Price discovery for cross-listed firms with foreign IPOs

We investigate the inter-market return and volatility linkages for an atypical case of firms with foreign IPOs that subsequently cross-listed in their domestic market. In particular, our data set consists of a unique sample of 29 Israeli firms that went public in the US (host market) and then cross-listed in the Israeli market (home market). To estimate the spillover effects, we employ bivariate GARCH models, assuming both constant and dynamic conditional correlation specifications. At the aggregate market level, we find unidirectional mean and volatility spillovers from the US to the Israeli market. For the portfolios of Israeli cross-listed stocks, we report significant spillovers, at both the mean and volatility levels, from the underlying stocks in the Israeli market to their American Depository Receipts (ADRs) but not vice versa. Thus, the home market dominates the host market in the price discovery process in this atypical international cross-listing case, providing new evidence in support of the home bias hypothesis. We also find that external shocks originating from the Middle East peace process have no impact on the conditional correlation between the two markets but external shocks originating from the world and regional markets impact the conditional correlation positively.     

What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide

We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.     

Portfolio preferences of foreign institutional investors

This paper examines the investment allocation choices of actively-managed US mutual funds in emerging market equities after the market crises of the 1990s. We analyze both country- and firm-level disclosure and institutional policies that influence mutual funds’ allocation choices relative to major stock market indices. At the country level, we find that US funds invest more in open emerging markets with stronger accounting standards, shareholder rights, and legal frameworks. At the firm level, US funds are found to invest more in firms that adopt discretionary policies such as greater accounting transparency and the issuance of an ADR. Our results suggest that steps can be taken both at the country and the firm level to create an environment conducive to foreign institutional investment.     

Cross-border regulatory enforcement and corporate voluntary disclosure

In this study, we find that foreign firms cross-listed in the US issue significantly more and better-quality management earnings forecasts after their home countries sign the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU), a nonbinding arrangement established by the International Organization of Securities Commissions to enhance the cross-border enforcement of securities laws. Specifically, we find that after the MMoU, relative to their domestic counterparts in the US, foreign firms cross-listed in the US are not only more likely to issue management earnings forecasts but also issue them more frequently. They also tend to issue better-quality earnings forecasts, as measured by lower surprise, higher precision, greater timeliness, more disaggregation, lower optimism and fewer errors. We find that the observed effects of the MMoU signing are stronger for cross-listed firms from countries with weaker institutional environments, resulting in greater enforcement concerns after the MMoU, and for firms with less foreign institutional ownership before the MMoU. Collectively, our findings support the conjecture that after a US-listed foreign firm's home country enters the MMoU, the firm has more incentives to engage in voluntary disclosure due to greater concerns about regulatory enforcement and increased information demand from investors.     

Monetary policy and portfolio rebalancing: Evidence from European equity mutual funds

In this study, we provide empirical evidence on the portfolio rebalancing of European equity mutual funds following both conventional (CMP) and unconventional monetary policies (UMP). We use 1772 equity mutual funds’ portfolio holdings over the period 2002Q4–2016Q4. This level of granularity allows us to characterise the funds’ asset allocation in different portfolio dimensions: the size, style, currency, and domicile of the stocks, and managers’ preferred investment strategies. Using a panel fixed effect estimator, our results support the existence of portfolio rebalancing across equity categories following UMP. European equity mutual funds’ assets are, on average, reallocated towards mid-cap, and core stocks and developing economies, and shifted away from small-cap and value stocks and home as well as developed countries. Furthermore, mutual funds seem to concentrate on their preferred and historical investment strategies. These two results suggest that managers are more willing to invest in safer and familiar stocks following UMP announcements thereby decreasing the risk of asymmetry of information. We finally show that the funds size, returns volatility and expense ratio affect the strength of the rebalancing.     

