Do investors still benefit from culturally home-biased diversification? An empirical study of China, Hong Kong, and Taiwan

Due to the continual economic integration and the accumulation of wealth in China, Hong Kong, and Taiwan, understanding portfolio strategies and the benefits of diversification for these countries is an indispensible element in managing global assets. Using weekly industry-level data, we analyze culturally home-biased diversification strategies and find that local investors still benefit from regional investments. The time-varying benefits of diversification exist even as the economies of this region have become increasingly integrated. Our analysis suggests that stricter weighting bounds reduce the economic values of diversification but enhance the feasibility of the optimal portfolio allocations. The larger benefits gained by Chinese investors suggest that international diversification is more advantageous to investors in emerging economies than to those in richer, developed markets. The robustness tests generate similar findings when we evaluate the out-of-sample effectiveness and the benefits of diversification under various parameter estimation windows.     

Do economic statistics contain information to predict stock indexes futures prices and returns? Evidence from Asian equity futures markets

This research examines the impact of local and international market factors on the pricing of stock indexes futures in East Asian countries. The purpose of this paper is to present a study of the significant factors that determine the major stock indexes futures’ prices of Hong Kong, Malaysia, Singapore, South Korea and Taiwan. This study first investigates the relationships between Hang Seng Index Futures, KLCI Futures, SiMSCI Futures, KOSPI Futures, Taiwan Exchange Index Futures and local interest rates, dividend yields, local exchange rates, overnight S&P500 index and a newly constructed index, Asian Tigers Malaysia Index (ATMI). 11 years historical data of stock indexes futures and the economic statistics are studied; 10 years in-sample data are used for testing and developing the pricing models, and 1 year out-of-sample data is used for the purpose of verifying the predicted values of the stock indexes futures. Using simple linear regressions, local interest rates, dividend yields, exchange rates, overnight S&P500 and ATMI are found to have significant impact on these futures contracts. In this research, the next period close is predicted using simple linear regression and non-linear artificial neural network (ANN). An examination of the prediction results using nonlinear autoregressive ANN with exogenous inputs (NARX) shows significant abnormal returns above the passive threshold buy and hold market returns and also above the profits of simple linear regression (SLR). The empirical evidence of this research suggests that economic statistics contain information which can be extracted using a hybrid SLR and NARX trading model to predict futures prices with some degree of confidence for a year forward. This justifies further research and development of pricing models using fundamentally significant economic determinants to predict futures prices.

     

Do individual short-sellers make money? Evidence from Korea

We use a proprietary trade- and account-level dataset of short sales to investigate the profitability of individual investors short-selling in the Korean stock market from August 1, 2007, to May 31, 2010. Using actual data on short-covering transactions, we find that the average profit is 26,810 Korean won (roughly USD 24.4) per trade per hour, and about 44% of shorted trades are covered within a day. We also find that the profitability of short-selling decreases as the hours-to-cover increases. Account-level analyses show that investors who sell short more firms make higher profits than those who sell short fewer firms and that the profitability of short-selling is persistent. We attribute the profitability to short-sellers’ ability to exploit short-run price reversals and information processing skills.     

Does Corporate Governance Predict Future Performance? Evidence from Hong Kong

This study uses time‐series data to examine the relation between changes in the quality of corporate governance practices and subsequent market valuation among large listed companies in Hong Kong. The results indicate that firms that exhibit improvements in the quality of corporate governance display a subsequent increase in market valuation, whereas firms that exhibit deterioration in the quality of corporate governance practices tend to encounter a decline in market valuation. Additionally, the impact is greater for firms that are included in the MSCI index or with a China affiliation. The results provide evidence in support of the notion that good corporate governance can predict future market valuation.     

