Does the equity premium puzzle persist during financial crisis? The case of the French equity market

This paper examines the effects of the financial crisis that began in 2008 on the equity premium of 6 French sector indices. Since the systematic risk coefficient beta remains the most common explanatory element of risk premium in most asset pricing models, we investigate the impact of the crisis on the time-varying beta of the six sector indices cited. We selected daily data from January 2003 to December 2012 and we applied the bivariate MA-GARCH model (BEKK) to estimate time-varying betas for the sector indices. The crisis was marked by increased volatility of the sector indices and the market. This rise in volatility led to an increase in the systematic risk coefficient during the crisis and first post-crisis period for all the major indices. The results are intuitive and corroborate findings in the empirical literature. The increase of the time-varying beta is considered by investors as an additional risk. Therefore, as expected, investors tend to increase their equity premiums to b ear the impact of financial crisis.     

Does equity market timing have a persistent impact on capital structure? Evidence from China

This paper uses the change in individual securities accounts as a measure of equity funding supply to examine whether the persistent timing effect on capital structure exists for the Chinese equity market. This new equity timing measure avoids previous criticisms over a timing measure not being independent of a firm's characteristics of capital structure. Our empirical results show that this new measure is an effective market timing variable for issuing equity in the Chinese equity market, and that a persistent effect of equity market timing on firm capital structure exists for more than 7 years. This paper offers evidence that the market conditions of equity funding supply play an important role in corporate financing decisions in China.     

Is financial advice a cure-all or the icing on the cake for financial literacy? Evidence from financial market participation in China

We examine how financial advice interacts with financial literacy to shape household decisions on stock market participation in China. Particularly, we investigate how the effect of financial advice varies with economic expectations, preferences for asset diversification and the level of financial literacy. Feeding the data of 5274 households into a Probit model that predicts the probability of holding stocks, we find that, while an increase in financial literacy significantly raises the stock market participation of all households, seeking financial advice only increases the participation for those households which have a preference for asset diversification or which have an optimistic expectation about the economy. Moreover, the effect of financial advice is concentrated on households with high financial literacy, implying that an insufficient level of financial literacy is the reason for the poor performance of financial advice in China. We also examine if there are influential trust or quality concerns which would reduce the effectiveness of financial advice but we find no significant evidence for it.     

Does gold Liquidity learn from the greenback or the equity?

This study seeks to understand and elucidate shifts of gold, dollar, and stock market liquidity, both before and after the 2008 financial crisis. The relationship among these assets is examined by allowing for nonlinear dynamics in the speed of adjustment to the equilibrium. The findings document the predictability role of liquidity proxies of dollar and equity on gold liquidity even after accounting for macroeconomic variables, suggesting that liquidity of both assets maintains an influence on gold behavior. During periods of high exchange-rate volatility between currencies, gold liquidity becomes highly affected by dollar liquidity movements through a nonlinear smooth transition framework. Yet evidence reveals that to fully understand the movements of gold and dollar it is necessary to factor in stock market liquidity as well.     

Does capital market drive corporate investment efficiency? Evidence from equity lending supply

The increased equity lending supply (ELS) in the equity loan market, available for short sellers to borrow, exposes a firm to greater short selling threats. Considering short sellers' strong incentives to uncover firm-specific information and monitor managers, we hypothesize that short selling threats, proxied by ELS, enhance corporate investment efficiency. We find that ELS significantly reduces managerial tendencies to underinvest (overinvest) especially for firms prone to underinvest (overinvest). The effect of ELS on investment efficiency is stronger for firms with higher information asymmetry and weaker corporate governance, confirming short sellers' role in mitigating information and agency costs. However, short selling risk weakens the effect of ELS. Our evidence is robust to endogeneity checks and suggests that corporate investment can be driven by a particular capital market condition: the amount of lendable shares in the equity loan market.     

Diamond investments – Is the market free from multiple price bubbles?

