Share Price Changes Research Articles

Stock market and aggregate consumption asymmetry: evidence from Malaysia

PurposeThe purpose of this paper is to analyze the influences of real share prices on aggregate consumption for Malaysia with the focus on whether there is asymmetry in the long‐run relation of the two variables.Design/methodology/approachThe paper specifies aggregate consumption to depend on real income and real share prices. Alternatively, imposing long‐run budget constraint, the paper specifies the relation between aggregate consumption and real share prices as ratio to real income. Then, it applies an asymmetric cointegration and error correction modeling.FindingsThe cointegration tests indicate the presence of a long‐run relation between consumption‐income ratio and share price‐income ratio. More interestingly, while changes in share prices exert short‐run causal influences on Malaysia's private consumption, evidence is found for the adjustments of consumption – income ratio to the long‐run equilibrium path only when it is above its long‐run value. The paper interprets the finding as suggesting downward revisions in the consumption patterns when there are adverse shocks in share prices and, accordingly, supports the existence of especially negative wealth effect for Malaysia.Research limitations/implicationsOwing to data limitations, the paper relies on aggregate consumption and aggregate income data. It acknowledges that the sum of non‐durable consumption and flow‐of‐services from durable purchases and labor income are more appropriate measures of, respectively, consumption and real income.Originality/valueThe findings have important implications for understanding consumption behavior in a developing country and can provide insight on the effectiveness of monetary policy.

Between a rock and a hard place: managing diversity in a shareholder society

This study examines whether the appointment of racial/ethnic minorities into top management positions has a different impact on share price than the appointment of Caucasians into equivalent positions. Our dependent variable is the degree of change in share price following the announcement of racial/ethnic minority and Caucasian men into senior management positions. Market reaction to the naming of racial/ethnic minorities into corporate leadership positions is significant and negative, while the market's reaction to the naming of Caucasians is significant and positive. However, the negative market reaction to the appointment of racial/ethnic minorities into top management positions is mitigated in those firms that have explicitly incorporated diversity into their strategic growth plan. Our findings suggest that to successfully introduce diversity into upper management, firm decision makers must first signal the importance of diversity to market actors.

When markets blink: US stock price responses to the appointment of minority leaders

This study examines whether the appointment of racial/ethnic minorities into top management positions has a different impact on share price than the appointment of members of the racial/ethnic majority into equivalent positions. Our dependent variable is the degree of change in share price following the announcement of minority and majority men into senior management positions. Market reaction to the naming of minorities into corporate leadership positions is significant and negative while the market's reaction to the naming of members of the racial/ethnic majority is significant and positive. Our findings suggest that racial/ethnic integration of corporate hierarchies may be impeded as investor reaction increasingly drives firm-level governance decisions.

Predicting Share Price of Energy Companies: June-September 2009

Previously, we have revealed the presence of a reliable linear dependence between share prices of energy-related companies and the difference between CPI and core CPI: any change in share prices is transmitted into a proportional change in this difference two and half months later. The difference itself is characterized by sustainable trends reigning over seven to twenty-year intervals. As a result, the link between the share prices and the difference allows predicting the former over longer intervals. Since mid-2008, the previously observed trend has been undergoing a transition to a new trend. Accordingly, one may formulate two principal problems: 'What is the dependence between share price and CPI during the transition?' and 'When and how can one determine the properties of the new trend?' Currently available information on the CPI allows predicting the share prices between June and September 2009.

Promoting Intellectual Discovery: Patents Versus Markets

Because they provide exclusive property rights, patents are generally considered to be an effective way to promote intellectual discovery. Here, we propose a different compensation scheme, in which everyone holds shares in the components of potential discoveries and can trade those shares in an anonymous market. In it, incentives to invent are indirect, through changes in share prices. In a series of experiments, we used the knapsack problem (in which participants have to determine the most valuable subset of objects that can fit in a knapsack of fixed volume) as a typical representation of intellectual discovery problems. We found that our "markets system" performed better than the patent system.

Can Corporate Governance Reforms Increase Firm Market Values? Event Study Evidence from India

