Fund ownership and stock price informativeness of Chinese listed firms

We examine the impact of mutual fund ownership on stock price informativeness in China. Existing evidence shows that stock price informativeness is low in China, and attributes this to firms’ lack of disclosure incentives under the weak investor protection institutional environment. Mutual funds are more sophisticated and influential than individual investors to monitor firms, and thus serve as an external governance mechanism to improve corporate transparency. However, the impact of mutual funds in China can also be moderated by state ownership of listed firms, which reduces firms’ dependence on outside investors for capital. Indeed, we find that mutual fund ownership is positively related to share price informativeness, but this effect is less pronounced among state-controlled firms. The main policy implication from our findings is that mutual funds contribute to the corporate information environment of emerging economies but further privatization of listed firms would be needed to realize greater benefit.     

Expected Returns and Idiosyncratic Risk: Industry-Level Evidence from Russia

We explore a relation between expected returns and idiosyncratic risk in Russia. Investors in the Russian stock market cannot fully diversify their portfolios due to transaction costs, information gathering and processing costs, and shortcomings in investor protection. This implies that investors demand a premium for idiosyncratic risk. We estimate the price of idiosyncratic risk using MIDAS regressions and a cross section of Russian industry portfolios. We find that idiosyncratic risk is economically significant and commands a negative (positive) premium, on average, of 10.0% (8.0) per year before (after) the global financial crisis in 2008. The results remain unaffected after controlling for global pricing factors and return reversal.     

Media Coverage and the Cross-section of Stock Returns

By reaching a broad population of investors, mass media can alleviate informational frictions and affect security pricing even if it does not supply genuine news. We investigate this hypothesis by studying the cross-sectional relation between media coverage and expected stock returns. We find that stocks with no media coverage earn higher returns than stocks with high media coverage even after controlling for well-known risk factors. These results are more pronounced among small stocks and stocks with high individual ownership, low analyst following, and high idiosyncratic volatility. Our findings suggest that the breadth of information dissemination affects stock returns.     

Idiosyncratic risk and the cross-section of stock returns: Merton (1987) meets Miller (1977)

Merton [1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510] predicts that idiosyncratic risk should be priced when investors hold sub-optimally diversified portfolios, and cross-sectional stock returns should be positively related to their idiosyncratic risk. However, the literature generally finds a negative relationship between returns and idiosyncratic risk, which is more consistent with Miller's [1977. Risk, uncertainty, and divergence of opinion. Journal of Finance 32, 1151–1168] analysis of asset pricing under short-sale constraints. We examine the cross-sectional effects of idiosyncratic risk while explicitly recognizing the confounding effects that dispersion of beliefs and short-sale constraints produce in the Merton framework. We find strong support for Merton's [1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510] model among stocks that have low levels of investor recognition and for which short selling is limited. For these stocks, the relation between idiosyncratic risk and expected returns is positive, as predicted by Merton [1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510].     

Accrual mispricing: Evidence from European sovereign debt crisis

PurposeThis paper examines the accrual anomaly on the European market and the impact of the financial crisis on its dynamics.Design/methodology/approachUsing a sample of public European firms, during the period 2005-2016, this paper follows Sloan (1996) seminal work and measures accruals as Dechow, Sloan and Sweeney (1995).FindingsThere is no evidence that accrual anomaly persists on European markets. The study shows that, contrary to previous research, investors are not underweighting the accrual component of earnings and that accruals are not a good predictor of future stock returns.Research limitations/implicationsOur study has two limitations. First, due to the lack of data, the original sample was reduced to about one third. Second, results must be interpreted carefully since the sample period may be seen as an outlier case attributed to the crisis. Research on future years may unveil a conclusion on this.Practical implicationsResults suggest that transaction costs and idiosyncratic risk are no longer a barrier to investors. Results also point toward a possible new outcome in investor´s behaviour during crisis. Economically, given the lower returns that can be obtained on today markets, it makes sense that investors may reduce their risk aversion levels to get more returns.Originality/valueThis study contributes to the ongoing debate about accruals anomaly and market efficiency. To the best of our knowledge, it provides an original contribution to the literature by framing the accrual anomaly during the European debt crisis.     

Family control and idiosyncratic volatility: Evidence from listed firms in Hong Kong

Family control of listed firms in Hong Kong is substantively different and materially higher than in the US which could offer different insights into the effects of family ownership on corporate transparency. Using a sample of listed Hong Kong firms and idiosyncratic volatility as a proxy for firm-specific stock price informativeness, we find that family firms exhibit higher idiosyncratic volatility of stock prices than similar non-family firms. Further, the relation between family ownership and idiosyncratic volatility is weaker for firms with higher leverage but stronger in periods before equity issues. Additionally, we find that family firms disclose more information, particularly related to operations, than nonfamily firms in annual reports. These results are consistent with the argument that family firms disclose more information than their nonfamily peers to reassure skeptical outside investors that they are not expropriating their investment.     

