The long-term performance of privatization-related ADR issues

American depository receipts (ADRs) have been increasingly used in the share issue privatization process (SIP) by privatizing governments, both in developed and developing countries. In this study, long-term performance of 143 privatization-related ADR programs were analyzed. The ADR programs covered in the study were initiated between 1984 and 1999 and included a diverse mix of companies from 29 different industries across 31 developed and emerging markets. The analysis of the long-run performance of these programs revealed interesting patterns. In all cases, average cumulative returns and average cumulative abnormal returns of developed country privatization-related ADRs exceeded emerging market privatization returns. The same conclusion was reached using an alternative return calculation methodology. While sample companies generally outperformed their respective country indices and the FT World Index, they under performed the S&P 500 Index. In addition, findings indicate that Level I issues traded in over-the-counter (OTC) markets outperform the Level II and Level III ADRs traded in the NYSE, as well as 144A private placements.     

Industry and country factors in emerging market returns: Did the Asian crisis make a difference?

Should investors diversify across emerging stock markets or across industries to achieve improvements in their risk–return tradeoffs especially during financial crisis periods? We examine the issue using individual firm data from a selection of emerging markets and including the period of the 1997 Asian financial crisis. We find that country effects were the dominant force behind the low co-movements among emerging stock market returns. There is evidence of increased industry effects beginning at the time of the Asian financial crisis, but this may have been a temporary phenomenon associated with contagion effects during the crisis.     

Dependence between the global gold market and emerging stock markets (E7+1): Evidence from Granger causality using quantile and quantile‐on‐quantile regression methods

This study examined the dependence between gold and stocks during 2002–18 in seven emerging countries. The study combined the bivariate cross‐quantilogram introduced recently with quantile‐on‐quantile regression (QQR) approaches to conduct comprehensive and complementary analyses. The QQR results for the full sample revealed a weak positive dependence in all the quantiles of gold and stock returns across all the countries selected during mild market conditions. The results for pre and post‐crisis periods largely were consistent with those obtained for the full sample, except for Turkey (pre‐crisis), and China and Indonesia (post‐crisis). The results of the causality test‐in‐mean (return) and that of the causality test‐in‐variance revealed no causal relation between stock and gold in the pre‐crisis period, while causality ran only from gold to some stocks in the post‐crisis period. Further, while there was volatility causality running only from gold to stocks during the pre‐crisis period, the volatility causality between the two markets was very high during the post‐crisis period. Therefore, we suggest that gold may have been a hedge for stocks during the pre‐crisis compared to the post‐crisis period. Further, international risk factors should be considered in optimal investment decisions between domestic and global markets' assets (stocks and gold).     

Market knowledge: Evidence from importers

Previous firm‐level literature established that there are substantial costs of entry into new export markets. Chaney (The American Economic Review, 104, 2014, 3600) opens the black‐box of entry costs by building a dynamic network model of international trade where firms acquire customers in new destinations through their existing customers in other destinations. Following his conjecture, this paper examines whether firms use their existing suppliers in a destination to find their first clients in those markets. I use a disaggregated data set on Turkish firms' exports and imports for the 2003–08 period, and investigate the effect of import experience on export entry. By identifying import experience using instrumental variables, and shutting down productivity channels with firm‐year fixed effects, I find that having a supplier in the destination country raises the probability of starting to export to that country by 5.5 percentage points on average, revealing a “market knowledge” phenomenon. The paper's main contribution to the literature is finding that firms' country‐specific import experience increases the likelihood of export‐market entry. Digging further to explore heterogeneous effects, I find that this effect does not exist when trading with low‐income countries, but it increases with the destination country's size, proximity, language similarity and the size of its Turkish immigrant community. Moreover, the strength of the firm's relationship with its supplier as proxied by several variables such as the share of imported products that are differentiated increases the probability of export‐market entry.     

