Value and capacity of tax shields: An analysis of the slicing approach

Correctly valuing tax shields has been a challenge in corporate valuation. A recent study by Liu (2009) introduces the slicing approach to separating the tax shield into the earned and unearned parts. Liu also shows that the MM results are wrong, and claims that the slicing approach has finally resolved the issue of pricing tax shields, thereby bringing closure to the topic. However, through careful analysis, we refute Liu’s main claims and restore the MM results. There are still open questions and the topic is not completely resolved as claimed in Liu (2009).     

Effective fair pricing of international mutual funds

We propose a new methodology to provide fair prices of international mutual funds by adjusting prices at the individual security level using a comprehensive and economically relevant information set. Stepwise regressions are used to endogenously determine the stock-specific optimal set of factors. Using 16 synthetic funds whose characteristics are extracted from 16 corresponding actual US-based Japanese mutual funds, we demonstrate that our method estimates fund prices significantly more accurately than existing methods. Although existing fair-pricing methods provide an improvement over the current practice of simply using Japanese market closing prices, they are still highly vulnerable to exploitation by market-timers. By contrast, our method is the most successful in preventing such strategic exploitation since no competing method can profit from our stated prices.     

A tale of two prices: Liquidity and asset prices in multiple markets

This paper investigates the liquidity effect in asset pricing by studying the liquidity–premium relationship of an American depositary receipt (ADR) and its underlying share. Using the [Amihud, Yakov, 2002. Illiquidity and stock returns: cross-section and time series effects. Journal of Financial Markets 5, 31–56] measure, the turnover ratio and trading infrequency as proxies for liquidity, we show that a higher ADR premium is associated with higher ADR liquidity and lower home share liquidity, in terms of changes in these variables. We find that the liquidity effects remain strong after we control for firm size and a number of country characteristics, such as the expected change in the foreign exchange rate, the stock market performance, as well as several variables measuring the openness and transparency of the home market.     

Behavior of liquidity and returns around Canadian seasoned equity offerings

Spread costs and their adverse selection and temporary components for Canadian SEOs follow an approximate V-shaped pattern with a trough at the closing window. Enhanced ownership diffusion partly explains the decrease in these spread costs post-SEO completion versus pre-SEO announcement. SEO spread costs decrease after the April 1996 TSX decimalization. The adverse selection cost of privately-placed Canadian SEOs decreases after Multilateral Instrument 45-102 reduced the lock-up period to four months in 2001. Consistent with results for non-US SEOs, negative abnormal returns (ARs) occur in announcement windows for undifferentiated SEOs. ARs are significantly different for public (significantly negative) versus private (insignificantly positive) SEOs consistent with their associated differential reductions in information asymmetry. Conditional residual volatilities decrease post-announcement, consistent with a diminished temporary spread cost and expected behavior following an unanticipated event.     

The economic determinants of interest rate option smiles

We address three questions relating to the interest rate options market: What is the shape of the smile? What are the economic determinants of the shape of the smile? Do these determinants have predictive power for the future shape of the smile and vice versa? We investigate these issues using daily bid and ask prices of euro (€) interest rate caps/floors. We find a clear smile pattern in interest rate options. The shape of the smile varies over time and is affected in a dynamic manner by yield curve variables and the future uncertainty in the interest rate markets; it also has information about future aggregate default risk. Our findings are useful for the pricing, hedging and risk management of these derivatives.     

THE DAYLIGHT SAVING TIME ANOMALY IN STOCK RETURNS: FACT OR FICTION?

Stock market returns in 22 markets around the world show no evidence of a daylight saving time effect. Returns on the days following a switch from or to daylight saving time do not behave any differently from stock market returns on any other day of the week or month. These results reject earlier conclusions in the literature—based on less data—that investors’ mood changes induced by changes in sleep patterns significantly affect stock returns.     

Do Decomposed Financial Ratios Predict Stock Returns and Fundamentals Better?

We investigate the prediction of excess returns and fundamentals by financial ratios, which include dividend‐price ratios, earnings‐price ratios, and book‐to‐market ratios, by decomposing financial ratios into a cyclical component and a stochastic trend component. We find both components predict excess returns and fundamentals. Cyclical components predict increases in future stock returns, while stochastic trend components predict declines in future stock returns in long horizons. This helps explain previous findings that financial ratios in the absence of decomposition find weak predictive power in short horizons and some predictive power in long horizons. We also find both components predict fundamentals.     

How important is asymmetric covariance for the risk premium of international assets?

