U‐shaped pattern varies across subnational regions such that the threshold at which an increase in FDI reduces productivity is lower for indigenous firms in coastal regions. This suggests that in China, local firms in inland and rural regions are the top beneficiaries of spillover effects. © 2015 Wiley Periodicals, Inc.     

Tourism expansion and corporate earnings in the tourism industry

Although tourism expansion is theoretically assumed to have a direct influence on the tourism industry, previous studies have not found any significant connection between tourism expansion and tourism firms’ stock performance. This study argues that tourism expansion would have a more direct impact on tourism firms’ earnings than on their stock performance. Accordingly, whether tourism expansion can create significant growth in corporate earnings for tourism firms is tested on the basis of a Granger non-causality procedure using a four-variable vector autoregression model. Test results support the assumption that tourism expansion could significantly improve the corporate earnings of tourism companies. The analyses of the generalized impulse response function and variance decomposition further indicate the critical role of tourism expansion in explaining increases in the tourism industry's corporate earnings. Policy implications are provided to guide the government tourism authorities.