Investor heterogeneity and commonality in stock return and liquidity

This paper examines how the trading activities of different investor types are related to common return and liquidity movements. Using a unique dataset, we decompose the daily return and liquidity of individual stocks into price impact components attributable to trades of institutional investors and retail investors. We then investigate the variation of each component relative to market-wide return and liquidity. We show that institutional trades contribute more than retail trades to liquidity commonality. However, retail trades contribute more strongly to return co-movement. The incremental contribution of retail trades to the co-variability of stock returns is more pronounced for firms with high information asymmetry.     

Information disclosure ratings and managerial short-termism: An empirical investigation of the Chinese stock market

Information asymmetry between managers and outside investors creates agency problems and impedes efficient capital allocation. Information disclosure is critical in alleviating information asymmetry in capital markets. This study investigates the effect of information asymmetry on managerial short-termism by examining information disclosure ratings (IDRs). Using real earnings management as a proxy for managerial short-termism, our analysis of a sample of Chinese A-share companies during 2001–2018 indicates that high IDRs mitigate managerial short-termism. The results also indicate that the effect of IDRs in reducing managerial short-termism is driven mainly by stock liquidity. This conclusion holds after consideration of endogeneity and application of two-stage least-squares and generalized method of moments methods, adjustment of the definition of IDRs, consideration of alternative proxies for managerial short-termism, and control for firm characteristics that might affect the extent of managerial short-termism. This study also examines the effects within three subsamples: companies listed on the Shenzhen Stock Exchange main board, small and medium enterprise board, and growth enterprise market board. IDRs substantially reduce managerial short-termism among firms listed on all three boards. These findings indicate that enterprises have corrected previous internal governance problems, and IDRs have helped to improve internal governance through stock liquidity. Therefore, external supervision also helps to reduce the agency problem of managerial short-termism.

     

Do voluntary disclosures of bad news improve liquidity?

Can managers improve market liquidity and lower the cost of capital by providing voluntary earnings guidance? This study examines the impact of profit warnings on market liquidity and finds that voluntary disclosure of bad news actually improves market liquidity. By conducting an empirical study over the period 1995–2010 on NYSE, NASDAQ and AMEX listed firms, we find that firms that issue profit warnings show enhanced market liquidity during the post-announcement period. We show that profit warnings reduce information asymmetry and lower bid-ask spreads and increase trading volumes. These results are invariant to daily (short run) and monthly (long run) data after controlling for firm specific attributes. The results have major corporate policy implications. By voluntarily disclosing negative earnings guidance by managers, firms will experience significant improvement in market liquidity, thereby lowering the cost of capital. Our results are even more profound for firms that release bad news with extremely negative stock market impact. In other words, voluntary disclosure of bad news is good for market liquidity.     

Event History Data and Making a History out of Cross-Sectional Data

At the turn of 20th century social scientists have built up a large stock of cross-sectional data-sets to study social change. However, scholars more and more collect event history data containing the exact timing of events. Comparing the (dis)advantages event history data are to be preferred. However, for research on value change the event history approach is inapplicable, since it is not possible to ask the timing of a value change retrospectively. I will illustrate that value change (i.e. cohort differences) can be studied adequately with cross-sectional data, if information about the historical context is added. For this purpose I test Inglehart's value change thesis.Interestingly, there are also topics in which cross-sectional data-sets are unnecessarily being used. Using research on secularization as an example, I show that the event-history approach can be used to answer the question whether the decreasing number of religious people concerns a cohort-effect. However, whatever data-set is being used, to study cohort differences, one should always give a theoretical answer to the key-question: what exactly makes cohorts different     

上证180指数流动性效应的实证研究

本文从实证的角度探讨了上证180指数创立事件对其成份股流动性的影响以及进一步改善的方法。上证180指数的成立事件一方面促进了成份股价差水平和交易信息对称程度的改善,另一方面又促使交易深度水平和交易活跃性的降低。这些流动性效应是由于机构投资者对180成份股偏好所造成的:机构投资者增加了180成份股的需求同时减少了供给,就导致了交易深度和活跃性的降低;机构投资者作为相对知情交易者,它们的偏好增加了市场的需求竞争程度,从而降低了交易者之间的信息不对称程度以及改善了市场价差水平。根据国外的经验,ETF可以有效地增强市场交易深度,因此本文建议创立上证180指数ETF弥补180指数对深度方面的负面影响。     

The effects of employee stock ownership on stock liquidity: Evidence from the Korean market

This study investigates the relationship between the level of employee stock ownership (ESO) and stock liquidity. Using Korean ESO data, we find that ESO is positively associated with various liquidity measures. Stock-owning employees tend to mitigate information asymmetry to increase their benefits from the transparent market. We also find stronger effects when the firm is not an affiliate of a chaebol family group, and is less monitored by financial analysts, foreign investors, and outside directors. Furthermore, we employ various robustness tests to mitigate potential endogeneity concerns.     

