Do industries matter in explaining stock returns and asset-pricing anomalies?

Industry returns cannot be explained fully by well-known asset pricing models. This study reveals that common factors extracted from industry returns carry significant risk premiums that go beyond the explanatory power of size, book-to-market (BM) ratios, and momentum. In particular, this study shows that (1) the small-firm effect is significant only for firms whose market capitalization is below their industry average; (2) the BM effect is an intra-industry phenomenon; (3) a one-year momentum effect is significant only for firms whose BM ratio is smaller than the industry average and limited to non-January months; and (4) there is seasonality in all effects that cannot be explained by risk-based asset-pricing models. Neither rational nor behavioral theories alone can explain industry returns, and it is perhaps too hasty to attribute asset pricing anomalies to a single driving force.     

Do extreme returns matter in emerging markets? Evidence from the Chinese stock market

Recent evidence in the U.S. and Europe indicates that stocks with high maximum daily returns in the previous month, perform poorly in the current month. We investigate the presence of a similar effect in the emerging Chinese stock markets with portfolio-level analysis and firm-level Fama–MacBeth cross-sectional regressions. We find evidence of a MAX effect similar to the U.S. and European markets. However, contrary to U.S. and European evidence, the MAX effect in China does not weaken much less reverse the anomalous idiosyncratic volatility (IV) effect. Both the MAX and IV effects appear to independently coexist in the Chinese stock markets. Interpreted together with the strong evidence of risk-seeking behaviour among Chinese investors, our results partially support the suggestion that the negative MAX effect is driven by investor preference for stocks with lottery-like features.     

Do shareholders really matter for firm performance? Evidence from the ownership characteristics of Italian listed companies

This paper studies the impact of the features of the shareholder base on the performance of a large sample of Italian listed firms between 2007 and 2019, both within and across firms. We expand the empirical evidence on the relation between shareholder type and different dimensions of firm performance by dividing shareholders into six categories, and further differentiating between domestic and foreign investors. We provide extensive evidence on the relation between firm performance and different types of shareholders, showing how diverse performance metrics are correlated with the voting rights of specific types of shareholders. Consistent with previous studies, the picture that emerges from our analysis shows that the ownership structure of Italian listed companies is characterized by a high degree of concentration. In this context, we find that ownership concentration or the presence of a controlling shareholder is in general associated with better performance. Moreover, a positive relation exists between diverse firm performance metrics and the voting rights of family shareholders, founders and foreign investors, while government ownership is detrimental in the short-term.     

Is size dead? A review of the size effect in equity returns

Beginning with Banz (1981), I review 30 years of research on the size effect in equity returns. Since Fama and French (1992), there has been a vigorous, ongoing debate on whether the size premium is a compensation for systematic risk. Since the late 1990s, research on the size effect has been characterized by two developments that are seemingly contradictory. At last, theoretical models have emerged in which the size effect arises endogenously as a result of systematic risk. However, recent empirical studies assert that the size effect has disappeared after the early 1980s. In this review, I address this disconnect between recent theoretical and empirical research.     

Does the choice of estimator matter when forecasting returns?

While the literature concerned with the predictability of stock returns is huge, surprisingly little is known when it comes to role of the choice of estimator of the predictive regression. Ideally, the choice of estimator should be rooted in the salient features of the data. In case of predictive regressions of returns there are at least three such features; (i) returns are heteroskedastic, (ii) predictors are persistent, and (iii) regression errors are correlated with predictor innovations. In this paper we examine if the accounting of these features in the estimation process has any bearing on our ability to forecast future returns. The results suggest that it does.     

Do corporate governance mechanisms matter for cash holdings and firm value?

This paper examines the relationships between firm-level corporate governance mechanisms and cash holdings; along with their combined effects on firm value for a sample of firms listed in Singapore and Malaysia. Firms with less effective governance attributes are found to be more inclined to accumulate cash than those with more effective governance. The results support the flexibility hypothesis in that an increase in agency conflicts between managers and minority shareholders leads to entrenched managers having more discretion to hoard cash reserves. In addition, the incremental value of holding excess cash is shown to be negative for firms with a single leadership structure, firms with a pyramidal ownership structure, as well as family-controlled firms. The discounts associated with these firms may reflect investors’ recognition of the possibility of managerial entrenchment.     

