Internationally cross-listed stock prices during overlapping trading hours: price discovery and exchange rate effects

We analyze exchange rates along with equity quotes for 3 German firms from New York (NYSE) and Frankfurt (XETRA) during overlapping trading hours to see where price discovery occurs and how stock prices adjust to an exchange rate shock. Findings include: (a) the exchange rate is exogenous with respect to the stock prices; (b) exchange rate innovations are more important in understanding the evolution of NYSE prices than XETRA prices; and (c) most (but not all) of the fundamental or random walk component of firm value is determined in Frankfurt.     

The roles of past returns and firm fundamentals in driving US stock price movements

This paper provides new empirical evidence that incorporating past stock returns from different time horizons can enhance the ability of firm fundamentals to better explain stock price movements but this benefit dissipates under uncertainty. We apply both OLS and state-space modeling to US firms' stock price movements over the period from 1999 to 2012 to compare the roles of the two main types of information typically used by equity investors. Empirical results reveal the importance of firm fundamentals over longer term horizons for particularly, small-cap stocks with greater information uncertainty. Furthermore, when market uncertainty is high, fundamentals unambiguously dominate in driving stock price movements of smaller sized firms indicating that uncertainty at the firm and market level both create attention bias on firm fundamentals.     

THE ROLE OF ACCOUNTING INFORMATION IN STOCK MARKET LIBERALIZATION: EVIDENCE FROM KOREA

Stock market liberalization is a decision by a country’s government to allow foreigners to buy securities in that country’s capital market. This study examines how the liberalization of the Korean stock market affected stock price behavior and changed the role of accounting information for investment decisions. The Korean stock market opened its door to foreign investment in 1991. Prior to this, market inefficiencies, such as the superfluous co-movement of stock prices with industry or market indices or investment based on rumor and speculation, were widespread. Since the opening of the stock market to foreigners, a more rational pricing behavior has emerged. This setting provides a unique opportunity to investigate how stock price behavior has changed with market liberalization and what was the role of accounting information in this process. Our results indicate that the co-movement behavior of stock prices by industry decreased and stock price differentiation based on individual firm characteristics increased after market liberalization. The results also show that the explanatory power of accounting numbers increased after market liberalization. Overall, the results imply that foreign investors contributed to the improvement of market efficiency with the opening up of capital markets in Korea. We believe that our results provide useful evidence to other capital markets that are in a similar situation.     

Do share prices matter?

This paper examines whether the cross sectional variation in Australian share prices is partially explained by measures of firm size and ownership characteristics in a manner that is consistent with firms behaving in accordance with Merton's (1987) model of capital market equilibrium with incomplete information. Based on a sample of firms whose shares were traded on the ASX during 1995, we show that firms largely owned by less wealthy shareholders tend to have low stock prices, although this relation is not linear. In addition, larger, better–known, firms tend to have higher stock prices. These findings are consistent with prior evidence from US markets, and suggest the existence of a shareholder clientele effect in Australia that is related to the share price of the underlying firm.     

What’s in the news? The ambiguity of the information content of index reconstitutions in Germany

We analyze stock price behavior around reconstitutions of the German DAX index family from 1990 to 2013. The strong price run-up of added stocks in the 2 months preceding the announcement date remains robust until 2 months after the effective date (ED), and is fully reversed 5 months later. Conversely, stock prices of deleted firms are under pressure until 10 months after the ED. Unlike most previous studies, we find that outright entries and exits have temporary price effects, as do additions to and deletions from better-known indices; however, promotions and demotions related to lesser-known indices command permanent stock price responses. Rather surprisingly, deleted stocks consistently earn higher abnormal returns than added stocks in the 5-year post-event period. Specifically, the return differential levels out at 77.3%. We establish that this differential in permanent stock prices is attributable to differences in operating performance and media coverage. In practice, index reconstitutions do not appear to give unambiguous signals about the long-run investment appeal of affected firms. However, index fund managers not constrained by tracking error minimization would be better off holding deleted stocks for 5 years after the ED.     

