Stock market short-termism—an international perspective

This study uses a VAR approach with a time-varying risk premium to see if stock market investors are short-term oriented, placing too much weight on current and near cash flows. Using aggregate stock market data for Australia, Germany, Japan, USA and UK markets (1977–1999), we find the degree of persistent under-valuation of future cash flows is far higher in the UK relative to the other countries in our sample, and is market-wide. Also, over the period, US investors appear to have consistently underestimated long horizon cash flows in current stock market valuations relative to a rational valuation model.     

Mandatory Portfolio Disclosure,Stock Liquidity,and Mutual Fund Performance

We examine the impact of mandatory portfolio disclosure by mutual funds on stock liquidity and fund performance. We develop a model of informed trading with disclosure and test its predictions using the May 2004 SEC regulation requiring more frequent disclosure. Stocks with higher fund ownership, especially those held by more informed funds or subject to greater information asymmetry, experience larger increases in liquidity after the regulation change. More informed funds, especially those holding stocks with greater information asymmetry, experience greater performance deterioration after the regulation change. Overall, mandatory disclosure improves stock liquidity but imposes costs on informed investors.     

Feedback and the success of irrational investors

We provide a model in which irrational investors trade based upon considerations that have no inherent connection to fundamentals. However, trading activity affects market prices, and because of feedback from security prices to cash flows, the irrational trades influence underlying cash flows. As a result, irrational investors can, in some situations, earn abnormal (i.e., risk-adjusted) profits that can exceed the abnormal profits of rational informed investors. Although the trading of irrational investors cause prices to deviate from fundamental values, stock prices follow a random walk.     

Stock Exchange Disclosure and Market Development: An Analysis of 50 International Exchanges

This study examines associations between measures of stock exchange disclosure and market development at 50 of the member stock exchanges of the World Federation of Exchanges. We focus on stock exchange disclosure systems (rather than actual company disclosures) because this approach links stock exchange policy with desired outcomes related to market development (such as liquidity, trading activity, and market size relative to gross domestic product). We find strong support for the hypothesis that the strength of the disclosure system (disclosure rules, monitoring, and enforcement) is positively associated with market development, after controlling for legal system, legal protection of investors, market size, and several other potentially relevant explanatory variables.     

The liquidity risk of liquid hedge funds

This paper evaluates hedge funds that grant favorable redemption terms to investors. Within this group of purportedly liquid funds, high net inflow funds subsequently outperform low net inflow funds by 4.79% per year after adjusting for risk. The return impact of fund flows is stronger when funds embrace liquidity risk, when market liquidity is low, and when funding liquidity, as measured by the Treasury-Eurodollar spread, aggregate hedge fund flows, and prime broker stock returns, is tight. In keeping with an agency explanation, funds with strong incentives to raise capital, low manager option deltas, and no manager capital co-invested are more likely to take on excessive liquidity risk. These results resonate with the theory of funding liquidity by Brunnermeier and Pedersen (2009).     

Informational Feedback,Adverse Selection,and Optimal Disclosure Policy

Faceless trading in a secondary stock market not only redistributes wealth among investors but also generates information that feeds back to real decisions. Using this observation we re‐evaluate the “leveling‐the‐playing‐field” rationale for disclosure to secondary stock markets. By partially preempting traders' information advantage established from information acquisition, disclosure reduces private incentives to acquire information, resulting in two opposite effects on firm value. On one hand, this narrows the information gap between informed and uninformed traders and improves liquidity of firm shares. On the other hand, this reduces the informational feedback from the stock market to real decisions. This tradeoff determines the optimal disclosure policy. The model explains why firm value can be higher in an environment that simultaneously promotes disclosure and private information production and why growth firms are endogenously more opaque than value firms.     

Explaining Intraday Pattern of Trading Volume from the Order Flow Data

Based on a comprehensive order flow data from the Taiwan stock market, this study examines directly how the intraday pattern of trading volume is related to the trading behavior of both informed and uninformed traders. The results indicate that both informed and uninformed investors have a strong desire to place orders at the market open and the close. Most of the orders at the market open are conservative and hence are waiting orders for price priority. The findings show that intraday trading volume as well as the real orders from both types of investors are J-shaped. In addition, both information and liquidity trading can explain the intraday pattern of trading volume. However, the impact of liquidity trading on volume is slightly higher than that of information trading.     

Effect of corporate disclosure and press media on market liquidity: Evidence from Japan

News on corporate information can enhance clarity or add to confusion for market participants, especially investors. We explore how two diverse types of information dissemination —corporate disclosure and media coverage—influence stock market liquidity by mediating information asymmetries. We conclude that the two information inflows have notable and distinct impacts on liquidity. Our chief finding suggests that information from corporate disclosures induces a wider bid-ask spread, consistent with increased information asymmetries among investors. In contrast, we find that press media coverage—both good and bad news—improves liquidity. This indicates that mass media is a critical channel that provides investors with news to mitigate information uncertainty. Further, this media effect is partly driven by original journalism coverage and assistance for investors' information assimilation. Finally, in the case of stocks in which retail investors' participation is greater, the liquidity-improving effect of mass media is more prominent.     

