Who are the vectors of contagion? Evidence from emerging markets

We test whether foreign investors are the vectors of contagion to emerging markets, as various theoretical models imply. We also explore the role of local institutions and individuals during and after contagion days. To do this, we propose a novel measure of contagion and estimate its dynamic relationship with the net purchases of each of the three groups of investors, from 2007 to 2016, in seven emerging markets. We find that foreign investors bring contagion by actively selling and impacting local prices on days of large declines in the US stock market and the days following. Local institutions are also net sellers on the day of contagion, while individuals act as the main liquidity providers, but institutions become net buyers soon after.     

Can hedge funds time global equity markets? Evidence from emerging markets

This paper examines the ability of global hedge funds to time a particularly volatile asset class — emerging market equities. In particular, we study whether or not these funds can either time emerging markets as a whole, or time their exposures to different regions. Using both pooled and calendar-time approaches, we generally find no evidence of overall timing ability. However, we do find some evidence of period-specific timing ability during the financial crisis and subsequent recovery.     

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.     

How useful are commercial corporate governance ratings? Evidence from emerging markets

A central issue in evaluating the effects of firm-level corporate governance (FLCG) is how to measure it. We focus here on emerging markets (EMs). One common approach to measuring FLCG uses country-specific (CSIs), tailored to each country's laws and institutions. Several studies report that CSIs can predict firm outcomes in a panel data framework with two-way (firm and time) fixed effects (TWFE). An alternate approach uses commercial CG ratings (CCGRs) that apply the same or similar elements across many countries. We assess the three best available CCGRs covering EMs (Asset4, Thomson Reuters, and MSCI), and find that they do not predict firm outcomes with TWFE in EMs. We also provide evidence that the likely cause for CCGRs' lack of performance is their poor construction rather than the inability of FLCG measures to predict outcomes. CSI-based studies suggest that disclosure (beyond country-mandated minimums) is the FLCG aspect that most consistently predicts firm outcomes in EMs. Yet, these CCGRs have no or minimal measures of disclosure. Other important limitations of the CCGRs include the use of elements that are U.S.-centric; reflect firm outcomes rather than CG; are implausible measures of good FLCG, or are vaguely or subjectively defined. We also attempt, but fail, to use element-level information from CCGRs to construct sound measures of FLCG.     

Does the reputation mechanism apply to independent directors in emerging markets? Evidence from China

We examine whether reputable independent directors improve firm performance and governance quality in emerging markets, using data from China. Firms with such directors, measured as the number of directorships in other listed firms, have higher profitability, operating efficiency and productivity. They suffer from fewer agency problems, pay more cash dividends and have lower likelihoods of receiving modified audit opinions and participating in financial disclosure-related irregularities than their counterparts. In China’s unique institutional context, the reputation mechanism for independent directors applies to firms in regions with weak marketization environments, non-state-owned enterprises and firms without political connections; it also applies when external governance is weak. Overall, reputable independent directors appear to occupy valuable advising and monitoring roles and compensate for weak institutions and governance in China.     

Is there a green fund premium? Evidence from twenty seven emerging markets

The popularity of green energy-based investments has spurred, notably during the last decade. This is mainly due to the positive socio-economic externalities and an increase in the financing flow. This paper assesses the financial performance and managerial abilities of green funds and their conventional peers. Using a comprehensive data set of 2339 funds across twenty-seven emerging markets, we report that traditional energy funds outperform renewable funds. Further, while conventional fund managers exhibit market and volatility timing, we cannot deduce any support for the same in the case of renewables. These results indicate disincentives for investors who would like to go green. Finally, the performance of renewable funds degraded during Covid-19, highlighting the additional investment drag. We propose that immediate legislative, governance, and regulatory interventions are warranted to promote a sustainable financial system.     

Are firms from developed markets more international than firms from emerging markets?

Regionalist supporters’ claim that most of the world's largest firms are regional rather than global and that managers should be encouraged to ‘think regional, act local and forget global’ (Rugman and Moore, 2004, p. 67). We apply the matrix of multinationality proposed by Aggarwal et al. (2011) to a sample of the world's 500 largest corporations, the Fortune Global 500. We show that these firms range from purely domestic to regional, trans-regional and entirely global with most lying in the trans-regional and global categories. Our results imply that global strategies are essential to international trade and management in today's business environment. We compare multinationality results by market type (developed versus emerging market), industry, size and age. We find that firms from more advanced economies tend to be older, larger and more multinational than firms from emerging markets. We find no relationship between multinationality and age or multinationality and size, and conclude that developed market firms are not more multinational as a result of size, age or industrial structure.     

Do foreign investors improve stock price informativeness in emerging equity markets? Evidence from Vietnam

Most of previous studies on stock price informativeness tend to focus on the context of mature stock markets while this issue is more acute in emerging equity markets where regulatory and institutional structure are weak. This paper examines the relationship between foreign ownership and stock price informativeness in Vietnam stock market. We utilize a data set covering firm attributes of non-financial firms listed on the Ho Chi Minh City stock exchange over the period 2007–2015. Employing different estimation techniques for panel data, the empirical results indicate that foreign investors improve stock price informativeness in Vietnam stock market. The finding from this paper confirms the important role of foreign investors in emerging equity markets.     

Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets

In this paper we examine the impact of foreign bank penetration on the competitive structure of domestic banking sectors in host emerging economies. We focus our analysis on Asia and Latin America during the period 1997-2008. Using bank-level panel data to identify foreign banks and to estimate measures of banking competition, we are able to provide robust empirical evidence that an increase in foreign bank penetration enhances competition in these host countries’ banking sectors. We find that this positive foreign bank penetration and banking competition link is associated with a spillover effect from foreign banks to their domestic counterparts. This spillover effect becomes stronger when more efficient and less risky foreign banks enter into less concentrated host country markets. We also find that the spillover effect is greater when foreign banks enter in the form of ‘de novo penetration’ than through mergers or acquisitions of domestic banks (‘M&A penetration’).     

Post-acquisition performance in the short and long run. Evidence from the Copenhagen Stock Exchange 1993–1997

The paper investigates the short-run price adjustment around acquisition announcements and the long-run upward bias of cross-sectional average buy-and-hold returns. The geometric Brownian motion model is applied to decompose the cross-sectional average long-run returns into transformed mean and volatility components. The decomposition improves the interpretation of security performance. The methodology is demonstrated on the security performance of bidding firms listed on the Copenhagen Stock Exchange. The most surprising finding is that the long-run abnormal return after three years is not significantly different from zero. This implies that the bidding firms do not under-perform relative to the market. This result stands in contrast to findings in other studies and it may reflect that earlier studies do not adjust correctly for the volatility component. These current findings indicate that the market efficiency hypothesis is intact in the long run. It is only in the very short run, a few days around acquisition announcements, that the market makes a significant adjustment to uphold the efficiency hypothesis.     

Do auditing standards improve the accounting disclosure and information environment of public companies? Evidence from the emerging markets in China

In this paper, we investigate the impact of the implementation of a set of new auditing standards in 1996 on the information environment in the emerging markets in China. Because the implementation of such standards can increase the quality and/or quantity of accounting disclosures, it can be conceptualized as an improvement in the information environment of public companies. We investigate the improvement in accounting disclosure and information environment from both the market perspective and the accounting perspective. First, consistent with the information economics literature (e.g., [Holthausen, R., & Verrecchia, R., (1990). The effect of informedness and consensus on price and volume behavior. The Accounting Review, 65, 191–208]), we find that companies experience a significant increase in trading volume and price volatility subsequent to the implementation of the standards. Second, consistent with the literature on earnings management (e.g., [Chen, C. W. K., & Yuan, H. Q., (2004). Earnings management and capital resource allocation: evidence from China's accounting-based regulation of right issue. The Accounting Review, 79, 645–665, Jian, M., & Wong, T. J., (2004). Earnings management and tunneling through related party transactions: evidence from Chinese corporate groups. Working Paper, Nanyang Technological University and Hong Kong University of Science and Technology]), we find a decrease in earnings management and, hence, an increase in quality of earnings. Finally, we find a decrease in the synchronicity of stock prices and, hence, an increase in the quality of firm-specific information available to investors, which is consistent with the literature on price synchronicity (e.g., [Morck, R., Yeung, B., & Yu, W., (2000). The information content of stock markets: why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58, 215–260]). Our results have significant implications for standard setters, regulators, researchers, managers, and investors in general and those in the emerging markets in particular.     

Do Attention-Grabbing Stocks Attract All Investors? Evidence from China

Abstract:

Using a unique and comprehensive data set of China’s Shenzhen Stock Exchange, we test whether all investors adopt attention-grabbing stocks. Only the less-wealthy individuals, the Small Group, are found to have the tendency to pursue attention-grabbing stocks, such as abnormal-volume stocks, extreme-return stocks, and initial public offering stocks. By contrast, wealthy individuals, such as the Middle and Large Groups, are the sellers of attention-grabbing stocks and prefer non-attention-grabbing stocks, thereby exhibiting a behavior resembling that of institutional investors. The wealth levels of individual investors may account for such heterogeneous trading behavior. Heterogeneous trading behavior may address one reason why only the less-wealthy individuals do poorly in China’s stock market. Accordingly, we suggest that the Small Group manage the stock selection problem through consultancy with investment institutions.     

What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries)

A central issue in corporate governance research is the extent to which “good” governance practices are universal (one size mostly fits all) or instead depend on country and firm characteristics. We report evidence that supports the second view. We first conduct a case study of Brazil, in which we survey Brazilian firms' governance practices at year-end 2004, construct a corporate governance index, and show that the index, as well as subindices for ownership structure, board procedure, and minority shareholder rights, predicts higher lagged Tobin's q. In contrast to other studies, greater board independence predicts lower Tobin's q. Firm characteristics also matter: governance predicts market value for nonmanufacturing (but not manufacturing) firms, small (but not large) firms, and high-growth (but not low-growth) firms. We then extend prior studies of India, Korea, and Russia, and compare those countries to Brazil, to assess which aspects of governance matter in which countries, and for which types of firms. Our “multi-country” results suggest that country characteristics strongly influence both which aspects of governance predict firm market value, and at which firms that association is found. They support a flexible approach to governance, with ample room for firm choice.     