Does Joint Bidding Reduce Competition? Evidence from Hong Kong Land Auctions

This paper analyses firms’ bidding behavior in auctions for development land in Hong Kong. The real estate market in Hong Kong is considered to be oligopolistic as it is dominated by a few top real estate firms, which have strong financial strength/development capacity and large land banks. Joint bidding is used by other real estate firms (“large” firms) to pool resources/capital in order to compete with the top firms. We test whether joint bidding increases or decreases the level of competition in land auctions, using land auction data in Hong Kong from 1991 to 2011. We find that large real estate firms are more likely to be successful than top firms at auctions when bidding jointly. However, joint bidding/winning does not harm competition as reflected by the number of bids, bids per bidder and number of bidders. Land prices also increase significantly in auctions won by joint bidders or alliances of large developers. Our results suggest that joint bidding enhances competition by allowing large firms to act strategically by pooling their resources and act aggressively to compete with the top firms.

     

Do Private Placements Turn Around Firms? Evidence from Taiwan

We analyze the stock and operating performance of firms issuing private placements in Taiwan. Issuing firms have poor pre‐issue performance and earn significantly positive returns at announcement. Placements with an owner‐manager or with nonexecutive directors are associated with better post‐issue stock and operating performance, suggesting that an increase in insiders’ stakes leads to better alignment of managerial incentives and an increase in monitoring by insiders. In contrast, placements made to outside investors are unlikely to turn around the issuing firms.     

Do board interlocks motivate voluntary disclosure? Evidence from Taiwan

Conference calls have become a widely used medium for voluntary corporate disclosure, especially among firms associated with greater information asymmetry, intangible assets, and external competition. These features are common in high-tech sectors, which dominate the Taiwanese economy and render it a useful research setting for investigating whether board interlock, as a social network, affects corporate decisions to hold conference calls. We show that firms connected to conference-call-making firms through interlocked directors are more likely to hold conference calls and the frequency of holding conference calls increases with interlocking directors’ relevant experience. Moreover, such evidence is more pronounced if the connections are held through independent directors and among firms with greater information asymmetry. These results support the argument that the spread of corporate practices is positively associated with board interlock networks. Our findings have implications for the choice of board of director members, and can be generalized to other emerging economies characterized by weaker corporate information environments.     

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.     

Do boutique investment banks have the Midas touch? Evidence from M&As

We study whether the meteoric rise of boutique advisors in mergers and acquisitions (M&As) is justified by their buy-side performance. We find that acquiring firms represented by boutique advisors generate superior short- and long-run abnormal returns over those employing full-service advisors. This effect is mainly prominent in private deals, interindustry mergers, and deals involving inexperienced acquirers, where valuation uncertainty tends to be higher. Overall, our results reflect that acquirer shareholders benefit from boutique investment banks' high level of industry expertise and independent advice, supporting the rising demand for their financial advisory services.     

Do we need higher-order comoments to enhance mean-variance portfolios? Evidence from a simplified jump process

We consider a joint distribution that decomposes asset returns into two independent components: an elliptical innovation (Gaussian) and a systematic non-elliptical latent process. The paper provides a tractable approach to estimate the underlying parameters and, hence, the assets’ exposures to the latent non-elliptical factor. Additionally, the framework incorporates higher-order moments, such as skewness and kurtosis, for portfolio selection. Taking into account estimation risk, we investigate the economic contribution of the non-elliptical term. Overall, we find weak empirical evidence to support the inclusion of the non-elliptical term and, hence, the higher-order comoments. Nonetheless, our findings support the mean–variance (MV) decision rule that incorporates the elliptical term alone. Excluding the non-elliptical term results in more robust mean–variance estimates and, thus, enhanced out-of-sample performance. This evidence is significant among stocks that exhibit a strong deviation from the Gaussian property. Moreover, it is most pronounced during market turmoils, when exposures to the latent factor are highest.     

