Equity market liberalization and corporate governance

Equity market liberalizations open up domestic stock markets to foreign investors. A puzzle in the literature is why developing countries exhibit relatively small financial impacts associated with liberalizations. We use cross-firm variation in corporate governance at the time of the official liberalization of the equity market in Korea to test whether governance can explain the extent to which firms benefit when countries liberalize. The results show that better-governed firms experience significantly greater stock price increases upon equity market liberalization. Following the liberalization in Korea, foreign ownership in firms with strong corporate governance was significantly higher than that in firms with weak governance. Better-governed firms also exhibit higher rates of physical capital accumulation after liberalization.     

Market integration and currency risk in Asian emerging markets

Most of the Asian emerging stock markets started to liberalize their markets in 1990s. In this paper, I examine whether those markets have become integrated with world stock market since the 1990s by estimating and testing a dynamic version of international CAPM (ICAPM) in the absence of purchasing power parity (PPP) using a parsimonious multivariate GARCH-in-Mean (MGARCH-M) approach. I also investigate to what extent the liberalization process has affected the cost of capital and price volatility for each market. The empirical results show that Philippines was segmented from the world stock market before its liberalization date, but no evidence of market segmentation is found for the other five markets (India, Korea, Malaysia, Taiwan, and Thailand) before their liberalization dates. However, all six markets have become integrated after opening up their markets to foreign investors. In addition, the estimated risk premia are lower after the liberalization, indicating that the liberalization process has reduced the cost of capital for their domestic firms. Moreover, there is no evidence of extra market volatility introduced by capital market liberalization, and on the contrary, the markets have become more stabilized through the liberalization process.     

资本市场开放与股权资本成本——基于沪港通、深港通的实证研究

本文基于沪港通和深港通研究资本市场开放对中国内地股权资本成本的影响。研究发现,受政策风险和市场环境等因素所限,沪港通在初始阶段并未对沪市公司的股权资本成本产生显著影响,但随着政策进一步完善、市场逐渐稳定和交易不断活跃,其对股权资本成本的降低效果于实施两年后开始显现;深港通建立在沪港通的制度基础和运行经验上,其在开通后显著降低了标的公司的股权资本成本。本文还进一步分析了资本市场开放影响股权资本成本的竞争渠道和信息渠道,发现深港通对股权资本成本的降低作用主要集中在投资者竞争程度较高,或是公开信息质量较高、信息不对称程度较低的股票样本。     

资本市场开放与股权资本成本——基于沪港通、深港通的实证研究

本文基于沪港通和深港通研究资本市场开放对中国内地股权资本成本的影响。研究发现,受政策风险和市场环境等因素所限,沪港通在初始阶段并未对沪市公司的股权资本成本产生显著影响,但随着政策进一步完善、市场逐渐稳定和交易不断活跃,其对股权资本成本的降低效果于实施两年后开始显现;深港通建立在沪港通的制度基础和运行经验上,其在开通后显著降低了标的公司的股权资本成本。本文还进一步分析了资本市场开放影响股权资本成本的竞争渠道和信息渠道,发现深港通对股权资本成本的降低作用主要集中在投资者竞争程度较高,或是公开信息质量较高、信息不对称程度较低的股票样本。     

A note on foreigners’ trading and price effects across firms

We study the investment behavior of foreign investors in association with an equity market liberalization, and find a strong link between foreigners’ trading and local market returns. In the period following the liberalization, net purchases by foreign investors induced a permanent increase in stock prices, suggesting that local firms reduced their cost of equity capital. We also find a strong link between a firm’s fraction of foreign ownership and the magnitude of the cost reduction. Foreign investors seem to prefer large and well-known firms, and these firms realize the largest reduction in capital cost. Furthermore, our analysis suggests that foreigners increase their net holding in firms that have recently performed well. Analyzing foreigners’ performance, we find very little evidence of informed trading, suggesting that risk sharing is the most plausible explanation for the reduction of the cost of equity capital.     

Product Market Competition, Insider Trading, and Stock Market Efficiency

How does competition in firms' product markets influence their behavior in equity markets? Do product market imperfections spread to equity markets? We examine these questions in a noisy rational expectations model in which firms operate under monopolistic competition while their shares trade in perfectly competitive markets. Firms use their monopoly power to pass on shocks to customers, thereby insulating their profits. This encourages stock trading, expedites the capitalization of private information into stock prices and improves the allocation of capital. Several implications are derived and tested.     

