Which market integration measure?

This paper compares the dynamics of the financial integration process as described by different empirical approaches. To this end, a wide range of measures accounting for several dimensions of integration is employed. In addition, we evaluate the performance of each measure by relying on an established international finance result, i.e., increasing financial integration leads to declining international portfolio diversification benefits. Using monthly equity market data for three different country groups (i.e., developed markets, emerging markets, developed plus emerging markets) and a dynamic indicator of international portfolio diversification benefits, we find that (i) all measures give rise to a very similar long-run integration pattern; (ii) the standard correlation explains variations in diversification benefits as well or better than more sophisticated measures. These findings are robust to a battery of robustness checks.     

Do shareholder agreements affect market valuation?: Evidence from Brazilian listed firms

Shareholder agreements are contracts that govern the relationship among different shareholders in a firm. This article uses a unique dataset to analyze shareholder agreements in listed companies and shows how they affect firm valuation. While shareholder agreements may be used to expropriate value from non-controlling investors, they can also mitigate conflicts of interest and protect minority shareholders. The analysis of a broad time-series and cross-section of Brazilian listed firms provides evidence that the latter effect dominates. We build a shareholder agreement index in order to measure on a firm-level basis the degree of investor protection granted by shareholder agreements. Companies with shareholder agreements have higher valuation and the degree of investor protection granted by shareholder agreements is positively related to firm value, even after controlling for the endogeneity of the firm's decision to adopt shareholder agreements.     

Which industries benefited from Trump environmental policy news? Evidence from industrial stock market reactions

We investigate whether election of Donald Trump as the president of the United States of America (the US) and subsequent changes in environmental policies and regulations affected any of the 49 different industry sectors in the US. We analyze 19 different events during Trump’s tenure that were mainly rollbacks of previously created regulations and policies. To analyze stock market effects, an event study methodology is used to assess industry reactions. We assume that Trump loosened environmental regulations and policies to strengthen the US economy. Results show that the lax enforcement of environmental regulations and policies was not effective. Only the coal industry can be considered a beneficiary because it experienced repetitive significant positive abnormal returns, whereas other industries experienced mixed or negative reactions or discontinuous positive reactions. Our results contribute to the extant literature on the US environmental policy within the scope of industry.     

Do less regulated markets attract lower quality firms? Evidence from the London AIM market

The paper examines whether the moderately regulated London AIM market is at a disadvantage in attracting high quality firms. The results show that firms listed on AIM are of the same quality level as firms listed in the US and in Continental Europe, albeit smaller in size. Furthermore, the delisting and valuation pattern is the same across markets, whereas AIM listed firms raise relatively more capital. Thus, rather than catering to low quality firms seeking to conceal their type, the AIM market attracts small firms that – due to size – face disproportional regulatory costs, but are otherwise equivalent to firms listing in more regulated markets.     

Are firms from developed markets more international than firms from emerging markets?

Regionalist supporters’ claim that most of the world's largest firms are regional rather than global and that managers should be encouraged to ‘think regional, act local and forget global’ (Rugman and Moore, 2004, p. 67). We apply the matrix of multinationality proposed by Aggarwal et al. (2011) to a sample of the world's 500 largest corporations, the Fortune Global 500. We show that these firms range from purely domestic to regional, trans-regional and entirely global with most lying in the trans-regional and global categories. Our results imply that global strategies are essential to international trade and management in today's business environment. We compare multinationality results by market type (developed versus emerging market), industry, size and age. We find that firms from more advanced economies tend to be older, larger and more multinational than firms from emerging markets. We find no relationship between multinationality and age or multinationality and size, and conclude that developed market firms are not more multinational as a result of size, age or industrial structure.     