Do Chinese managers listen to the media?: Evidence from mergers and acquisitions

This study investigates whether listed companies in China are sensitive to public media coverage when making investment decisions regarding mergers and acquisitions (M&As). We find that the likelihood of abandoning a proposed M&A transaction is positively associated with negative media coverage, and this association is stronger with lower announcement abnormal returns. Our analysis demonstrates that the negative information effect is amplified for glamour acquirers. We argue that negative media reactions drive the external feedback mechanism of M&A attempts and help guard against managerial hubris.     

Do conference calls facilitate market price discovery? Evidence from Taiwan

This study examines whether conference calls accelerate the speed at which the market and analysts understand the implications of the accrual components of current earnings on future earnings. We analyze Taiwan’s listed firms from 2001 through 2014 and find that (1) delayed market reactions to earnings news during the following 12?months occur less often for firms than for host conference calls, and (2) conference calls are associated with a significant improvement in the accuracy of analysts’ earnings forecasts. One possible explanation for our results is that conference calls improve the efficacy of investors’ and analysts’ reactions to earnings announcements by conveying information regarding the accrual components of reported earnings. Our results have implications for other Asian economies that have relatively opaque information environments and weak shareholder protections.     

How do corporate websites contribute to the information environment? Evidence from the U.S. and Taiwan

We study corporate website disclosures in the U.S. and Taiwan, two countries with different regulatory and market environments, to provide insights into the uniformity of website content and its contribution to the information environment. We observe significant variation in content both within and between the two countries. U.S. firms with higher analyst following tend to create more transparent financial information environments and provide disclosures that are complementary to analysts’ analyses through their corporate websites. They also tend to provide easier access to investor relations (IR) services if analyst coverage is light or nonexistent. However, neither effect is true in Taiwan where the securities analysis industry is less mature. Individual investors have greater ownership share in U.S. firms with more information about IR services on their websites; however, their ownership share drops as financial disclosure on the firm’s website increases, consistent with institutions diluting individual ownership in firms with more transparency in financial reporting. In Taiwan, however, institutions dilute individual ownership share in firms with less financial information and more trading information on their websites. These results are consistent with Barber et al.’s (2009) findings that institutions find Taiwan firms that attract the aggressive, speculative trading of individuals to be extremely profitable investments. Website disclosures in both countries have some effect on the stock-price response to mandatory earnings releases, but their impact is greater in the U.S. Our findings indicate that website disclosures contribute to the information environment and are related to the degree of interest in the firm by sophisticated market participants. Thus, they provide insights to regulators of both countries as they seek to improve disclosure and “level the information playing field.”     

Does acquisition lead to the growth of high-tech scale-ups? Evidence from Europe

The post-acquisition growth of high-tech scaleups has received relatively little research attention. This is surprising since buyers are known to target these firms for growth opportunities whilst sellers increasingly seek strategic partners to access resources to scale their ventures. We examine the post-acquisition revenue and employment growth of high-tech scaleups in a multi-country setting, comprising five European economies. Using a propensity-score matching approach and difference-in-differences regression, for a sample of 2187 high-tech scaleups, we demonstrate that acquisition has a positive effect on target firms equivalent to cumulative growth of revenue (employment) of 9–13 (6−10) percent after five (four) years, relative to control firms. We find that nationality matters such that the targets of foreign-owned acquirers exhibit significantly higher cumulative revenue and employment growth than their domestic counterparts. Taking a longer-term perspective, we show that growth dips in the first year, then stabilizes and accelerates in the years following acquisition, indicating a period of adjustment.     

Dynamic Linkages Between the Greater China Economic Area Stock Markets—Mainland China,Hong Kong,and Taiwan

This research examines the linkages among three Greater China Economic Area (GCEA) stock markets, including Mainland China, Hong Kong, and Taiwan, and two developed markets, Japan and the United States. We find that: (1) a random walk model is outpredicted by an autoregressive GARCH model and an ARIMA model in all three GCEA markets; (2) the three GCEA markets are not cointegrated with either U.S. or Japan but there exists weak nonlinear relationships between these markets; and (3) result from the innovation accounting analysis reveals that the U.S. market has larger influence on the GCEA markets than the Japanese market. Additionally, Hong Kong is the most influential among the three GCEA markets.JEL Classification: G10, G14, G15Opinions and results presented in this paper are those of the authors and are not intended to represent the views, policies, or interests of Fannie Mae. This paper is not the result of Fannie Mae related research and does not use or cite Fannie Mae data sources.     

