PO Lock-in Agreements in the UK

When a company offers shares in an initial public offering (IPO), existing owners often enter into lock-in agreements prohibiting them from selling shares for a specified period after the IPO. There is some recent US evidence of predictable share-price movements at the time of expiry of these lock-in agreements. Using a sample of 188 firms, 83 classified as high-tech and 105 others, that went public on the London Stock Exchange (LSE) during 1992–1998, we focus on the characteristics of lock-in agreements in the UK and on the behaviour of stocks returns around the lock-in expiry date. We find that the lock-in contracts of LSE-listed firms are much more complex, varied and diverse than US contracts, which usually standardise the lock-in period at 180 days after the IPO. We also find evidence of negative abnormal stock returns at and around lock-in expiry of similar magnitude to those reported in US studies. However, these abnormal returns are typically not statistically significant. While the deterioration in stock returns immediately around the expiry date appears to be particularly much more pronounced for high-tech stocks than for others, the differences in performance are not statistically significant.     

Taxes,dividend yields and returns in the UK equity market

The higher rate of taxation on dividend income relative to capital gains has been offered as an explanation for the positive relation between stock returns and dividend yields among US firms. In the UK the relative tax rates are the reverse of those in the US. Thus, UK data provides an independent test of the tax-based approach to explaining the relation between stock returns and dividend yields. We find that high yielding stocks earn positive risk adjusted returns, whereas low yielding stocks earn negative risk adjusted returns. We also detect evidence of non-linearity in the performance of zero-dividend stocks. Controlling for firm size, seasonality and market risk we find a significant positive relation between dividend yields and returns. We conclude that the evidence is inconsistent with a tax-based explanation.     

Accruals quality,stock returns and asset pricing: Evidence from the UK

The extent to which accruals quality (AQ) is relevant for asset pricing has been debated widely. Prior research in this area has focused almost exclusively on the US. Using UK data, we investigate whether AQ portfolios exhibit evidence of significant mispricing, and whether an AQ factor is useful in explaining the portfolios' returns. We also investigate whether AQ is a priced risk factor. Using a two stage cross-sectional regression, we show that an AQ measure explains the cross-section of stock returns. AQ also explains the time-series variation in returns for two sets of portfolios: 16 size-BM portfolios, and 20 industry portfolios. Consistent with some recent US evidence, however, we find no evidence that AQ is a priced risk factor for UK stocks.     

On the Existence of Visual Technical Patterns in the UK Stock Market

The aim in this paper is to replicate and extend the analysis of visual technical patterns by Lo et al. (2000) using data on the UK market. A non‐parametric smoother is used to model a nonlinear trend in stock price series. Technical patterns, such as the 'head‐and‐shoulders' pattern, that are characterised by a sequence of turning points are identified in the smoothed data. Statistical tests are used to determine whether returns conditioned on the technical patterns are different from random returns and, in an extension to the analysis of Lo et al. (2000), whether they can outperform a market benchmark return. For the stocks in the FTSE 100 and FTSE 250 indices over the period 1986 to 2001, we find that technical patterns occur with different frequencies to each other and in different relativities to the frequencies found in the US market. Our extended statistical testing indicates that UK stock returns are less influenced by technical patterns than was the case for US stock returns.     

Mutual Fund Herding and the Impact on Stock Prices

We analyze the trading activity of the mutual fund industry from 1975 through 1994 to determine whether funds "herd" when they trade stocks and to investigate the impact of herding on stock prices. Although we find little herding by mutual funds in the average stock, we find much higher levels in trades of small stocks and in trading by growth-oriented funds. Stocks that herds buy outperform stocks that they sell by 4 percent during the following six months; this return difference is much more pronounced among small stocks. Our results are consistent with mutual fund herding speeding the price-adjustment process.     

