Australian Equity Research Articles

Network centrality, information diffusion and asset pricing

This paper empirically investigates the asset pricing implications of trade network topology in the Australian equity market, emphasizing its role in economic shock propagation and information dissemination. We explore the influence of industries' network positions on the paradigm of risk and return. Empirical results demonstrate that industries located in the centre of the trade network, benefiting from diversified trade relations, yield lower returns without heightened exposure to systematic risk. Exploring the interplay between network centrality and information diffusion, we find that information transmission is slower among central firms due to attention constraints of investors and the complexity involved in analyzing them.

Do rights matter? An intraday analysis of rights issues in Australia

AbstractWe examine intraday abnormal returns associated with rights issue announcements in the Australian equity market over the period January 2000 to December 2022. Consistent with prior studies, we find significant abnormal returns ranging from −2.9% to −2.7% on the event day. We provide the first evidence on intraday price reactions pertaining to rights issues in Australia. Within 15 min of an announcement, we find significant abnormal trade returns of −1.2%. However, market participants are unable to profit by trading on these announcements due to transaction costs. Our results imply that the information content is fully impounded within 90 min.

Herding in the Australian stock market during the era of COVID-19: the roles of liquidity, government interventions and mood contagion

PurposeThis study explores the economic impact of the COVID-19 crisis on herding behaviour in the Australian equity market by considering liquidity, government interventions and sentiment contagion.Design/methodology/approachThis study utilizes a daily dataset of the top 500 stocks in the Australian market from January 2009 to December 2021. Both predictive regression and portfolio approaches are employed to consider the impact of COVID-19 on herding intention.FindingsThis study confirms that herding propensity is more pronounced at the beginning of the crisis and becomes less significant towards later phases when reverse herding is more visible. Investors herd more toward sectors with less available information on financial support from the government during the financial meltdown. Conditioning the stock liquidity, herding is only detectable during highly liquid periods and high-liquid stocks, which is more observable during the initial phases of the crisis. Further, the mood contagion from the United States (US) market to Australian market and asymmetric herding intention are evident during the pandemic.Originality/valueThis is the first study to shed further light on the impact of a health crisis on the trading behaviour of Australian investors, which is driven by liquidity, public information and sentiment. Notwithstanding the theoretical contributions to the prior literature, several practical implications are proposed for businesses, policymakers and investors during uncertainty periods.

Predicting long‐run risk factors of stock returns: Evidence from Australia

AbstractThis study utilises the stock market data provided by the Australian Equity Database to analyse the long‐run relationship between Australian stock returns and key macroeconomic variables over the period 1926–2017. To measure the diverse risk factors in the stock market, we examine the possible determinants in four main categories: real, financial, domestic and international. Our results reveal that historical stock returns are strongly connected to financial and international factors as compared to real and domestic factors. Both the 1973–1974 OPEC Oil Price Crisis and 2007–2008 Global Financial Crisis had dampening effects on stock returns. There is a positive association between the US and Australian stock markets in the long‐run. These findings on stock market dynamics and their linkages with domestic and international macroeconomic policy changes in the long‐run have important implications for traders and practitioners.

Corporate payouts in Australia

Kahle and Stulz (2021) find that inflation-adjusted corporate payouts (dividends and repurchases) in the US are three times larger over the period 2000–2019 (post-2000) compared to the 1971–1999 period (pre-2000), and that the growth in the payouts comes from repurchases instead of dividends. We investigate the corporate payouts in Australian equity markets with a dividend imputation system and find that the payouts increase by almost 80% from the pre-2000s to the 2000s. Unlike in the US, the payout increase is largely driven by dividends instead of share repurchases in Australia. Similar to the US, Australian top payers have also become bigger, older, more profitable, and have more free cash flow in the 2000s than before. Moreover, top Australian payers pay out more of their free cash flow, since they spend less on capital expenditures.

Health equity for trans and gender-diverse Australians: addressing the inverse care law through the provision of gender-affirming health care in the primary healthcare setting.

