Investor type trading behavior and trade performance: Evidence from the Thai stock market

This paper examines the trading behavior and decomposes the trading performance of foreign, individual and institutional investors as well as proprietary traders in a dynamic emerging stock market, the Stock Exchange of Thailand. Foreign investors follow a positive feedback, momentum strategy and are good short term market timers but have poor security selection performance in poor markets, thus suggesting that they have a macro (market timing) but not a micro (security selection) informational advantage relative to local investors. Institutions and proprietary traders have poor security selection trading performance. Individuals display herding behavior and have fairly good security selection performance, but individual investors appear to compensate proprietary traders for the provision of short term liquidity by proprietary traders, so individuals' security selection gains are canceled out by market timing losses.     

Automation, speed, and stock market quality: The NYSE's Hybrid

Automation and trading speed are increasingly important aspects of competition among financial markets. Yet we know little about how changing a market's automation and speed affects the cost of immediacy and price discovery, two key dimensions of market quality. At the end of 2006 the New York Stock Exchange introduced its Hybrid Market, increasing automation and reducing the execution time for market orders from 10 seconds to less than one second. We find that the change raises the cost of immediacy (bid-ask spreads) because of increased adverse selection and reduces the noise in prices, making prices more efficient.     

Comovements of earnings, dividends, and stock prices

We investigate the comovements of the log of earnings, dividends, and stock prices by testing for the number of common stochastic trends among these series. We find that the three series are cointegrated with a single cointegrating vector. Our findings collectively imply that (i) there is an equilibrium force that tends to keep these series together over time, (ii) changes in dividends are primarily influenced by changes in some measure of permanent earnings, and (iii) a substantial fraction of stock price movement is driven by neither earnings changes nor dividend changes. When we take into account the cointegration relationship, we find that the dynamic relationship between these variables is significantly affected. We present a common stochastic trends model of earnings, dividends, and stock prices, whose implications are broadly consistent with these findings.     

Control-ownership wedge and investment sensitivity to stock price

This study examines whether insiders’ incentives for private control benefits affect investment sensitivity to stock price. While Chen et al. (2007) link stock price informativeness to firms’ learning from the stock market, we offer an alternative agency-cost based explanation. Using a total of 2822 firms from 22 countries in East Asia and Western Europe, we document a strong negative association between control-ownership wedge and investment-q sensitivity, suggesting that insiders’ incentives for private control benefit reduce their propensity to listen to the market. Furthermore, the negative impact of wedge on investment-q sensitivity is primarily driven by sub-optimal investments. Overall, we provide evidence that agency problem is an important factor that determines the learning from the stock market in capital allocation.     

Ability of accounting and audit quality variables to predict bank failure during the financial crisis

We examine the ability of selected accounting and audit quality variables measured in a period prior to the financial crisis (i.e., the four quarters of 2006), to predict banks that subsequently failed during the financial crisis. We employ two sets of samples from the US: a troubled banks sample that includes banks that failed in or after 2007 as well as banks classified as being troubled based on profitability, loan quality, and balance sheet position in 2007, and a full sample that includes all banks with available required data. Using the troubled banks sample, we identify six reliable predictors of bank failure: auditor type, auditor industry specialization, Tier 1 capital ratio, proportion of securitized loans, growth in loans, and loan mix. For the larger full sample of banks, we identify the following ten predictors of bank failure: auditor type, Tier 1 capital ratio, proportion of securitized loans, nonperforming loans, loan loss provisions, growth in commercial loans, growth in real estate loans, growth in overall loans, loan mix, and whether the bank is a public bank.     

Local market makers, liquidity and market quality

We examine the role of geographically proximate (local) market makers in providing liquidity and improving the quality of a dealer market. Firms with active participation of local dealers enjoy lower quoted and effective spreads, as well as more informative prices. The beneficial effects from local market makers are not confined to a few “top” local dealers and they cannot be attributed to their participation in the firm's IPO syndicate or industry specialization. Further, we find that days with aggressive bidding from local market makers relative to their non-local counterparts are associated with significant positive abnormal returns, consistent with local market makers possessing information advantages. In summary, our results suggest that the information advantages of local market makers may be a contributing factor to the reduction in the cost of trading.     

