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).     

Liquidity and asset pricing: Evidence from the Hong Kong stock market

This study investigates the role of liquidity in pricing stock returns in the Hong Kong stock market. Our results show that liquidity is an important factor for pricing returns in Hong Kong after taking well-documented asset pricing factors into consideration. The results are robust to adding portfolio residuals and higher moment factor in the factor models. The results are also robust to seasonality, and conditional-market tests. We also compare alternative factor models and find that the liquidity four-factor model (market excess return, size, book-to-market ratio, and liquidity) is the best model to explain stock returns in the Hong Kong stock market, while the momentum factor is not found to be priced.     

Short‐Horizon Return Predictability in International Equity Markets

This study measures the degree of short‐horizon return predictability of 50 international equity markets and examines how its variation is related to the indicators of equity market development. Two multiple‐horizon variance ratio tests are employed to measure the degree of return predictability. We find evidence that return predictability is negatively correlated with publicly available indicators of equity market development. Our cross‐sectional regression analysis shows that the per capita gross domestic product, market turnover, investor protection, and absence of short‐selling restrictions are correlated with cross‐market variations in return predictability.     

The effect of macroeconomic news on beliefs and preferences: Evidence from the options market

We examine the effect of regularly scheduled macroeconomic announcements on the beliefs and preferences of participants in the U.S. Treasury market by comparing the option-implied state-price densities (SPDs) of bond prices shortly before and after the announcements. We find that the announcements reduce the uncertainty implicit in the second moment of the SPD regardless of the content of the news. The changes in the higher-order moments, in contrast, depend on whether the news is good or bad for economic prospects. We explore three alternative explanations for our empirical findings: relative mispricing, changes in beliefs, and changes in preferences. We find that our results are consistent with time-varying risk aversion.     

The week-of-the-year effect: Evidence from around the globe

This study investigates another calendar anomaly the literature does not yet address – the week-of-the-year (WOY) effect. Using the weekly returns on the stock market indexes of 20 countries worldwide, for a period that ends in December 2010, the findings demonstrate that returns in Week 44, which starts on October 29 and ends on November 4, are positive in 19 of the 20 countries, and in 18 of them, it is also statistically significant. In contrast, the returns for Week 43, which starts on October 22 and ends on October 28, are negative in 19 of the 20 countries, and statistically significant for most of the countries. We also apply an investment strategy derived from these findings to a prediction period (2009–2010), and find that this strategy beats the simple buy-and-hold policy by a substantial margin.     

Product differentiation,market dynamics and the value relevance of trade payables: Evidence from UK listed firms

This paper provides a comprehensive evidence on how product and market dynamics affect the value relevance of trade payables. Using a sample of 2559 UK listed firms over the period 2005–2014, we find a positive relationship between trade payables and firm performance. Our evidence suggests that trade payables increase (decrease) performance in firms with differentiated products and demand uncertainty (larger market share). We demonstrate that the relative value relevance of bank credit versus suppliers’ credit is dependent on the nature of the product, the level of sales volatility, and market share. We use an innovative approach to assess the robustness of our results to omitted variable bias.     

Stock returns,order imbalances,and commonality: Evidence on individual,institutional, and proprietary investors in China

Using a unique dataset from the Shanghai Stock Exchange, we study the relation between daily open-to-close stock returns and order imbalances, and the commonality in order imbalances across individual, institutional, and proprietary investors. We find that institutional (proprietary) order imbalances have a larger price impact, but account for a significantly smaller proportion of daily price fluctuations. Commonality is much stronger for individual, rather than institutional (proprietary), order imbalances. Institutional (proprietary) investors favor large capitalization stocks, and co-movement in institutional (proprietary) order imbalances is stronger for these stocks.     

How the Subprime Crisis went global: Evidence from bank credit default swap spreads

How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal components analysis to identify common factors in the movement of banks' credit default swap spreads. We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels – but now they more clearly reflected heightened funding and counterparty risk. After Lehman's failure, the prospect of global recession became imminent, auguring the further deterioration of banks' loan portfolios. At this point the entire global financial system had become infected.     

Stock returns and volatility following the September 11 attacks: Evidence from 53 equity markets

September 11 attacks matter, and why not? Given that globalization has integrated financial markets, the magnitudes of the effect of the September 11 attacks on global markets are expected to be pervasive. We used data from 53 equity markets to investigate the short term impact of the September 11 attacks on markets' returns and volatility. Our empirical findings indicate that the impact of the attacks resulted in significant increases in volatility across regions and over the study period. However, stock returns experienced significant negative returns in the short-run but recovered quickly afterwards. Nevertheless, we find that the impact of the attacks on financial markets varied across regions. The implication here is that the less integrated regions (e.g., Middle East and North Africa) are with the international economy, the less exposed they are to shocks.     

Information Asymmetry,Trade Size,and the Dynamic Volume‐Return Relation: Evidence from the Australian Securities Exchange

This paper investigates the influence of information asymmetry on the cross‐sectional variation of volume‐return relation. We find that the dynamic volume‐return relation within medium‐size trades has the most significant response to the degree of information asymmetry. We also show that the effect of information asymmetry on the volume‐return dynamics migrates to small‐size trades in recent years, especially in larger stocks. These results are consistent with the notion that informed traders prefer medium‐size trades and this preference has shifted to small‐size trades. Our findings highlight the importance of incorporating informed traders’ trade‐size decision in the examination of the dynamic volume‐return relation.     

