Ex-dividend Day Pricing in New Zealand

Controversy continues over the question of tax clientele effects in the pricing of shares that pay dividends. The empirical results remain inconclusive, with variations in testing methods and sample formation the probable causes of much of the variation in outcomes. This study focuses on testing for the presence of a tax clientele effect consistent with prior tests for the same effect using a sample from a particular tax regime period in New Zealand in which companies could pay either or both taxable and non-taxable dividends. The results are generally consistent with the presence of a tax clientele effect in the New Zealand market for the time period, while providing essentially no support for the short term trading hypothesis.
JEL classification: G10; G15     

The effect of accounting firm mergers on the market for audit services: New Zealand evidence

This article examines the outcomes of accounting firm mergers using data about the frequency of audit switches, the numbers of partners in the respective firms, and perceptions revealed in interviews with partners. Evidence from client switches does not show any evidence that the mergers were followed by cost reductions, or of collusion to force prices up. The effects of the mergers appear to have been elsewhere—the merging firms reduced partner numbers substantially, increasing partner leverage so that individual remaining partners were better off. Data from interviews confirm these findings, and show that the culture of individual firms had a significant effect on determining which group of partners controlled the merged firm.     

Cash, investments and asset returns

We use an investment-based asset pricing model to examine the effect of firms’ investments relative to cash holdings on stock returns, assuming holding cash lowers transaction costs. We find that mimicking portfolios based on investments relative to non-cash capital and based on investments relative to cash capital are priced for various testing portfolios. On average, momentum stocks and growth stocks are more sensitive to the factor constructed using investment relative to cash.     

In America's thrall: the effects of the US market and US security characteristics on Australian stock returns

Can Australian equity returns be modelled by ‘home‐grown’ factors? We examine the indigenous capital asset pricing model, the indigenous Fama–French three‐factor model, and extensions to the latter, and find them all wanting. We find evidence of domestic market segmentation in Australia. For the smallest firms, all the models we study fail. For the largest Australian firms, we find that the US Fama–French three factors (downloaded from French's website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ ) provide a successful model of Australian returns. It is as if the largest firms in the Australian market are simply part of the larger US market.     

Risk factors in Australian bond returns

This study examines the risk factors in Australian bond returns. The study quantifies bond liquidity and estimates a liquidity risk factor in the Australian setting. We develop a three‐factor asset pricing framework that uses term, default and liquidity risk factors to explain the variation of Australian bond returns. Our findings corroborate the US evidence on the pervasiveness of these risk factors faced by bond investors. The three‐factor model developed in this study has practical applications when calculating the cost of debt, evaluating the performance of an active bond fund manager and hedging underlying risk in a bond portfolio.     

Long-run returns following open market share repurchases

Past studies find abnormal returns to buying after repurchase program announcements. We analyze the profitability of trading after both program announcements and individual repurchase trade publication using different trading strategies – market and limit orders. The analysis of trades is possible because of a unique Canadian data set. The highest abnormal returns are earned by companies on their own repurchase trades which benefits the non-tendering shareholders. For the public investor, we find no strategies that, in practice, would earn abnormal returns to buying after program announcements. However, there is qualified evidence of abnormal returns to a limit order strategy following publication of individual repurchase trades.     

Audit Education for Future Professionals: Perceptions of New Zealand Auditors

Audit professionals are charged with gathering evidence and expressing their opinions on the financial claims made by others. In New Zealand, as elsewhere, these opinions are relied upon for a myriad of decisions as to the economic position and operations of an organisation. The educational experience that future professionals receive in their tertiary study is important because it lays the pedagogical foundation for this role. The aim of this study is to evaluate those teaching practices, subjects and techniques that might be of value to future audit professionals. The analysis is uniquely from the perspective of the professional members who are most likely to benefit from students' experiences. The literature is used to identify relevant questions, and a survey of 360 professional auditors in New Zealand yielded a 36.4% response rate. A triangulated analysis of comments and scaled questions reveals that these professionals are concerned with communication, small business engagements and the relationships between, for example, risk and planning and independence and ethics. Findings also confirm the value of experiential and practice-informed learning and direct us to a few topics that may accommodate non-traditional teaching methods. Conclusions consider implications for teaching and future research.     

