When Is a Firm's Information Asymmetry Priced? The Role of Institutional Investors

This study reexamines the competing claims that probability of informed trading (PIN) is priced in the cross‐section of stock returns while adjusted PIN (AdjPIN), the component of PIN related to information asymmetry, is not. We find that behind these seemingly contradicting conclusions is the role of institutional investors, and the pricing of PIN and AdjPIN depends on institutional ownership. Only for those stocks with low institutional ownership are both PIN and AdjPIN priced. Our findings imply that investors require compensation for information risk only from stocks with low institutional ownership.     

Does corporate governance risk at home affect investment choices abroad?

Disparity between control and ownership rights gives rise to the risk of tunneling by the controlling shareholder, and is prevalent in many emerging market economies and present in some developed countries. At the same time, international investors come from different countries whose home markets are characterized by varying degrees of control–ownership disparity. This paper studies whether this difference in investors' home countries affects their portfolio choice in an emerging market. It combines two unique data sets on ownership and control in business groups, and investor-stock level foreign investment in Korea. A key finding is that investors from low-disparity countries disfavor high-disparity stocks in Korea, but investors from high-disparity countries are indifferent. Moreover, investors from low-disparity countries became averse to disparity only after the Asian financial crisis. These results suggest that the nature of corporate governance in international investors' home countries affects their portfolio choice abroad, and therefore these investors should not be lumped together in the analyses of their portfolio choice.     

Who should sell stocks?

Never selling stocks is optimal for investors with a long horizon and a realistic range of preference and market parameters, if relative risk aversion, investment opportunities, proportional transaction costs, and dividend yields are constant. Such investors should buy stocks when their portfolio weight is too low and otherwise hold them, letting dividends rebalance to cash over time rather than selling. With capital gains taxes, this policy outperforms both static buy‐and‐hold and dynamic rebalancing strategies that account for transaction costs. Selling stocks becomes optimal if either their target weight is low or intermediate consumption is substantial.     

The Analysis of 52‐Week High Investing Strategy Based on Herding Behavior

The present study develops zero‐costing strategies that are based on the 52‐week high and herding behavior. Proximity of the current price to the 52‐week high and the level of herding behavior of individual/institutional investors are the two criteria used to screen stocks. Because herding behavior affects stocks that are associated with value‐related beliefs that investors are reluctant to revise, the level‐of‐herding criterion uses the 52‐week high strategy to improve profits. The present study examines strategy profits in Taiwan, a market in which more than 70% of investors are individuals and where the level of herding among individual investors is higher than that for institutional investors. Empirical results found that profits earned using zero‐costing strategies, identified both using the 52‐week high and herding, were larger than those earned using only the 52‐week high strategy. Furthermore, stocks with values that were far from their 52‐week high made significant and positive profits through buy‐herding and by shorting sell‐herding stocks.     

The role of the temporary component in spot prices in the revision of expected future spot prices: Evidence from index futures quotes

It is frequently argued that foreign investors have extrapolative expectations due to their informational disadvantages. That is, in the absence of other sources of information, foreigners revise their expectations on the future price of a domestic stock more in line with its current price change than do domestic investors. In this study, we analytically show that foreigners might respond more to a price change because they pay relatively less attention to a temporary component in price—i.e. because they are more well‐informed. We confirm this hypothesis with a simple yet powerful test that is designed by the identification schemes arising directly from the nature of a temporary component and by the access to a direct measure of the investor's expectation, namely, the quote for futures contracts. After controlling for the temporary component effect and using the lead–lag relationship between the spot and futures markets, we show that foreign investors are indeed most well‐informed, whereas domestic individuals are at the other end with the most extrapolative expectations. Finally, domestic institutions are largely indistinguishable from foreigners but are noticeably different from domestic individuals.     

Some Features of the Early Merger Movements in British Manufacturing Industry

This paper argues that a number of non-conventional types of foreign direct investments – such as free-standing firms – that fit awkwardly in models where multinational firms arise to exploit abroad their firm-specific advantages, can be explained by looking at the role of these institutions in the international transfer of financial capital. The paper develops a theory to explain why a particular form of transfer will be used based on the choice between price and hierarchical transfer on one hand, and intermediated versus non-intermediated transfer on the other. Hierarchical transfer (equity) will be favoured when transaction costs in the market for investible funds are high. Intermediation will take place when there is considerable asymmetry between savers and investors. Non-intermediated equity transfers (free-standing firms) will arise to finance projects offering no collateral (hence equity) but of low scale and known technology (hence non-intermediated).     