Financial reporting quality and idiosyncratic return volatility

Campbell et al. (2001) document that firms’ stock returns have become more volatile in the U.S. since 1960. We hypothesize and find that deteriorating earnings quality is associated with higher idiosyncratic return volatility over 1962–2001. These results are robust to controlling for (i) inter-temporal changes in the disclosure of value-relevant information, sophistication of investors and the possibility that earnings quality can be informative about future cash flows; (ii) stock return performance, cash flow operating performance, cash flow variability, growth, leverage and firm size; and (iii) new listings, high-technology firms, firm-years with losses, mergers and acquisitions and financial distress.     

Voluntary Disclosure with Informed Trading in the IPO Market

We examine voluntary disclosure and capital investment by an informed manager in an initial public offering (IPO) in the presence of informed and uninformed investors. We find that in equilibrium, disclosure is more forthcoming—and investment efficiency is lower—when a greater fraction of the investment community is already informed. Moreover, managers disclose more information when the likelihood of an information event is higher, more equity is issued, or the cost of information acquisition is lower. Investment efficiency and the expected level of underpricing are non‐monotonic in the likelihood that the manager is privately informed.     

The relevance of earnings and cash flows in a heavily regulated industry: Evidence from the Greek banking sector

This study examines the informational quality of annual accounting earnings within Greek banking institutions taking into consideration the most significant risks facing by such firms and specifically interest rate risk, credit risk, liquidity risk and solvency risk, alongside with the persistence of earnings and bank size as significant determinants of ERCs. Data analysis over a period of ten years (1995-2004) revealed that earnings have higher incremental importance in explaining stock return movements compared to cash flows since earnings change has been found to affect stock returns positively. Additionally, interest rate risk has a positive but not significant impact on the return-earnings relation but on the contrary solvency risk, credit risk and liquidity risk proved to have a negative impact on the valuation process for both small and big-sized banks. Finally, tests on the incremental informativeness of cash flows when earnings are transitory provide significant results suggesting that investors seek for alternative measures of banks' performance when earnings are characterized by increased extremity but inversely cash flows and earnings seem to be equally value relevant when investors evaluate big-sized banking institutions. The results are generally robust to the specification of the empirical models and the research design employed in our study.     

Do Financial Markets Care about Corporate Social Responsibility Disclosure? Further Evidence from China

Corporations increasingly define their corporate social responsibility (CSR) activities as a part of their business. However, is this trend beneficial to investors? Based on an event study methodology and a sample of Chinese listed companies, we extend the literature on voluntary disclosure by exploring the role of CSR disclosure in reducing stock market information asymmetry, as proxied by share price volatility and liquidity. Our results show that the share price volatility after CSR disclosure is lower than before CSR disclosure; however, the trend is that it decreases first and then increases for three months following disclosure. Stock liquidity also significantly improves after CSR disclosure; however, it increases first and then decreases. Additionally, by dividing CSR disclosure into economic (hard) disclosure and generic (soft) disclosure, we find that the reduction in information asymmetry is higher for hard disclosure than soft disclosure, suggesting that although CSR disclosure does indeed have an impact on investors’ behaviour in China, an economic‐based disclosure contributes more substantially. Finally, to better understand the characteristics of the Chinese financial market, we also explore the role of marketisation with results that show that the effect in reducing information asymmetry is greater for companies located in a region with a higher degree of marketisation.     

股指期货推出对现货市场价格影响的理论分析

本文构建一个由策略交易者、趋势跟随者、流动性提供者以及套利者组成的多期多市场决策模型,分析在股指期货推出时间给定的条件下,推出前后大盘价格的变动。我们发现,股指期货的引入对股票现货市场的短期效应受市场跟风行为的强弱,即羊群效应大小的影响。当跟风程度较弱时,股指在期货推出前短期下跌,推出后继续下跌;而当跟风程度较强时,股指在期货推出前短期上涨,推出后则下跌。由于国内投资者具有很强的跟风倾向,该模型预测股指期货在推出前短期内将抬高大盘,推出后则压低大盘。另外,股指期货的推出也可能降低市场的波动性。     

Canada's Dual Class Shares: Further Evidence on the Market Value of Cash Dividends

The Canada Income Tax Act of 1971 permitted Canadian corporations to create two classes of equity, one paying ordinary cash income and the other paying capital gains income. Cash-paying shares have often sold at a premium. Empirical results indicate that the premium is largely explained by the relative value of the dividends paid and by costs imposed on investors by stock dividend payment and share conversion procedures. Premiums for a few firms also reflect the relative liquidity of the two classes of shares. No evidence exists that investors prefer cash income to equal amounts of capital gains.     

What’s wrong with Pittsburgh? Delegated investors and liquidity concentration

What makes an asset institutional quality? This paper proposes that one reason is the existing concentration of delegated investors in a market through a liquidity channel. Consistent with this intuition, it documents differences in investor composition across US cities and shows that delegated investors concentrate their investments in cities with higher turnover. It then estimates a search model showing how heterogeneity in liquidity preferences makes some markets more liquid, even when assets have identical cash flows. The paper provides evidence for clientele equilibria arising in frictional asset markets and suggests that a liquidity channel may explain divergent paths in city development.     