Individual investors repurchasing behaviour: evidence from the Portuguese stock market

We study the repurchasing behaviour of individual investors and identify-related stock- and investor-specific attributes that affect the preference to repurchase stocks previously owned. Using a unique database of Portuguese individual investors, we find that investors prefer to repurchase stocks that were associated with a gain during their previous roundtrip (i.e. prior winners) and have suffered price declines subsequent to their last sale. Consistent with the extant literature based on the US market, our results suggest that different market characteristics do not seem to affect investors’ preference regarding stock repurchases. Moreover, we find that this preference increases with the magnitude of the prior gain or the decline in price following the last sale. We also demonstrate that larger and more visible domestic stocks are more likely to be repurchased and that less active, under-diversified and home-biased investors are more likely to engage in such behaviour. Finally, we find that repurchased stocks yield poor post-performance – approximately 267 basis points less than newly purchased stocks. Our main conclusion is that repurchases are essentially emotionally driven and penalize investor’s performance.     

Is gold the best hedge and a safe haven under changing stock market volatility?

We evaluate the role of gold and other precious metals relative to volatility (Volatility Index (VIX)) as a hedge (negatively correlated with stocks) and safe haven (negatively correlated with stocks in extreme stock market declines) using data from the US stock market. Using daily data from November 1995 to November 2010, we find that gold, unlike other precious metals, serves as a hedge and a weak safe haven for US stock market. However, we find that VIX serves as a very strong hedge and a strong safe haven during our sample period. We also find that in periods of extremely low or high volatility, gold does not have a negative correlation with the US stock market. Our results show that VIX is a superior hedging tool and serves as a better safe haven than gold during our sample period. We highlight the practical significance of our results for financial market participants by conducting a portfolio analysis.     

Transitions in the stock markets of the US,UK and Germany

In an analysis of the US, the UK and German stock market, we find a change in the behaviour based on the stocks’ beta values. In the years 1995–2006, trades of stocks with high beta and large volume were concentrated in the IT and technology sector, whereas in 2006–2012 those trades are dominated by stocks from the financial sector. We show that an agent-based model can reproduce such a transition. We further show that the initial impulse for the transition might stem from the increase of high-frequency trading at that time.     

The asset pricing effects of UK market liquidity shocks: Evidence from tick data

Using tick data covering a 12 year period including much of the recent financial crisis we provide an unprecedented examination of the relationship between liquidity and stock returns in the UK market. Previous research on liquidity using high frequency data omits the recent financial crisis and is focused on the US, which has a different market structure to the UK. We first construct several microstructure liquidity measures for FTSE All Share stocks, demonstrating that tick data reveal patterns in intra-day liquidity not observable with lower frequency daily data. Our asymptotic principal component analysis captures commonality in liquidity across stocks to construct systematic market liquidity factors. We find that cross-sectional differences in returns exist across portfolios sorted by liquidity risk. These are strongly robust to market, size and value risk. The inclusion of a momentum factor partially explains some of the liquidity premia but they remain statistically significant. However, during the crisis period a long liquidity risk strategy experiences significantly negative alphas.     

Social media and price discovery: The case of cross-listed firms

In this article, we examine whether social media information affects the price-discovery process for cross-listed companies. Using over 29 million overnight tweets mentioning cross-listed companies, we examine the role of social media for a link between the last periods of trading in the US markets and the first periods in the UK market. Our estimates suggest that the size and content of information flows on social networks support the price-discovery process. The interactions between lagged US stock features and overnight tweets significantly affect stock returns and volatility of cross-listed stocks when the UK market opens. These effects weaken and disappear 1 to 3 hr after the opening of the UK market. We also develop a profitable trading strategy based on overnight social media, and the profits remain economically significant after considering transaction costs.     

The role of future economic conditions in the cross-section of stock returns: Evidence from the US and UK

Our study investigates the explanatory power of future economic conditions on individual stock returns in the US and UK equity markets. We analyse a new trading strategy that is based on rational forecasts of future real activity. In addition, we specifically examine the performance of this trading strategy applied to two different classifications of stocks – procyclical stocks and countercyclical stocks. Our findings indicate a strong persistence in the relationship between returns on pro-cyclical stocks and the business cycle. However, such persistence is not present when moving to counter-cyclical stocks in the US and the UK. From this we suggest that US and UK equity investors who predict future real activity accurately can improve their investment profitability by longing pro-cyclical stocks when they expect future economic conditions to be above the long-run trend and shorting those stocks when future activity is anticipated to be below the steady state.     