A central problem in conducting an event study of the valuation effects of corporate governance reforms is that most reforms affect all firms in a country. Share price changes may reflect the reforms, but could also reflect other information. We address this identification issue by studying India's adoption of major governance reforms (Clause 49). Clause 49 requires, among other things, audit committees, a minimum number of independent directors, and CEO/CFO certification of financial statements and internal controls. The reforms were sponsored by the Confederation of Indian Industry (an organization of large Indian public firms), applied initially to larger firms, and reached smaller public firms only after a several‐year lag. The difference in effective dates offers a natural experiment: large firms are the treatment group for the reforms; small firms provide a control group for other news affecting India generally. The May 1999 announcement by Indian securities regulators of plans to adopt what became Clause 49 is accompanied by a 4 percent increase in the price of large firms over a two‐day event window (the announcement date plus the next trading day), relative to smaller public firms; the difference grows to 7 percent over a five‐day event window and 10 percent over a two‐week window. Mid‐sized firms had an intermediate reaction.Faster‐growing firms gained more than other firms, consistent with firms that need external equity capital benefiting more from governance rules. Cross‐listed firms gained more than other firms, suggesting that local regulation can sometimes complement, rather than substitute for, the benefits of cross‐listing. The positive reaction of large Indian firms contrasts with the mixed reaction to the Sarbanes‐Oxley Act (which is similar to Clause 49 in important respects), suggesting that the value of mandatory governance rules may depend on a country's prior institutional environment.

Long-run performance following quality management certification

Public firms that seek and successfully receive certification of quality management, type ISO 9000, seem to experience different post-announcement share-price drifts depending on their size. This result is not consistent with the notion that companies seeking to implement a quality management system may be reducing agency problems between managers and shareholders, which are among corporate governance and control goals of any well management company. Otherwise, we should have observed material and positive abnormal share-price changes, following ISO 9000 registration announcements, independently of company size. Our results show that only stocks of large-size firms, experience positive average significantly abnormal returns over the post-announcement 1-, 2-, and 3-year horizons. On the other hand, stocks of small-size firms experience negative average significantly abnormal returns, and stocks of mid-size firms do not show any material gain over the same horizons. Although there is a rich finance literature that has studied the long-run abnormal stock-price returns following several major corporate events, this study seems to be the only one that have examined the potential long-run impact of this certification-event, despite the fact that those standards have been around since the middle 1980s.

Effectiveness and Market Reaction to the Stock Exchange's Inquiry in Australia

Abstract: This paper examines a unique stock market monitoring program used by the Australian Stock Exchange (ASX). When the ASX observes unusual share price or trading volume changes of a listed company, it sends a letter demanding an explanation. Companies need to respond publicly to several stylized questions. Such public communications between the stock exchange and listed companies contain information. This paper documents how companies respond to the ASX inquiry and how the market reacts to the replies. It is found that some companies do release new information to the market when asked. After the firm's reply is posted, the average trading volume and the bid‐ask spread are reduced, and in most cases, the share price is also stabilized with the following two exceptions: (1) The price will continue to rally on average if the company releases only partial information when questioned after a significant price jump; (2) The downward price trend will be reversed if the company states that no new information could explain the decline. Furthermore, there are statistically significant, positive abnormal returns for the first five trading days, which are not conditional upon the replies firms give to the ASX inquiries.

The effect of the rand exchange rate on the JSE Top-40 stocks: An analysis for the practitioner

This paper investigates the relationship between the returns of the ALSI Top 40 companies and changes in the Rand-Dollar exchange rate. Each of the Top 40 companies was grouped, a priori, according to their global positioning vis-à-vis income and costs into four main categories; namely, Rand-hedge, Rand-leverage, Rand-play and Mixed. The expected reaction of each of the shares within these categories to movements in the exchange rate was in almost all cases confirmed by GARCH adjusted regression analysis over two separate periods, February 1999 to January 2002 and February 2002 to August 2005. Ranked t-statistics were then used to gauge the consistency of the risk-adjusted magnitude of share price changes with respect to changes in the exchange rate. This ranking allows investors to construct customised portfolios according to their expectation of future exchange rate movements and to more fully understand the exchange rate risk that their current portfolio may have.

Money illusion in intuitive financial judgments: Influences of nominal representation of share prices

We report two experiments to demonstrate the money illusion in intuitive financial judgments. In Experiment 1 we assess the extent to which the nominal representation affects participants’ expectations of changes in share prices following negative or positive financial information. In support of an anticipated bias towards the nominal representation, a lower share price was found to lead to higher expected percentage changes. Experiment 2 investigates equivalent effects for share prices represented in euros or Swedish crowns (approximately equal to 0.1 euro). Here shares represented in the more expensive euro resulted in higher expected percentage changes in share prices, hence replicating the results of Experiment 1. A third experiment was also conducted where we demonstrate how changes of nominal prices affect participants’ trading following a split or a reverse split of share prices. The results show that both buyers and sellers were more willing to trade shares after a split, whereas the opposite was true after a reversed split.

