Herding behaviour and the declining value relevance of accounting information: evidence from an emerging stock market

This article sheds light on the underlying mechanisms behind the changes in the value relevance of accounting information in the Karachi Stock Exchange (KSE) during the 1999–2010 period. We find that neither changes in earnings quality nor the earnings lack of timeliness hypothesis can explain the decline in the value relevance of accounting information in the KSE. Based on the stylized facts associated with the growth of the KSE and the broader economics literature, we argue that the reduction in the explanatory power of accounting information vis-à-vis stock returns was caused by herding behaviour. Empirical estimates from state-space model of herding behaviour confirm the existence of herding, and we find that the value relevance of accounting information is significantly lower in periods characterized by herding behaviour. This article is also amongst the first attempts to empirically demonstrate that an expansionary monetary policy and increases in foreign portfolio investment lead to increased levels of herding.     

The relationship between developed equity markets and the Pacific Basin's emerging equity markets

Using a trivariate vector autoregression (VAR) model with a proper control for heteroscedasticity, this paper investigates the relationships between the two largest equity markets in the world—the U.S. and Japan—and the four Asian emerging equity markets: Hong Kong, Korea, Singapore, and Taiwan. Evidence indicates that the links between the developed markets and the Asian emerging markets (AEMs) began to increase after the stock market crash in October 1987, and have significantly intensified since the outbreak of the Asian financial crisis in July 1997.     

Return predictability in emerging equity market sectors

This article investigates the predictive power of technical trading rules in the emerging equity market sector portfolios and finds that trading strategies based on technical indicators significantly outperform the buy-and-hold benchmark. Combination of data snooping bias, data measurement errors in the form of non-synchronicity bias and fluctuations in currency exchange rates is unable to explain the observed outperformance. The introduction of transaction costs tempers the results but technical analysis still possesses significant predictive power for a number of sectors. The performance of technical analysis in the emerging equity market sectors does not conform to historical trends observed in the developed equity markets as well as in the emerging equity markets when broadly diversified portfolios are considered, where predictive power of technical trading rules has been shown to decline over time.     

Determining the going market value of a business in an emerging information technology industry: The case of the cellular communications industry

Given the phenomenal growth or the anticipation of growth in certain information technology industries, concerns for economy of scale, market access and expansion, and the need for ongoing research and development are resulting in mergers, acquisitions, and strategic alliances. A key question in such industries is what is, or should be the going market value of a business? This paper suggests an approach to imbed market penetration models in the popular value-based planning approach suggested by Rappaport [36] to obtain the going market value of a business. The model developed in implementing the approach is tailored for the cellular communications industry. Limitations and adaptations of the approach to other industries are discussed.     

A portfolio model of capital flows to emerging markets

Since the crises of the late 1990's, most emerging market economies have built up substantial positive holdings of US dollar treasury bills, while at the same time experiencing a boom in FDI capital inflows. This paper develops a DSGE model of the interaction between an emerging market economy and an advanced economy which incorporates two-way capital flows between the economies. The novel aspect of the paper is to make use of new methods for analyzing portfolio choice in DSGE models. We compare a range of alternative financial market structures, in each case computing equilibrium portfolios. We find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital (FDI) can achieve a considerable degree of international risk-sharing. This risk-sharing can be enhanced by a more stable monetary policy in the advanced economy.     

Debt markets and corporate debt structure in an emerging market: The South African example

This is a first attempt at gauging the effects of corporate public debt issuance on the debt structure, risk profile and valuation of firms in an emerging market. We find that financial services firms, along with government institutions, are important early supporters of an organized public debt market. Firms in this market use equity, public debt and private debt funds simultaneously as need be. Consistent with predictions of the corporate debt structure literature, public debt-issuing firms are larger, older, more profitable, and less informational opaque than non-public debt-issuing firms. Moreover, public debt-issuing firms experience significant reductions in both overall and systematic risks, and incur lower cost of capital following issuance than non-public debt issuers. These and other findings of the study suggest deepening national debt markets can be a fruitful financial market development exercise for emerging markets.     

The expectation hypothesis in emerging financial markets: the case of Malaysia

This article deals with the expectation hypothesis of the term structure of interest rates. It is argued that the rapid progress and financial market liberalization that is occurring in emerging financial markets could provide additional evidence for testing the expectation hypothesis. This article employs data from the Malaysian government securities market which represents one of the examples of an emerging financial market. Cointegration and error correction analyses show significant empirical validity for the expectation hypothesis. The long- and short-term interest rates are shown to be cointegrated and subject to a long-run equilibrium path. In addition to shedding some light on the experience of emerging financial market, this article explicitly identifies the process of adjustment towards the long run equilibrium. For the long-run, the results are in favour of the long-to-short version of expectation hypothesis with longer-term interest rates playing a greater role as equilibrium attractor. However, in the short run causal impact runs from short- to long-term interest rates. The empirical findings of the article generally support the proposition of expectation hypothesis.     

Corporate governance practices in emerging markets: The case of GCC countries

This paper examines the corporate governance (CG) practices in emerging markets with special reference to the listed firms in the Gulf Cooperation Council's (GCC) oil rich countries. It develops an un-weighted Corporate Governance Index (CGI) model for non-financial firms using recent data. The usefulness of the model is demonstrated with a specific country example. The index identifies thirty internal governance attributes which are abridged in three categories of all the selected firms to form the best CG practices in the region. The results demonstrate that GCC companies adhere to 69% of the attributes addressed in the CGI. The results also show that the firms listed in the United Arab Emirates stock markets exhibit the best adherence to the CG attributes examined in the study followed by Oman, Saudi Arabia, Qatar and Kuwait, respectively. The current paper offers valuable recommendations to policy makers to gradually embed strong and specific governance practices. Special emphasis is placed to board effectiveness and structural and organizational frameworks in order to ensure a sustainable quality of CG practices in the region.     