The impact of nominal stock price on ex-dividend price responses

In this paper, we examine whether nominal stock price can help to explain the ex-dividend day anomaly where stock prices drop by less than the dividend amount on the ex-dividend date. We find that stocks with lower nominal prices have ex-dividend day price drops that are more consistent with theoretical predictions based on an efficient market. After controlling for factors that have been previously documented to influence ex-dividend day stock price behavior, price-drop-to-dividend ratios are closer to one for lower priced stocks. To further explore this phenomenon, we examine the change in the price-drop-to-dividend ratio around stock splits. Firms that split their shares have a larger price-drop-to-dividend ratio after the split, and companies that reverse split their shares have a smaller price-drop-to-dividend ratio after the split. Our evidence indicates that ex-dividend day stock price behavior is influenced by the nominal price of a share and that this relation could also influence the decision to split a firm’s shares.     

The Comovement of US and UK Stock Markets

US and UK stock returns are highly positively correlated over the period 1918–99. Using VAR‐based variance decompositions, we investigate the nature of this comovement. Excess return innovations are decomposed into news about future dividends, real interest rates, and excess returns. We find that the latter news component is the most important in explaining stock return volatility in both the USA and the UK and that stock return news is highly correlated across countries. This is evidence against Beltratti and Shiller's (1993) finding that the comovement of US and UK stock markets can be explained in terms of a simple present value model. We interpret the comovement as indicating that equity premia in the two countries are hit by common real shocks.     

What's in a “China” Name? A Test of Investor Attention Hypothesis

We study whether a firm's name affects investor attention and firm valuation. Some Chinese firms listed on US stock exchanges have the word “China” included in their company names (“China‐name stocks”), while others do not (“non‐China‐name stocks”). During the 2007 China stock market boom, we find that China‐name stocks significantly outperform non‐China‐name stocks. This is not due to differences in firm characteristics, risk, or liquidity. The “China‐name effect” is largely consistent with the investor attention hypothesis that price pressure caused by increased investor attention on China‐name stocks during the boom period drives up China‐name stocks more than non‐China‐name stocks.     

An Analysis of Contrarian Investment Strategies in the UK

The performance of contrarian, or value strategies – those that invest in stocks that have low market value relative to a measure of their fundamentals – continues to attract attention from researchers and practitioners alike. While there is much extant evidence on the profitability of value strategies, however, most of this evidence pertains to the US. In this paper, we provide a detailed characterisation of value strategies using data on UK stocks for the period 1975 to 1998. We first undertake simple one-way and two-way classifications of stocks in which value is defined using both past performance and expected future performance. Using sales growth as a proxy for past performance and book-to-market, earnings yield and cash flow yield as measures of expected future performance, we find that that stocks that have both poor past performance and low expected future performance have significantly higher returns than those that have either good past performance or good expected future performance. Allowing for size effects in returns reduces the value premium but it nevertheless remains significant. We go on to explore whether the profitability of value strategies in the UK can be explained using the three factor model of Fama and French (1996). Broadly consistent with the results for the US, we find that using the one-way classification the excess returns to almost all value strategies can be explained by their loading on the market, book-to-market and size factors. However, in contrast with the US, using the two-way classification there are excess returns to value strategies based on book-to-market and sales growth, even after controlling for their loading on the market, book-to-market and size factors.     

Non-linear Dependence in Stock Returns: Does Trading Frequency Matter?

