Are the investors biased? An Empirical Study of Financial Market

Financial Market Integration and Income Inequality

This dissertation includes three research papers, two of which are empirical studies and one of which illustrates a mechanism through a theoretical model. The first paper focuses on the effect of stock market liquidity on corporate cash holdings. This paper provides empirical evidence that stock market liquidity has a positive impact on cash holdings. The two main competing hypotheses are cascade hypothesis and financial constraints hypothesis. Subrahmanyam and Titman (2001) study the cascade mechanism through which stock prices affect cash flows. In this paper, the cascade hypothesis states that firms with more liquid stocks need more cash holdings to avoid negative cascades or to stimulate positive cascades, whereas the financial constraints hypothesis states that firms with more liquid stocks need less cash holdings because more liquid stocks indicate less cost of external financing and then less financial constraints. The empirical findings support the cascade hypothesis. Causality is carefully tested through a decimalization test, which is designed based on the tick decimalization in stock markets in 2001. Furthermore, a test by a system of simultaneous equations suggests that there is a two-way causality between stock market liquidity and cash holdings. The second paper studies the causal impact of stock short sales on corporate cash holdings. Short sellers benefit from the drop of stock prices, which provides strong incentive to dig on the dark side of firms. For example, short sellers actively investigate target firms and aggressively spread negative research reports among stakeholders (e.g. capital providers, customers, suppliers, and employees). Short sales facilitate the incorporation of negative information into stock prices. Attacks of short sellers isolate firms from stakeholders, increase the cost of external financing, and decrease operational cash flow. Firms should be wary of short selling activities in financial markets. Precautionary motive drives the firms hold cash as the ammunition for the battle with short sellers and as unconditional liquidity support during negative events. This paper provides empirical evidence that short-selling pressure has a positive impact on cash holdings. The results are robust after controlling for relevant firm characteristics, heterogeneity of belief, investors' holding horizons, institutional monitoring incentives, and other information channels (such as financial analysts). A test by a system of simultaneous equations supports the causal impact of short sales on cash holdings and excludes the reverse causality. This paper also sheds light on a better understanding of the determinants of short-selling activities in financial markets. The third paper proposes a theoretical model to demonstrate a mechanism by which financial markets affect corporate policies when managers do not learn from financial markets. The existing research on the real effect of financial markets on corporate policies depends on the assumption that corporate managers learn from prices in financial markets when making corporate policies (Chen, Goldstein and Jiang, 2007; Bond, Goldstein and Prescott, 2010; Edmans, Goldstein, and Jiang, 2012; Fresard, 2012). The manager-learning argument is reasonable and intuitive. However, given the fact that managers naturally have an informational advantage with regard to the firms they operate, will financial markets affect corporate policies if managers do not need to learn from financial markets? This paper suggests a channel based on the interaction between managers and other stakeholders. This paper extends the idea in Subruhmanyam and Titman (2001) by considering financial constraints of the new investment and adding a firm manager in the model structure. The manager has private information and does not need to learn from financial market. However, other stakeholders, such as customers, suppliers, capital providers, may learn from security prices, and their actions affect corporate cash flows and may generate new investment opportunities. Therefore, even if managers do not need to learn from financial markets, they still can not ignore financial markets when making corporate policies.

Purpose– The purpose of this paper, and a companion paper (Duxbury, 2015), is to review the insights provided by experimental studies examining financial decisions and market behavior.Design/methodology/approach– Focus is directed on those studies examining explicitly, or with direct implications for, the most robustly identified phenomena or stylized facts observed in behavioral finance. The themes for this first paper are theory and financial markets.Findings– Experiments complement the findings from empirical studies in behavioral finance by avoiding some of the limitations or assumptions implicit in such studies.Originality/value– The authors synthesize the valuable contribution made by experimental studies in extending the knowledge of the functioning of financial markets and the financial behavior of individuals.

