Stock Market Development and the Decline of the Portion of Dividend Payers throughout the World

I contend that stock market development has substantially contributed to the decline of dividend payers worldwide. Using data from 31 countries, my research shows that stock market development makes firms in countries with a relatively high dependence on stock market financing less likely to pay dividends, to pay less, and more likely to omit. These results also are robust to the sample selection, the time‐varying firm characteristics, and the differences in legal systems, capital market scales, and country‐level information disclosure.     

International diversification strategies: Revisited from the risk perspective

Following Roll [Roll, R., 1992. Industrial structure and comparative behaviour of international stock market indices. Journal of Finance 47, 3–42] and Heston and Rouwenhorst [Heston, S.L., Rouwenhorst, G.K., 1994. Does industrial structure explain the benefits of international diversification. Journal of Financial Economics 36, 3–27], researchers have decomposed stock returns into country and industry components. Evidence suggests that industry components have become more important in recent years, but the reasons for this are unclear. Existing research concentrated mainly on stock returns in industrial countries. In this paper we consider instead the decomposition of stock risks within emerging equity markets. We provide a rationale for this procedure and its relationship to return decompositions. The results provide new firm-specific evidence on the debate over country and industry components, their stability over time, and the implications for portfolio diversification.     

International portfolio diversification: Currency,industry and country effects revisited

We examine the relative importance of country, industry, world market and currency risk factors for international stock returns. Our approach focuses on testing the mean-variance efficiency of the various factor portfolios. An unconditional analysis does not show significant differences between country, industry and world portfolios, nor any role for currency risk factors. However, when we allow expected returns, volatilities and correlations to vary over time, we find that equity returns are mainly driven by global industry and currency risk factors. We propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets.     

International Stock Return Comovements

We examine international stock return comovements using country‐industry and country‐style portfolios as the base portfolios. We first establish that parsimonious risk‐based factor models capture the data covariance structure better than the popular Heston–Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, there is no evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short‐lived phenomenon. Third, large growth stocks are more correlated across countries than are small value stocks, and the difference has increased over time.     

The Importance of Industry and Country Effects in the EMU Equity Markets

Most empirical studies find that country effects are larger than industry effects in stock returns, although industry effects have gained in importance recently. Our results support the dominance of country effects relative to industry and common effects in the EMU equity markets in the 1975–2001 period. However, there is an increasing importance of industry effect relative to country effect in the 1990s. In fact, industry effects is similar in magnitude to country effect in the post‐euro period. The evolution of the ratio of country to industry effect is explained by the decrease in the cross‐sectional variance of interest rate movements across EMU countries. Thus, there is evidence that nominal convergence has reduced the differences between national equity markets.     

Does institutional ownership matter for international stock return comovement?

We study the link between international stock return comovements and institutional investment. We test whether the rise of institutional ownership has increased cross-country correlations and decreased cross-industry correlations. Using stock-level institutional holdings across 45 countries during the 2001–2010 period, we find that industry and global factors are relatively more important the country factors in explaining stock return variation among stocks with higher institutional ownership. Industry diversification strategies are more beneficial than country diversification strategies for stocks with high institutional ownership. We show that cross-border portfolio investment is a powerful force of international capital market integration and convergence of asset prices.     

Another look at the role of the industrial structure of markets for international diversification strategies

This paper re-examines the extent to which gains from international diversification are due to differences in industrial structure across countries. Recent papers by Roll (1992), Journal of Finance 47, 3–42 and Heston and Rouwenhorst (1994), Journal of Financial Economics 36, 3–27 investigate this issue and find conflicting evidence. Using a new database, the Dow Jones World Stock Index, with coverage in 25 countries and over 66 industry classifications, we decompose comprehensively both country and industrial sources of variation. We confirm that little of the variation in country index returns can be explained by their industrial composition. We also uncover differences in the proportion of variation in industry index returns that is captured by country and industry factors and discuss the implications for global diversification strategies.     

CAN STOCK MARKET LIBERALIZATION IN EMERGING ECONOMIES MITIGATE LEGAL SYSTEMS DEFICIENCIES?

We document positive valuation effects around the time of stock market liberalization. We find that the valuation effects are larger for countries with civil law traditions compared with countries with common law origins. Similarly, we find that countries with weaker shareholder protections exhibit greater market valuation increases compared with countries with stronger shareholder protections. The results reinforce the importance of country legal systems and of shareholder protections in determining the quality of corporate governance systems and financial market outcomes. The findings suggest that stock market liberalization may mitigate deficiencies in the existing institutional environments not supportive of effective corporate governance systems.     

Transition to the Euro and its impact on country portfolio diversification

By examining the impact of the introduction of the Euro on stock markets and on country diversification within the Eurozone, the evidence does not suggest a high risk to the stock market to justify a risk premium as a result of currency union. Although the Euro market integration has increased inter-country correlations, it does not preclude gains from international diversification, which partially rely on the non-Eurozone countries for an optimal portfolio in a mean-variance framework. Furthermore, the empirical evidence supports that there is a significant stationarity of average correlations over time between pre-Euro and post-Euro periods, and it has improved since the introduction of the Euro. Also, results show that the Euro produced a change in volatility with a different pace within the Eurozone vis-à-vis non-Eurozone countries, to support a direct and opposite relationship between volatility and correlation.     

U.S. takeovers in foreign markets: Do they impact emerging and developed markets differently?

We investigate the effect that U.S. acquisitions of targets in emerging and developed countries have on the targets' rivals by measuring their stock price reaction to the acquisition announcement. On average, emerging market rivals react positively to these acquisitions while the reaction in developed markets is insignificant. In developed markets, the main factors explaining the reaction of rival firms are individual rival characteristics such as rival size, efficiency, growth opportunities, and leverage. In contrast, in emerging markets, country, industry, and acquisition characteristics such as economic development, shareholder protection, and the target's public status, industry, and percent acquired, play a more important role.