Accruals and the performance of stock returns following external financing activities

This paper investigates the relation of the external financing anomaly with the accrual anomaly, by focusing separately on working capital accruals and long-term accruals. We find that external financing and accrual hedge portfolios not only generate superior returns, but they also constitute statistical arbitrage opportunities. Portfolio-level analysis and firm-level cross-sectional regressions show that the ability of external financing measures in predicting future returns remains strong, after controlling for working capital accruals. However, this ability is substantially reduced after controlling for long-term accruals. Our results appear to be consistent with investors’ failure to recognise agency-related overinvestment and/or opportunistic earnings management.     

Takeover premiums and the perception of auditor independence and reputation

This study investigates if there is a positive association between takeover premiums and the bidder’s perception of target firm auditor reputation and independence. Using auditor size as a proxy for auditor reputation, the results indicate that in hostile takeovers target shareholders receive a higher takeover premium when a Big 4 auditor audits the target firm prior to the takeover. This result is only significant, however, in the period prior to the highly publicised audit failures. The impact of perceived auditor independence on takeover premiums is studied using the levels and size of non-audit service (NAS) fees provided by the target firm auditor. Using three proxies for auditor independence, the results show no association between perceived auditor independence and takeover premiums. This finding is robust to partitioning the sample by auditor size, takeover hostility and splitting the sample into takeovers pre- and post- the corporate scandals that occurred in 2002.     

The subprime asset-backed securities market and the equity prices of large complex financial institutions

In this paper, we investigate the relationship between the subprime asset-backed collateralized debt obligations (CDO) market and Large Complex Financial Institutions (LCFIs). We attempt to account for the dynamics between the ABX index returns and the banks’ equity returns through conditioning our analysis on the historical correlation between the variables. Three key results emerge from the analysis. First, we find a positive correlation between movements of the ABX index and the equity returns for all the LCFIs. Second, the volatility of ABX index returns tend to be transmitted to the volatilities of the equity returns of the financial institutions. Third, ABX prices changes lead equity returns changes of the European-based LCFIs. For the US LCFIs a two-way linkage emerges.     

Macroeconomic risk and the cross-section of stock returns

We develop a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. In addition, our conditional CCAPM performs approximately as well as Fama and French’s (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times, supporting the risk-based story.     

Do modified audit opinions have economic consequences? Empirical evidence based on financial constraints

We present a framework and empirical evidence to explain why, on average, 11% of listed firms in China received modified audit opinions (MAOs) between 1992 and 2009. We argue that there are two reasons for this phenomenon: strong earnings management incentives lower firms’ financial reporting quality and soft budget constraints weaken the information and governance roles of audit opinions. We find that firms’ financial constraints eased after receiving MAOs, which suggests that MAOs have limited economic consequences. Further analysis shows that this phenomenon predominantly exists in government-controlled firms and firms that receive MAOs for the first time. We also find that MAOs have not influenced financial constraints after 2006. Finally, we find that MAOs did not affect borrowing cash flows from banks until 2005, suggesting that MAOs did not start affecting bank financing until that year. We also find that firms receive more related-party financing after receiving MAOs. Our results indicate that a limited effect on bank financing and increased related-party financing reduce the effect of MAOs on financial constraints.     

The effect of macroeconomic news on stock returns: New evidence from newspaper coverage

Previous literature has produced weak evidence to support the hypothesis that real economic news affects stock returns. This is, in part, attributed to the difficulty of measuring how investors interpret macroeconomic announcements in different economic environments. In this paper, we choose a different approach of measuring macroeconomic news to better estimate its effect on stock returns. Since newspaper stories provide an interpretation of the statistical releases, we choose newspaper stories as our measure of news. Our findings indicate that news about GDP and unemployment does affect stock returns.     

Directors' and officers' liability insurance and acquisition outcomes

We examine the effect of directors' and officers' liability insurance (D&O insurance) on the outcomes of merger and acquisition (M&A) decisions. We find that acquirers whose executives have a higher level of D&O insurance coverage experience significantly lower announcement-period abnormal stock returns. Further analyses suggest that acquirers with a higher level of D&O insurance protection tend to pay higher acquisition premiums and their acquisitions appear to exhibit lower synergies. The evidence provides support for the notion that the provision of D&O insurance can induce unintended moral hazard by shielding directors and officers from the discipline of shareholder litigation.     

