Does corporate eco-innovation affect stock price crash risk?

We examine the effect of corporate environmental innovation (hereafter eco-innovation) on stock price crash risk and document a significant negative association. Utilising a large sample of publicly listed U.S. firms for the period 2003 to 2017, we find that an increase in eco-innovation from the 25th to the 75th percentile is associated with 17.62% reduction in stock price crash risk. This outcome remains robust to a variety of sensitivity tests and after accounting for potential endogeneity concerns. Eco-innovative firms attract more institutional investors and equity analyst following and disclose more information leading to lower stock price crash risk. Additional tests reveal that the negative effect of eco-innovation is contingent on the political leadership's ideology and environmental sensitivity. Our paper contributes to the ongoing discourse on the costs and benefits of eco-innovation, documenting the value-enhancing perspective of eco-innovation.     

Does online interaction between firms and investors reduce stock price crash risk?

This paper examines how online interaction between firm management and investors impacts stock price crash risk. Based on the previous literature, we postulate that online interaction constrains crash risk via two channels, i.e., deterring bad news hoarding activities of managers and decreasing differences of opinion among investors. Relying on the launch of Hudongyi (the first official investor relations management platform in the world) for identification, we demonstrate that online firm-investor interaction significantly reduces future stock price crash risk and that these two channels can both explain this effect. Overall, our findings highlight the important role of online interaction in risk management.     

Does the stock market affect firm investment in China? A price informativeness perspective

This paper investigates the empirical relationship between firm-level investment and the stock market in China from a price informativeness perspective. We find that firm investment does not significantly respond to the stock market valuation, because stock prices contain very little extra information about the future operating performance of firms. This finding is further supported by the relative investment response test and the relative price information content test based on the informativeness proxy of price non-synchronicity combined with firm information transparency.     

Do political connections affect stock price crash risk? Firm-level evidence from China

Using a sample of Chinese listed firms in the period from 2003 to 2012, this paper empirically investigates how the presence of politically connected directors affects stock price crash risk. We thereby make a distinction between listed state-controlled firms and privately controlled firms due to their different incentives to appoint politicians as directors on the board. Our empirical results show that politically connected directors exacerbate stock price crash risk in listed state-controlled firms, an effect driven by the appointment of local government officials as directors. In contrast, hiring politicians as directors, particularly central-government-affiliated directors, helps listed privately controlled firms to reduce stock price crash risk. Finally, good quality of institutions does not help to alleviate the positive relationship between political connections and stock price crash risk in listed state-controlled firms. However, it does weaken the role of political connections in reducing crash risk in listed privately controlled firms.     

Does stock exchange consolidation improve market liquidity? A study of stock exchange acquisition in Russia

The last couple of decades have witnessed significant institutional and structural changes in financial sector within a worldwide trend toward consolidation. In the segment of organized trading stock exchanges merge and develop into large and diversified publicly traded companies. These processes are rather complicated in case of a transition economy like Russia. In December 2011 MICEX, the first largest and state-controlled stock exchange acquired RTS, the second largest and privately owned stock exchange primarily designed for foreign investors. We empirically investigate whether the acquisition resulted in improved liquidity of the Russian stock market which was one of the declared acquisition objectives. We use the Kolmogorov–Smirnov and the Wilcoxon tests to compare market-wide liquidity in several discrete periods pre and post acquisition. A deep and thorough insight into liquidity performance is ensured by assessing liquidity from limit order book data of tick frequency along three dimensions (tightness, immediacy, and elasticity).     

Does monetary policy determine stock market liquidity? New evidence from the euro zone

The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of aggregate stock market liquidity in the German, French and Italian markets. Furthermore, the effect of monetary policy is significantly stronger for smaller stocks, suggesting a non-linear impact of monetary policy on stock liquidity.     

Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis

This study uses data on 27 European stock indices over the period from January 2007 to December 2012 to investigate the relationship between innovations and the market reaction to negative news during the financial crisis. We use the bivariate BEKK-GARCH approach to estimate time-varying betas and abnormal returns. We show that index prices of countries in the high (low) innovation groups experience significantly positive (negative) abnormal returns on and following the negative news announcement dates. We also find that index beta changes following the arrival of bad news is negatively associated with a country's innovativeness. This finding suggests that innovations promote economic stability and enhance investors' confidence in a country's ability to cope during difficult times. Thus, policy makers who are concerned with sustainable growth should encourage R&D investments by adopting effective policies and avoid unnecessary cuts in R&D expenditures even during times of crisis. A study of the pre-crisis period from January 2001 to December 2006, using the same methods, indicates that investors value innovation more during difficult times.     

Does the major market influence transfer? Alternative effect on Asian stock markets

Based on the time-varying regression model of Chow et al. (J Comp Econ 39(4):577–583, 2011. doi: 10.1016/j.jce.2011.06.001), this paper simultaneously analyzes the ebb and flow of change by China and the U.S. as leading players in relation to their comovement on various Asian stock markets. We include several important controls for worldwide economy performance, the stock market return rates of major importing nations, and linear/non-linear time trend fixed effects to stress the influence of China and U.S. on eight Asian economies. The empirical results indicate the increasing influence of the China stock market during the subprime mortgage crisis. Moreover, the U.S. market remains influential on the Chinese region, but loses/decreases its influence, especially on the Four Asian Tigers, significantly during/after the subprime mortgage crisis.     

Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China

China introduced short selling for designated stocks in March 2010. Using this important policy change as a natural experiment, we examine the effect of short selling on stock price efficiency and liquidity. We show that the introduction of short selling significantly improves price efficiency, as measured by the differences in individual stock responses to market returns and the delay in price adjustments. Short selling also enhances stock liquidity, as measured by bid-ask spread and Amihud [2002. ‘Illiquidity and Stock Returns: Cross-section and Time-series Effects.’ Journal of Financial Markets 5: 31–56] illiquidity measure; and reduces stock volatility. Overall, our results suggest that short selling helps to stabilize asset prices, provides additional liquidity and improves market quality, even in an emerging economy with a less developed stock market than that in the US and Europe.     

Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies

We empirically investigate the effects of market structure on profitability and stability for 1929 banks in 40 emerging and advanced economies over 1999–2008 by incorporating the traditional structure-conduct-performance (SCP) and relative-market-power (RMP) hypotheses. We observe that a greater market share leads to higher bank profitability being biased toward the RMP hypothesis in advanced economies, yet neither of the hypotheses is supported for profitability in emerging economies. The SCP appears to exert a destabilising effect on advanced banks, suggesting that a more concentrated banking system may be vulnerable to financial instability, however, the RMP seems to perform a stabilising effect in both economies. Evidence also highlights that profitability and stability increase with an increased interest-margin revenues in a less competitive environment for emerging markets. Overall, these results suggest that although policy measures to promote competition may dampen economic rent, excessive implementation may have an undesired destabilising impact on banks.     

The market price of risk and the equity premium: A legacy of the Great Depression?

By positing learning and a pessimistic initial prior, we build a model that disconnects a representative consumer's subjective attitudes toward risk from the high price of risk that a rational-expectations econometrician would deduce from financial market data. We follow Friedman and Schwartz [1963. A Monetary History of the United States, 1857-1960. Princeton University Press, Princeton, NJ] in hypothesizing that the Great Depression heightened fears of economic instability. We use a robustness calculation to elicit a pessimistic prior for a representative consumer and let him update beliefs via Bayes’ law. Learning eventually erases pessimism, but while it persists, pessimism contributes a volatile multiplicative component to the stochastic discount factor that a rational-expectation econometrician would detect. With sufficient initial pessimism, the model generates substantial values for the market price of risk and equity premium and predicts high Sharpe ratios and forecastable excess stock returns.     

A comparison of the stock market reactions of convertible bond offerings between financial and non-financial institutions: Do they differ?