Which sentiment index is more informative to forecast stock market volatility? Evidence from China

In this paper, we investigate the predictive ability of three sentiment indices constructed by social media, newspaper, and Internet media news to forecast the realized volatility (RV) of SSEC from in- and out-of-sample perspectives. Our research is based on the heterogeneous autoregressive (HAR) framework. There are several notable findings. First, the in-sample estimation results suggest that the daily social media and Internet media news sentiment indices have significant impact for stock market volatility, while the sentiment index built by traditional newspaper have no impact. Second, the one-day-ahead out-of-sample forecasting results indicate that the two sentiment indices constructed by social media and Internet media news can considerably improve forecast accuracy. In addition, the model incorporating the positive and negative social media sentiment indices exhibits more superior forecasting performance. Third, we find only the sentiment index built by Internet media news can improve the mid- and long-run volatility predictive accuracy. Fourth, the empirical results based on alternative prediction periods and alternative volatility estimator confirm our conclusions are robust. Finally, we examine the predictability of the monthly sentiment indices and find that the two sentiment indices of social media and Internet media news contain more informative to forecast the monthly RV of SSEC, CSI800, and SZCI, however invalid for CSI300.     

Do shareholders benefit from green bonds?

The green bond market has been growing rapidly worldwide since its debut in 2007. We present the first empirical study on the announcement returns and real effects of green bond issuance by firms in 28 countries during 2007–2017. After compiling a comprehensive international green bond dataset, we document that stock prices positively respond to green bond issuance. However, we do not find a consistently significant premium for green bonds, suggesting that the positive stock returns around green bond announcements are not fully driven by the lower cost of debt. Nevertheless, we show that institutional ownership, especially from domestic institutions, increases after the firm issues green bonds. Moreover, stock liquidity significantly improves upon the issuance of green bonds. Overall, our findings suggest that the firm's issuance of green bonds is beneficial to its existing shareholders.     

The hiring of accounting and finance officers from audit firms: how did the market react?

This study investigates the market’s reaction to companies hiring accounting and finance officers directly from their external audit firms—the auditor-to-client hiring practice referred to as the “revolving door.” The Sarbanes-Oxley Act (SOX) eliminated this hiring practice, reflecting concerns that such appointments may impair audit and financial reporting quality. However, it was also argued that companies may have benefited from hiring individuals already familiar with their systems, organization and personnel. To determine the prevalence of this hiring practice and how shareholders viewed these appointments, we examine 3-day cumulative abnormal returns around the announcements of newly appointed accounting and finance officers over the period 1985–2002. We find that the proportion of revolving door hires is relatively low (only 6.1% of all hires in our sample), but that when they did occur the market valued the revolving door appointments more positively than other appointments. Further tests reveal that the positive market reaction to revolving door appointments is driven mainly by smaller companies, and that these appointments are not associated with lower financial reporting quality when assessing subsequent discretionary accruals or the receipt of an Accounting and Auditing Enforcement Release (AAER). Overall, the low frequency of occurrence, investors’ positive perceptions, and the lack of association with deteriorated reporting quality indicate that the SOX restriction on revolving door appointments may have been unnecessary and will do little to protect shareholders.

Which firms engage small, foreign, or state banks? And who goes Islamic? Evidence from Turkey

We study a representative dataset from Turkey that identifies firm–bank connections. Banks in Turkey differ not only in size and nationality, but also in ownership and orientation (non-Islamic versus Islamic)—resulting in at least six distinct bank types. We estimate a multinomial logit of the choice by the firm of bank type. We document a strong correspondence between bank type and firm characteristics that is not always the same as has been documented so far for US datasets. For example, small firms engage large rather than small banks. Young, large, multiple-bank, and industry-diversified firms, that are located in or close to Istanbul, team up with foreign banks. Islamic banks mainly deal with young, multiple-bank, industry-focused and transparent firms.     