Housing prices and the optimal time-on-the-market decision

This paper provides a model for housing prices based on a seller solving the optimal time-on-the market problem. Given the seller’s optimal time-on-the market, analytical expressions are provided for both the expected time-on-the-market and the sales price. These expressions facilitate the computation of comparative statics. Consistent with economic intuition, we show that (i) both the expected time-on-the market and sales price decrease as interest rates increase, (ii) the expected time-on-the market increases and the expected sales price decreases as offer activity declines, and (iii) the expected time-on-the market and expected sales price both increase as the list price increases.     

A multi-country test of the Fisher model for stock returns

This article provides a test of the Fisher model, linking expected stock returns and inflation, based on international data. Since the Fisher model is ‘universal’ and calls for a slope of 1 in any country, we improve the testing power by conducting a joint test over eight countries. The pooling of data for several countries seems to reduce the small-sample bias. We test the Fisher model, using an instrumental variable approach, for holding-period horizons ranging from 1–12 months. The Fisher model is not rejected at any horizon: however, the magnitude of the slope coefficient lends stronger support at long horizons. This study using multi-country panel data provides evidence corroborating the finding of Boudoukh and Richardson (1993) that the Fisher model holds at long horizons (5 years), using 180 years of US data.     

The role of corporate governance in the write-off decision

The recent popularity of write-offs allows for examination of the role governance plays in the write-off decision. I find that well governed companies are more likely to announce write-offs. Additionally, better governed firms announce smaller write-offs relative to poorly governed firms. The evidence also indicates that the stocks of well governed firms experience announcement abnormal returns that are over six percent higher than those of poorly governed firms. The results suggest better governed firms take a pro-active approach to reveal bad news early, and thereby mitigate further uncertainty for investors.     

The accuracy of the tick test: Evidence from the Australian stock exchange

In the absence of information regarding whether a trade is buyer or seller initiated, many researchers have employed the ‘tick’ rule as a proxy. These researchers have been supported in their endeavours by the work of Lee and Ready (1991) which suggests that the tick rule is 90% accurate. Unfortunately, the difficulty of securing data on this issue has made Lee and Ready's paper somewhat unique in that there have been few attempts to confirm their result in US markets and no attempts in other markets. The purpose of this work is to test the robustness of their result in the Australian securities market. Using cleaner intra-day data we mimic the Lee and Ready study to cast some doubt upon the robustness of their findings in different markets. Our results suggest an overall accuracy of approximately 74% as opposed to Lee and Ready's 90%. However, accuracy in excess of 90% is documented when zero ticks are excluded. Further analysis provides evidence that a volatile or trending market will decrease the accuracy of the tick rule. It is also demonstrated that the tick rule is less likely to accurately classify seller initiated trades and small buyer initiated trades.     

Value Relevance of Inflation-adjusted Equity and Income

This paper investigates the role incremental information content of inflation-adjusted data plays in explaining the market value of equity and stock returns on the Istanbul Stock Exchange (ISE). We show the effect of inflation accounting application on basic financial ratios, and we test the value relevance of inflation-adjusted and historical cost-based book value and earnings. The findings show that inflation adjustment affects financial ratios significantly, which may create different risk assessments for the selected firms. Furthermore, the results indicate that both inflation-adjusted and historical cost-based earnings and book values are significantly value relevant. The two sets of data are not to be used as substitutes, but, rather, they are complementary. For this reason, inflation-adjusted data should be required as supplementary data to the historical cost information rather than in place of historical cost data.     

Stock market volatility and the crash of 1987: evidence from six emerging markets

This paper studies volatility, risk premia and the persistence of volatility in six emerging stock markets before and after the 1987 stock market crash. The empirical investigation is conducted by means of the GARCH in the mean model (GARCH-M) and monthly data from Argentina, Greece, India, Mexico, Thailand, and Zimbabwe between January of 1976 and August of 1994. Results indicate changes in the ARCH parameter, risk premia and persistence of volatility before and after the 1987 crash. But these noted changes are not uniform and depend upon the individual markets. Factors other than the 1987 crash may also be responsible for the changes.     

Isolating the effect of disclosure on information risk

This study examines companies with two classes of shares that entitle their holders to identical cash flow and voting rights but that are available to mutually exclusive sets of investors: A shares to domestic investors and B shares to foreign investors. Price differences between A and B shares are higher in firms with a greater disparity in the disclosures that they make to domestic and foreign investors. This association is more pronounced when the cost (benefit) of information transfer is higher (lower). The results suggest that disclosure disparity creates meaningful differences in investors' average information precision across A and B shares and thus influences the cross-sectional variation in price differences.