Do senior citizens prefer dividends? Local clienteles vs. firm characteristics

We examine the payout policy of U.S. firms over the period 1980–2008. Prior research indicates that firm characteristics, managerial preferences, and investor clienteles are all important factors in setting payout policy. Counter to the oft-reported positive relation between senior citizens and the use of dividends, we find no such significant relation. Our results indicate that either senior citizens are indifferent between dividends and repurchases, or that if seniors do demand dividends, they have no influence over firm payout policy. The evolution of firm characteristics, including the average firm size, age, and volatility of earnings over time, best explains payout policy.     

Do independent directors cause improvements in firm transparency?

Although recent research documents a positive relation between corporate transparency and the proportion of independent directors, the direction of causality is unclear. We examine a regulatory shock that substantially increased board independence for some firms, and find that information asymmetry, and to some extent management disclosure and financial intermediation, changed at firms affected by this shock. We also examine whether these effects vary as a function of management entrenchment, information processing costs, and required changes to audit committee independence. Our results suggest that firms can alter their corporate transparency to suit the informational demands of a particular board structure.     

Do women directors improve firm performance in China?

This paper examines the effect of board gender diversity on firm performance in China's listed firms from 1999 to 2011. We document a positive and significant relation between board gender diversity and firm performance. Female executive directors have a stronger positive effect on firm performance than female independent directors, indicating that the executive effect outweighs the monitoring effect. Moreover, boards with three or more female directors have a stronger impact on firm performance than boards with two or fewer female directors, consistent with the critical mass theory. Finally, we find that the impact of female directors on firm performance is significant in legal person-controlled firms but insignificant in state-controlled firms. This paper sheds new light on China's boardroom dynamics. As governments increasingly contemplate board gender diversity policies, our study offers useful empirical guidance to Chinese regulators on the issue.     

Do dividends matter more in declining markets?

We find dividends do matter to shareholders, but more in declining markets than advancing ones. Dividend-paying stocks outperform non-dividend-paying stocks by 1 to 2% more per month in declining markets than in advancing markets. These results are economically and statistically significant and robust to many risk adjustments and across industries. In addition, we find an asymmetric response to dividend changes based on market conditions: dividend increases matter more in declining markets than advancing ones. Tests indicate that results are not due to more profitable firms and appear not to be caused either by free cash flow or signaling explanations. We also find that it is the existence of dividends, and not the dividend yield, that drives returns' asymmetric behavior relative to market movements.     

The effect of independent directors’ characteristics on firm performance: Tenure and multiple directorships

In this paper, we analyze how the tenure and the number of directorships of independent directors may influence the relationship between board independence and firm performance. Our sample is composed of US listed firms for the period 2008–2012. Several robustness checks and sensitivity analyses are performed and we confirm that the board’s independence positively influences the firm’s performance. Nevertheless, this relationship exists only under certain values of directors’ tenure and external directorships. Our findings show that these variables determine the effectiveness of independent directors. Therefore, this paper highlights the need for a more specific approach, based on the personal characteristics of independent directors, in order to study their influence on corporate decisions, strategy and outcomes. Furthermore, our evidence has direct implications for companies in the selection of board members.     

Do students’ perceptions matter? A study of the effect of students’ perceptions on academic performance

Prior accounting education literature documents that students typically associate accounting subjects with negative perceptions, but there are also recent suggestions that the stereotype of the accountant has positive associations. These perceptions of accounting are likely to affect students’ attitudes towards learning and, consequently, influence their performance. We examine the relationship between students’ perceptions and students’ performance. The present study involved undergraduate and graduate students enrolled in management accounting subjects. Our findings indicate that students’ performance is negatively affected by the negative perceptions of accounting that students bring to the subject. Our findings also suggest that positive perceptions of accounting held by students at the end of the semester have a positive impact on students’ performance.     