Equity-based entry modes of emerging country multinationals: Lessons from Turkey

Based on a sample of 522 foreign affiliates of Turkish multinational enterprises (MNEs) with varying levels of Turkish equity ownership, this study provides an empirical analysis of the determinants of equity-based entry mode strategies in host country markets. A number of hypotheses are developed to examine the impact of institutional, transaction specific and firm level variables on Turkish MNEs’ choice of equity ownership mode in their foreign affiliates. The results reveal that institutional variables are important in explaining the equity composition of foreign affiliates of Turkish MNEs. Particularly important in determining equity ownership mode were found to be political constraints, linguistic distance, knowledge infrastructure and the extent of parent diversity. Results concerning the influences of the size of the affiliate are contrary to expectations and contradict the findings of previous research. No support was found for the impact of cultural distance on the equity ownership mode of Turkish MNEs in their foreign affiliates. Apart from political constraints, equity ownership choice and its underlying determinants do not vary between emerging and developed host country markets.     

Foreign Ownership Restriction and Momentum – Evidence from Emerging Markets

This study investigates the impact of foreign investors on stock price efficiency and return predictability in emerging markets. It finds that stocks fully investible for foreign investors exhibit stronger price momentum than non‐investible stocks. The difference in momentum effects between stocks with different levels of investibility cannot be fully explained by world market risk, size, turnover, or country‐specific factors. Further tests show that fully investible stocks have no post‐earnings‐announcement drift (PEAD), and their short‐term momentum reverses over a longer horizon. These results show that the stronger momentum of highly investible stocks does not appear to be driven by foreign investors' underreaction to firm‐specific information, but is more likely to be generated by their positive feedback trading.     

Does a sustainability risk premium exist where it matters the most?

Using a sample of ESG ratings, we examine the sustainability risk premium for developed and emerging markets between 2015 and 2019-end. Our results show that this premium is not empirically distinguishable in developed equity markets, whilst highly positive in the emerging ones. We further partition the emerging markets to comprehend whether country development and firm size have an impact on the sustainability risk premium. As uncovered, both factors play a significant role in the emergence of the risk premium. Consequently, larger corporations and advanced nations drive sustainability in the emerging markets and thus experience the financial benefits.     

Entries and Exits in Foreign Markets: Italian Firms' Multinational Expansion in the European Union

This paper focuses on the expansion strategies in foreign markets of a sample of Italian firms during the period 1987-93. The data reveal strong dynamics in entry and exit strategies and an overall increase in Italian firms' foreign manufacturing activities. Firms seem to be restructuring and reorganising their range of activities in view of the new competitive scenario promoted by the completion of the Single European Market. A logit model investigating the determinants of entry in foreign markets is tested at the firm level. The results suggest that firms' specific resources, target industry and foreign country characteristics are important explanatory variables. Some new insights concerning the export substitution effect, the presence of technological sourcing and the multinational/ diversification dichotomy are also discussed.     

Returns on ADRs and arbitrage in emerging markets

In this paper we compare the distributions of ADR returns and the returns of the locally traded shares between Chile and Argentina. This comparison is interesting because both countries are emerging economies with a similar free market orientation and the trading hours in both countries virtually coincide with the trading hours in New York. Argentina and Chile differ, however, in two important aspects: During our sample period: (1) The Argentinean market was completely under a fixed-exchange rate system, while Chile maintained a flexible exchange rate regime; and (2) Argentina did not impose any restrictions on foreign investments, while Chile did. We find that the return distributions of the Chilean ADRs are significantly different from the distributions of the returns on the respective underlying Chilean shares. While the mean returns are the same, the return's S.D. are significantly different. In contrast, the hypothesis that the distributions of the returns on the Argentinean ADRs and the returns on their respective underlying shares are the same cannot be rejected. We then use a threshold model to estimate the transaction costs of trading the ADRs and the locally traded shares. We find that the transaction costs that must be added to the returns spread before arbitrage is possible were between 100 and 200 basis points for Chilean ADRs. It was between 66 and 165 basis points for the Argentinean ADRs. The daily return spread reversion caused by arbitrage activities was estimated to be approximately 30% for Chilean ADRs and 40% for Argentinean ADRs. Finally, we cannot reject the hypothesis that low liquidity was a major factor in the cost difference between the two countries.     