Foreign and Local Institutional Ownership and the Speed of Price Adjustment

Abstract:  This paper examines the relation between the speed of price adjustment and stock ownership by foreign and local institutional investors using data from the Korean stock market. We show that returns of stocks with high foreign institutional ownership lead returns of stocks with low foreign institutional ownership, especially after foreign ownership restriction is lifted. Likewise, returns of stocks with high local institutional ownership lead returns of stocks with low local institutional ownership. These results support the idea that foreign institutional (local institutional) investors have faster access to or processing power of new information than local institutional (local individual) investors.     

Investor Protection and the Mode of Acquisition: Implications for Ownership Dilution and Formation of Pyramids

This paper examines how investor protection affects mode of acquisition and shapes subsequent control structures. I find that (stock‐based) mergers are more likely when investors are well protected, while (cash‐based) control transactions are more prevalent under weak protection. Repeated acquisitions by common law firms result in substantial ownership dilution especially in the United States, but not in civil law countries. Alternatively, a series of acquisitions in civil law countries linked through firms that are bidders in one acquisition, but targets in another, tends to generate a corresponding series of intercorporate control pyramids, while such correspondence is much weaker in common law countries.     

Incomplete information,idiosyncratic volatility and stock returns

When investors have incomplete information, expected returns, as measured by an econometrician, deviate from those predicted by standard asset pricing models by including a term that is the product of the stock’s idiosyncratic volatility and the investors’ aggregated forecast errors. If investors are biased this term generates a relation between idiosyncratic volatility and expected stocks returns. Relying on forecast revisions from IBES, we construct a new variable that proxies for this term and show that it explains a significant part of the empirical relation between idiosyncratic volatility and stock returns.     

Block ownership and firm-specific information

This study examines the impact of block ownership on the firm’s information environment. Previous research shows that stock price efficiency depends on the cost of acquiring private information, as well as on the precision of this information. Blockholders have a clear advantage over diffuse, atomistic shareholders in terms of the precision and acquisition cost of their private information. We hypothesize that this informational advantage will manifest itself primarily in the firm-specific component of stock returns. Our empirical findings confirm that blockholders increase the probability of informed trading and idiosyncratic volatility, and decrease the firm’s stock return synchronicity. These results hold for both inside and outside blockholders, but are insignificant for blocks controlled by employee stock ownership plans (ESOPs). Overall, our findings support the contention that ownership structure plays a significant role in shaping the firm’s information environment.     

Local institutional investors,information asymmetries,and equity returns

We examine the informational role of geographically proximate institutions in stock markets. We find that both the level of and change in local institutional ownership predict future stock returns, particularly for firms with high information asymmetry; in contrast, such predictive abilities are relatively weak for nonlocal institutional ownership. The local advantage is especially evident for local investment advisors, high local ownership institutions, and high local turnover institutions. We also find that the stocks that local institutional investors hold (trade) earn higher excess returns around future earnings announcements than those that nonlocal institutional investors hold (trade).     

Information Inertia

We show that aversion to risk and ambiguity leads to information inertia when investors process public news about assets. Optimal portfolios do not always depend on news that is worse than expected; hence, the equilibrium stock price does not reflect this bad news. This informational inefficiency is more severe when there is more risk and ambiguity but disappears when investors are risk‐neutral or the news is about idiosyncratic risk. Information inertia leads to news momentum (e.g., after earnings announcements) and is consistent with low household trading activity. An ambiguity premium helps explain the macro and earnings announcement premium.     

市场摩擦对特质风险溢价的影响效应——基于A股主板市场的实证分析

与国外发达市场相比,我国A股主板市场的市场摩擦因素对市场微观结构和资产定价的影响更大。在防范和化解系统性风险的过程中,进一步分析市场摩擦如何作用于特质风险定价效应的问题具有重要的理论和现实意义。本文通过采用多维市场摩擦指标来代理信息不对称、交易成本、买卖限制、卖空限制、风险对冲和外部冲击,检验中国股市特质风险和预期收益率的关系,并判断出市场摩擦因素间的差异性影响机制。回归发现,市场摩擦和特质风险因子(特质波动率和特质偏度)都具有定价效应。各维度市场摩擦因素降低了股票流动性,进而增强了特质波动率的负向定价效应,部分解释了“特质波动率之谜”,但市场摩擦对特质偏度因子溢价的影响较为微弱。同时,基于特质波动率和特质偏度因子的投资策略能够产生超越CAPM、三因子和五因子模型的绝对收益,并印证了市场摩擦对特质风险因子绝对收益的影响作用。     

Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income

This paper examines how risky labor income and retirement affect optimal portfolio choice. With idiosyncratic labor income risk, the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors, consistent with the typical recommendations of investment advisors. Increasing idiosyncratic labor income risk raises investors' willingness to save and reduces their stock portfolio allocation towards the level of retired investors. Positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors.     