Slow-moving capital and stock returns

This paper studies the effects that delay in capital allocations in the stock market and high short-term trading incentives have on returns of this market. We report that capital inertia makes the Sharpe ratio and the volatility of the stock returns many times higher than in an economy with no capital delays. Furthermore, in agreement with empirical literature, the stock price displays short-term overreaction and high volatility of the conditional Sharpe ratio.     

Foreign exchange risk and the cross-section of stock returns

We examine the relation between the cross-section of US stock returns and foreign exchange rates during the period from 1973 to 2002. We find that stocks most sensitive to foreign exchange risk (in absolute value) have lower returns than others. This implies a non-linear, negative premium for foreign exchange risk. Sensitivity to foreign exchange generates a cross-sectional spread in stock returns unexplained by existing asset-pricing models. Consequently, we form a zero-investment factor related to foreign exchange-sensitivity and show that it can reduce mean pricing errors for exchange-sensitive portfolios. One possible explanation for our findings includes Johnson's [2004. Forecast dispersion and the cross-section of expected returns. Journal of Finance, 59, 1957–1978] option-theoretic model in which expected returns are decreasing in idiosyncratic cashflow volatility.     

Downside risk of international stock returns

This paper investigates the downside risk exposure of international stock returns in 14 major industrialized economies around the world. For the period 1975–2010, we find that differences in returns on value and growth portfolios can be rationalized by assets’ reagibilities to market’s downside shocks. International value stocks are particularly sensitive to market’s permanent downside shocks, while international growth stocks are particularly sensitive to market’s temporary downside shocks. In line with recent evidence for the US, risk associated with unfavorable changes in market’s cash-flow innovations carries a premium which is pervasive and statistically significant.     

Factors influencing the performance of foreign-owned banks in New Zealand

This article reviews factors affecting the performance of foreign-owned banks in New Zealand, where they control 99.2% of all banking system assets. Two sets of pooled cross-sectional time-series data—seven banks over the 10-year period 1991–2000 and eight banks over the 8-year period 1991–1998—provided the basis for the econometric analysis. The most important variables for bank performance were the length of time the foreign bank had been in New Zealand and the parent bank's return on assets. This suggests that parent-bank specific ownership advantages are the dominant factor in their subsidiaries’ performance in New Zealand.     

Credit ratings and the cross-section of stock returns

Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints.     

Information diffusion and the predictability of New Zealand stock market returns

This paper examines the impact of international predictors from liquid markets on the predictability of excess returns in the New Zealand stock market using data from May 1992 to February 2011. We find that US stock market return and VIX contribute significantly to the out‐of‐sample forecasts at short horizons even after controlling for the effect of local predictors, while the contribution by Australian stock market return is not significant. We further demonstrate that the predictability of New Zealand stock market returns using US market predictors could be explained by the information diffusion between these two countries.     

Liquidity risk and the cross-section of hedge-fund returns

This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important determinant in the cross-section of hedge-fund returns. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6% annually, on average, over the period 1994–2008, while negative performance is observed during liquidity crises. The returns are independent of the liquidity a fund provides to its investors as measured by lockup and redemption notice periods, and they are also robust to commonly used hedge-fund factors, none of which carries a significant premium during the sample period. These findings highlight the importance of understanding systematic liquidity variations in the evaluation of hedge-fund performance.     