Time variation paths of international transmission of stock volatility — US vs. Hong Kong and South Korea

This study examines continuous time variation paths of sensitivities of the Hong Kong and South Korea stock markets to the US stock market and bond market (proxied by long-term interest rates) by using the Flexible Least Squares (FLS) estimation technique. The FLS findings suggest that changes in both the US stock market and US long-term interest rates may simultaneously have significant effects on the Hong Kong stock market in some time periods. In other periods, neither may have significant effects on the Hong Kong stock market. The results also indicate that the South Korea stock market is overall insensitive to changes in the US capital markets. However, it becomes more sensitive in the 1990s. Some macroeconomic variables may explain changes in the sensitivities of the Hong Kong and South Korea stock markets to changes in the US capital markets.     

The Onshore–Offshore Exchange Rate Differential,Interest Rate Spreads,and Internationalization: Evidence from the Hong Kong Offshore Renminbi Market

This article investigates the linkages among the onshore–offshore exchange rate differential, interest rate spreads, and Hong Kong’s RMB deposits (a proxy for RMB internationalization), based on a structural vector autoregression model. We find that this differential and the spreads have significant effects on Hong Kong’s RMB deposits, but the rise in the spreads will lead to a decline in offshore RMB deposits in Hong Kong. The differential is a stronger factor than spread shocks in explaining fluctuations in Hong Kong’s RMB deposits. Moreover, an analysis of sources of the divergence in the differential and spreads finds several economic variables that are the significant and main factors.     

Do Capital Flows Matter to Stock and House Prices? Evidence from China

This article analyzes the impacts of foreign direct investment (FDI) and short-term capital flows, otherwise known as hot money, on stock and house prices in China. Empirical results, estimated using the local projections approach, reveal that a positive hot money net inflow shock significantly increases stock and house prices and the impacts persist for up to 1–2 months, while a positive FDI net inflow shock contributes significantly to lagged house price appreciation but has no effect on stock prices. This study also identifies negative pass-through effects of FDI net inflows on hot money net inflows and positive pass-through effects of stock prices on house prices.     

Do financial analysts' long-term growth forecasts matter? Evidence from stock recommendations and career outcomes

Prior literature portrays long-term growth (LTG) forecasts as nonsensical from a valuation perspective. Instead, we hypothesize that LTG forecasts signal high effort and ability to analyze firms' long-term prospects. We document stronger market response to stock recommendation revisions of analysts who publish accompanying LTG forecasts. We also hypothesize and find that these analysts are less likely to leave the profession or move to smaller brokerage houses. Consistent with Reg. FD's intention to promote fundamental analysis of long-term earnings prospects, post-Reg. FD observations drive our results. Overall, we identify previously undocumented benefits accruing to analysts who publish LTG forecasts.     

Do insurers respond to active purchasing? Evidence from the Massachusetts health insurance exchange

Health insurance markets face continued challenges with high premiums and limited insurer competition. We describe a unique set of “active purchasing” policies used by Massachusetts' pioneer health insurance exchange to shape the rules of competition and reward lower-price insurers with additional customers. We provide evidence that these policies significantly influenced insurer pricing. Between 2010 and 2013, over 80% of insurer prices were set exactly at or within 1% of pricing thresholds created by active purchasing policies. A key “limited choice” policy was associated with a 16%–20% reduction in average insurance prices relative to comparison markets in 2012–2014. Insurers achieved these price cuts partly through cost reductions via narrower provider networks and partly through reduced profit margins.