Auditor Quality,IFRS Adoption,and Stock Price Crash Risk: Korean Evidence

This paper investigates the relationship among auditor quality, International Financial Reporting Standard (IFRS) adoption and stock price crash risk. Using 657 unique listed companies spanning 2002–2014 in Korea, this study finds that stock price crash risk decreases, especially for firms using Big 4 auditors, after IFRS adoption in Korea. Stock price crash risk decreases for a firm included in Big 4 auditors, while it does not increase for a firm excluded from Big 4 auditors after IFRS adoption. Finally, this study finds that Big 4 auditor decreases stock price crash risk only when the firm size is above-median.     

Do monetary policy announcements affect stock prices in emerging market countries? The case of Thailand

We examine the effect of monetary policy announcements in Thailand, which is one of emerging market countries in Asia, on stock prices at the firm level. We find that the expected change, rather than the unexpected change, in interest rates affects stock prices. The stock price response to the interest rate announcement is asymmetric. For instance, the relation between interest rate surprises and stock prices is conditional on the direction of the interest rate change. In general, macroeconomic conditions and firm characteristics cannot explain the stock price reaction to the announcement. In addition, stock prices of firms in different industries appear to react heterogeneously to the interest rate announcement.     

Oil prices,US stock return,and the dependence between their quantiles

In this article, we examine the relationship between oil prices and US equities by proposing a novel quantile-on-quantile (QQ) approach to construct estimates of the effect that the quantiles of oil price shocks have on the quantiles of the US stock return. This approach captures the dependence between the distributions of oil price shocks and the US stock return and uncovers two nuance features in the oil–stock relationship. First, large, negative oil price shocks (i.e. low oil price shock quantiles) can affect US equities positively when the US market is performing well (i.e. at high US return quantiles). Second, while negative oil price shocks could affect the US stock market, the influence of positive oil price shocks is weak, which suggests that the relationship between oil prices on the US equities is asymmetric.     

IFRS reporting, firm-specific information flows, and institutional environments: international evidence

This study investigates whether and how a firm??s voluntary adoption of International Financial Reporting Standards (IFRS) influences the extent to which firm-specific information is capitalized into stock prices measured by stock price synchronicity. We also study the role of analyst following and institutional environments in determining the relation between IFRS reporting and synchronicity. Using firm-level data from 34 countries, we find that synchronicity is significantly lower for IFRS adopters than for non-adopters across all regression specifications and that for IFRS adopters it decreases from the pre-adoption period to the post-adoption period. This finding supports the view that voluntary IFRS adoption facilitates the incorporation of firm-specific information into stock prices, thereby reducing synchronicity. We also find that the synchronicity-reducing effect of IFRS adoption is attenuated (accentuated) for firms with high (low) analyst following and is stronger (weaker) for firms in countries with poor (good) institutional environments.     

Oil and stock market activity when prices go up and down: the case of the oil and gas industry

We examine the asymmetric effects of daily oil price changes on equity returns, market betas, oil betas, return variances, and trading volumes for the US oil and gas industry. The responses of stock returns associated with negative changes in oil prices are higher than that associated with positive changes in oil prices. Stock risk measured by market beta is influenced more due to oil price decreases than due to oil price increases. On the other hand, oil risk exposures (oil betas) and return variances are more influenced by oil price increases than oil price decreases. The results of our study indicate that oil and gas firm returns, market betas, oil betas, return variances respond asymmetrically to oil price changes. We also find that relative changes in oil prices along with firm-specific factors such as firm size, ROA, leverage, market-to-book ratio (MBR) are important in determining the effects of oil price changes on oil and gas firms’ returns, risks, and trading volumes.     

Are share price levels informative? Evidence from the ownership, pricing, turnover and performance of IPO firms

We ask whether a firm's choice of IPO price is informative in the sense that it relates systematically to the firm's other choices and characteristics. We find that both institutional ownership and underwriter reputation increases monotonically with the chosen IPO price level. We also find that the relationship between IPO price and underpricing is U-shaped. In contrast, post-IPO turnover displays an inverted U-shaped relation to IPO price. Moreover, firms choosing a higher (lower) stock price level experience lower (higher) mortality rates. Our results are robust to controls for market liquidity and firm size, and for partial adjustment of IPO prices based on pre-market information.     