Managers, investors, and crises: mutual fund strategies in emerging markets

We examine the trading strategies of mutual funds in emerging markets. We develop a method for disentangling the behavior of fund managers from that of underlying investors. For both managers and investors, we strongly reject the null hypothesis of no momentum trading: mutual funds systematically sell losers and buy winners. Selling current losers and buying current winners is stronger during crises, and equally strong for managers and investors. Selling past losers and buying past winners is stronger for managers. Managers and investors also practice contagion trading—they sell (buy) assets from one country when asset prices fall (rise) in another.     

Do single‐stock circuit breakers provide a safety net for Canadian investors?

This study looks at the market impact of recent regulatory changes in Canada that provide for trading halts on individual stocks that experience large upside or downside movements. The focus is on all stocks traded on the Toronto Stock Exchange since the inception of the single‐stock circuit breaker rule (SSCB) in February 2012, to replace the short‐sale uptick rule. The results support pricing efficiency: material information that caused the circuit breaker is incorporated in stock prices on the day of the halt (neither overreaction nor underreaction), with no decline in market liquidity. Using trade‐by‐trade data constructed on five‐minute trading intervals, we refine the daily results, and show that shocks in realized volatility are focused in the 10‐minute trading interval surrounding the halts. While circuit breakers provide a limited safety net for investors when their stocks are subject to severe volatility, they do not allow for a quick turnaround for stocks experiencing severe price decline events.     

Impact of Liquidity on the Futures‐Cash Basis: Evidence from the Indian Market

Arbitragers’ activities are constrained by market liquidity. In turn, arbitrage activity may trigger order imbalances adversely affecting liquidity. We examine this issue by analyzing the link between the futures‐cash basis and bid–ask spreads using intraday data on single stock futures (SSFs) contracts on Indian stocks. In contrast to other countries, the SSF market in India is very active due to retail investors’ prior experience with the badla system, a form of forward markets. The analysis reveals two‐way Granger causality between the basis and spreads in both the futures and cash markets. Evidence for spreads Granger‐causing basis is stronger for stocks with higher volume and SSFs that are relatively more active than underlying stocks. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:266–298, 2013     

Do Foreign Investors Promote Stock Price Efficiency in Emerging Markets?

This paper examines the role of foreign investors in promoting stock price efficiency in emerging stock markets relying on the fact that stock prices in these markets are influenced by both local and global factors. We employ a data sample of Vietnamese‐listed firms on the Ho Chi Minh City stock exchange over the period from 2006 to 2015. We utilize the panel data estimation analysis. The results show that foreign investors accelerate the incorporation of available information into local stock prices. The finding reinforces the important role of foreign investors in domestic stock markets of emerging economies.     

The price effects of index additions: A new explanation

We further explore a new volatility explanation for the permanent price effect of index additions, using a sample of changes in the Nikkei 225. Additions to the index elicit significant price hikes, which tend to be permanent despite temporary price reversals. Meanwhile, investor awareness and demand increase, while price volatility decreases for the added stocks, contrary to the higher price volatility for stocks added to the S&P 500. Moreover, multivariate regression analysis demonstrates that the lower volatility contributes significantly to the permanent price boost, a new explanation; so does the higher investor awareness, consistent with the prior literature.     

A Dynamic Volume–Return Relation and Investors' Positive Feedback Trading

With individual stocks, a larger increase in trading volume indicates a stronger short‐term return persistence. A reason for this short‐horizon ‘volume–return relation’ is that it can signal the existence of fundamental news, which can be gradually incorporated into stock price. In this study, we present another plausible explanation by considering investors' short‐term positive feedback trading. First, through empirical analysis, we show that the volume–return relation remains strong among stocks for which there is little fundamental news. Through a model‐based analysis, we demonstrate that positive feedback trading can cause this relation even when there is no news. Our findings raise the possibility that the short‐horizon volume–return relation is also caused by short‐term positive feedback trading.     

Price and Earnings Momentum,Transaction Costs,and an Innovative Practitioner Technique

We use an innovative practitioner technique to investigate the interplay between the ex post performance of momentum strategies and transaction costs, rebalancing frequency, turnover constraints, and fund size. We have three interrelated main results: first, the level of and correlation between active returns to price momentum and earnings momentum strategies vary dramatically with these factors; second, strategies that are fearful of ex ante transaction costs generate returns net of transaction costs that are far superior to the net returns of naive strategies; and third, obtaining better traction with the unique elements of each strategy yields a more profitable combined strategy.     