Style drift: Evidence from small-cap mutual funds

This paper documents that small-cap mutual funds allocate on average 27% of their portfolio to mid- and large-cap stocks. We find that larger and older small-cap funds are more likely to hold mid- and large-cap stocks, consistent with funds straying from their objective over time. Funds that invest heavily in mid- and large-cap stocks expose their investors to unanticipated risks but investors do not experience higher abnormal returns or performance persistence overall. These funds did outperform their peers by 3% annually in the most recent period between January 2003 and March 2010.     

What determines mutual fund trading in foreign stocks?

We examine the portfolio rebalancing, measured by the equity churn rate, of mutual funds from 29 countries based on annual stockholdings over the 1999–2006 period. We find that funds more often trade the stocks of companies located in countries with higher degree of information asymmetry and are less familiar to fund managers, after we control for the effects of stock market development and investor protection. Consistent with the behavioral bias, fund managers more often rebalance stocks in foreign markets that perform well. This bias is exacerbated when fund managers are less familiar with and less informed about those markets.     

Barriers to international investing and market segmentation: Evidence from Indian GDR market

In this paper we evaluate market segmentation and its effect on the pricing of cross-listed securities using Indian Global Depositary Receipts (GDRs). When international capital markets are segmented, cross-listed securities may trade at different prices. We test this market segmentation hypothesis using a theoretical and empirical model developed along the lines of Hietala [Hietala, P.T., 1989, Asset pricing in partially segmented markets: Evidence from the Finnish market, Journal of Finance 44, 697–718]) and Foerster and Karolyi [Foerster, S.R., Karolyi, A.G., 1999, The effects of market segmentation and investor recognition on asset prices: Evidence from foreign stocks listing in the United States, Journal of Finance 54, 981–1013; Foerster, S.R., Karolyi, A.G., 1999, The long-run performance of global equity offerings, Working Paper, Ohio State University]. Our model looks at a specific type of market segmentation in India, where capital flow barriers are such that domestic investors are allowed to invest only in domestic securities, while the foreign investors can invest in dollar-denominated Indian GDRs as well as other foreign securities. Tests on these GDRs indicate that foreign investors, who hold these depositary receipts, estimate the expected returns at a lower level than the domestic investors do. This leads to the GDRs being priced at a premium over the exchange rate adjusted prices of the underlying Indian securities. GDR index returns are affected by both domestic and international factors, while the underlying Indian securities are affected only by domestic variables.     

Price Comovement and Institutional Performance Following Large Market Movements

This paper investigates the price comovement of stocks actively traded by institutions and the investment performance of foreign and domestic institutional investors in Taiwan's stock markets during periods of large market movements. Stocks of small size, high share turnover, and high return volatility tend to move together with the market when markets rise sharply. In short-term holdings, foreign investors and domestic mutual funds can outperform the market by trading small-size, high-turnover, and high-volatility stocks.     

Related securities and price discovery: Evidence from NYSE-listed Non-U.S. stocks

In this paper we analyze whether handling related securities improves a market maker's information environment and helps to incorporate new information in stock prices. Our empirical tests are focused on New York Stock Exchange specialists and the U.S. share in price discovery of 64 British and French companies cross-listed on the NYSE. We define related securities as stocks from the same country, the same region, or other foreign stocks. We find strong evidence that a higher prominence of related stocks in the specialist portfolio is associated with a higher U.S. share in price discovery of our sample firms. We interpret our findings as evidence that concentrating market makers in similar stocks reduces information asymmetries and improves the information environment as market makers can extract information relevant to a stock from order flow to related securities. To support our argument, we show that the adverse selection component of the bid–ask spread is negatively related to the prominence of other foreign stocks in the specialist portfolio.     

Measuring Mutual Fund Performance with Characteristic-Based Benchmarks

This article develops and applies new measures of portfolio performance which use benchmarks based on the characteristics of stocks held by the portfolios that are evaluated. Specifically, the benchmarks are constructed from the returns of 125 passive portfolios that are matched with stocks held in the evaluated portfolio on the basis of the market capitalization, book-to-market, and prior-year return characteristics of those stocks. Based on these benchmarks, “Characteristic Timing” and “Characteristic Selectivity” measures are developed that detect, respectively, whether portfolio managers successfully time their portfolio weightings on these characteristics and whether managers can select stocks that outperform the average stock having the same characteristics. We apply these measures to a new database of mutual fund holdings covering over 2500 equity funds from 1975 to 1994. Our results show that mutual funds, particularly aggressive-growth funds, exhibit some selectivity ability, but that funds exhibit no characteristic timing ability.     