Equitable access to gender-affirming hormone treatment (GAHT) for trans and gender-diverse people has been identified as a key factor in addressing rates of poor health outcomes in the trans and gender-diverse community. In Australia, GAHT is largely delivered via a medical model, and within acute care facilities. Medicalisation and pathologisation of gender-affirming care acts as a significant barrier to access for many trans and gender-diverse individuals. This project incorporated a case study approach using multiple methods to investigate a recent community sponsored, co-designed program providing GAHT that included a peer navigator (PN) model of care in a primary healthcare (community health) setting. Service activity in Year 1 and Year 2 demonstrated acceptability of the model, with over 1000 appointments delivered. This was supported by client feedback survey data collected at their initial (n =110) and then 6-months post visit (n =78) with the PN, and 31 interviews with clients, staff and stakeholders. Findings highlight the integral nature of the PN to the sustainability of the program, with some key insights into potential barriers. Basing service design on an Informed Consent model recognises the agency of the individual and their right to equitable access to health care of their choosing.

The beta anomaly in the Australian stock market and the lottery demand

Frazzini and Pedersen (2014) [Betting against beta. Journal of Financial Economics, 111(1), 1–25] report an insignificant performance for the betting against beta (BAB) strategy in the Australian equity market, suggesting that the beta anomaly does not exist in this market. We extend their sample period and find strong evidence for a low-beta effect. The arbitrage portfolio that takes long positions in low-beta stocks and short positions in high-beta stocks generates a significant abnormal return of 5.9% per year. The beta anomaly over 1995–2019 is strong and robust after controlling for risk factors and stock characteristics. Decomposition of the beta anomaly into stock and industry level components shows that the low-beta effect is driven by the firm, and not the industry level beta. We further find that lottery demand explains the low-beta effect. In a series of portfolio and cross-sectional analyses, we show that the abnormal returns related to the beta anomaly become insignificant after controlling for lottery demand. The findings are robust to different proxies for lottery demand, alternative beta estimation and regression analyses. There is no evidence that the beta anomaly can be explained by leverage constraints, coskewness risk or investment and profitability risk factors. We further show that beta anomaly is more pronounced during the upmarket than the downmarket periods and that lottery demand plays a role in its time-variation. The findings have important implications for retail and institutional investors who trade on beta.

Impact of government policy responses of COVID-19 pandemic on stock market liquidity for Australian companies.

This study investigates the impact of government policy responses of COVID‐19 pandemic on stock market liquidity for listed Australian companies and for 11 different industries separately. A quantitative deductive approach is used for a sample of 1,452 companies with a total of 292,164 firm‐day observations over a period from January 25, 2020 to December 31, 2020 during the outbreak of COVID‐19. Univariate and multivariate (two‐way cluster‐robust panel regression) analysis were conducted. Data were collected from the Oxford COVID‐19 Government Response Tracker, Worldmeter, Refinitiv Workspace and Datastream. Our findings indicate that the influences of the six out of seven stringency policy responses reduced Australian equity market liquidity. However, public information campaigns enhanced market liquidity and hence trading activity. Among the 11 industries, our analysis shows that the non‐pharmaceutical interventions by the Australian government have significant and positive effects on four industries: Consumer non‐cyclicals, healthcare, financial and technology. However, the worse effects were depicted in the industrial (transportation) and energy industries. This study is important for investors, policymakers and regulators to understand the diverse effects of government policy responses of COVID‐19 on stock market liquidity to enhance financial stability. Moreover, understanding this effect is particularly important to decision‐makers such as portfolio and fund managers to manage their portfolios and trading activities during extreme turbulence times, such as COVID‐19. Unlike previous studies that focus on country analysis, this study examines on firm basis the impact of government interventions on stock market liquidity in a well developed Australian stock market.

Economic uncertainty and cross section of stock returns: Australian evidence

In this paper, we construct a new macroeconomic uncertainty index for the Australian economy. We then examine the pricing implication of macroeconomic uncertainty on the cross section of Australian equity returns. Our paper replicates Bali, Brown and Tang (2017)’s findings that U.S. investors pay (require) higher prices (lower premium) for stocks that perform well when economic uncertainty increases. We also find evidence supporting such premium in the Australian equity market.

