Did the 1986 Tax Reform Act Affect Market Reactions to Stock Splits?: A Test of the Tax-Option Hypothesis

This paper tests the prediction of the tax-option hypothesis that the market impact of stock splits would be reduced by the 1986 Tax Reform Act which eliminated the difference between long- and short-term capital gains tax rates. The results show significant excess returns on stock split announcement and ex-days even after 1986. The announcement and ex-day excess returns are similar in different periods before and after the Act. Further, there is no significant relationship between announcement excess returns and increase in returns volatility following splits. These findings are inconsistent with the tax-option hypothesis.     

THE MARKET REACTION TO THE 1986 TAX OVERHAUL: A STUDY OF THE CAPITAL GAIN TAX CHANGE

The Tax Reform Act of 1986 (TRA) eliminated the favorable tax treatment on long-term capital gains in the US. Using a standard event study… CONTENTS AND ABSTRACTS 111 methodology, this paper examines daily stock return reactions to the tax overhaul. The results show that high dividend yield stocks earned a significant positive abnormal return and low yield stocks a significant negative return during the legislation period. This finding is consistent with the notion that the TRA made the market valuation of stocks shift in favor of high yield stocks.     

Real and Financial Industry Booms and Busts

We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. Our results show how real and financial factors interact in industry business cycles. In competitive industries, we find that high industry-level stock market valuation, investment, and financing are followed by sharply lower operating cash flows and abnormal stock returns. Analyst estimates are positively biased and returns comove more. In concentrated industries these relations are weak and generally insignificant. Our results are consistent with participants in competitive industries not fully internalizing the negative externality of industry competition on cash flows and stock returns.     

Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices

A stock market liberalization is a decision by a country's government to allow foreigners to purchase shares in that country's stock market. On average, a country's aggregate equity price index experiences abnormal returns of 3.3 percent per month in real dollar terms during an eight-month window leading up to the implementation of its initial stock market liberalization. This result is consistent with the prediction of standard international asset pricing models that stock market liberalization may reduce the liberalizing country's cost of equity capital by allowing for risk sharing between domestic and foreign agents.     

Three Decades of IPO Markets in Canada: Evolution,Risk and Return

This article explores the extent that the long‐run returns following initial public offerings (IPOs) can explain the asserted decrease in IPOs in Canada. The causes of such a decrease remain controversial, in part because of our limited knowledge of this market. We first describe in detail the evolution of Canadian IPOs on the senior and the venture stock exchanges over three decades (1986–2016). This evolution differs considerably between natural resource and non‐natural resource firms. Second, using other junior markets as a benchmark, we show that the Canadian IPO market is very particular, mainly because it lists very small firms at an early development stage. Third, using 2,145 Canadian IPOs, we provide evidence that these IPOs generate three‐year negative average abnormal returns, and more than 70 percent report negative abnormal returns. Large issuers reporting profits constitute the only subsample that provides fair returns, but they account for less than 5 percent of IPOs. Such a market probably survived for many decades because of investors' preference for skewness and the characteristics of the returns' distribution. We observe a high level of skewness of abnormal returns, consistent with the behavioral finance proposition that investors are often unduly optimistic when valuing lottery stocks.     

GOOD NEWS, BAD NEWS, VOLUME, AND THE MONDAY EFFECT

New evidence is presented on the nature of the Monday effect in stock market returns. Using stock returns for the years 1962-1986, the Monday effect is found to be confined to periods of negative market returns. Monday's returns are no different from other weekday returns in periods of positive returns. In addition, trading volume and the Monday effect are related. Monday's volume is lower than the other weekdays. When returns are compared controlling for trading volume, we find that the Monday effect is confined to negative return periods with above normal volume, which represent only two per cent of the sample period.     