Liquidity Dry-ups in equity markets

This paper examines how mutual fund investors’ demand for liquidity provision endogenously affects stock liquidity in the equity market. We find that actively managed funds in the US tend to hold less liquidity than their respective benchmarks, which leads them to rely on only a small fraction of liquid stocks when it comes to liquidity demand. Using mutual fund sell transactions, we further show that mutual funds tend to sell more liquid stocks in their holdings when experiencing outflows. Concentrated sales of liquid stocks, however, significantly reduce the liquidity of these stocks, resulting in liquidity deterioration or dry-up among highly liquid stocks in periods of high market-wide liquidity demand. Overall, the results indicate that mutual funds fail to predict the liquidity of the asset at purchase.     

A return-based approach to identify home bias of European equity funds

This paper introduces a return-based approach to studying a possible home bias of European equity funds by estimating their exposures to their domestic markets. We first confirm the robustness of our approach using simulated portfolios with different proportions of domestic and foreign stocks. The empirical analysis examines equity funds domiciled in 15 European countries that invest in European stocks. We examine individual funds as well as portfolios comprising funds that are all domiciled in a particular country. Our findings reveal that the portfolios of four domiciles show a significant home bias. Moreover, we observe that in seven domiciles more than a quarter of the individual funds are home-biased. These results are robust when controlling for fund-specific benchmarks or for the average country exposures of all funds in our final sample. Finally, a home bias of individual funds is not related to superior performance, but actually results in higher investment risk consistent with underdiversification.     

Underpricing of homecoming A-share IPOs by Chinese firms already listed abroad

Many Chinese firms have pursued overseas listings in Hong Kong or US without being first listed in China’s domestic market, mainly due to the regulatory constraints imposed by the Chinese government. Some of them eventually returned to mainland China through an A-share offering to Chinese investors. This unique feature of cross-listed Chinese stocks offers an experiment field to test some of the conventional theories of initial public offerings (IPOs) underpricing. Homebound IPOs are expected to be less underpriced than domestic only IPOs that are not cross-listed because being already listed in a developed market can mitigate the information asymmetry and issue uncertainty associated with their A-share IPOs. Nevertheless, we find that homecoming A-share IPOs are still substantially underpriced, with an average market adjusted first-day return of 96.53 %. Furthermore, their first-day returns are not significantly different from those of domestic only IPOs once firm- and offer-characteristics are controlled. This is in sharp contrast to the lukewarm aftermarket performance experienced in their overseas debuts. The mean market adjusted first-day return is merely 5.35 % in their US ADR offerings and 11.63 % in their Hong Kong H-share IPOs. Overall, our results suggest the importance of local market structures and norms as influential factors of IPO underpricing.     

The efficiency of international information flow: Evidence from the ETF and CEF prices

While similar in their trading and organization, closed-end funds (CEFs) and exchange-traded funds (ETFs) differ in their liquidity and ease of arbitrage. We compare their price transmission dynamics using a sample of funds that invest in foreign securities and are most likely to show the deficiencies in the manner in which they process information. Our analysis shows that ETF returns are more closely related to their portfolio returns than are CEF returns. However, both fund types underreact to portfolio returns but overreact to domestic stock market returns. A simple trading strategy using these results is profitable with roundtrip trading costs less than 1.38% for CEFs and 0.71% for ETFs.     