On the differences in measuring SMB and HML in the UK – Do they matter?

The Fama–French (FF) three factor model expands the capital asset pricing model (CAPM) to include two additional factors to the market factor – SMB, employed to capture a firm size effect in returns and HML employed to capture book-to-market effects in returns. In the UK, different researchers use different ways of calculating SMB and HML in the context of empirical applications of the three factor model, or extensions of it, perhaps because they believe the differences in the construction of the SMB and HML factors to be relatively unimportant from an empirical standpoint. We investigate whether indeed factor construction methods are unimportant. Our conclusion is that they do matter.     

Information asymmetry,leverage and firm value: Do crisis and growth matter?

Drawing on pecking order and agency cost theories, we assess the extent to which information asymmetry is an important determinant of firm value and the extent to which this relationship is conditional on the leverage level of firms. We also assess the impact of information asymmetry on firm value during the pre and post 2007/09 financial crisis period and for high and low growth opportunity firms. Using a large sample of UK firms, our empirical findings suggest that information asymmetry adversely impacts firm value, and that this effect decreases with firm's leverage. We also find that leverage has a negative effect on firm value, and that the marginal effect of leverage is lower for information asymmetric firms. Further, we find that the relation between information asymmetry and firm value is more pronounced in the post-crisis period than the pre-crisis period. Finally, we show that the impact of information asymmetry on firm value is higher (lower) for firms with high (low) growth opportunities.     

Do FOMC minutes matter to markets? An intraday analysis of FOMC minutes releases on individual equity volatility and returns

This paper examines the 2006 to 2007 time period to determine the extent to which the release of the Federal Reserve minutes affects equity volatility and returns for 2832 individual firms. Using intraday data, we find that equity returns are essentially unaffected by FOMC minutes releases. We do find evidence of volatility effects, in that conditional volatility is lower prior to the minutes release and higher after the minutes release on release days, relative to a “control” day one week prior to the release date. These differences manifest at the 2:00–2:05 pm interval, and generally dissipate within 15 min. Consistent with previous literature, we also find evidence of both industry-specific and firm size effects in our data. Finally, we see that volatility is higher (lower) when the minutes are released after the Federal Reserve engages in restrictive (expansionary) monetary policy. Our results are robust to a variety of different definitions of the “control” dates, as well as differing industry definitions.     

Does the connectedness among fossil energy returns matter for renewable energy stock returns? Fresh insights from the Cross-Quantilogram analysis

The response of renewable energy stock returns to the dynamics of fossil energy markets is a vital concern of low-carbon transitions. There is still sparse literature documenting the directional dependence of renewable energy stock returns on the connectedness among fossil energy returns, even though previous studies have examined the relationship among renewable energy stocks and fossil energy markets. Additionally, the conclusions of prior studies are quite far from reaching a consensus regarding the relationship between the renewable energy stock and the fossil energy markets. To this end, by using the TVP-VAR based connectedness approach and Cross-Quantilogram techniques, this study does the first attempt to unpack the complicated and controversial directional dependence of renewable energy stock returns on the returns and connectedness of fossil energy markets, considering various market conditions and time horizons. The empirical analysis demonstrates that, first, the directional dependence of renewable energy stock returns on fossil energy returns is pronounced during extreme market conditions, whereas they appear to be decoupled from fossil energy returns during normal market conditions. Second, the total connectedness between fossil energy returns transmits a substantial shock to renewable energy stock returns during most market conditions, which is in stark contrast to the information transmission directly originating from fossil energy markets. The performance of renewable energy stock markets improves with stronger fossil energy return connectedness, whereas weaker fossil energy return connectedness hinders it. Additionally, further study reveals that the directional dependence of renewable energy stock returns on the net connectedness of the crude oil market is dominated by negative dependence when the net connectedness of the crude oil market is low, whereas it displays positive dependence when the net connectedness of the crude oil market is high. This directional dependence pattern on the net connectedness of the crude oil market is opposite to that exhibited in the net connectedness of the coal and natural gas markets. Third, in general, the directional dependence of renewable energy stock returns on fossil energy returns is more pronounced in the short term but diminishes over the medium and long terms. Conversely, the directional dependence of renewable energy stock returns on fossil energy return connectedness persists over the medium and long terms. Final, with the outbreak of the Global Financial Crisis during 2007–2008, we notice an abrupt jump in the directional dependence of renewable energy stock returns on fossil energy returns and their connectedness, particularly during extreme market conditions. Our findings provide noteworthy implications for energy transformation, energy security, and climate mitigation.     