Earnings Management and Audit Adjustments: An Empirical Study of IBEX 35 Constituents

T HIS study empirically examines the effects of increases in the level and enforcement of insider-trading regulations in the 1980s on corporate insiders.1 The main goal of the insider-trading regulations is to prevent insiders from trading on the basis of material, nonpublic corporate information. In addition, regulations require that insiders report their transactions to the Securities and Exchange Commission (SEC) and refrain from generating short-term profits by trading in their own firms' stocks. Regulations also prohibit insiders from short selling the securities of their firms.

In recent years, financial markets have become an important subject. It is due to several factors. First, financial markets are essential in mobilizing national savings and channeling them into investment fields that support the national economy and achieve economic development through more efficient resource allocation. Second, many countries have helped the growth and development of financial markets and the pivotal role it plays in moving the economic growth of any country. Third, the evaluation of corporate governance in the Iraqi financial market varies in application and commitment to the principles and mechanisms of control. What is reflected over the exercise of management profits, especially by the shareholders and good corporate governance? The Corporate Governance Mechanism is one of the essential mechanisms of the knowledge economy. It has received significant international attention from international scientific and professional organizations and councils due to its role in preventing companies from being exposed to defaults and financial and administrative bankruptcy, as well as its role in maximizing the value of the company in the market and ensuring its survival and growth in the international business world. Regionally and locally.

This research empirically analyzes the informational content of intangible assets in order to understand the perception of information related to intangible by the WAEMU financial market. Based on a cylindrical panel sample of 24 companies listed at the BRVM, observed over a 10-year period (2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014), the results first indicate that intangible assets are negatively and significantly associated with the stock market price. As a result, information inherent in intangible assets acts as a negative signal to investors in the regional financial market. Secondly, the economic depreciation of intangible assets is of little relevance for investors because no significant statistical link has been detected with either the stock price or the stock return. Finally, high immaterial density is negatively and significantly associated with stock market return. As a result, in the regional financial market, investors perceive the activation of intangible investments negatively. It acts as a negative signal to investors. Moreover, securities of intangible intensive companies are penalized by investors on this financial market. This assumes that intangible intensive and activating companies have low returns on their securities. This finding further confirms the hypothesis that investors seem to adopt a myopic vision or favour a short-term vision in the process of building their portfolio by penalizing companies that activate intangible investments in the short term. However, these results cannot be extrapolated due to the nonrepresentativeness of the study sample.

The Efficient Markets Hypothesis (EMH) is the focusing topic in the past 50 years of financial market researches. Many empirical studies are then provided that want to test EMH but have no consensus. The perception of EMH determines the attitude and strategy of participants and regulators in financial market. One perception of EMH argues that investors’ behavior of seeking abnormal profits and arbitrage drives prices to their ‘‘correct’’ value. Investigating the “correct” value derives the concept of “market indeterminacy”. It means the inability to determine whether stock prices are efficient or inefficient. Market indeterminacy pervades stock markets because “correct” prices are unknown because of imperfect information and model sensitivity. Market indeterminacy makes arbitrage risky and makes event studies unreliable in some policy and litigation applications. The concept of market efficiency is needed to be re-recognized considering the mechanism of price formation. In order to further research and practice in law and financial market, there needs a view from the “jumping together” of disparate disciplines. Adaptive Markets Hypothesis(AMH) that using the evolutionary principles in financial market is a new viewpoint oncognitive decision and deserves to be paid more attention to.

The Impact of Terrorism on Financial Markets: An Empirical Study

Empirical studies have documented the influence of investor sentiment on financial markets, but the underlying economic mechanism remains unclear. This study links psychological research and a traditional asset-pricing model to investigate the influence of investor sentiment variations on financial markets. By relaxing the assumption of investor rationality, this investigation shows that a modified Lucas [1978] model can adequately interpret prominent financial market anomalies, such as high volatility, bubble and crash formation, and the relationships among investor sentiment, asset prices and expected returns.