STOCK PRICE DYNAMICS IN OVERLAPPED MARKET SEGMENTS: INTRA AND INTER-INDUSTRY CONTAGION EFFECTS

This study examines stock price dynamics of contagion effects in overlapping markets using an exponential ARCH (Autoregressive Conditional Hetero-scedastic) model. Specifically, the stock price dynamics among the oil and oil-related industries of the US are examined to see how stock price movements in one industry affect those of the related industries. The results suggest that when the amount of price innovations is larger than the expected amount, volatility of stock returns will be affected. The results further show that this influence comes from the oil-service industry and spreads to the oil industry and the gas industry. That is, inter-industry contagion effects do exist. In addition, when the firms of the oil industry are grouped into three size categories - large, medium and small - the results indicate that the source of contagion is from the large and the small oil firms. The influence of their price innovations spread to medium-sized oil firms, the oil-service industry and the gas industry. That is, the inter-industry and intra-industry contagion effects exist simultaneously.     

THE RELATION AMONG DIVIDEND POLICY,FIRM SIZE,AND THE INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS

In this paper we investigate the role of dividends in explaining the size effect. The previous literature concludes that before the firm's earnings announcement, small firm stock prices impound less information than large firm stock prices. This size effect is evidenced by the greater market reaction to small firm earnings announcements than to large firm earnings announcements. We find that if the dividend announcement precedes the earnings announcement, no size effect exists. The implication is that the information conveyed by dividend announcements includes the information conveyed to investors in large firms by other information sources. However, if the firm does not pay dividends or if the firm's earnings announcement precedes its dividend announcement, the size effect exists. The implication is that dividends do not completely explain the size effect. That is, there are information sources other than dividends that are exclusively available to investors in large firms, and the information provided by these sources is reflected in the stock price of large firms before the earnings announcement.     

Characteristics of Earnings-Leading Versus Price-Leading Firms

This study attempts to identify firm characteristics that explain the disparity between the information content of accounting earnings and stock prices. Granger's causality concept was employed to classify sample firms into four groups: price-leading firms, feedback-system firms, earnings-leading firms, and no-causation firms. The feedback-system firms were either combined with the no-causation firms or eliminated entirely to form three sample groups. The entire sample firms then were divided into two classes. The first is for estimation, and the second is for prediction. Results indicate that firm size, capital structure, R-square of regressing prices at time t against earnings at time t – 1, R-square of regressing earnings at time t against prices at time t – 1, and percentage of shares held by institutions are the significant explaining variables. The application of the coefficient estimates to the hold-out sample indicates that 76.2% of the firms can be correctly classified into the corresponding groups. These results were consistent with those from canonical discrimination and other multivariate statistical methods.     

Speculation and price bubbles in the Korean and Japanese real estate markets

This article investigates the possibility of speculation having caused the prices of land and housing to deviate from their given long-run equilibrium levels in Korea and Japan. We modeled speculation by incorporating the expected future price into the demand equation. The existence of growing rational bubbles was tested on Korean and Japanese data using the standard econometric technique for estimating linear rational expectations models. Our analysis of the Korean annual data suggests that a growing rationale bubble existed during the 1974–1989 period, nominal or real. Estimation results of the same model using Japanese annual data also confirmed the existence of a bubble in land price. Contrary to our analysis of land price data, the evidence of the bubble was much less obvious in Korean annual housing price data. We therefore estimated the model using quarterly data and found that the existence of a bubble could not be established in housing prices. This finding was also consistent with the trend of the rent-to-value ratio series in apartment units. Our results need to be taken with caution because our approach suffers from the common econometric problem of possible mis-specification of the model and because of the small size of the sample.     