The risk–return relations in the Singapore stock market

This paper examines the risk–return relations in the Singapore stock market for the period April 1986 to December 1998. Though beta is significantly related to realized returns, the explanatory power is low. Adding other stock characteristics such as skewness and kurtosis provides limited incremental benefits. However, when a conditional framework based on up and down markets is introduced, the explanatory power increases more than 100 times and there is a significant positive (negative) relation between beta and returns when the market excess returns are positive (negative). The same relation applies when unsystematic risk, total risk and kurtosis are added separately to the beta–return relation during up and down markets with increased explanatory power. Our results indicate that other stock characteristics in addition to beta are also important in pricing risky assets and investors do not hold diversified portfolios. Our results are also checked and compared with another conditional model with time-varying betas conditional on a set of economic variables.     

Examining the Impact of the 1986 Tax Reform Act on Corporate Dividend Policy: A New Methodology

This article introduces a new methodology to investigate the effects of the 1986 Tax Reform Act (TRA) on corporate dividend policy. The methodology employs a modified version of Rozeff's (1982) model to control for the potential effect of underlying influential variables. The empirical results show there is no widespread reaction to the 1986 TRA passage on the aggregate level of dividends and only modest support for an industry-related dividend effect. We also find that firm size does not play a significant role in dividend policy reaction to the 1986 TRA.     

Relative performance evaluation in board cash compensation: UK empirical evidence

This paper presents an empirical examination of whether evidence of the implicit use of relative performance evaluation (RPE) can be found in the cash compensation of boards of directors for 169 UK non-financial listed companies that existed for all of the period from 1971 to 1998. We perform two types of analyses. Initially, we estimate individual firm time series regressions of the change in board cash compensation against measures of firm and peer group performance. The measures of firm performance we use are annual cash stock market returns and pre-tax accounting earnings. Peer group measures of performance are industry value-weighted average cash stock market returns and industry value-weighted average pre-tax accounting earnings. Subsequently, we analyse the data as a balanced panel.We provide evidence that board cash compensation is positively related to accounting earnings and negatively associated with peer group pre-tax accounting earnings. Some evidence suggests that board cash compensation is related to firm stock market returns but none suggests it is related to peer group market returns. This result implies the presence of RPE based on accounting earnings in the design of UK board compensation, with the cash compensation of boards of directors implicitly (partially) protected from industry uncertainties.     

Industry Concentration,Firm Efficiency and Average Stock Returns: Evidence from Australia

This study examines the relationship between industry concentration and level of firm efficiency and their effect on cross-sectional stock returns in Australian market. Our analysis shows that industry concentration and firm efficiency have independent effects on stock returns. By forming 25 double-sorted portfolios based on industry concentration and firm efficiency, INEFFICIENT firms in concentrated industry earn highest stock returns, while EFFICIENT firms in concentrated industry earn lowest stock returns. Also we find that industry concentration appears to be associated with market share while efficiency has a greater effect on firm earnings. In our cross-sectional regressions, industry concentration shows a positive relationship with average stock returns while firm efficiency shows a negative association with average stock returns. The concentration and efficiency effects are persistent throughout the sample period and is robust after controlling for size and book-to-market.     

Industry Structure and Ripple Effects of Bankruptcy Announcements

The market structure of an industry plays an important role in determining the stock market performance of surviving firms during intra-industry bankruptcy announcements. On evaluating the announcement effects of a survivor sample from each of two industries with very different market structures, namely the airline industry and the railroad industry, we find that the airline sample received significant abnormal returns (positive ripple) while the railroad sample experienced significant abnormal losses (negative ripple). Furthermore, the differences of the abnormal returns from the two samples also are statistically significant. These findings demonstrate support for the market structure hypothesis (MSH), but cast doubt on the contagion effect hypothesis (CEH).     

A NOTE ON THE BEHAVIOR OF SECURITY RETURNS: A TEST OF STOCK MARKET OVERREACTION AND EFFICIENCY

Researchers have debated stock market efficiency for years and have found several apparent anomalies, among them the overreaction investment strategy. In a sample of virtually all AMEX and NYSE stocks over twenty-one years, it is demonstrated that abnormal returns earned in one year are positively related to the abnormal returns earned in the next year. This evidence is contrary to the overreaction investment philosophy.     