This paper empirically investigates the importance of asymmetric conditional covariance when computing the risk premium of international assets. Conditional second moment asymmetry of equity indices is significant and varies over time. The risk premia estimated allowing for asymmetry are statistically and economically different from risk premia estimated without allowing for asymmetry. In particular, an international investor who ignores covariance asymmetry overestimates required returns for equities of the G4 countries and for the world market, on average.     

Can mispricing explain the value premium?

Empirical research finds that stocks with low market-to-book (MTB) ratios outperform stocks with high MTB ratios. Rhodes-Kropf, Robinson, and Viswanathan separate the MTB ratio into mispricing and growth options components. We report that the mispricing component, but not the growth options component, predicts abnormal returns for up to 5 years. We also find that the mispricing component, but not the growth options component, provides incremental information relative to existing asset pricing models. Moreover, after controlling for mispricing, value no longer beats growth. Overall, our evidence is consistent with a behavioral explanation of the value premium.     

Marketability,control, and the pricing of block shares

Unlike in other countries, negotiated block shares have huge discounts in China. We argue that trading restrictions help to explain this puzzle. Block shares in China face trading restrictions in the open market and can only be traded in the form of block transfers at negotiated prices. Using a dataset of 233 block transfers in China between 2002 and 2003, we find that discounts on block share prices increase with the proportion of restricted shares in the ownership. The likelihood of private benefit of control has positive impact on block prices, but the effect diminishes when there are other large shareholders. Furthermore, private institutions offer a higher price than state-owned institutions.     

Time-varying integration,interdependence and contagion

Bekaert et al. (2005) define contagion as “correlation over and above what one would expect from economic fundamentals”. Based on a two-factor asset pricing specification to model fundamentally-driven linkages between markets, they define contagion as correlation among the model residuals, and develop a corresponding test procedure. In this paper, we investigate to what extent conclusions from this contagion test depend upon the specification of the time-varying factor exposures. We develop a two-factor model with global and regional market shocks as factors. We make the global and regional market exposures conditional upon both a latent regime variable and three structural instruments, and find that, for a set of 14 European countries, this model outperforms more restricted versions. The structurally-driven increase in global (regional) market exposures and correlations suggest that market integration has increased substantially over the last three decades. Using our optimal model, we do not find evidence that further integration has come at the cost of contagion. We do find evidence for contagion, however, when more restricted versions of the factor specifications are used. We conclude that the specification of the global and regional market exposures is an important issue in any test for contagion.     

DOES IT PAY TO DISCLOSE MANAGERIAL EARNINGS INFORMATION EARLY?

Does it pay to voluntarily disclose the manager's private information about the firm's earnings prospects before the mandatory announcement date? This question has been a subject of much debate because prior research establishes both benefits and costs of early information disclosure. We provide evidence on the net effect of such disclosure by examining its impact on firm value. Using a large sample and correcting for self‐selection bias, we find that early disclosure of the manager's private earnings information enhances the end‐of‐period value of the firm.     

Internal liquidity risk in corporate bond yield spreads

The recent global financial crisis reveals the important role of internal liquidity risk in corporate credit risk. However, few existing studies investigate its effects on bond yield spreads. Panel data for the period from year 1993 through 2008 show that corporate internal liquidity risk significantly impacts bond yield spreads (and changes) when controlling for well-known bond yield determinant variables, traditional accounting measures of corporate debt servicing ability, cash flow volatility, credit ratings, and state variables. This finding indicates that internal liquidity risk should therefore be incorporated into bond yield spread modeling.     

Learning and the disappearing association between governance and returns

The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.     

Intraday trading volume and international spillover effects

The objective of this paper is to explore whether lagged trading activity in one market contributes to the return and volatility process in other markets, using 5-min concurrent data from German and British equity market. Our results lend support to our initial premise that if international investors have access to the same information set as domestic traders, then after observing foreign trading activity, market makers adjust prices to reflect their expectation of the security value, conditional upon all available information, including prior trades. Our findings clearly indicate that intraday trading volume contains predictive power for cross-border return and volatility processes. Moreover, these volume effects are found to be asymmetric in the sense that the impact of positive volume changes upon foreign stock market volatility is greater than is the impact of negative changes.     

Liquidity and stock returns: Evidence from a pure order-driven market using a new liquidity proxy

Liquidity has been found to be a determinant of stock returns in large hybrid quote-driven markets. Liquidity proxies have ranged from trade-based measures such as turnover rate to order-based measures such as the bid-ask spread. The relationship between return and liquidity in small pure order-driven markets is less clear, with different liquidity proxies yielding conflicting results. This study adds to the existing literature by considering the return-liquidity relationship on the Australian Stock Exchange, a small pure order-driven market, using a new liquidity measure, Weighted Order Value (WOV). Liquidity is found to be an important determinant of returns.