The following study aims to investigate whether multiple price bubbles, in which the quoted market price of diamonds significantly deviates from their fundamental value, exist in the diamond market. It was conducted using ADF, SADF and GSADF tests, with the latter found to be an optimal form of evaluating the analysed issue.The presented results support the conclusion that the diamond market is not free from periods defined as price bubbles. The study revealed price bubbles related to the leading, albeit declining in recent years, position of De Beers within the market and its activities, the financial crisis of 2008, the subsequent European debt crisis, and the crisis caused by the aggression of the Russian Federation against Ukraine in 2022. However, the identified periods of speculative bubbles in the diamond market are short and tend to affect the rough diamond segment earlier than the broader diamond market.     

Does the stock market fully value intangibles? Employee satisfaction and equity prices

This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the “100 Best Companies to Work For in America” earned an annual four-factor alpha of 3.5% from 1984 to 2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies, and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing (SRI) screens may improve investment returns.     

Stock market correlations during the financial crisis of 2008–2009: Evidence from 50 equity markets

Using data from 50 equity markets we examine conditional and unconditional correlations around two major banking events during the financial crisis of 2008–09. To measure the value of covariance information on the augmented DCC model used in the study, a portfolio in-sample estimation is performed. We show that by taking into account the change in the level of variance in high volatility periods, the estimates of the conditional covariance are more efficient in capturing the dynamics of the stock markets variance. Furthermore, in a two-asset allocation framework, the model consistently generates relatively low portfolio variances, implying substantial benefits in portfolio diversification.     

Does financial market liberalization increase the degree of market efficiency? The case of the Athens stock exchange

In this paper we assess if the financial market liberalization introduced in the beginning of the 1990s in Greece has changed the degree of market development (efficiency) by studying time-varying global Hurst exponents. Our results suggest that changes in financial market liberalization have important positive implications on the degree of development of stock markets. These results have important policy implications for the development of stock markets around the world.     

Serving the truth: Do directors with media background improve financial reporting quality?

This study examines whether and how independent directors with media background affect financial reporting quality. Using a proprietary dataset of independent directors' backgrounds, we find that firms with media backgrounds directors sitting on the board have lower absolute discretionary accruals. Besides, the effect is more pronounced when media background independent directors are from a news agency, or the directors bear higher reputation cost. Furthermore, media independent directors play a monitoring role by saying “no” at the board meeting and increasing the probability of exposure to financial frauds to reduce discretionary accruals. Overall, our evidence suggests that media independent directors with higher integrity and reputation concerns could improve firms' financial quality.     

Does the tea market require a futures contract? Evidence from the Sri Lankan tea market

Tea is one of the most popular beverages in the world. Its consumption exceeds the consumption of milk, coffee and orange juice. Despite its importance, tea has not been considered a commodity on financial markets and there is still no futures contract on tea. This study adds to the current literature by providing an overview of the development of the world’s oldest and largely unknown tea market. In addition, this study examines the issue of whether it is feasible to introduce a tea futures contract that would be advantageous for tea market participants. In conclusion, this analysis indicates that introducing a successful tea futures contract is viable but challenging under the existing market structure.     

Does intraday technical analysis in the U.S. equity market have value?

This paper investigates whether intraday technical analysis is profitable in the U.S. equity market. Surveys of market participants indicate that they place more emphasis on technical analysis (and less on fundamental analysis) the shorter the time horizon; however, the technical analysis literature to date has focused on long-term technical trading rules. We find, using two bootstrap methodologies, that none of the 7846 popular technical trading rules we test are profitable after data snooping bias is taken into account. There is no evidence that the market is inefficient over this time horizon.     

Do low-carbon investments in emerging economies pay off? Evidence from the Brazilian stock market

Climate change has created both challenges and opportunities for investors worldwide. Investing in carbon-efficient assets, for instance, may reduce investors' climate risks while contributing to global efforts for climate change mitigation. Investors need updated and robust information on the financial performance of low-carbon investments, especially in emerging markets, where climate finance initiatives are still scattered. In this work, we provide a first insight into the financial performance of a portfolio of shares from Brazilian carbon-efficient companies. To that end, we use as reference the Carbon Efficient Index (ICO2) and assess its financial performance from 2010 to 2019 through the lens of several classic and modern portfolio metrics. We find that the index outperformed both the Brazilian market benchmark and the country's broad sustainability index, and provided competitive risk-adjusted returns compared with other sectorial indices. The results thus indicate that investing in carbon-efficient companies in Brazil has so far positively contributed to portfolio performance while offering investors an opportunity to reduce climate risk exposure in stock markets.     