Trading volume and exchange rate volatility: Evidence for the sequential arrival of information hypothesis

The relationship between trading volume and volatility in foreign exchange markets continues to be of much interest, especially given the higher than expected volatility of returns. Allowing for nonlinearities, this paper tests competing hypotheses on the possible relationship between volatility and trading volume using data for three major currency futures contracts denominated in US dollars, namely the British pound, the Canadian dollar and the Japanese yen. We find that trading volumes and return volatility are negatively correlated, implying a lack of support for the mixture of distributions hypothesis (MDH). Using linear and nonlinear Granger causality tests, we document significant lead-lag relations between trading volumes and return volatility consistent with the sequential arrival of information (SAI) hypothesis. These findings are robust and not sample-dependent or due to heterogeneity of beliefs as proxied by open interest. Furthermore, our results are insensitive to the modeling approach used to recover volatility measures. Overall, our findings support the contention that short- to medium-term currency relationships may be dominated by trading dynamics and not by 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.     

Explaining underpricing of IPOs in frontier markets: Evidence from the Nigeria Stock Exchange

The paper provides empirical analyses of IPO underpricing on the Nigerian Stock Exchange, from the period 1990 to 2006. The results indicate an average abnormal initial day returns of 43.1%. There is evidence of long-run underperformance of 0.6%. Results from our regression model explaining initial abnormal returns for the IPOs of Nigeria show that size of firm and audit quality are important variables affecting underpricing. The results also show the presence of a non-linear relationship between the offer price and underpricing.     

Pricing currency risk in the stock market: Evidence from Finland and Sweden 1970-2009

We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rates. We apply the Ding and Engle (2001) covariance stationary specification in a multivariate GARCH-M setup to test a conditional international asset pricing model. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets, and that the price and the risk premium are lower after the floatation of the currencies, especially for Finland. We also find the cross-country exchange rate shock from Finland to affect the price of currency risk in Sweden, but not vice versa. Finally, we discuss some of the potential issues in applying multivariate GARCH-M specifications in tests of asset pricing models.     

Realizing the volatility impacts of sovereign credit ratings information on equity and currency markets: Evidence from the Asian Financial Crisis

We examine the effects of different types of sovereign rating announcements on realized stock and currency market volatilities and cross-asset correlations around periods of financial crises. Using intraday market data and sovereign ratings data for nine sample countries in the Asia-Pacific region over 1997–2001, we find that currency and stock markets react somewhat heterogeneously to various rating announcements and that stock markets are more responsive to rating news than currency markets. We find new evidence that ratings events have significant and asymmetric impacts on intraday market data and that national market attributes influence rating impacts during financial crises.     

Overconfident individual day traders: Evidence from the Taiwan futures market

A specific day-trading policy in Taiwan futures market allows an investigation of the performance of day traders. Since October 2007, investors who characterize themselves as “day traders” by closing their day-trade positions on the same day enjoy a 50% reduction in the initial margin. Because we can identify day traders ex ante, we have a laboratory to explore trading behavior without the contamination of potential behavioral biases. Our results show that the 3470 individual day traders in the sample incur on average a significant loss of 61,500 (26,700) New Taiwan dollars after (before) transaction costs over October 2007–September 2008. This implies that day traders are not only overconfident about the accuracy of their information but also biased in their interpretations of information. We also find that excessive trading is hazardous only to the overconfident losers, but not to the winners. Last, we provide evidence that more experienced individual investors exhibit more aggressive day trading behavior, although they do not learn their types or gain superior trading skills that could mitigate their losses.     

Order imbalance,market returns and macroeconomic news: Evidence from the Australian interest rate futures market

The relationship between order imbalance, market returns and macroeconomic news is examined in the context of the Australian interest rate futures market. Contemporaneous order imbalance exerts a significant impact on market returns in the expected direction i.e. excess buy (sell) orders drive up (down) prices. Order imbalances are related to past market returns with market participants acting in a contrarian manner across all products following market rallies. Nine major macroeconomic announcements are identified with order imbalance, and returns, reacting to such announcements in a manner that correctly reflects the news component. Following a scheduled macroeconomic announcement there is an increase in the level of information asymmetry within the interest rate futures market, demonstrated by an increased sensitivity to order flow. Finally, the pattern of order imbalance immediately prior to scheduled announcements suggests that there is no information leakage.     

Exchange-rate return predictability and the adaptive markets hypothesis: Evidence from major foreign exchange rates

This study examines return predictability of major foreign exchange rates by testing for martingale difference hypothesis (MDH) using daily and weekly nominal exchange rates from 1975 to 2009. We use three alternative tests for the MDH, which include the wild bootstrap automatic variance ratio test, generalized spectral test, and Dominguez–Lobato consistent tests. We evaluate time-varying return predictability by applying these tests with fixed-length moving sub-sample windows. While exchange rate returns are found to be unpredictable most of times, we do observe a number of episodes of statistically significant return predictability. They are mostly associated with the major events such as coordinated central bank interventions and financial crises. This finding suggests that return predictability of foreign exchange rates occurs from time to time depending on changing market conditions, consistent with the implications of the adaptive markets hypothesis.     

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.     

Price Movers on the Stock Exchange of Thailand: Evidence from a Fully Automated Order‐Driven Market

This study examines which trade sizes move stock prices on the Stock Exchange of Thailand (SET), a pure limit order market, over two distinct market conditions of bull and bear. Using intraday data, the study finds that large‐sized trades (i.e., those larger than the 75th percentile) account for a disproportionately large impact on changes in traded and quoted prices. The finding remains even after it has been subjected to a battery of robustness checks. In contrast, the results of studies conducted in the United States show that informed traders employ trade sizes falling between the 40th and 95th percentiles ( Barclay and Warner, 1993 ; Chakravarty, 2001 ). Our results support the hypothesis that informed traders in a pure limit order market, such as the SET, where there are no market makers, also use larger‐size trades than those employed by informed traders in the United States.