Fraud Risk in Emerging Markets

David L. Stulb, joint leader of Ernst ＆ Young＇s global Fraud Investigations ＆ Dispute Servicespractice, said,“Major fraud and corruption scandals attract headlines around the world, dramatically affecting corporate and market values. With the fear of fraud greatest in emerging markets, and with 20% of all companies having been victims of fraud, the consequences for those companies that continue to underestimate the risk could be severe.” at the launch of the 9th Global Fraud Survey, Fraud Risk in Emerging Markets.     

Do Investment Newsletters Move Markets?

We analyze the market impact of stock recommendations made by a single investment newsletter that focuses on instances of heavy insider trading. The market reacts positively to the actual insider trades and the associated Form 4 Securities and Exchange Commission (SEC) filings that attracted the newsletter's interest. The subsequent recommendations, which occur within a delay of several days, are associated with an even larger announcement period return and higher trade volume. Thus, despite the fact that recommendations are largely based on publicly available information on insider trades and the reach of the newsletter is limited, the newsletter has a significant impact on the market.     

Money Funds or Markets? Valuing Intermediary Services

Recent market developments, such as on-line trading of Treasury securities and the reduction of the minimum Treasury bill denomination to $1,000, facilitate creation of a viable alternative to U.S. Treasury money funds for investors. Comparison of a direct investment in Treasury bills to U.S. Treasury money funds shows that money fund intermediary services such as check writing, telephone exchange privileges, payroll and automatic transfers, retirement plans, and minimum initial and subsequent purchases are worth an estimated 43 basis points per year, and investors pay an additional 11 basis points for active portfolio management. An analysis of fund net cash flows shows evidence consistent with arbitrage activity between money funds and the direct investment in Treasury bills, especially for investors with few ties to the money fund manager.     

Is There Excess Capacity in Rural Banking Markets?

The literature indicates that it is difficult to identify and quantify the degree of excess capacity in banking. Economic theory indicates that there are at least three indicators of excess capacity in banking: (a) low loan-to-asset ratios, (b) low profitability and (c) high per unit operating expense relative to some norm. If excess capacity exists, it will be easiest to identify, through these indicators, at small rural banks. This paper finds significant evidence of excess capacity at rural Colorado banks using univariate analysis; simultaneous equations analysis reinforces this conclusion. It appears that the “excess capacity effect”outweighs the “market power effect”in these rural banking markets.     

Does Default Probability Matter in Latin American Emerging Markets?

We analyze the impact of default probability in four leading Latin American stock markets: Argentina, Brazil, Chile, and Mexico. We find no positive default-risk premium except in the case of Brazil, and in fact we find a negative risk premium for Argentina and Mexico. The latter effect tends to fade when the analysis accounts for size and book-to-market variables. Although we find no size effect in any of the markets considered, the book-to-market effect is very strong in all of them, and our results reveal a consistent relationship, analogous to that found in more developed markets, between default probability and the size and book-to-market variables.     

Is There a Size Effect in the Pricing of Stocks in the Chinese Stock Markets?: The Case of Bull Versus Bear Markets

Size effect studies generally suggest that a return premium exists for small firms. While the size effect has mostly disappeared in recent years in mature markets (e.g., US and UK), it remains mostly strong in developing markets. The purpose of this paper is to examine the relationship between firm size and excess stock returns in the Chinese stock markets, and to examine this effect in both a bull and bear market. No studies have previously examined these relationships in the Chinese markets. The results of the study indicate that a size effect exists in the Chinese stock markets over the 6-year period from 1998 to 2003. We find small firms have significantly greater excess returns than large firms. Moreover, small firms are found to have a stronger reaction to the direction of the market than large firms. Small firms have significantly greater positive excess returns than large firms during the bull market. However, small firms have significantly greater negative returns (using total market value), or no significant difference in returns (using float market value) during the bear market period.     

What Causes the Positive Price-Turnover Correlation in European Housing Markets?

This paper examines what determines the correlation between prices and turnover in European housing markets. Using a panel vector autoregressive model, we find that there is a particularly strong feedback mechanism between prices and turnover. Momentum effects are another important reason why prices and turnover are correlated. Common underlying factors, such as GDP and interest rates, also explain part of the price-turnover correlation. The results in this paper imply that, to understand price and turnover dynamics, it is important to model prices and turnover as two interdependent processes. There is a considerable bias in the coefficient estimates of standard house price models if this dependency is not explicitly taken into account.     

Do Markets Like Frozen Defined Benefit Pensions? An Event Study

An increasing number of North American companies are freezing or terminating their traditional defined benefit (DB) pension plans. In this article we document a positive announcement effect when a publicly traded company discloses that it has partially or fully frozen its DB plan and replaced it with—or enhanced—the 401(k) defined contribution (DC) plan. This positive risk‐adjusted return is greater for firms with higher beta and/or lower return on equity (ROE) prior to the freeze. In other words the positive impact is more pronounced for firms that are likely to face financial distress if they maintain their traditional pension plan and the associated long‐term promises.     

Why Have Debt Ratios Increased for Firms in Emerging Markets?