Does foreign institutional ownership motivate firms in an emerging market to increase voluntary disclosure? Evidence from Taiwan

This study examines the relationship between foreign institutional ownership and voluntary disclosure in an emerging market. By exploiting a unique dataset of daily foreign investment flow and ownership data from Taiwan, this paper examines whether foreign ownership is associated with the likelihood of holding conference calls and investigates whether conference calls are informative to foreign market participants. After controlling for other characteristics of a firm??s information environment, we find that the decision to hold conference calls is positively associated with foreign institutional ownership. We also provide evidence that the trading turnover by foreign institutional investors immediately increases after the conference calls, indicating that conference calls are informative for foreign institutional investors. Our results are robust, after controlling for endogeneity.     

How do firms overcome financial constraint anxiety to survive in the market? Evidence from large manufacturing data

In so far as financial constraints affect firm performance, they may expose firms to survival risks. Using a large panel of Chinese firms observed from 1998 to 2013, I analyse the causal relationship between firm survival and financial constraints and how firm performance impacts this relationship. I find that financial constraints play an important role in influencing firm survival. Moreover, financial constraints are the mechanism underlying the relationship between firm performance and survival, and productive and profitable firms can alleviate financial constraints. Privately owned and foreign-owned firms with more leverage face more difficulties surviving in the market; however, state-owned enterprises with more leverage can ease their financial limitations. Finally, I provide evidence that high dependency and high coverage ratios can facilitate firms' survival through alleviating financial constraints.     

Do productive firms get external finance? Evidence from Chinese listed manufacturing firms

Due to information asymmetry problem in financial markets good quality firms often find it difficult to prove to external finance providers about their true quality and to distinguish themselves from bad quality firms. We argue that instead of sending indirect signals to financial market good quality firms could focus on improving their productivity to obtain external finance. Besides relying solely on firms' balance sheet information external finance providers using firms' TFP or labour productivity information would have a true knowledge of firms' efficiency and risk. Overall, using a panel of 1591 Chinese listed manufacturing firms between 2003 and 2016 we find that productivity measured by TFP or labour productivity is statistically and economically important and positive in determining firms' external finance, i.e. total leverage, new issue of equity and long-term debt. We find that productivity is helpful for firms to raise new equity finance, but only some weak results for total leverage and long-term debt. Such results hold for both the whole sample and private firm sample. We also find that large and/or old firms and exporting firms are able to make better use of their productivity to gain external finance than their respective counterparts, i.e. small young firms and non-exporting firms. The causality of the regression results is also confirmed by difference-in-difference tests using an exogenous industrial policy shock.     

What drives the market value of firms in the defense industry?

This article assesses the relative importance of different types of news in driving significant stock price changes in the defense industry. We implement a systematic event study with the 58 largest publicly listed companies in the defense industry, over the time period 1995-2005. We first identify, for each firm, the statistically significant abnormal returns over the time period. Then, we look for information releases likely to cause such stock price movements. Most of the key drivers in the defense industry are the same as in other industries (key role of formal earnings announcements and analysts’ recommendations) but we also identify some specific features, in particular the influence of geopolitical events and the relevance and frequency of bids and contracts on stock prices. Finally, we examine the impact of the September 11 terrorist attacks on defense firms.     

How efficient is the market for Australian firms’ earnings information?

We construct a measure of the speed with which forecasts issued by sell-side analysts accurately forecast future annual earnings. Following Marshall, we label this measure earnings information flow timeliness (EIFT). This measure avoids the aggregation problem inherent in price-based measures of information efficiency. We document large variation in EIFT across firm-years, and show that EIFT is positively associated with the extent of analyst following, consistent with increased analyst coverage improving the speed with which earnings-related information is recognised. We also find that EIFT is higher for firm-years classified as ‘bad news’ (i.e., where analysts’ forecasts at the start of the financial period exceed the reported outcome). However, when we separately consider instances where analysts appear to forecast non-GAAP (or ‘street’) earnings rather than GAAP earnings, we find that the greater timeliness of bad news is concentrated among observations where analysts forecast non-GAAP earnings, where unusual items are typically excluded. We conclude that the market for accounting information is more efficient for negative operating outcomes than for negative outcomes reflecting unusual items.     