Do institutional ownership and innovation influence idiosyncratic risk?

Business decisions influence the level of idiosyncratic risk. Several factors that contribute to idiosyncratic risk must be explored. Therefore, we examine the impact of innovation and institutional ownership on idiosyncratic risk for NYSE- and NASDAQ-listed firms. The sample contains 30,888 firm-year observations based on annual data from 2003 to 2016. We use a dynamic panel approach to address potential endogeneity difficulties when analyzing the results. Large-scale innovation activity, institutional investors, and innovation reduce idiosyncratic risk. Furthermore, the interactions between institutional investors and high-level ownership stakeholders considerably minimize idiosyncratic risk. Our study demonstrates that the degree to which firms adopt innovation and institutional ownership may affect firm-specific hazards.     

High Idiosyncratic Volatility and Low Returns: A Prospect Theory Explanation

The well‐documented negative relationship between idiosyncratic volatility and stock returns is puzzling if investors are risk‐averse. However, under prospect theory, while investors are risk‐averse in the domain of gains, they exhibit risk‐seeking behavior in the domain of losses. Consistent with risk‐seeking investors’ preference for high‐volatility stocks in the loss domain, we find that the negative relationship between idiosyncratic volatility and stock returns is concentrated in stocks with unrealized capital losses, but is nonexistent in stocks with unrealized capital gains. This finding is robust to control for short‐term return reversals and maximum daily return, among other variables.     

Ownership Restrictions and Stock Prices: Evidence from Chinese Markets

In this paper, I test a one-period capital asset pricing model (CAPM) under share ownership restrictions to explain differences in prices and expected excess returns between the classes of shares that can be bought and traded by domestic and foreign investors, respectively, in the Chinese stock markets. I find that cross-sectional variability in the spread between the expected domestic and foreign share excess returns is related to differences in individual shares' market betas. The empirical results are by and large consistent with the CAPM. After the betas are controlled for, idiosyncratic variance and firm size have no effect.     

Institutional investors: Arbitrageurs or rational trend chasers

This paper studies the relationship between institutional investor holdings and stock misvaluation in the U.S. between 1980 and 2010. I find that institutional investors overweigh overvalued and underweigh undervalued stocks in their portfolio, taking the market portfolio as a benchmark. Cross-sectionally, institutional investors hold more overvalued stocks than undervalued stocks. The time-series studies also show that institutional ownership of overvalued portfolios increases as the portfolios' degree of overvaluation. As an investment strategy, institutional investors' ride of stock misvaluation is neither driven by the fund flows from individual investors into institutions, nor industry-specific. Consistent with the agency problem explanation, investment companies and independent investment advisors have a higher tendency to ride stock misvaluation than other institutions. There is weak evidence that institutional investors make a profit by riding stock misvaluation. My findings challenge the models that view individual investors as noise traders and disregard the role of institutional investors in stock market misvaluation.     

Idiosyncratic volatility,fundamentals, and institutional herding: Evidence from the Japanese stock market

Using Japanese data from 1975 to 2003, we show that both institutional herding and firm earnings are positively related to idiosyncratic volatility. We reject the hypothesis that institutional investors herd toward stocks with high idiosyncratic volatility and systematic risk. Our results suggest that a behavior story may explain the negative premium earned by high idiosyncratic volatility stocks found by Ang et al. [Ang, Andrew, Hodrick, Robert J., Yuhang Xing, Xiaoyan Zhang, 2004. The cross-section of volatility and expected returns, Forthcoming Journal of Finance]. We also find that the dispersions of change in institutional ownership and return-on-asset move together with the market aggregate idiosyncratic volatility over time. Our results suggest that investor behavior and stock fundamentals may both help explain the time-series pattern of market aggregate idiosyncratic volatility.     

Stock price synchronicity,crash risk,and institutional investors

Both stock price synchronicity and crash risk are negatively related to the firm's ownership by dedicated institutional investors, which have strong incentive to monitor due to their large stake holdings and long investment horizons. In contrast, the relations become positive for transient institutional investors as they tend to trade rather than monitor. These findings suggest that institutional monitoring limits managers' extraction of the firm's cash flows, which reduces the firm-specific risk absorbed by managers, thereby leading to a lower R². Moreover, institutional monitoring mitigates managerial bad-news hoarding, which results in a stock price crash when the accumulated bad news is finally released.