股票市场开放与企业投资效率——基于“沪港通”的准自然实验

资本市场的持续对外开放是党的十九大强调的重要举措。本文基于沪港通开通这一准自然实验,检验了股票市场开放对企业投资效率的影响。结果发现:沪港通的开启促进了标的公司投资效率的提高,这一影响主要体现在信息环境不透明、治理水平低的公司;机制分析发现,沪港通开启后,公司信息质量的提高和分析师预测准确度的增加是股票市场开放影响标的公司投资效率的重要渠道;最终标的公司在沪港通开通后经营业绩也得到提升。本文结论表明,股票市场开放改善了公司的投资效率,提高了对实体经济的服务能力,这对党的十九大提出的“深化资本市场对外开放”和“金融服务实体经济”系列改革有重要启示。     

Equity Market Liberalization in Emerging Markets

Equity market liberalizations, if effective, lead to important changes in both the financial and real sectors as the economy becomes integrated into world capital markets. The study of market integration is complicated because one can liberalize in many ways and many countries have taken different routes. To study the effectiveness of particular liberalization policies, the sequencing of liberalizations, and the impact on the real economy, systematic methods must be developed to date the liberalization of emerging equity markets. We provide a synthesis of the current methods and show the impact of liberalization on the real sector.     

Can Managers Forecast Aggregate Market Returns?

Previous studies have found that the proportion of equity in total new debt and equity issues is negatively correlated with future equity market returns. Researchers have interpreted this finding as evidence that corporate managers are able to predict the systematic component of their stock returns and to issue equity when the market is overvalued. In this article we show that the predictive power of the share of equity in total new issues stems from pseudo‐market timing and not from any abnormal ability of managers to time the equity markets.     

股票的权益比、账面市值比及其公司规模与股票投资风险——以上海证券市场的10只上市公司股票投资风险为例

最近20年来一些学者对CAPM理论模型检验的结果大都表明,股票的投资风险(或其收益)并非像该模型描述的那样由β系数唯一决定,还存在其他因素在股票投资风险中起影响作用。国内学者借助于横截面法的回归模型研究指出,股票的权益比率(D/E)、账面/市值价值比(BV/MV)与公司规模是决定股票投资风险除β系数外的三个主要经济变量。为了验证他们理论的正确性与精确性,该文率先运用模糊数学的聚类分析法,对上证市场随机选取10只样本股票的D/E、BV/MV、公司规模与股票投资风险相关性进行实证分析,并与用回归分析方法得到的β指数与风险关系进行比较研究。经研究进一步证实,股票投资风险并非唯一由β系数决定,股票的D/E、BV/MV及其公司规模应当成为β系数以外影响股票投资风险不可忽视的重要因素。本文研究的意义在于建议股票投资者,衡量股票投资风险不仅要考察股票的β系数,还应进一步考察股票的D/E、BV/MV和公司规模等。     

Stock market liberalization and innovation

We investigate the effect of stock market liberalization on technological innovation. Using a sample of 20 economies that experience stock market liberalization, we find that these economies exhibit a higher level of innovation output after liberalization and that this effect is disproportionately stronger in more innovative industries. The relaxation of financial constraints, enhanced risk sharing between domestic and foreign investors, and improved corporate governance are three plausible channels that allow stock market liberalization to promote innovation. Finally, we show that technological innovation is a mechanism through which stock market liberalization affects productivity growth and therefore economic growth. Our paper provides new insights into the real effects of stock market liberalization on productivity growth and the economy.     

Asian Economic Integration and Stock Market Comovement

Using daily returns from 1988 to 1998, we investigate to what degree twelve equity markets in Asia are integrated with Japan's equity market and examine the factors that affect the level of economic integration. We find that the equity markets of Australia, China, Hong Kong, Malaysia, New Zealand, and Singapore are highly integrated with the stock market in Japan. There is also evidence that these Asian markets become more integrated over time, especially since 1994. A higher import share as well as a greater differential in inflation rates, real interest rates, and gross domestic product growth rates have negative effects on stock market comovements between country pairs. Conversely, increased export share by Asian economies to Japan and greater foreign direct investment from Japan to other Asian economies contribute to greater comovement.     

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.     