Internal capital markets,corporate investment,and the COVID-19 pandemic: Evidence from Korean business groups

This paper examines whether the investment of Korean business group (“chaebol”) affiliated firms behaved differently from that of non-chaebol firms in response to the COVID-19 outbreak. I show that chaebol firms cut back investment to a lesser degree than similar non-chaebol firms. Chaebol firms with higher-than-industry-median market-to-book ratios invested more and experienced less decline in their stock prices, while I do not find such relationships for non-chaebol firms. This paper provides evidence that chaebol internal capital markets helped mitigate the negative effects of the pandemic on firm investment and value.     

The Choice of Methodology for Computing Housing Price Indexes: Comparisons of Temporal Aggregation and Sample Definition

Housing transactions are executed and recorded daily, but are routinely pooled into longer time periods for the measurement and analysis of housing price trends. We utilize an unusually rich data set, covering essentially all arm's length housing sales in Sweden for a dozen years, in an attempt to understand the effect of temporal aggregation upon estimates of housing prices and their volatilities. This rich data set also provides a unique opportunity to compare the results using the conventional weighted repeat sales model (WRS) to those based on a research strategy which incorporates all available information on house sales. The results indicate the clear importance of temporal disaggregation in the estimation of housing prices and volatilities—regardless of the model employed.The appropriately disaggregated model is then used as a benchmark to compare estimates of the course of housing prices produced by the two models during the twelve year period 1981–1993. These results indicate that much of the difference between estimates of price movements can be attributed to the data limitations which are inherent in the repeat sales approach. The results, thus, suggest caution in the interpretation of government-produced price indices or those produced by private firms based on the repeated sales model.     

Price Linkages Between the US,Japan and UK Stock Markets

This study presents an empirical analysis of the short- and long-term relationships among stock prices in the US, Japan and the UK. We re-examine the evidence of market linkages and cointegration between S&P 500, Nikkei 225 and FTSE-100 stock indices. The results suggest that mature markets are cointegrated, indicating a stationary long-run relationship. Furthermore, Granger causality tests show a bi-directional causality between Nikkei 225–FTSE-100, and unidirectional causalities between S&P 500–FTSE-100 and S&P 500–Nikkei 225. These findings suggest that the potential for diversifying risk by investing in mature markets is limited.     

Capital market equilibrium with externalities, production and heterogeneous agents

The paper studies general equilibrium in an economy with externalities, production and heterogeneous agents. The model developed builds on Brock [Brock, W.A., 1982. Asset prices in a production economy. In: McCall, J.J. (Ed.), The Economics of Information and Uncertainty. University of Chicago Press, Chicago, pp. 1–43] and Merton [Merton, R.C., 1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510]; it involves both a stock market and a market for loans, together with negative externalities produced by a subset of firms. Importantly, the technological production structure of the firms is reflected in the properties of the shares traded in the stock market. Agents are heterogeneous in their financial choices, potentially discriminating against the firms producing a negative externality. The model sheds light on the utility costs of the discriminating behavior and on the impact on the price of the stock issued by the firm which is responsible for the externality. The model is used to study the factors which may magnify or reduce the impact of discrimination. A set of discriminated firms may be seriously affected only if the discriminating investors command a large portion of overall wealth and/or they do not represent important diversification instruments. The model can be applied to understanding the effects of socially responsible investment, whereby investors discriminate against companies belonging to some sectors which are perceived as socially dangerous or unethical.     

Cross-Listing, Bonding Hypothesis and Corporate Governance

Abstract:  This paper examines the relationship between cross-listing and corporate governance for Canadian firms, that were cross-listed on US stock exchanges during the period 1997–2003. We find that cross-listed firms have more independent boards and audit committees after the listing relative to a non-cross-listed matched sample of firms and relative to the pre-listing period. Moreover, cross-listed firms experience changes in their ownership structure after the listing. Finally, we provide evidence that the sensitivity of the relation between cross-listed firm valuation with audit committee independence and ownership structure becomes more important after the listing. The results are robust after adjusting for various firm risk characteristics. Overall, the results are consistent with the literature on the bonding role of cross-listings on US stock exchanges.