Stock price behavior surrounding stock repurchase announcements: Evidence from Japan

This paper examines stock price behavior surrounding announcements of stock repurchases made by Japanese firms from 1995 to 1998. Our analysis shows that, much as in the case of the U.S. markets, stock prices in Japan go up in response to stock repurchase announcements. We also find that there is no significant difference between the market reaction to the announcement for intention of repurchase execution and the market reaction to the announcement of an article alteration to allow stock repurchases. On the other hand, there is a significant difference in the pre-announcement period returns motivating these two announcements. While a large decline in stock price will motivate a firm to execute a stock repurchase, a smaller price decline will motivate a firm to merely alter its articles of association to allow future repurchases.     

Value of outside blockholder activism: Evidence from the switchers

This paper measures the value of shareholder activism focusing on outside blockholders who switch their investment purpose from passive to active but are not likely to engage in control-related activities. Unlike the usual 5% ownership disclosure, a switch does not necessarily involve additional share purchase, and thus provides a cleaner test in effectively ruling out alternative theories such as those related to stock picking skills, private information, or herding. We apply the test to outside blockholders in the Korean market, which experienced a concentrated number of switchers in the first half of 2005 when the government adopted a new disclosure rule. We find that target price reaction is significantly positive around the time of the switch disclosure and this effect is more pronounced when the switcher declares to use a wider scope of activist measures. Following the switch, we also find evidence of increases in dividend payouts for firms targeted by switchers with a wider scope of activism, and those with high free cash flows.     

Investment trust IPOs: Issuing behaviour and price performance Evidence from the London Stock Exchange

In this paper, we document an average first day return of 1.91 percent for the population of 105 investment trust IPOs during the period from January 1984 through August 1992 on the London Stock Exchange. This is the first study that finds evidence of significant first day returns for a sample of closed-end fund IPOs. The results also suggest that investment trust IPOs are subject to ‘hot’ issue periods. These tend to occur when there is a marked narrowing in the discounts of seasoned investment trusts. Initial gains are, however, short lived; by the end of their first year, investment trust IPOs substantially underperform a number of relevant benchmarks and, on average, trade at discounts to their underlying net asset values.     

The impact of trading halts on liquidity and price volatility: Evidence from the Australian Stock Exchange

This study examines market behaviour around trading halts associated with information releases on the Australian Stock Exchange, which operates an open electronic limit order book. Using the Lee, Ready and Seguin (1994) pseudo-halt methodology, we find trading halts increase both volume and price volatility. Trading halts also increase bid-ask spreads and reduce market depth at the best-quotes in the immediate post-halt period. The results of this study imply that trading halts impair rather than improve market quality in markets that operate open electronic limit order books.     

Stock price effects and costs of secondary distributions

This study does not support the view that a large number of shares can be sold at the prevailing market price and at a small cost. A significant stock price decrease is observed at the initial announcement of secondary distributions. The price declines are greater for offerings by officers and directors and for larger offerings, but are significant for all types of sellers and for large and small offerings. There is no significant price decline at the offering when secondaries are announced in advance. Underwriting and other selling costs are substantial and are positively related to relative offering size.     

Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio

This study proposes a new price impact ratio as an alternative to the widely used Amihud’s (2002) Return-to-Volume ratio. We demonstrate that the new price impact ratio, which is deemed Return-to-Turnover ratio, has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991–2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of a size bias. More importantly, it encapsulates the stocks’ cross-sectional variability in trading frequency, a relatively neglected but possibly important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock returns by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation.     

The costs of shareholder activism: Evidence from a sequential decision model

This paper provides benchmarks for monitoring costs and evaluates the net returns to shareholder activism. I model activism as a sequential decision process consisting of demand negotiations, board representation, and proxy contest and estimate the costs of each activism stage. A campaign ending in a proxy fight has average costs of $10.71 million. I find that the estimated monitoring costs reduce activist returns by more than two-thirds. The mean net activist return is close to zero but the top quartile of activists earns higher returns on their activist holdings than on their non-activist investments. The large-sample evidence presented in this paper aids in understanding the nature and evolution of activist engagements.     

Stock Splits: Evidence from Mutual Funds

Mutual fund splits occur in high-priced funds after unusually high returns. Split factors are related to the deviation of a fund's price from the mean of all fund prices. Post-split prices are below the mean of other funds' prices. Post-split numbers of shareholders and assets do not increase compared with funds having similar rates of asset growth. However, I find evidence that mutual fund splits bring per account shareholdings back up to normal levels. I argue that signaling, liquidity, and tick size theories do not apply to mutual fund splits.     

Tax avoidance, cost of debt and shareholder activism: Evidence from Korea

This paper examines the impact of tax avoidance on the cost of debt and its interaction effect with shareholder activism. Using Korean firms, I find a negative relationship between tax avoidance and the cost of debt, supporting the trade-off theory. Further tests reveal that the negative relationship becomes stronger when the level of institutional ownership is high. It becomes even stronger after 1998, when the shareholder rights of institutional investors were strengthened. It suggests that the managerial opportunism theory has an additional explanation for tax avoidance activities. My findings indicate that tax avoidance reduces the cost of debt through trade-offs and creates a managerial rent diversion, which is mitigated in firms with larger institutional holdings.     

The effect of shareholder activism on earnings management: Evidence from shareholder proposals

We find that in general, both accrual-based and real earnings management decrease after the passage of shareholder-sponsored governance proposals. However, when accounting for the type of proposal, we observe significant heterogeneity in the effects on earnings management. Specifically, proposals focused on changing the governance structure (e.g., board independence) lead to reductions in both types of earnings management, whereas proposals specifically targeted at improving financial reporting quality lead to decreased accrual-based earnings management but increased real earnings management. The results suggest that constraints on accrual-based earnings management induce a shift toward real earnings management. Our paper indicates that the nature of the shareholder proposal has a significant impact on shareholder intervention.     