The relative importance of capital inflows: some evidence from emerging market economies

This article examines the relative importance of the main components of capital inflows for a sample of emerging market economies. Does composition matter? Is there a nexus between capital inflow components? We assess, firstly, how each capital inflow component reacts to important macro and policy variables, and secondly, how the components themselves interact. We find that bank inflows appear the most sensitive to macro factors, institutions matter more for Latin America and external financial factors matter more for Asia. Further, for Latin America, capital inflows interact largely as complements, while for Asia, any expansion of bank inflows might crowd out FDI and portfolio flows.     

Effects of capital flow on the equity and housing markets in Hong Kong

The revival of strong capital flows to emerging economies following the global financial crisis in 2008–2009 has rekindled the debate on effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross‐border fund movements. It is found that the official and illicit capital flow measures display a low level of comovement and exhibit differential effects on Hong Kong's equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of sector‐specific capital management policies.     

Foreign equity trading and emerging market volatility: Evidence from Indonesia and Thailand

This paper documents a strong contemporaneous relationship between foreign equity trading and market volatility in Indonesia and Thailand. Although foreign selling accounts for only a small portion of daily trading, it has the highest explanatory power for market volatility in both countries. Trading within foreign and local investor groups is often negatively related to volatility. The findings are robust to different sub-periods and different measures for volatility and trading activities. We explore two economic explanations for the asymmetric effects of foreign and local investors.     

Foreign equity trading and emerging market volatility: Evidence from Indonesia and Thailand

This paper documents a strong contemporaneous relationship between foreign equity trading and market volatility in Indonesia and Thailand. Although foreign selling accounts for only a small portion of daily trading, it has the highest explanatory power for market volatility in both countries. Trading within foreign and local investor groups is often negatively related to volatility. The findings are robust to different sub-periods and different measures for volatility and trading activities. We explore two economic explanations for the asymmetric effects of foreign and local investors.     

Herding by foreign investors and emerging market equity returns: Evidence from Korea

This paper studies the effect of herding by foreign investors on stock returns in the Korean market. We conduct both pre and post-liberalization analyses and utilize a three-stage least squares analysis in order to control for the simultaneous relationship. We find evidence of a significant impact of foreign investor herding on stock returns in addition to intra-year positive feedback trading by foreign investors. However, changes in domestic institutional ownership do not have any significant effect on stock returns. In addition, foreign investors tend to buy/sell shares that domestic institutions sell/buy in the herding year.     

Combining value and momentum: evidence from the Nordic equity market

This is the first article that explores the recently proposed average ranking approach for the value and momentum strategy in the Nordic equity market offering an exceptional experimental environment. Our results indicate that in the Nordic stock markets, the value anomaly offered excess returns in the 1993–2017 sample period only when small stocks were a part of the portfolio, whereas the momentum effect is strong and significant, irrespective of size. Interestingly, our findings also indicate that the negative correlation between value and momentum seems to be driven by growth stocks: Winner stocks that are value stocks generated 1.66% per month on average, whereas winner stocks that are growth stocks exhibit virtually the same average payoff. On the other hand, the spread between value and growth stocks that are loser stocks is on average 0.97% per month.     

The composition of capital inflows when emerging market firms face financing constraints

The composition of capital inflows to emerging market economies tends to follow a predictable dynamic pattern across the business cycle. In most emerging market economies, total inflows are pro-cyclical, with debt and portfolio equity flowing in first, followed later in the expansion by foreign direct investment (FDI). To understand the dynamic composition of these flows, we use a small open economy (SOE) framework to model the composition of capital inflows as the equilibrium outcome of emerging market firms' financing decisions. We show how costly external financing and FDI search costs generate a state contingent cost of financing such that the cheapest source of financing depends on the phase of the business cycle. In this manner, the financial frictions are able to explain the interaction between the types of flows and deliver a time-varying composition of flows, as well as other standard features of emerging market business cycles. If, as this work suggests, flows are an equilibrium outcome of firms' financing decisions, then volatility of capital inflows is not necessarily bad for an economy. Furthermore, using capital controls to shut down one type of flow and encourage another is certain to have both short- and long-run welfare implications.     

Learning in asymmetric duopoly markets: competition in information and market correlation

This paper explores experimentation and learning in asymmetric duopoly markets with product differentiation and demand uncertainty. We define the concepts of strategic substitutability and strategic complementarity in information and we show how both the mode of information competition and the transmission of information across markets affect duopoly experimentation. We relate information competition with market competition and we find that, when goods are substitutes and the correlation between market shocks is negative, firms will have a higher incentive to experiment in asymmetric markets than in symmetric ones. The opposite result follows when such correlation is positive. Also, when goods are complements the above findings are reversed.JEL Classification: D83, C72The authors thank partial financial support from the Spanish Ministry of Science and Technology under project B2000-1429, from the Spanish Ministry of Education and Science under project SEJ2004-07554 and from the “Generalitat Valénciana” under project GRUPOS04/13.