We focus on the stock price reaction to convertible bond offering made by financial institutions and find that the cumulative abnormal return over the three day interval around convertible bond issuance is 1.41 percentage higher than that for non-financial institutions. This result supports our hypothesis that since financials are heavily regulated, the market is less likely to assume that the issuance of convertible bond by financials signals information that are overvalued. Our results remain robust after controlling for a number of firm-, issue-, and market-specific characteristics as well as the level of short selling pressure induced by convertible bond arbitrageurs.     

Monetary policy and bank lending in the Euro area: Is there a stock market channel or an interest rate channel?

In this paper I compare a traditional demand oriented model of bank lending with its focus on short-term interest rates in the money market, to a non-traditional capital budgeting model of bank lending based on movements in share valuations for the Euro area. Using non-nested hypothesis tests, omitted variables tests, and Granger Causality tests, I reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions (MFI's) in the Euro area. Even though Europe is a bank-based financial system, it appears the stock market plays a key role in the lending decisions and allocation of resources in Europe. One possible policy implication of this research is that the central bank should try and stabilize stock prices in order to achieve their goal of stabilizing bank lending and the economy.     

Does tax convexity matter for risk? A dynamic study of tax asymmetry and equity beta

The purpose of this study is to explore the effect of tax convexity on firms’ market risk, where tax convexity measures the progressivity of firms’ tax function. We examine the relation between equity beta and tax convexity based on a standard contingent-claims model, in which firms face nonlinear tax schedules. We verify that in the presence of default and growth options, the effect of tax convexity on beta is significant and depends on several countervailing forces. Tax convexity has a direct, positive effect on beta, as well as two indirect countereffects through default and growth options. The overall effect is ambiguous and quantitatively significant. As asymmetric tax schedules are used in most countries, assuming a linear tax schedule in the valuation framework may misestimate beta and thus fail to assess risk accurately. Our theoretical model shows that tax convexity should be taken into consideration when estimating equity beta.     

Is sin always a sin? The interaction effect of social norms and financial incentives on market participants’ behavior

Using alcohol, tobacco, and gaming consumption data and people’s attitudes toward these sin products to proxy for social norm acceptance levels, we show a strong interaction effect between social norms and financial incentives, which significantly influence the behavior of market participants. Specifically, institutional investors’ shareholdings and analyst coverage of sin companies increase with the degree of social norm acceptance. The association between shareholdings/coverage and social norm acceptance is less pronounced for firms with higher future expected performance. Our results show that social norms and financial incentives have a powerful interaction effect in determining the behavior of market participants, suggesting that social norms can be crossed when motive and opportunity exist.     

Conglomerates on the rise again? A cross-regional study on the impact of the 2008–2009 financial crisis on the diversification discount

This paper investigates how the 2008–2009 financial crisis affected the value of diversification in different regions of the world, thereby emphasizing the role of the institutional context. We show that the effect of the credit crunch upon the diversification discount varied with the regions' level of capital market maturity and legal environment. In developed Asia Pacific, the British Isles, and North America, we find that the discount on conglomerates fell significantly during the crisis years; however, in Continental Europe – the region possessing the least developed capital markets and lowest legal investor protection in our sample – the impact of the financial meltdown upon the relative value of diversified firms was insignificant. Our study provides additional evidence on factors influencing the relative costs and benefits of diversified firms and highlights in particular the importance of accounting for different institutional settings.     

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.     

Does the exchange rate follow a random walk? A Monte Carlo study of four tests for a random walk

Several authors have urged that real and nominal exchange rates follow a random walk. Conditions under which the exchange rate follows a random walk are reviewed in this paper. Many of these do not appear to hold. Therefore, the empirical evidence presents a puzzle : some evidence suggets the exchange rate follows a random walk, while other evidence suggests the opposite should be true. This paper attempts to reconcile the evidence. It is argued that the tests for a random walk have low power. Monte Carlo evidence on four tests for a random walk, is presented that suppors this claim.     

What is the best Lévy model for stock indices? A comparative study with a view to time consistency

Financial Markets and Portfolio Management - Lévy models are frequently used for asset log-returns. An important criterion is the distributional assumption on the increments. Candidates...