投资者结构模式变迁与市场流动性风险

本文研究了市场流动性风险与投资者结构模式之间的关系。随着机构投资者的不断发展壮大,我国投资者结构模式发生了重要转变,然而新的投资者结构模式下,市场流动性的波动结构是否有所不同？本文以流动性水平变化率为研究对象,构建了包含虚拟变量的TGARCH模型对其波动方程进行拟合,研究发现：机构投资者壮大后市场流动性风险显著降低;机构占主导后市场流动性风险受新信息的影响权重较之前增大,而旧有信息对流动性风险的影响相比以前减小。     

Compensation for illiquidity in China: Evidence from an alternative measure

This paper shows that liquidity is an important source of priced risk in China. Using A-share stocks in Shanghai and Shenzhen Exchange over the period 2007–2017, we examine the influence of liquidity on stock returns. A new liquidity measure that captures multiple dimensions of liquidity is proposed. Fama-Macbeth cross-sectional regression shows that the expected return is negatively correlated with liquidity. Based on Fama and French (1993), we propose a five-factor pricing model by incorporating reversal factor and liquidity factor. Time-series regressions show that the liquidity factor makes significantly marginal contributions to explaining excess stock returns. The liquidity factor based on the proposed measure works better than alternative liquidity measures such as turnover, Amihud illiquidity measure and the measure in Liu (2006).     

Large changes in stock prices: Market,liquidity, and momentum effect

This article investigates the determinants of large changes in stock prices. Empirical evidences suggest that the asymmetry phenomenon in determinants of large changes in stock prices is found in three stock exchanges. In the New York Stock Exchange (NYSE), momentum effect accounts for most of the likelihood of big gains in stock prices, while liquidity characteristics account for sharp declines of stock prices. An interesting finding is that the opposite is true for stocks traded in Amex and NASDAQ. The possible explanations of the different results in different stock exchanges may attribute to the characteristics of firms listed in these stock exchanges are different.     

会计信息对称的一般研究

自美国加州大学乔治·阿克尔洛夫因研究信息不对称理论获得2001年诺贝尔经济学奖以来,管理理论都以信息不对称为研究假设。在实践中,因为会计信息不对称发生了大量现金犯罪和财务造假。为什么会计信息会不对称?学者们在理论上是如何论述的?有关部门在实务上又是如何治理的?论文以现金犯罪和财务造假为研究背景,以前人已有成果为研究参考,对学术界的研究动态和有关部门的治理举措进行了梳理,并提出了破解信息不对称难题的基本思路。     

Determinants of commonality in liquidity: Evidence from an order-driven emerging market

Using an extensive, time-series, cross-sectional data-set of actively traded Indian stocks with up to 1.75 million firm-day observations, we discern the key determinants of commonality in liquidity among emerging markets. The paper shows evidence for both supply-side and demand-side factors contributing to liquidity commonality. However, the results are more supportive towards supply-side rationale for liquidity commonality among the firms where regulators and banks play an important source of commonality in liquidity, especially during market turmoil. Results are partially driven by the fact that the Indian stick exchange is an order-driven market. Economic activities like cheap exports and undervalued currency, rather than correlated trading by the institutional investors determine the demand for liquidity. These findings endorse the effect of high firm value, market return, liquidity, volatility, turnover, and alternate proxies of commonality in liquidity estimation.     