Do firms have leverage targets? Evidence from acquisitions

In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage, and we show that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within five years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.     

Does bank transparency benefit from the Volcker Rule?

The Volcker Rule intends to limit bank risk taking by prohibiting or restricting proprietary trading. We find that discretionary loan loss provision significantly increases for affected banks. Affected banks are also less timely in their loan loss recognition. Our findings suggest the Volcker Rule has unintended consequence on bank transparency. This is consistent with the current concern that the Volcker Rule increases bank risk and reduces the effectiveness of risk management.     

Why firms favour the AIM when they can list on main market?

It is often argued that the popularity of Alternative Investment Market (AIM) in terms of higher number of listings relative to the Main Market (MM) is mainly due to the strict listing requirements in the MM. During the 1995 to 2014 period, 577 out of 1143 AIM listed firms did not qualify for MM listing, but the rest (566) that raised equity in AIM could have joined the MM. This raises the question why firms that meet the heavier regulatory environment of the MM choose the AIM, a lighter regulatory environment. This paper subjects this question to a comprehensive investigation and finds that the market choice is a self-selection decision. The two markets attract companies with different characteristics, and dissimilar post-listing investment and financing priorities. The evidence also shows that smaller and younger companies choose to be listed on the AIM due to lower listing and on-going costs. Heckman Selection models addressing the important question of what would have been the operating performance if AIM companies joined MM indicate that AIM companies would not perform better had they selected to go public in the MM.     

Do foreign investors insulate firms from local shocks? Evidence from the response of investable firms to monetary policy

Extant research shows that stock returns of investable firms are highly sensitive to foreign market and global information shocks, suggesting that having foreign investors might insulate investable firms from shocks to local fundamentals. Examining 24 emerging markets, we find that both investable and non-investable firms are sensitive to local monetary policy shocks. This allays the concern that emerging-market opening reduces the efficacy of local monetary policy. We also find that in 11 countries (46% of our country-sample), investable firms are more sensitive to local shocks than non-investable firms. Differences in leverage, stock liquidity, size, domestic product-market exposure, or industry cyclicality do not drive this finding.     

Which time-frequency domain dominates spillover in the Chinese energy stock market?

Previous studies detected the spillover relations among stocks and identified the spillover roles of stocks. However, due to the participants with different dealing frequencies, the spillover effects in the stock market present multiscale features, then which time-frequency domain dominates the spillover in the stock market? Take Chinese energy stocks as an example, this paper examines the return spillover effects of the energy stock market under each time-frequency domain. We find significant return spillover in the Chinese energy stock market under different time scales, and the spillover effect under the time scale of 32–64 days contributes the most to the spillover in the whole energy stock market. Then we take further research on the directional spillovers, spillovers between energy stocks and spillovers between energy industries to detect who plays leading positions under each time scale. We divide the stocks into four roles, and find that it is different role that plays a leading position under each time scale. Furthermore, a small number of spillover relationships between energy stocks carry a large part of the total spillover quantities, and coal and consumable fuel-related stocks play an important role in the spillover of Chinese energy stocks. The robustness of our results is proved by additional tests with different forecast horizons. Our paper contributes to the literature by examining the multiscale spillover effect in the Chinese energy stock market, which provides references for market participants on investment horizons choosing, stocks selection and risk aversion.     

Leverage vs. feedback: Which Effect drives the oil market?

This article brings new insights on the role played by (implied) volatility on the WTI crude oil price. An increase in the volatility subsequent to an increase in the oil price (i.e. inverse leverage effect) remains the dominant effect as it might reflect the fear of oil consumers to face rising oil prices. However, this effect is amplified by an increase in the oil price subsequent to an increase in the volatility (i.e. inverse feedback effect) with a two-day delayed effect. This lead-lag relation between the oil price and its volatility is central to any type of trading strategy based on futures and options on the OVX implied volatility index. It is of interest to traders, risk- and fund-managers.