Expected stock returns and volatility

This paper examines the relation between stock returns and stock market volatility. We find evidence that the expected market risk premium (the expected return on a stock portfolio minus the Treasury bill yield) is positively related to the predictable volatility of stock returns. There is also evidence that unexpected stock market returns are negatively related to the unexpected change in the volatility of stock returns. This negative relation provides indirect evidence of a positive relation between expected risk premiums and volatility.     

Market segmentation and international diversification across country and industry portfolios

We conjecture that partially segmented stock indexes that are characterized by low correlation with the world market are mainly priced by local factors and should produce abnormal returns relative to a global asset-pricing model. This implies a negative relation between correlation and future index returns in the presence of segmented indexes. Empirical evidence confirms such a relationship for the sample of industry indexes, suggesting a heterogeneous segmentation. However, we do not observe a similar pattern for country indexes. In addition, the international diversification potential of industries does not vanish during volatile periods. The hypothesis that the negative relationship should be stronger for the more segmented subsamples that are characterized by small market size and emerging country origin is verified for the industry sample. Thus, cross-industry diversification is superior to mere cross-country diversification.     

Target Firm Returns: Does the Form of Payment Affect Abnormal Returns?

Research indicates that at the time of a takeover announcement, target firm shareholders receiving cash earn larger abnormal returns than those receiving stock. Our work confirms that cash targets receive larger direct payments from bidders and that the size of target firm abnormal returns is related to the relative size of this direct payment. Once we control for the size of the payment, however, we find the target firm abnormal returns to be unrelated to the payment method. Thus the relationship between payment method and target firm abnormal returns is indirect. This finding is important because it casts doubt on the signaling (asymmetric information) hypothesis. That is, cash offers do not seem to be valued by the market as a means of reducing this uncertainty. Something else, such as the tax implication differences between cash and stock offers, drives cash target firms to demand larger payments from bidding firms.     

Volatility Modeling and Value-at-Risk (VaR) Forecasting of Emerging Stock Markets in the Presence of Long Memory,Asymmetry, and Skewed Heavy Tails

In this article, we elaborate some empirical stylized facts of eight emerging stock markets for estimating one-day- and one-week-ahead Value-at-Risk (VaR) in the case of both short- and long-trading positions. We model the emerging equity market returns via APARCH, FIGARCH, and FIAPARCH models under Student-t and skewed Student-t innovations. The FIAPARCH models under skewed Student-t distribution provide the best fit for all the equity market returns. Furthermore, we model the daily and one-week-ahead market risks with the conditional volatilities generated from the FIAPARCH models and document that the skewed Student-t distribution yields the best results in predicting one-day-ahead VaR forecasts for all the stock markets. The results also reveal that the prediction power of the models deteriorate for longer forecasting horizons.     

我国IPO长期市场表现的实证研究——基于超常收益率不同测度方法的比较分析

本文选取1995年1月至2000年12月沪深两市774个A股IPO样本,计算IPO的等权平均、流通市值加权平均和总市值加权平均收益率,并使用不同的市场指数及配比股票组合的收益率加以调整来评价IPO的长期市场表现。经过事件时间和日历时间的实证研究发现:(1)我国IPO在上市后3年内总体上表现出长期强势。(2)IPO长期超常收益率对使用何种参照指标的收益率来调整以及使用何种加权平均方法很敏感。CAR和日历时间研究的结果更明显地表明我国IPO存在长期强势特征,而且使用市值加权平均方法计算的正超常收益率更为显著。(3)Fama-French三因素模型和CAPM模型回归的截距项都表明我国IPO存在正的长期超常收益率。     

Speculative bubbles and the cross-sectional variation in stock returns

Evidence suggests that rational, periodically collapsing speculative bubbles may be pervasive in stock markets globally, but there is no research that considers them at the individual stock level. In this study we develop and test an empirical asset pricing model that allows for speculative bubbles to affect stock returns. We show that stocks incorporating larger bubbles yield higher returns. The bubble deviation, at the stock level as opposed to the industry or market level, is a priced source of risk that is separate from the standard market risk, size and value factors. We demonstrate that much of the common variation in stock returns that can be attributable to market risk is due to the co-movement of bubbles rather than being driven by fundamentals.