The Stock Liquidity of Banks: A Comparison between Islamic and Conventional Banks in Emerging Economies

We explore the stock liquidity of Islamic banks (IBs) and matching conventional banks (CBs) in emerging economies. We find that IBs have higher stock liquidity than CBs, suggesting that investors prefer IBs' stocks and neglect what they consider to be “sin stocks” (i.e., CBs' stocks), which do not conform to their religious beliefs. We also find that the liquidity effects are particularly important for small IBs, and during the global financial crisis. This evidence is stronger in countries with less developed banking sectors and weaker bank supervision and regulation. Hence, faith-driven investors tend to value more norm-conforming stocks (i.e., IBs) during times of distress and uncertainty, and in weaker regulatory environments.     

Stock return predictability of the cumulative abnormal returns around the earnings announcement date: Evidence from China

We find that cumulative abnormal returns adjusted by size, book-to-market, and momentum around the earnings announcement date (DGTW_CAR3 hereafter) significantly and positively predict stock returns in the 6-month period from May 2005 to October 2020 in the China's A-shares market. The monthly equally-weighted DGTW_CAR3 premiums are 0.47% and 0.67% after risk adjustment. Although stock price delay fails to fully account for the DGTW_CAR3 premium, we find that the DGTW_CAR3 premium is more significant for illiquid stocks and during periods with high investor sentiment. This result suggests that market inefficiency explains the DGTW_CAR3 premium. Further analysis shows that, in addition to earnings information, the optimism reflected in the management discussion and analysis section of the annual or half-year report also contributes to the DGTW_CAR3 premium. This finding implies that DGTW_CAR3 may contain new fundamental information that correlates significantly and positively with future stock performance. Finally, we find that the institutional ownership change of a stock associated with DGTW_CAR3 also significantly and positively predicts the stock's return, suggesting that institutional investors adjust their holdings according to DGTW_CAR3 and consequently influence the demand for the stock in the China's A-shares market.     

An empirical study about the impacts of China's accession to the WTO on the telecommunications industry in China

Post‐China's accession to the World Trade Organization (WTO), China's telecommunication industry now needs to face a much stronger competition in a relatively open market that has a number of diverse rivalries. There are specific benefits and risks associated with both domestic telecommunication (telecom) companies and foreign investors in the telecommunication or information technology area. To meet with these new challenges and take advantage of the competitive, strategic advantages to penetrate the market, both China's telecom industry and foreign investors must understand the impacts of China's accession to the WTO on its telecommunication industry and hence make the necessary adjustments and/or implementation improvements. In specific, we carefully examine the impacts such as prices, quality, and local protectionism in this article. We draw the findings based on the data collected from a survey and the resulting statistic analysis.     

Does home bias affect firm value? Evidence from holdings of mutual funds worldwide

This study finds strong evidence that home bias affects firm valuation at both country and firm levels. At the country level, increasing the bias of domestic investors toward home equity lowers the market valuation of home equity. At the firm level, firm value increases as the compositions of local equities held by domestic and foreign investors tend toward the firms' global market capitalization weights, but decreases as their weights deviate from global weights. Overall, the evidence is consistent with the optimal global risk-sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation.     

Price discovery in dual‐class shares across multiple markets

This paper proposes a new measure of price discovery that uses the spectral decomposition. The methodology is especially important in the context of large price systems, such as interest rate parities with spot and futures contracts or dual‐class shares in multiple markets. We employ high frequency data to study price discovery in dual‐class Brazilian stocks and their ADRs. We find that the foreign market is at least as informative as the home market and that shocks in the dual‐class premium entail a permanent effect in normal times, but transitory in periods of financial distress     

Expiration‐day effects on individual stocks and the overall market: Evidence from Taiwan

On expiration days of the MSCI‐TW index futures, the Taiwan spot market is associated with abnormally large volume and high index volatility, along with mild index reversal. The effects concentrate only in the last five minutes of expiration days and appear to be strengthened by the adoption a call auction closing procedure by the Taiwan Stock Exchange. Individual index stocks show high volatility and strong tendency of price reversal, with large‐ and small‐cap stocks being affected more than the medium‐sized stocks. The highest‐weighted stocks exhibit excessive volume and volatility, which is disproportionate to the impact on all other index stocks, indicating that the expiration‐day effects may have been amplified by the attempt of price manipulation using large‐cap stocks. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:920–945, 2009     

The Chinese Stock Markets on Trial: The Fat Finger Accident of Everbright Securities

Everbright Securities Ltd. erroneously submitted huge quantities of buy orders on SSE180 constituent stocks from 11:05 through 11:07 on 16 August 2013. This fat finger accident had a pronounced impact on the Chinese stock markets. This paper uses the accident to study market quality and investors’ responses. We show that the Chinese stock markets were robust enough to stand the trial, exhibiting deep depths and strong resiliency. However, the markets performed poorly in terms of aggregating information because there were large price swings after the erroneous orders were executed. Moreover, investors quickly change their beliefs as to the reasons to the dramatic price jumps, consistent with information cascade theory.