Ownership structure,information asymmetry and growth of the firm: Implications from nonfinancial firms listed in S&P500

This paper investigates the association between growth of the firm and ownership structure under conditions of information asymmetry. The objective is to show the effects of information asymmetry (favorable vs. adverse selection) on the choice of the ownership structure that helps firms grow. Our sample includes nonfinancial firms listed in the S&P500 over the period 2000 to 2016. The dependent variable is growth of the firm measured by growth in sales. The independent variables are proxies for changes in ownership structure, individual investors, investment managers, and brokerage firms. Observations are grouped according to level of information asymmetry (high or low) using three proxies for information asymmetry: beta of return on equity (ROE), probability of default of ROE, and q ratio. The results conclude that (a) changes in ownership structure affect growth of the firm positively and (b) the effect of ownership structure is more significant and consistent at low level of information asymmetry. The contribution of the paper is threefold. First, it extends the arguments of corporate governance by showing the impact of ownership structure on growth of the firm. Second, the paper offers robust evidence that growth of the firm is associated with low level of information asymmetry. Third, the paper shows that fundamental financial information can help lessen the level of information asymmetry and thus help firms grow.     

Disclosure, Corporate Governance and Foreign Share Ownership on the Zimbabwe Stock Exchange

We investigate the association of foreign share ownership with firm‐level disclosure and corporate governance structures in Zimbabwe, a developing country in Southern Africa. Our motivation for the study derives from the literature, which suggests that foreign investors: (1) generally have a preference for companies in which they are well informed and where their investments are more likely to be protected, and (2) avoid companies in developing countries because of weak corporate governance structures and low disclosure. Using data drawn from companies listed on the Zimbabwe Stock Exchange, we examine the effect of disclosure and corporate governance on foreign share ownership. We find that disclosure, proportion of non‐executive directors, institutional share ownership and audit committee independence are all positively and significantly associated with foreign share ownership. Our results also demonstrate that market capitalization, return on equity and liquidity ratios are significantly associated with foreign share ownership. These results are consistent with the notion that foreign investors have a preference for companies with effective corporate governance structures, companies with less information asymmetry, as well as companies with healthy cash positions. The results have implications for policy‐makers in developing countries in their endeavour to improve liquidity on stock markets through the participation of foreign investors. The results are also useful to managers in developing countries who are keen to increase the market value of their company, thereby reducing their cost of capital.     

Trading cost expectations: Evidence from S&P 500 index replacement stock announcements

This paper tests the effect on stock value of an expected change in future trading costs. The capitalized value of a reduction in trading costs is hypothesized to increase the stock value, a trading cost effect. Improved liquidity reduces trading costs. Inclusion as an S&P 500 Index replacement stock is an event hypothesized to increase liquidity. We use 114 observations between January 1, 1983 and October 12, 1989 of stocks added to the Index as replacements for stocks removed. The abnormal return of each stock is regressed against the ratio of the bidask spread to the price of the stock, the change in trading volume of the stock, and the open interest in the Index futures contracts at the close of the month prior to the replacement announcement. We find that the positive abnormal returns for replacement stocks are related to increased daily trading volume after inclusion in the Index. Further, the trading cost effect is proportional to percentage bid-ask spreads prior to inclusion. The trading cost effect increases as trading in derivatives of the Index increases. The volume and stock price changes after replacement are not transitory, indicating an improvement in liquidity. Three alternate hypotheses suggested in prior research to explain the abnormal returns for replacement stocks are tested. Testing each of the three models previously considered: price pressure, inelastic demand curves, and information, we find that none can be accepted with statistical confidence. The abnormal returns of Index replacement stocks are consistent with rational pricing of an anticipated reduction in future transaction costs. This anticipated reduction is capitalized in the value of the stock at the time of the replacement announcement. These results are consistent with a trading cost effect.     

基于流动性调整CAViaR模型的风险度量方法

本文提出了流动性风险度量的一个新的方法,流动性调整的CAViaR模型。该模型能够直接反映资产流动性的变动对未来风险的影响,并在此基础上计算资产未来经过流动性调整的风险VaR,从而使投资者能够更好地管理风险,尤其是流动性风险。实证研究表明,该模型能够较好地刻画中国股市流动性风险的动态变化特征;并且发现股票流动性的大幅下降通常导致未来风险明显加大,且正向流动性下降所带来的风险往往较负向流动性要更大,因此更值得投资者关注。     