Does oil price uncertainty matter in firm innovation? Evidence from China

Inspired by the prevalence of firm innovation and substantial influence of international oil price uncertainty (OPU) on firm operation and decision-making, we investigate the influence of OPU on firm innovation. Using a sample of Chinese listed firms over the 2007–2019 period, our study reveals that OPU decreases firm innovation. This finding is consistent with the real options theory and the prospect theory. Mediation analysis shows that OPU could decrease firm innovation by increasing firms' financing constraints degree. Moreover, high-tech firms and those in highly competitive industries have fewer options to delay their innovation investments, we find that the adverse effects of OPU on their innovation are weaker. Finally, further analysis shows that government subsidies can help mitigate adverse effects of OPU on firm innovation. This paper reveals that OPU goes beyond the commonly known and understood regular indicator that shapes a firm's innovation activity and enriches firm-level evidence for the effects of OPU by highlighting the effects on long-term investment in intangible assets.     

Does intellectual capital disclosure in analysts' reports vary by firm characteristics?

In this paper, we explore how Australian sell-side financial analysts contribute to the supply of intellectual capital (IC) information in the capital market. Toward this end, we examine how types and semantic properties of IC disclosures in analyst reports vary by a number of firm-specific characteristics likely to be associated with voluntary corporate disclosure. Consistent with our expectations, we find that the uncertainty associated with forecasting firm's earnings and the IC intensity of the industry in which the firm operates are associated positively with the extent as well as several semantic properties of IC disclosure in analyst reports. Highlighting that IC disclosure in analyst reports is not always a function of the extent of IC disclosed by firm, we find a statistically significant but negative association between firm profitability and the extent and certain semantic properties of IC disclosure in analyst reports. Firm size was significantly and positively associated with only the extent of forward-looking IC disclosure. Of the three categories of IC, only relation capital disclosure varied with any of the explanatory variables. Our findings highlight the importance of analyst reports as an IC communication media that could complement corporate communications of IC not only for firms disclosing less IC information voluntarily but also for those firms known to disclose more.     

The size effect on stock returns: Is it simply a risk effect not adequately reflected by the usual measures?

One of the satisfactory explanations of the size effect would seem to be in the inadequacy of the usual measure of risk as an appropriate ex ante proxy for risk. One of the ex ante measures is provided by the Standard and Poor's quality rankings for common stocks and is examined in this paper. It is shown that the quality rankings assigned by security analysts are superior over beta and variance measures of risk in explaining returns and in subsuming the size effect. These results are consistent with the hypothesis that the size effect mainly reflects a risk effect and that a significant part of the latter is not caught by the usual beta and variance measures.     

Do idiosyncratic jumps matter?

We show that idiosyncratic jumps are a key determinant of mean stock returns from both an ex post and ex ante perspective. Ex post, the entire annual average return of a typical stock accrues on the four days on which its price jumps. Ex ante, idiosyncratic jump risk earns a premium: a value-weighted weekly long-short portfolio that buys (sells) stocks with high (low) predicted jump probabilities earns annualized mean returns of 9.4% and four-factor alphas of 8.1%. This strategy’s returns are larger when there are greater limits to arbitrage. These results are consistent with investor aversion to idiosyncratic jump risk.