I study trends in capital structure between 1980 and 2004 in a sample of over 11,000 firms from 34 emerging markets. The average firm's market‐value debt ratio rose by 15 percentage points over this quarter century. I study how this rise in leverage was influenced by firm‐level factors and by the availability of debt financing at the country level. The central finding is that the increase in debt ratios can largely be attributed to changes in the characteristics of emerging market firms over this period. For the average firm, the most prominent determinants of capital structure – size, profitability, asset tangibility, and growth opportunities – all shifted in the direction implying a higher optimal level of debt. At the country level, increased financial development within the country is associated with lower debt ratios, but increased financial openness to foreign markets is associated with higher debt ratios.     

How Integrated are Credit and Equity Markets? Evidence from Index Options

We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit-risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. The model captures many aspects of the joint dynamics of CDX and SPX options. However, it cannot reconcile the relative levels of option prices, suggesting that credit and equity markets are not fully integrated. A strategy of selling CDX volatility yields significantly higher excess returns than selling SPX volatility.     

Why Do Foreign Firms Leave U.S. Equity Markets?

Foreign firms terminate their Securities and Exchange Commission registration in the aftermath of the Sarbanes–Oxley Act (SOX) because they no longer require outside funds to finance growth opportunities. Deregistering firms’ insiders benefit from greater discretion to consume private benefits without having to raise higher cost funds. Foreign firms with more agency problems have worse stock‐price reactions to the adoption of Rule 12h‐6 in 2007, which made deregistration easier, than those firms more adversely affected by the compliance costs of SOX. Stock‐price reactions to deregistration announcements are negative, but less so under Rule 12h‐6, and more so for firms that raise fewer funds externally.     

2007全球创业板市场报告(2007 Global Growth Markets Guide)

截至2006年底,全球已有41个创业板市场。其中,欧洲的奥地利、塞浦路斯、法国、德国、希腊、冰岛、爱尔兰、意大利、瑞典、波兰、西班牙、土耳其、英国这13个国家设有19个创业板市场,亚太地区的印度、日本、韩国、中国(含香港)、马来西亚、菲律宾、新加坡、泰国这8个国家设有11个创业板市场,     

Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry

We propose a quantile‐based measure of conditional skewness, particularly suitable for handling recalcitrant emerging market (EM) returns. The skewness of international stock market returns varies significantly across countries over time, and persists at long horizons. In EMs, skewness is mostly positive and idiosyncratic, and significantly relates to a country's financial and trade openness and balance of payments. In an international portfolio setting, return asymmetry leads to sizeable certainty‐equivalent gains and increases the weight on emerging countries to about 30%. Investing in EMs seems to be about expectations of a higher upside than downside, consistent with recent theories.     

Eclipse of the Public Corporation or Eclipse of the Public Markets?

The authors look back at Michael Jensen's 1989 article “The Eclipse of the Public Corporation.” They find some of his predictions have been borne out but other important ones, not. Jensen concluded that the publicly held corporation was in decline and had outlived its usefulness in many sectors. He argued that agency costs made public corporations an inefficient form of organization and that new private organizational forms promoted by private equity firms would likely replace the public firm. The number of public firms in the U.S. has declined significantly but there are still many hugely profitable and successful public companies. U.S. public markets are still well‐suited for firms with mostly tangible assets. So, what we are really witnessing is an eclipse not of public corporations, but of the public markets as the place where young firms with mostly intangible capital seek their funding. This is especially true when the usefulness of the intangible assets has yet to be proven. Sometimes the market is extremely optimistic about some intangible assets, but otherwise firms with unproven intangible assets may be better off funding themselves privately. This evolution has a downside: investors limited to public markets are cut off from investing in high intangible‐asset firms. Additionally, as fewer firms remain publicly listed, fewer firms will be transparent to society.     

Does the Presence of Big Banks Influence Competition in Local Markets?

This paper examines whether the biggest organizations in the banking industry influence competition differently than their smaller rivals. Big bank financial strength, multimarket links, diversified operations, status as too big to fail, economies of scale and scope, and in some cases, weak incentives to be aggressive may result in big banks affecting competition in a given local market differently than would be suggested by market shares and other structural measures. Understanding the influence of big banks on competition has important implications for antitrust policy toward bank mergers. Empirical results reveal that, in rural markets where big banks operate, competition may be reduced, thereby enabling all banks in those markets to earn greater returns. The presence of a big bank is associated with an approximately 0.09 percentage point effect on a bank's return on assets, which represents about a 7.7% performance advantage for firms that face big banks over firms that do not. The relationship between big banks and profitability holds only when banks are classified as big if they are both very large and regionally prominent. The presence of banks that possess only one of these characteristics does not appear to substantially influence competition. Finally, no clear and consistent patterns of variation are found in the relationship between the profitability of small banks and the presence of big banks. The number of big banks, the market shares of big banks, and the level of concentration in markets with big banks do not strongly influence the relationship.     

Is Investor Attention for Sale? The Role of Advertising in Financial Markets

Prior research documents capital market benefits of increased investor attention to accounting disclosures and media coverage; however, little is known about how investors and markets respond to attention‐grabbing events that reveal little nonpublic information. We use daily firm advertising data to test how advertisements, which are designed to attract consumers' attention, influence investors' attention and financial markets (i.e., spillover effects). Exploiting the fact that firms often advertise at weekly intervals, we use an instrumental variables approach to provide evidence that print ads, especially in business publications, trigger temporary spikes in investor attention. We further find that trading volume and quoted dollar depths increase on days with ads in a business publication. We contribute to research on how management choices influence firms' information environments, determinants and consequences of investor attention, and consequences of advertising for financial markets.