Countertrade

Abstract

Countertrade is a generic term for parallel business transactions linking sales contracts with agreements to purchase goods or services. Various forms of countertrade all have one common feature-reciprocity. Countertrade has been viewed as an inefficient and cumbersome way of doing business primarily because of problems associated with (1) Disposing of products accepted as part of the deal, (2) Quality variations and (3) Negotiation process and resulting increase in transaction costs. A review of the International Trade literature indicates that market imperfections (shortage of convertible currency, information asymmetry that may create the so-called lemon problem and moral hazard) provide a motivation for countertrade. This article looks at the economic rationalization for countertrade. Since the widespread existence of countertrade, particularly in North-South and in East-West trade, is somewhat of a puzzle, one explanation that is often proposed in the literature is that liquidity constraints might force firms to engage in countertrade (particularly barter). The article compares and contrasts two strategies facing the management team of a profit maximizing firm. The standard neoclassical mathematical model developed shows that countertrade strategy may be superior to standard money-mediated trade strategy when there is liquidity shortage. Therefore, countertrade (particularly, buy-back, counterpurchase and offset) may be a rational response to conditions that restrict standard trade. As such, countertrade can supplement standard money-mediated trade and contribute to the growth of international business.     

Labor's liquidity service and firing costs

This paper studies the specific effect that firing costs can have on firms facing liquidity constraints. When firing costs are zero and a time gap exists between production and its associated revenues, firing allows firms to hold on to their liquid assets by saving on wages, and thus, allows firms to cope better with liquidity shocks when external financing is too costly or unavailable. I refer to this feature as labor's liquidity service. Higher firing costs reduces the value of labor's liquidity service, and thus, increases firms' incentive for hoarding liquidity and reduces firms' demand for production inputs. In addition to this negative effect at the creation margin of production, firing costs have a relatively higher positive effect on the destruction margin of production of financially restricted firms. This paper presents a model that develops these ideas and shows that the presence of firing costs has a stronger negative effect on the output of firms facing liquidity constraints. Regression analysis, based on country-industry panel data sets, provides empirical evidence consistent with the liquidity service effect of firing costs. I find a relatively stronger negative effect of firing costs on the output of industries with higher liquidity requirements and a relatively stronger negative effect of firing costs on the output of small, and more likely financially constrained, firms.     

Information asymmetry,sentiment interactions,and asset price

We develop an asset pricing model with sentiment interactions between institutional and individual investors under the condition of information asymmetry. Our model considers private information and investor sentiment, two imperfections in securities markets, and integrates them into a theoretical model to investigate the role of the interaction between information asymmetry and investor sentiment in asset pricing. We show that the joint effect of private information and investor sentiment deviate the price of risky assets and efficiently explains anomalies in the stock market. Investor sentiment changes the effect of information on the equilibrium price relative to a world where all investors are completely rational. Private information changes the effect of investor sentiment on the equilibrium price in comparison with a scenario with symmetric market information. In addition, the individual investors’ learning and the disclosure of information both allow private information to be better integrated into the price and simultaneously changes the effect of investor sentiment on the equilibrium price.     

House price appreciation, liquidity constraints, and second mortgages

This paper analyzes how households use second mortgages in response to shocks to housing wealth. Two related questions are examined: Do households use home equity in response to house price appreciation? Are liquidity constraints important for homeowners? A theoretical model shows that liquidity-constrained households respond more strongly to house price changes than unconstrained households. Using PSID, I find noteworthy differences in borrowing patterns of homeowners by the ratio of wealth to income. Low wealth-to-income homeowners exhibit a strong reaction to house price appreciation, whereas high wealth-to-income ones do not. The results indicate the importance of liquidity constraints among homeowners.     

Do adjustment costs explain investment-cash flow insensitivity?

In this paper, I explain two “puzzles” that have been observed in firm level data. First, firms that display a high sensitivity of investment to cash flow (commonly believed to be an indicator of liquidity constraints) usually have large unutilized lines of credit which, presumably, could be used to overcome the shortage of funds. Second, firms that are perceived to be extremely liquidity constrained actually show very little sensitivity of investment to cash flow.I show how a dynamic model of firm investment with liquidity constraints and non-convex costs of adjustment of capital can explain these facts. These two features together imply that firms need to have a certain threshold level of financial resources before they can afford to increase investment. Once they cross this threshold, firms’ investment will be positively correlated with their financial resources until they reach their desired level of capital stock. However, even if investment is sensitive to cash flow, firms may borrow below their credit limit to guard against future bankruptcy or binding liquidity constraints.