Does stable ownership create value? Evidence from the global financial crisis

We investigate the value of stable ownership for a sample of European firms using the global financial crisis as an exogenous shock and pre-and post-crisis years as benchmark periods. Consistent with the argument that stable ownership allows managers to focus on the creation of long-term value, we find that stable ownership resulted in higher stock returns and a higher market-to-book ratio during the crisis. This positive effect of stable ownership was not reversed after the crisis. Stable institutional blockholdings were more valuable in countries with weaker investor protection. However, the positive effect does not apply to firms in which a family is the largest blockholder. Finally, we also find that ownership stability was associated with a higher level of investments, illustrating that stable ownership affects real corporate decisions.

     

Does deposit insurance improve financial intermediation? Evidence from the Russian experiment

This study examines how the introduction of deposit insurance affects depositors and banks, using the deposit-insurance scheme introduced into the Russian banking system as a natural experiment. The fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit-taking and decreased reliance upon State-owned banks as custodians of retail deposits. We find that banks entering the new deposit-insurance system increase both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that do not enter the new deposit insurance system. These results hold up in a multivariate panel-data analysis that controls for bank- and time-random effects. The longer a bank has been entered into the deposit insurance system, the greater is its level of deposits and its ratio of deposits to assets. Moreover, this effect is stronger for regional banks and for smaller banks. We also find that implementation of the new deposit-insurance system has the effect of “leveling the playing field” between State-owned banks and privately owned banks. Finally, we find strong evidence of moral hazard following implementation of deposit insurance in the form of increased bank risk-taking. Financial risk and, to a lesser degree, operating risk increase following implementation.     

Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market

Using a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors, and whether International Financial Reporting Standards (IFRS) are more value-relevant than domestic generally accepted accounting principles (GAAP). These issues are key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements. The study provides evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP financial statements are more value-relevant than IFRS. Finally, this paper documents the important role of model specification in value-relevance studies.     

Does the market discipline banks? New evidence from regulatory capital mix

While bank capital requirements permit a bank to freely substitute between equity and subordinated debt, lenders and investors view debt and equity as imperfect substitutes. It follows that, after controlling for the level of regulatory capital, the mix of debt in capital isolates the role that the market plays in disciplining banks. I document that the mix of debt in capital affects bank behavior, but only when investors can impose real constraints. In particular, the mix of debt reduces the probability of failure and future distress for BHC-affiliated institutions (where the investor has control rights through an equity position) and for stand-alone banks before the Basel Accord (when debt issues included restrictive covenants). However, substituting equity for subordinated debt at the bank holding company level or in stand-alone banks since the Basel Accord (where the investor has few protections) only increases the probability of distress and failure.     

Does the market overweight imprecise information? Evidence from customer earnings announcements

We examine how supplier-firm shareholders respond to the earnings announcements of their major customers to test the moderated confidence hypothesis, which predicts overreaction to imprecise signals. In our setting, the moderated confidence hypothesis predicts that supplier shareholders will overreact to customer earnings news because that news contains imprecise information about the suppliers’ future cash flows. We find evidence that supplier earnings announcement abnormal returns are negatively correlated with supplier abnormal returns at the earlier customers’ earnings announcements, consistent with supplier overreaction. We also find evidence that the overreaction declines with the strength of the economic ties between the supplier and the customer.     

Risk,illiquidity or marketability: What matters for the discounts on private equity placements?

Using a clean sample of private equity placements over the period of 1999 to 2012, we examine the determinants of the discounts on private placements. Classifying various determinants into three categories, namely risk, illiquidity, and marketability, we show that risk and marketability are significant determinants of the discount on private placements over the entire sample period. However, we identify a structural break in the relation between the discount on private placements with illiquidity and, to a lesser degree, marketability. Specifically, we find that liquidity is a more important determinant during the pre-2003 period, but marketability becomes a more important determinant during the post-2003 period. We attribute the structural break to substantial changes in market microstructure during our sample period. Lower transaction costs make illiquidity less of a concern for investors, whereas more active trading by investors calls for a higher discount for the lack of marketability.