Mutual Funds and Stock and Bond Market Stability

The unprecedented growth of mutual funds has raised questions about the impact of mutual fund flows on stock and bond prices. Many believe that the equity bull market of the 1990s is attributable to the huge flows of funds into equity mutual funds during this period and that a withdrawal of those funds could send stock prices plummeting. This article investigates the relationship between aggregate monthly mutual fund flows (sales, redemptions, and net sales) and stock and bond monthly returns during a 30-year period beginning January 1961 utilizing Granger causality and instrumental variables analysis. With one exception, flows into stock and bond funds have not affected either stock and bond returns. The exception is 1971–1981, when widespread redemptions from equity mutual funds significantly depressed stock returns. In contrast, the magnitude of flows into both stock and bond funds are affected significantly by stock and bond returns.     

The Impact of Investment Opportunities and Free Cash Flow on Financial Liberalization:A Cross-Firm Analysis of Emerging Economies

This study undertakes firm-level analysis of investment opportunities and free cash flow in an attempt to explain the source of the wealth effect of financial liberalization for 14 emerging countries. We find that the market's responses to stock market liberalization announcements are more favorable for high-growth firms than for low-growth firms, a result that is consistent with the investment opportunities hypothesis. We also demonstrate that firms with high cash flow experience lower announcement-period returns associated with stock market liberalization than do firms with low cash flow. Our findings suggest that the free cash flow hypothesis dominates the corporate governance hypothesis in terms of the net effect of stock market liberalization on a firm's stock returns. We further document similar evidence with regard to banking liberalization. Finally, we demonstrate that stock market liberalization leads to the more efficient allocation of capital.     

Pseudo Market Timing and the Long-Run Underperformance of IPOs

Numerous studies document long-run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed ex-post in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. Ex-post , issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when ex-ante expected abnormal returns are zero, median ex-post underperformance for equity issuers will be significantly negative in event-time. Using calendar-time returns solves the problem.     

The Stock Market and the Financing of Corporate Growth in Africa: The Case of Ghana

This paper examines corporate financing patterns in Ghana, in particular, whether listed Ghanaian corporations make considerable use of the stock market to finance their growth. The paper also examines econometrically the effect of stock market development on the importance of debt relative to external equity in the balance sheet of Ghanaian firms. The results show that the average listed Ghanaian firm finances its growth mainly from short-term debt. The stock market, however, is the most important source of longterm external finance. Stock market development tends to shift the financial structure of Ghanaian firms toward more equity and less debt. Overall, the evidence suggests that the stock market is a surprisingly important source of finance for funding corporate growth.     

Market Misvaluation,Managerial Horizon,and Acquisitions

This paper analyzes the impact of managerial horizon on mergers and acquisitions activity. The main predication is that acquiring firms managed by short-horizon executives have higher abnormal returns at acquisition announcements, less likelihood of using equity to pay for the transactions, and inferior postmerger stock performance in the long run. I construct two proxies for managerial horizon based on the CEO's career concern and compensation scheme, and provide empirical evidence supporting the above prediction. Moreover, I also demonstrate that long-horizon managers are more likely to initiate acquisitions in response to high stock market valuation.     

Foreign competition for shares and the pricing of information asymmetry: Evidence from equity market liberalization

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.     

Financial Restatements, Cost of Debt and Information Spillover: Evidence From the Secondary Loan Market

Abstract:  In this paper, we investigate the effect of financial restatements on the debt market. Specifically, we focus on the secondary loan market, which has become one of the largest capital markets in the US, and ask the following: (1) whether financial restatements increase restating firm's cost of debt financing and (2) whether the information about restatements arrives at the secondary loan market earlier than at the stock market? Using 176 restatement data, we find significant negative abnormal loan returns and increased bid-ask spreads around restatement announcements. Furthermore, this negative loan market reaction is more pronounced when the restatement is initiated by either the SEC or auditors, and when the primary reason for restatement is related to revenue recognition issues. Additionally, we find restatement information arrives at the secondary loan market earlier than at the equity market, and that such private information quickly flows into the equity market. We also show that stock prices begin to decline approximately 30 days prior to the restatement announcements for firms with traded loans. However, we do not find such informational leakage for firms without traded loans. Collectively, the results of this paper suggest: (1) increased cost of debt financing after restatements and (2) superior informational efficiency of the secondary loan market to the stock market.