Stock market linkages: Evidence from Latin America

This study investigates the dynamic interdependence of the major stock markets in Latin America. Using data from 1995 to 2000, we examine the stock market indexes of Argentina, Brazil, Chile, Colombia, Mexico and Venezuela. The index level series are non-stationary and so we employ cointegration analysis and error correction vector autoregressions (VAR) techniques to model the interdependencies. We find that there is one cointegrating vector which appears to explain the dependencies in prices. The results are robust to sensitivity tests based on translating indexes to US dollars (i.e., a common currency for all the markets) and to partitioning the sample into periods before and after the Asian and Russian financial crises of 1997 and 1998, respectively. Our results suggest that the potential for diversifying risk by investing in different Latin American markets is limited.     

Financial Sector Risk and the Stock Returns: Evidence from Tokyo Stock Exchange Firms

We investigate whether the activity of financial firms creates value and/or risk to the economy within the asset pricing framework. We use stock return data from nonfinancial firms listed in the first section of the Tokyo Stock Exchange. The value-weighted index that is solely composed of nonfinancial firms is augmented with the index of the firms from the financial sector, and we estimate multivariate asset pricing model with these two indices. We note that our procedure can simultaneously take into account the cross-holding phenomena among Japanese firms, especially between the financial sector and the nonfinancial sector. Our augmented index model performs well both with cross-sectional Fama and MacBeth regression test and GMM test. Our two index model with additional Fama and French's HML factor can capture cross-sectional variations of the returns of sample portfolios better than the original Fama and French model can, when measured by Hansen and Jagannathan distance measure. We find that this additional new sector variable can be a substitute for Fama and French's size factor, but not related to the bond index return. This variable has similar factor characteristic as money supply growth or the term structure, but the latter variables contain more information than the former. Morever, our financial sector model helps explain the return and risk structure of Japanese firms during the so-called bubble period.     

Liquidity,Skewness and Stock Returns: Evidence from Chinese Stock Market

In this paper, a capital asset pricing model (CAPM) incorporating liquidity and skewness factors is proposed and tested by using the Chinese stock market data. The empirical results indicate that, under various market conditions, the liquidity-adjusted three-moment CAPM provides a better fit to the realized returns of various stock portfolios. Overall, this research reveals that illiquidity cost, liquidity risk and as well as skewness have important impacts on asset pricing in the Chinese stock market.     

Commonality in liquidity: Evidence from the Australian Stock Exchange

Several studies have reported strong evidence of commonality in liquidity in US markets. The present study uses the research design of Chordia et al. (2000) to examine commonality in liquidity for a broad sample of stocks listed on the Australian Stock Exchange (ASX). In contrast to previous research, there is some evidence of market‐wide commonality in liquidity for ASX stocks, but it is less significant and less pervasive than that observed in other markets. These results are consistent with explanations based on differences in market structure between the USA and Australia.     

Price Limit Performance: Evidence from the Tokyo Stock Exchange

Price limit advocates claim that price limits decrease stock price volatility, counter overreaction, and do not interfere with trading activity. Conversely, price limit critics claim that price limits cause higher volatility levels on subsequent days (volatility spillover hypothesis), prevent prices from efficiently reaching their equilibrium level (delayed price discovery hypothesis), and interfere with trading due to limitations imposed by price limits (trading interference hypothesis). Empirical research does not provide conclusive support for either positions. We examine the Tokyo Stock Exchange price limit system to test these hypotheses. Our evidence supports all three hypotheses suggesting that price limits may be ineffective.     

Stock exchange governance initiatives: Evidence from the Italian STARs

Can a stock exchange improve corporate governance and transparency by designating companies that exhibit superior corporate governance? In 2000, the Borsa Italiana created a mid-cap segment with strong listing standards, which is composed of firms (called STARS) that follow stricter standards of transparency, disclosure, monitoring and liquidity. We find that STAR firms exhibit governance characteristics not observed in non-STAR firms, such as a higher incidence of audit and executive committees and higher debt ratios. They experienced a modestly favorable share price response upon the implementation of the STAR initiative. Moreover, they experienced significantly higher buy and hold returns and transparency after the initiative. Several governance characteristics are cross-sectionally associated with performance following the STAR initiative. Overall, the results suggest that firms may be willing to improve governance when they are endorsed by a credible agency for doing so, and such improvements may lead to better performance. The STAR initiative may serve as a model that can be adapted by other stock exchanges to promote transparency and governance.     

Worrying about the Stock Market: Evidence from Hospital Admissions

Using individual patient records for every hospital in California from 1983 to 2011, we find a strong inverse link between daily stock returns and hospital admissions, particularly for psychological conditions such as anxiety, panic disorder, and major depression. The effect is nearly instantaneous (within the same day) for psychological conditions, suggesting that anticipation over future consumption directly influences instantaneous utility.     

Commonality in liquidity: Evidence from the Stock Exchange of Thailand

This study examines commonality in liquidity of the Stock Exchange of Thailand (SET) using a limited order book data from 1996 to 2003. Strong evidence is found for market-wide commonality in liquidity, which prevails across several liquidity measurements. Industry-wide commonality is found to be stronger than market-wide commonality in liquidity. However, we do not find a market-wide correlated liquidity supply imbalance. There is evidence that indicates a fall in individual liquidity on Monday and after a day with a positive return.