Dividend Imputation and Shareholder Wealth: The Case of New Zealand

On April 1, 1988, New Zealand stopped the double taxation of dividends by implementing a full dividend imputation program. Because many believed that the tax advantage of debt had led to more highly leveraged firms subject to greater financial risk than was socially optimal, it was hoped the removal of incentives to finance with debt would result in a more efficient allocation of capital. The empirical results suggest that the shareholder wealth gain from dividend imputation was more than offset in firms with large debt levels. Moreover, an examination of debt ratios indicates debt levels declined in the post–imputation period.     

Wavelet timescales and conditional relationship between higher-order systematic co-moments and portfolio returns

This paper investigates the association between portfolio returns and higher-order systematic co-moments at different timescales obtained through wavelet multi-scaling, a technique that decomposes a given return series into timescales enabling investigation at different return intervals. In Australian industry portfolios, the relative risk positions indicated by systematic co-moments at some timescales are different from those revealed in daily returns. A strong positive (negative) linear association between beta and portfolio return and co-kurtosis and portfolio return in the up (down) market is observed in daily returns and at different timescales. The beta risk is priced in the up and down markets. Co-kurtosis is not priced when the beta is in the pricing model. Co-skewness appears to be priced at a relatively high timescale and this is observed only after the up and down separation of market returns.     

Detecting log-periodicity in a regime-switching model of stock returns

Log-periodic precursors have been identified before most and perhaps all financial crashes of the Twentieth Century, but efforts to statistically validate the leading model of log-periodicity, the Johansen–Ledoit–Sornette (JLS) model, have generally failed. The main feature of this model is that log-harmonic fluctuations in financial prices are driven by similar fluctuations in expected daily returns. Here we search more broadly for evidence of any log-periodic variation in expected daily returns by estimating a regime-switching model of stock returns in which the mean return fluctuates between a high and a low value. We find such evidence prior to the two largest drawdowns in the S&P 500 since 1950. However, if we estimate a log-harmonic specification for the stock index for the same time periods, fixing the frequency and critical time according to the results of the regime-switching model, the parameters do not satisfy restrictions imposed by the JLS model.     

Explaining abnormal returns in stock markets: An alpha-neutral version of the CAPM

This paper develops a behavioural asset pricing model in which traders are not fully rational as is commonly assumed in the literature. The model derived is underpinned by the notion that agents’ preferences are affected by their degree of optimism or pessimism regarding future market states. It is characterized by a representation consistent with the Capital Asset Pricing Model, augmented by a behavioural bias that yields a simple and intuitive economic explanation of the abnormal returns typically left unexplained by benchmark models. The results we provide show how the factor introduced is able to absorb the “abnormal” returns that are not captured by the traditional CAPM, thereby reducing the pricing errors in the asset pricing model to statistical insignificance.     

Monotonicity in asset returns: New tests with applications to the term structure,the CAPM,and portfolio sorts

Many theories in finance imply monotonic patterns in expected returns and other financial variables. The liquidity preference hypothesis predicts higher expected returns for bonds with longer times to maturity; the Capital Asset Pricing Model (CAPM) implies higher expected returns for stocks with higher betas; and standard asset pricing models imply that the pricing kernel is declining in market returns. The full set of implications of monotonicity is generally not exploited in empirical work, however. This paper proposes new and simple ways to test for monotonicity in financial variables and compares the proposed tests with extant alternatives such as t-tests, Bonferroni bounds, and multivariate inequality tests through empirical applications and simulations.     

Long-term U.S. infrastructure returns and portfolio selection

Our understanding of the long-term return behavior and portfolio characteristics of public infrastructure investments is limited by a relatively short history of empirical data. We re-construct U.S. listed infrastructure index returns by mapping their monthly performance to received systematic and industry risk factors from 1927 through 2010. Our findings reveal that the infrastructure returns in recent years may understate the tail-risk that investors could experience over the long-term, however, this tail-risk is commensurate with holding a broad portfolio of U.S. stocks. For mean-variance and mean-CVaR investors, we report the benefits of holding public infrastructure assets in investment portfolios.