How valuable is information and communication technology? A study of emerging economy enterprises

Anchored at the knowledge management perspective, we address how information and communication technology (ICT) improves the productivity of emerging economy enterprises. We present the logic that ICT enhances firm performance because it is an important channel or facilitator of effective knowledge sharing and knowledge integration. We further argue that the conditions characterizing an emerging economy (i.e., a country’s economic development) and emerging economy businesses (i.e., internationalization and quality assurance) would affect the extent to which ICT contributes to knowledge management, and thus to firm performance. Our hierarchical linear modeling analysis of 6236 firms from 27 emerging economies lends support to our arguments and predictions, suggesting that ICT is a critical investment that generates satisfactory returns for emerging economy enterprises, yet this investment–return relationship is further contingent upon the macro- and micro-level conditions facing these enterprises. ICT actually adds more value to productivity when a focal emerging economy is less economically developed, and when a focal firm reaches foreign markets or its quality control and assurance is superior.     

Stock price informativeness and analyst coverage

We examine whether more analyst coverage translates into more informative stock prices and apply this to both developed and emerging markets. We measure price informativeness using the association between current stock returns and future earnings. We argue that more informative stock prices contain more information about future earnings. Results indicate that analysts' activities do not contribute to the impounding of future earnings information into current stock prices, in accordance with the view that analysts are outsiders who do not have full access to firm‐level information. We also find that analysts specialize according to industry and that “industry expertise” is limited to developed countries. Overall, our evidence is consistent with the explanation that analysts focus on gathering and mapping industry‐ and market‐level information (macroeconomic information) into stock prices. Copyright © 2013 ASAC. Published by John Wiley & Sons, Ltd.     

Stock Returns,Productivity, and Corruption in Eight European Fast-Emerging Markets

This article addresses the impact of productivity, corruption, and trade openness on the stock returns of 265 industrial companies listed in eight Eastern European fast-emerging markets, over the 2004-2013 period. Through a three-factor model that includes both measures at firm level and macro-level control variables, our findings suggest that country corruption index is negatively correlated with the total annual return of the stocks of the listed industrial companies of our sample. Moreover, the most productive firms are featured by higher stock returns, while leverage seems not to be a key predictor of stock returns. In addition, the article uncovers innovative evidence about trade openness that is negatively correlated with stock returns due to its connection with the recent financial crisis. That is, firms operating in markets that are more open to trade show a higher degree of interconnection with other economies and are more likely to undergo the effects of negative fluctuations from foreign markets during the economic crisis. © 2015 Wiley Periodicals, Inc.     

Where Do Firms Export,How Much and Why?

The empirical finding that exporting firms are more productive on average than non‐exporters has provoked a large theoretical literature based on models such as Melitz ( 2003 ), where more productive firms are more likely to overcome costs associated with trade. This paper investigates how closely the productivity heterogeneity framework fits the data from a firm‐level survey that includes information on export destinations and firm characteristics such as productivity. We find a high degree of unpredictable idiosyncratic participation in export markets by firms and a relatively weak positive correlation between the extent of a firm's export market participation and its export sales. We find that a small number of standard gravity variables provide a close fit to the country‐level determinants of trade but that greater variation results in more difficulty in explaining firm‐specific factors driving exporting behaviour. We also illustrate some elements of the dynamics over time in firm exporting patterns by destination. We show that lagged exporting activity has a significant effect on a firm's current exporting profile.     

Do cross-border mergers and acquisitions increase short-term market performance? The case of Chinese firms

Despite the new momentum in cross-border mergers and acquisitions (M&As) by emerging market firms, we have a limited understanding of the impact of these activities. Drawing on signalling theory and the institution-based view, this paper examines the extent of stock market reactions to the announcement of cross-border M&A deals, based on an event study of a sample of Chinese firms during the period 2000–2012. The findings indicate that the announcement of cross-border M&As results in a positive stock market reaction; this effect is more significant in the mainland Chinese stock markets (Shanghai and Shenzhen) than that in the Hong Kong market. The shareholders of Chinese firms that acquire a target firm in a host country with a low level of political risk gain higher cumulative abnormal returns than those firms targeting companies in countries with a high level of political risk. The shareholders of Chinese state-owned enterprises experience lower abnormal returns compared with those of Chinese privately owned firms when engaging in cross-border M&A deals.     