The UK has a quote-driven pure dealer market structure that is very different from order driven markets such as the NYSE and Japanese markets. This paper investigates non-linear dependence in stock returns for an exhaustive sample of UK stocks for a 21 year period. The results are analysed on the basis of trading frequency. It is found that non-linear dependence is highly significant in all cases for both individual stocks and stock portfolios formed on the basis of trading frequency. The non-linear dependence is primarily over a one day interval, although statistically significant non-linear dependence exists consistently even up to five trading days. Most of the non-linear dependence is in the form of ARCH-type conditional heteroskedasticity. However, statistically significant non-linearity in addition to an EGARCH(1,1) dependence also appears to be present. This additional non-linearity is greater for individual stocks than for portfolios and greater for smaller, less-liquid portfolios. Non-linear dependence does not appear to be caused by non-stationarity in underlying economic fundamentals or by non-linearity in the conditional mean. However, low dimensional chaos is not generally supported. The limited evidence on chaotic behaviour is stronger for portfolios with long price adjustment delays across component stocks. The main results are consistent with US studies on stock indices, suggesting that the process generating non-linear dependence is not dependent on market microstructure characteristics.     

Price and volume effects of changes in MSCI indices – nature and causes

Using changes in the MSCI Standard Country Indices for 29 countries between 1998 and 2001, we document that stock returns and volumes exhibit “index effects” in international markets similar to those detected by the studies of US stocks. The stocks added to the indices experience a sharp rise in prices after the announcement and a further rise during the period preceding the actual change, though part of the gain is lost after the actual change date. The stocks that are deleted from the indices, on the other hand, witness a steady and marked decline in their prices. Trading volumes increase significantly and remain at high levels after the change date for the added stocks. There are also considerable cross-country variations in these effects. Tests using data on various measures reflecting the different hypotheses fail to turn up any evidence in support of information effects. Our evidence appears to be more supportive of the downward sloping demand curve hypothesis. There is some evidence of price-pressure and mild evidence of liquidity effect, particularly in Japan and UK.     

Pricing assets with higher moments: Evidence from the Australian and us stock markets

This paper investigates the importance of higher moments of return distributions in capturing the variation of average stock returns for companies listed in the leading S&P US and Australian indices. We find that Australian stocks are more negatively skewed but less leptokurtic than US stocks. As a result, we find that co-skewness plays a more important role in explaining Australian returns while co-kurtosis is consistently influential for US stock returns. We postulate that the differences in results are related to the underlying firm characteristics of the companies in the two indices, where principally the Australian firms are noticeably smaller than their US counterparts and concentrated in a smaller number industry sectors. This implies that for many smaller exchanges around the world higher moment characteristics displayed by the US market may not be applicable. We also show our results are robust to partly explaining average stock returns in the presence of size, value, and momentum effects.     

The relationship between asset growth and the cross-section of stock returns

There is a large body of literature examining the association between stock characteristics and the cross-section of stock returns in international markets. Recently, Cooper et al. (2008) reported a strong association between total asset growth and stock returns in the US. In this paper, we show that an asset-growth effect also exists in the Australian equity market. Of particular interest, it is present amongst the largest Australian stocks. Over the 1983-2007 period, an equally-weighted portfolio of low-growth Big stocks outperforms a portfolio of high-growth Big stocks by an average 1% per month, equating to nearly 13% per annum. At an individual stock level of analysis, the asset-growth effect remains even after controlling for other variables whose association with the cross-section of returns is well known. Finally, we explicitly test whether asset growth is a priced risk factor using the common two-stage cross-sectional regression methodology. We find no evidence to support a risk-based explanation, thereby lending credence to Cooper et al.’s (2008) suggestion that the asset-growth effect is attributable to mispricing.     

Net equity issuance effect in the UK

Net equity issuance (NEI) by firms has predictive power for US stock returns. This paper examines the NEI anomaly for UK stocks, using regression on firm characteristics and sorted portfolios with several factor models. The anomaly generalises to the UK only in part. We confirm the existence of a large NEI effect for small and midsize stocks, but not for large stocks. The repurchase effect, of positive abnormal returns following repurchases, is absent in the UK. We also find that the NEI effect in smaller stocks is not exploitable by investors, allowing for transaction costs.