Numerous studies conducted on emerging market economies have suggested that equity and debt markets truly reflect the economy’s financial health. Macroeconomic events have an influence on financial markets. In order to effectively diversify our portfolio, it is imperative to analyse the various financial market interrelationships. During turbulent times these inter dependencies are supposedly stronger between markets as compared to the calmer financial periods. This fact was especially visibly evident, during the global financial crisis. Hence, the predictability of stock return interrelationships is a critical topic that is frequently discussed in empirical studies. The paper considers the role of macroeconomics indicators in order to understand the dynamics of various interrelationships that exist in financial markets. The main aim of this study is to examine the relationship between market returns and a set of macroeconomic variables for different economies using annual data from the year 2000 to 2020. The results of the study primarily prove that there is co-integration between some macroeconomic variables and different stock indices which are indicative of a long-run relationship. The study highlights the impact of macroeconomic variables on the stock market performance of a developing economy, whose performance can be measured by the macroeconomic variables. It also confirms the presence of autocorrelation in different markets and macro-economic variables implying that markets fall into a form of Efficient Market Hypothesis. It suggests that any change of exchange rate, interest rate and other indicators significantly influences the stock market in the economy and vice versa. The study delineates the unidirectional causality moving from international stock markets to domestic stock markets, exchange rates, interest rates, and inflation rates indicating substantial impact on the stock market movement for our considered study period.KeywordsMacroeconomicsGDPForeign exchange rateInflationInterest rateUnemploymentNiftySensex

It is very important to mensurate volatility spillover for the dynamic investment portfolio and risk management. The known literature tend to study whether volatility spillover exists between two financial markets. However, common volatility spillover from multi-financial markets to one financial market has not yet been mentioned. By first using independent components analysis (ICA) and GARCH model, we study common volatility spillover from the multi-financial markets to one financial market and conduct the empirical analysis

The motivation for this study stems from the critical role of financial markets in economic development and the need to understand the factors influencing stock market performance in the East African Community (EAC) member countries. Financial liberalization is pivotal in shaping stock market returns. However, empirical studies examining these relationships within the EAC context are limited, prompting this comprehensive analysis. The general objective of this study was to investigate the effect of financial liberalization, market liquidity, and macroeconomic factors on stock market returns among EAC member countries. The study was anchored on the theory of financial liberalization, neoclassical theory, efficient market hypothesis, behavioral finance theory, and the general theory of employment, interest, and money. Data were collected from secondary sources, including financial reports, stock exchange databases, and relevant economic databases, covering the period from 2002 to 2021.The study employed fixed-effects regression models, chosen based on the Hausman specification test, to control for unobserved heterogeneity across countries. Baron and Kenny’s approach was used to test for mediation and moderation effects. The analysis involved examining the direct, mediating, and moderating relationships between the key variables. The findings revealed that financial liberalization significantly and positively affects stock market returns. The study concludes that financial liberalization is a crucial determinant of stock market performance in the EAC region. Based on the findings of this study, it is recommended that policymakers in EAC member countries further liberalize their financial markets to attract more foreign investments. This can be achieved by easing restrictions on foreign ownership, reducing regulatory barriers, and promoting cross-border financial activities.

We are entering into a new phase in EU corporate governance. More than ever, our action plan must be focused and based on a solid assessment of actual needs of market players and investors. 1 As Ch...

Abstract: This study proposes an early warning system (EWS) for detection of financial crisis with a daily financial condition indicator (DFCI) designed to monitor the financial markets and provide warning signals. The proposed EWS differs from other commonly used EWSs in two aspects: (i) it is based on dynamic daily movements of the financial markets; and (ii) it is established as a pattern classifier, which identifies predefined unstable states in terms of financial market volatility. Indeed it issues warning signals on a daily basis by judging whether the financial market has entered a predefined unstable state or not. The major strength of a DFCI is that it can issue timely warning signals while other conventional EWSs must wait for the next round input of monthly or quarterly information. Construction of a DFCI consists of two steps where machine learning algorithms are expected to play a significant role, i.e. (i) establishing sub-DFCIs on various daily financial variables by an artificial neural network, and (ii) integrating the sub-DFCIs into an integrated DFCI by a genetic algorithm. The DFCI for the Korean financial market is built as an empirical case study.