Wealth effects on cross-border acquisition firms from emerging economies

Cross-border acquisitions (CBAs), as a corporate expansion strategy, are being espoused by emerging market firms (EMFs) to overcome their competitive disadvantage at the global level. The objective of this paper is to analyse the wealth effects of cross-border acquisition announcement on the acquiring firms from emerging economies during the period of 2001–17. Wealth effects have been measured in terms of short-term change in equity prices (investors' reaction) around the public announcement of 553 and 125 overseas acquisitions by Indian and Chinese listed firms respectively. The investors' reaction to the acquisition of a foreign target has been captured using the event study methodology. Further, a disaggregated analysis has been conducted to gauge the impact of various deal-specific factors, the legal structure of the target firm and the development status of the target country on the wealth creation potential of a cross-border acquisition.Both Indian and Chinese investors have responded favourably to the announcement of international acquisitions as exhibited in significant and positive average abnormal returns of 0.71% and 0.23% respectively on the event day. Further, it is revealing to note that investors in these economies differ widely with regard to their perception pertaining to the method of payment and acquisition strategy. At the same time, the extent of wealth creation is higher when acquired firms are based in developed economies possessing high quality resources and advanced technology along with better institutional and regulatory milieu; Indian as well as Chinese markets have experienced larger abnormal returns on acquiring advanced vis-à-vis developing market firms.     

Robustness of size and value effects in emerging equity markets, 1985–2000

We examine the robustness of size and book-to-market effects in 35 emerging equity markets during 1985–2000. Mean returns for high book-to-market firms significantly exceed mean returns for low book-to-market firms. These findings are robust to tests that control for size effects and that remove extreme returns. Similarly, mean returns for small firms exceed mean returns for large firms. But, the firm size results lack robustness to the removal of extreme returns. Moreover, significant size effects are found in tests that define firm size relative to the local market average, but generally are not found in tests that use absolute firm size. Our findings are confirmed by cross-sectional regressions that control for systematic risk at the global and local levels.     

Cross Hedging with Currency Forward Contracts

This study examines the behavior of a competitive exporting firm that exports to a foreign country and faces multiple sources of exchange rate uncertainty. Although there are no hedging instruments between the home and foreign currencies, there is a third country that has well‐developed currency forward markets to which the firm has access. The firm's optimal cross‐hedging decision is shown to depend both on the degree of incompleteness of the currency forward markets in the third country, and on the correlation structure of the random spot exchange rates. Furthermore, the firm is shown to be more eager to produce and expand its exports to the foreign country when the missing currency forward contracts between the home and foreign currencies can be synthesized by the existing currency forward contracts. In this case of perfect cross hedging, the separation theorem holds but the full‐hedging theorem may or may not hold. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark     

Dismantling institutional complexity behind international competitiveness of emerging market firms

The paper examines the perceived role of emerging market institutions in the creation of firm‐specific advantages of local small‐ and medium‐sized enterprises (SMEs) supporting international expansion and competitiveness. Our objective is to deepen conceptual understanding of the complex link between emerging market institutional factors and an ability of emerging market SMEs to compete internationally. Our empirical evidence from Russian software SMEs operating in global niche markets reveals that managers perceive institutional influence on their firms' ability to compete internationally in a number of direct and indirect means. We find that, in addition to the well acknowledged negative impact of institutions, there are supportive and triggering forces that incentivize SMEs' international expansion and development of competitive advantages. We contribute to the literature by elaborating about the complexity of institutional influence on international competitiveness of emerging market SMEs. This research offers insights for managers about the prospects of international expansion of SMEs from emerging markets.     

Country and industry factors in returns: evidence from emerging markets’ stocks

This study examines the influence of country and industry factors on the cross-sectional variance and correlation structure of returns. I use new data on emerging markets’ stocks obtained from the Emerging Markets Data Base. I find that emerging markets’ returns are mainly driven by country factors, as it was shown previously in studies for mature markets, and that cross-market correlation is not affected by the industrial composition of the indices. These results have important implications in regard to international portfolio diversification: cross-market diversification seems to be a better bet than cross-industry diversification. A finer industry partition shows, however, that ignoring the industrial mix leads to an important loss of diversification benefits.