Does ownership concentration improve M&A outcomes in emerging markets?: Evidence from India

Using firm level data from India, we examine the impact of ownership concentration on post-M&A performance of firms. Our analysis has implications for both the M&A literature, which emphasises the role of agency conflict between managers and owners of widely held companies as a key reason for M&A failures, and the corporate governance literature, especially in the context of emerging market economies. A cautious interpretation of our results suggests that while ownership concentration may reduce the manager–owner agency conflict, it may nevertheless precipitate other forms of agency conflict such that ownership concentration may not necessarily improve post-M&A performance. In particular, our results have implications for the literature on the agency conflict between large (or majority) shareholders and small (or minority) shareholders of a company, especially in contexts such as emerging market economies where corporate governance quality is weak.     

Does foreign investor demand for information affect forecast accuracy? Evidence from the Chinese stock markets

Prior international accounting studies have examined mainly the supply side of analyst research. Specific trading rights and financial reporting systems in China provide a unique opportunity to test both demand and supply factors of analyst information. For shares traded only by less-informed foreign investors, the increased information demand may create incentives for analysts to exert greater efforts than for shares traded by local investors. This study provides evidence that analyst effort (proxied by analyst coverage) and expertise (proxied by consensus cross-analyst forecast variability) affect forecast accuracy more significantly for shares traded by foreign investors than for shares traded by local investors. Additionally, I find that the relation between analyst characteristics and relative forecast accuracy is stronger for shares traded by the foreign investors. The findings are consistent with analysts responding to demands for information by less-informed investors.     

What determines cash holdings at privately held and publicly traded firms? Evidence from 20 emerging markets

We provide one of the first large sample studies to examine how firm-level characteristics and national-level institutions affect cash balances in privately held and publicly traded firms and investigate whether the determinants of cash holdings for both types of firms are similar. Using panel analysis for data we analyze a sample of 9453 private versus 7319 public firms and 104,571 firm-year observations from Central and Eastern Europe over the period 2001–2010. We first show that privately held firms tend to hold more cash than publicly traded firms. Second, firms in more market-oriented countries, according to transition indicators, have larger cash reserves. Third, the same determinants of cash balances are relevant for both privately held and publicly traded firms regardless the stage in the transition to capitalism.     

Is convexity efficiently priced? Evidence from international swap markets

While it is widely claimed in the literature that convexity is correctly priced, we find evidence in four major swap markets that this is the case only on average and that extended periods occur when convexity-based trading strategies offer economically very significant exceptional returns. These abnormal returns can be reaped with fully no-peek-ahead strategies and after accounting for transaction costs. We find a strong link between the periods of highest profitability and conditions of reduced market liquidity. This suggests that, as observed in recent liquidity studies on US Treasuries, temporary deviations from market efficiency at the long end of the swap curve occur when pseudo-arbitrageurs do not have sufficient capital to correct the mispricings.     

Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets

This study examines global diversification benefits from the perspective of local investors in the frontier markets in the Gulf Cooperation Council using two diversification measures: the correlation index and return dispersion. The findings suggest a strong link between market volatility and both diversification measures in all markets, with the exception of Bahrain, indicating that investors in these frontier markets will face significant challenges achieving desired levels of diversification using domestic stocks only. However, I also find that significant amount of market risk in these countries can be eliminated by supplementing domestic portfolios with positions in advanced markets. Finally, I show that risk minimization strategies using foreign traded assets also lead to favorable risk adjusted returns for investors in these markets, stressing the potential benefits of financial liberalization in developing markets.     

Unchecked manipulations,price–volume relationship and market efficiency: Evidence from emerging markets

This paper investigates how unchecked manipulations could cause frequent trade-induced manipulations and weak-form market inefficiency in South Asian stock markets [Bombay Stock Exchange (BSE), Dhaka Stock Exchange (DSE) and Karachi Stock Exchange (KSE)]. Specifically, the paper analyses the price–volume relationship as one of the many cases of market inefficiency. By employing various econometric tests, this paper first provides conclusive evidence of market inefficiency in these markets. It then extracts evidence of manipulation periods from legal cases and analyses price–volume relationship during these periods. The paper finds that there exists market-wide trading-induced manipulations, where excessive buying and selling causes prices to inflate artificially before crashing down. The paper concludes that South-Asian markets are inefficient in the weak-form.     

Who benefits from financial liberalization? Evidence from advanced and emerging market economies

In recent decades most countries have implemented significant reforms to foster financial liberalization. This article examines to what extent these reforms have benefited advanced economies and emerging market economies. We focus on four groups of countries: the G-7, other European countries, Latin America and East Asia over the period 1973–2006. We find evidence supporting the hypothesis that the different forms of financial liberalization affected growth differently in the four groups of countries. The main finding is that the benefits of financial liberalization are more important for advanced economies. In contrast, financial liberalization in emerging market economies has a weak positive impact on growth when its scope is limited, whereas full liberalization has been associated with slower economic growth.