Predicting the Australian equity risk premium

This paper examines the predictive performance of a range of financial, economic, and sentiment variables that may predict the Australian All Ordinaries index equity risk premium using data for the last 28 years (1992–2020). The methods employed address a range of potential econometric biases that affect inference based on the predictive regression. Results show consistent in-sample and out-of-sample predictability evidence for various predictors, including the dividend yield, interest rates, and sentiment at selected forecasting horizons ranging from one month to one year. The analysis reveals new insights about time-varying predictability patterns in the Australian stock market and identifies phases of predictability in the time series. For several predictors, results show that mean-variance investors may rely on forecasts generated by the predictive regression to derive significant utility gains. Additional tests indicate that the predictability evidence is robust to the microstructure bias and variable selection bias for several predictors used in the analysis.

Institutional ownership and liquidity commonality: evidence from Australia

AbstractWe study the liquidity commonality impact of local and foreign institutional investment in the Australian equity market in the cross‐section and over time. We find that commonality in liquidity is higher for large stocks compared to small stocks in the cross‐section of stocks, and the spread between the two has increased over the past two decades. We show that this divergence can be explained by foreign institutional ownership. This finding suggests that foreign institutional investment contributes to an increase in the exposure of large stocks to unexpected liquidity events in the local market. We find a positive association between foreign institutional ownership and commonality in liquidity across all stocks, particularly in large and mid‐cap stocks. Correlated trading by foreign institutions explains this association. However, local institutional ownership is positively related to the commonality in liquidity for large‐cap stocks only.

Institutional trading in stock market anomalies in Australia

AbstractThis study examines the role played by institutional investors in Australia. With a unique database that provides comprehensive coverage of institutional ownership, this study is the first to examine the overall performance of all institutions in the Australian equity market. Institutional investors do not outperform the market. Examining their trading activities in greater detail, we find that institutional investors do not exploit well‐known stock market anomalies, with the exception of momentum. Institutional investors are also found to sell loser stocks heavily at the end of the financial year, thus contributing to a strong quarter‐end momentum effect.

Sectoral Performance and the Government Interventions during COVID-19 Pandemic: Australian Evidence

This study explores the contrasting impacts of the COVID-19 pandemic on various industries in Australia. Considering all daily announced information, we analyzed the diverse impacts of COVID-19 on the sectoral stock returns from 26 January to 20 July 2020. Sixteen out of twenty examined stock indices negatively react to the daily rise in COVID-19 confirmed cases. Several actions from the Australian government to control the pandemic are relatively ineffective in boosting the overall financial market; however, some positive interactions are captured in five sectors of industrials, health care, metals and mining, materials, and resources. The result shows that all industries that benefited from government financial assistance are either shielded or less severely affected by the pandemic. While sectors that did not directly receive financial remedies relatively showed no enhancement in their overall performance. Having achieved short-term success in helping the economy, the government recorded an all-time high deficit since 2004 that might eventually lead to adverse effects on the overall economy. The Australian equity market is found to be rationally distinct to the crude oil price risk, while positive correlations between AUD/USD rate and real estate-related sectors are reported.

Underpricing in a developing capital market: Australian equity issuances, 1920–39†

AbstractDeveloping capital markets generally lack the regulatory safeguards and rich informational sources that assist investors in judging new equity issues in modern markets. Focusing on the early stage capital market in interwar Australia, we calculate the success (underpricing and percentage raised) of 786 new equity issues, comparing initial public offerings, seasoned equity offerings, and rights issues. We examine whether the use of underwriters and the choice of security (ordinary or preference shares) affected the success of the equity issue. We find that certification by underwriters had no effect on capital‐raising success once we controlled for firm‐specific factors in the multivariate regressions, while underpricing and percentage raised varied by type of shares offered to investors.