中国公募基金挖掘了股票市场异象吗？

公募基金是我国重要的机构投资者之一,分析其投资逻辑对理解机构投资者行为和公募基金的选择至关重要。基于2005年至2019年主动管理偏股型开放式基金数据,本文检验了公募基金对A股市场87个异象因子的挖掘。为解决因子维度过大问题,本文采用非参方法从87个异象因子中提取有效信息的综合指标A-Score,并根据基金持仓构建基金的异象投资指标AIM(Anomalies Investing Measure)。结果显示:(1)中国公募基金挖掘了市场异象;(2)利用AIM可以选择表现更好的基金,并能获得0.45%的月度多空组合收益;(3)基金经理的选股能力、风格选择能力和风控能力是其挖掘异象收益的主要来源;(4)异象挖掘可以为基金带来长期资金流,同时也缓和了市场的错误定价。     

Affiliated mutual funds and analyst optimism

This paper extends the literature on analyst optimism. Our analysis of a large sample of recommendations issued from 1995 through 2006 indicates that sell-side analysts are likely to assign frequent and favorable ratings to a stock after the analysts’ affiliated mutual funds invest in that stock. Controlling for a number of variables, including the ties between analysts and investment banks, we find that the greater the portfolio weight of a stock in the fund family, the more optimistic the stock ratings from affiliated analysts become. Since 2002, analysts’ optimism on stocks held by affiliated mutual funds has declined. However, an analyst's decision of upgrading a stock to a “strong buy” rating is still significantly associated with the portfolio weight of that stock in the fund family.     

Flight-to-liquidity,market uncertainty,and the actions of mutual fund investors

We explore the trading decisions of equity mutual funds during ten periods of extreme market uncertainty. We find that mutual funds reduced their aggregate holdings of illiquid stocks. Exploring the drivers behind this result reveals that this is mainly driven by larger withdrawals from funds that hold less liquid stocks. We further find that the sell-off of illiquid stocks occurred only after initial deterioration in market conditions, consistent with retail investors’ response to bad performance. At a broader level, this shows that mutual funds consumed liquidity during periods where liquidity was most valuable. Moreover, the fact that fund managers traded in response to these withdrawals suggests a potentially magnifying channel for the drop in illiquid stock prices, also known as flight-to-liquidity.     

Taiwanese Mutual Fund Performance Under Different Central Bank of China Monetary Policy Environments

This study examines the performance of mutual funds under different Central Bank of China monetary policy environments in the emerging Taiwan market. To measure monetary policy changes effectively, we exploit changes in the discount rate and further categorize the monetary environment as either restrictive or expansive. We consider a restrictive monetary environment to be a period in which the discount rate rises, whereas an expansive monetary condition is a period in which the discount rate drops. It is found that all mutual funds, both domestic and international funds, exhibit a higher mean return, lower risk, and higher Sharpe and Treynor ratios under expansive monetary policy environments. Regression results show that domestic mutual fund returns are related significantly to local monetary policy. Furthermore, after controlling for the possible effect of macro factors on the association between the monetary policy dummy variable and mutual fund returns, the significant influence of monetary policy on domestic mutual fund returns remains robust. In contrast, changes in U.S. monetary policy stringency, in general, do not affect the performance of either domestic or international mutual funds in Taiwan.     

Do social factors influence investment behavior and performance? Evidence from mutual fund holdings

We study the economic significance of social dimensions in investment decisions by analyzing the holdings of U.S. equity mutual funds over the period 2004–2012. Using these holdings, we measure funds’ exposures to socially sensitive stocks in order to answer two questions. What explains cross-sectional variation in mutual funds’ exposure to controversial companies? Does exposure to controversial stocks drive fund returns? We find that exposures to socially sensitive stocks are weaker for funds that aim to attract socially conscious and institutional investor clientele, and they relate to local political and religious factors. The financial payoff associated with greater “sin” stock exposure is positive and statistically significant, but becomes non-significant with broader definitions of socially sensitive investments. Despite the positive relation between mutual fund return and sin stock exposure, the annualized risk-adjusted return spread between a portfolio of funds with highest sin stock exposure and its lowest-ranked counterpart is statistically not significant. The results suggest that fund managers do not tilt heavily towards controversial stocks because of social considerations and practical constraints.