The value relevance of cash flows, current accruals, and non-current accruals in the UK

Cash flow statements have a longstanding history as mandated financial statement disclosures, having replaced funds flow statements. The usefulness of such disclosures with respect to one of the main purposes of financial statements—providing information relevant to the assessment of future cash flows and their uncertainty, and the market value of firms—is still subject to debate. This study investigates whether various partitions of earnings involving combinations of a cash flow measure of performance and measures of current accruals and non-current accruals improve the ability to explain market values in the UK relative to using earnings alone. Using a valuation model-based methodology, and employing a UK sample of non-financial firms for the years 1993 to 2007, our results suggest strong support for the assertion that cash flows can have incremental value relevance relative to either earnings or funds flows. By implication, cash flows can have separate value relevance from total and, in particular, current accruals. There is slightly less consistent evidence that current and non-current accruals can have separate value relevance but, nonetheless, the results are still strongly in favour in this respect. Generally, the main source of increase in explanatory power for market values is the separate inclusion of our cash flow measure in the estimated regressions. As a consequence, we conclude that the statement of cash flows in the UK provides information useful to UK investors in valuing firms. Further, requiring a cash flow statement, as opposed to a funds flow statement, improves the information content of financial statements in the UK.     

A theory of risk disclosure

In this paper, we consider the price effects of risk disclosure. We develop a model in which investors are uncertain about the variance of a firm’s cash flows and the firm releases an imperfect signal regarding this variance. In our model, uncertainty over the riskiness of a firm’s cash flows leads to a variance uncertainty premium in its price. We demonstrate that risk disclosure decreases the firm’s cost of capital by reducing this premium and that the market response to risk disclosure is small when the expected level of risk is high. Moreover, we find that firms acquire and disclose more risk information when their cash flow risk is greater than expected. Finally, we demonstrate that in a multi-asset setting, only risk disclosure concerning systematic risks will impact the cost of capital.     

A Cognitive Theory of Corporate Disclosures

I analyze how disclosure policies and managerial cognitive abilities interact to influence stock prices, firm values, and the liquidity of financial markets. High cognitive ability assists in value-creation within private corporations, but also may enhance the success odds of strategies which mislead large numbers of financial market agents who have access to firms' disclosure statements. Thus, the equilibrium degree of misrepresentation in disclosures can increase with managerial cognitive capacity (or intellect). Equilibrium efforts at improving true expected values of firms are limited by expected gains from misrepresentation. I argue that agents may face very high costs of acquiring information in firms run by managers who are effective at misrepresenting their firms in disclosure statements. This indicates that contrary to extant theoretical literature, there may be a positive relation between liquidity and the degree of information asymmetry between management and outside investors.     

The consequences of deviating from financial reporting industry norms: Evidence from the disclosure of foreign cash

This study examines how investors respond to firms’ disclosure practices that deviate from the majority of industry peers (i.e., industry norms). The SEC has made repeated calls for the disclosure of foreign cash in order for investors to have more information in determining firms’ liquidity positions. We examine the association between firm value and the non-disclosure of foreign cash in industries where the majority of firms choose to disclose foreign cash. We define partial disclosure as disclosing permanently reinvested earnings (PRE), but withholding the disclosure of foreign cash, and find that when the majority of industry peers disclose foreign cash, investors discount the firm-specific partial disclosure of foreign operations. This finding suggests that investors have similar information demands as the SEC, and that withholding foreign cash results in a valuation discount. We also find that this discount is more pronounced for firms predicted to have higher levels of foreign cash and higher levels of PRE. The discount in firm value is also concentrated among firms with managers who have more career concerns, suggesting that managers shift the cost of partial disclosure to shareholders instead of bearing the personal reputational cost of full disclosure. Our results are robust to multiple matched samples and entropy balancing. While previous literature has considered the valuation implications of foreign cash disclosures, we reveal the consequences of opting to withhold the disclosure of foreign cash. Our findings should be of interest to both managers and policy-setters in forming their disclosure protocols.     

Liquidity,the Value of the Firm,and Corporate Finance

The theory of corporate finance has been based on the idea that a company's market value is determined mainly by just two variables: the company's expected after‐tax operating cash flows or earnings, and the risk associated with producing them. The authors argue that there is another important factor affecting a company's value: the liquidity of its own securities, debt as well as equity. The paper supports this argument by reviewing the large and growing body of evidence showing that differences—and changes—in liquidity can have major effects on the pricing of corporate stocks and bonds or, equivalently, on investors' required returns for holding them. The authors also suggest that the liquidity of a company's securities can be managed by corporate policies and actions. For those companies whose value is likely to be increased by having more liquid securities—which is by no means true of all companies (mature firms that don't need outside capital may well benefit from having more concentrated ownership and hence less liquidity)—management should consider actions such as reducing leverage and substituting dividends for stock repurchases as well as measures designed to increase the effectiveness of their disclosure and investor relations program and the size of their investor base.