Assessing the usefulness of daily and monthly asset‐pricing factors for Australian equities

AbstractThis paper considers which factors are worthy of inclusion in asset‐pricing models for Australian equity returns at daily and monthly frequencies. We utilise the recently developed methodology of Harvey and Liu (2020) to employ a performance metric specifically designed for model comparison and to conduct statistical inference that accommodates the possibility of data mining. The clear and consistent finding is that the market risk premium is the most important factor. This is the case for both daily and monthly asset‐pricing specifications, and irrespective of whether individual stocks or portfolios are used as test assets. There is no compelling evidence that any other factors are useful, implying that a parsimonious model suffices.

Kidney health equity for Indigenous Australians: an achievable goal.

Ameliorating the inequitable burden of kidney disease that is experienced by Aboriginal and Torres Strait Islander peoples is an achievable goal. Genuine and committed partnerships between the Australian government, health-care providers and Aboriginal and Torres Strait Islander peoples are imperative to maximize the success of health equity initiatives.

Decomposing value: Changes in size or changes in book-to-market?

Recently, Gerakos and Linnainmaa (2018) decompose book-to-market into past book-to-market and changes in market and book values of equity. They find that book-to-market is highly persistent over time, and its explanatory power on US equity returns disappears when changes in market value of equity are accounted for. We find that, in both the US and Australian equity markets, changes in book-to-market stem largely from changes in firm size. However, contrary to the findings in the US market, book-to-market remains a strong predictor of Australian equity returns in the decomposition analysis. The results suggest that the finding in Gerakos and Linnainmaa (2018) is sample specific to the US equity market.

Testing the mood seasonality hypothesis: Evidence from down under

We examine whether seasonal variations in investor mood are associated with return seasonalities in U.S. and Australian equity markets. We first replicate the main results of Hirshleifer et al. (2020) for the U.S. market that stock returns' relative performance during past high or low mood periods tends to recur in periods with congruent mood but reverse in periods with noncongruent mood. We next test the mood seasonality hypothesis in Australia (Southern hemisphere), where the calendar timing of seasons is opposite to that experienced in the United States (Northern hemisphere). This enables us to identify whether the seasonally varying investor mood effect on returns is independent of the actual calendar month. In the Australian market we also find the congruent-mood recurrence and noncongruent-mood reversal effects under our hypothesized high and low mood months, and this effect is particularly strong for the full cross-section of individual assets.

Investor sentiment and the economic policy uncertainty premium

Motivated by recent studies documenting an equity premium associated with economic policy uncertainty (EPU), we test the hypothesis that the EPU premium is stronger (weaker) following periods of low (high) investor sentiment. We estimate stock sensitivity to an economic policy uncertainty (EPU) index and show that stocks in the Australian equities market in the highest uncertainty beta quintile underperform stocks in the lowest quintile, similar to U.S. stocks. However, we find that this negative uncertainty premium remains significant only following periods of low investor sentiment as it disappears following periods of high sentiment. Our results complement the U.S. evidence in that uncertainty averse investors are willing to pay high prices for stocks with positive uncertainty beta and require extra compensation to hold stocks with the negative beta, but only in low sentiment periods. These results are consistent with strong (weak) intertemporal hedging demand for positive EPU beta stocks in low (high) sentiment periods. It is also consistent with limited (full) participation of pessimistic investors and investors with a high aversion to uncertainty in low (high) sentiment periods. Our results suggest that betting against EPU as a trading strategy would be relatively more profitable when executed during low sentiment periods.

Algorithmic trading in turbulent markets

Does Algorithmic Trading (AT) exacerbate price swings in turbulent markets? We find that stocks with high AT experience less price drops (surges) on days when the market declines (increases) for more than 2%. This result is consistent with the view that AT minimizes price pressures and mitigates transitory pricing errors. Further analyses show that the net imbalances of AT liquidity demand and supply orders have smaller price impacts compared to non-AT net order imbalances and algorithmic traders reduce their price pressure by executing their trades based on the prevailing volume-weighted average prices.