Asset Allocation Approach to Understanding Stock Market Dynamics

Equity portfolio managers typically convey instructions to their traders in the form of target portfolio weights for the various shares in their portfolio. We present a set of differential equations that allows the calculation of the share prices, number of shares, and value of each manager's portfolio over time, in terms of share weights. It is also necessary to know the amount of cash flowing into each portfolio and the number of each type of shares outstanding. We suggest some potentially useful information that might be derived from this formalism, such as a quantitative estimate of the main driver of share price changes, the influence of index investing on the market, and the origin of the equity premium. We believe that this realistic method could be the basis for a better understanding of how financial markets operate, as compared with the conventional academic approach. In our view standard asset pricing theory makes implausible assumptions about the existence of stochastic processes, the ability of participants to foretell the future, and their capacity to make sound deductions from the information they have. Even an imperfect alternative should be better than that house of cards.

Impact of the FTSE4Good Index on firm price: An event study

This paper examines whether corporate financial performance is affected by public endorsement of environmental and social performance. Event study methodology, which relies on the notion of market efficiency, is used to examine the relationship between positive and negative announcements and changes in share prices or daily returns. Inclusion in and deletion from the FTSE4Good UK Index is used as a proxy measure for good (poor) corporate social responsibility. The abnormal or unexpected daily returns associated with an event are calculated and their significance tested. The results show a trend towards positive and negative announcements having the expected effects on daily returns. But these movements are not significant and the data do not suggest that a firm's presence on the index brings it any significant financial return for signalling its corporate social responsibility.

Share Price as a Poor Criterion for Good Corporate Law

Author(s): Stout, Lynn A. | Abstract: Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price.Contemporary economic and corporate theory (as well as recent business history) nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, including the problem of private information; obstacles to effective arbitrage; investors' cognitive defects and biases; options theory and the problem of multiple residual claimants; and the problem of corporate spillover effects that erode diversified shareholders' returns. These considerations argue against assuming there is a tight connection between stock prices and underlying corporate wealth generation. A corporation or a corporate law system designed around the philosophy that anything that raises share price is good is likely to produce a firm that cooks its books; that avoids long-term projects that won't appeal to unsophisticated investors; that chases after investment fads and fancies; that tries to opportunistically exploit creditors, employees, and customers; and that pursues business strategies that harm its diversified shareholders' other investment interests.The Essay concludes that, if we allow our desire for a universal performance measure to blind us to the fallibility of share price, we court costly error. The Essay examines three recent examples of just such erroneous triumphs of hope over experience: the rise and fall of the Revlon doctrine; the 1990s infatuation with options-based executive compensation; and academics' current preoccupation with event studies, regressions on Tobin's Q, and other forms of empirical scholarship that attempt to judge the quality of corporate law and practice according to changes in share price.

The Influence of the Nature of an Enterprise's Activities on Earnings Per Share and Cash Flow Per Share as Determinants of Share Prices

The relative merits of earnings per share (EPS) and cash flow per share (CPS) as determinants of share prices are considered in this paper. Demsetz's method is used for quantifying the role of EPS and CPS for both an upswing and a decline phase of the economic cycle. The nature of an enterprise's activities i.e. predominantly labour intensive or predominantly capital intensive is also taken into account. Year-on-year changes for contemporaneous periods, various lead periods and various lag periods in EPS are contrasted with similar changes in CPS in explaining year-on-year changes in share prices. It is shown that the relative merits of EPS and CPS are conditional on both the nature of an enterprise's activities and the economic cycle. Furthermore, it is shown that the Demsetz-statistics are useless without information regarding their variability but that the bootstrap method can be used for calculating such estimates.

Share Price as a Poor Criterion for Good Corporate Law

Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price. Contemporary economic and corporate theory (as well as recent business history) nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, including the problem of private information; obstacles to effective arbitrage; investors' cognitive defects and biases; options theory and the problem of multiple residual claimants; and the problem of corporate spillover effects that erode diversified shareholders' returns. These considerations argue against assuming there is a tight connection between stock prices and underlying corporate wealth generation. A corporation or a corporate law system designed around the philosophy that anything that raises share price is good is likely to produce a firm that cooks its books; that avoids long-term projects that won't appeal to unsophisticated investors; that chases after investment fads and fancies; that tries to opportunistically exploit creditors, employees, and customers; and that pursues business strategies that harm its diversified shareholders' other investment interests. The Essay concludes that, if we allow our desire for a universal performance measure to blind us to the fallibility of share price, we court costly error. The Essay examines three recent examples of just such erroneous triumphs of hope over experience: the rise and fall of the Revlon doctrine; the 1990s infatuation with options-based executive compensation; and academics' current preoccupation with event studies, regressions on Tobin's Q, and other forms of empirical scholarship that attempt to judge the quality of corporate law and practice according to changes in share price.

Partial Adjustment Toward Target Capital Structures

The literature provides conflicting assessments about how firms choose their capital structures, with the tradeoff, pecking order, and market timing hypotheses all receiving some empirical support. Distinguishing among these theories requires that we know whether firms have long-run leverage targets and (if so) how quickly they adjust toward them. Yet many previous researchers have relied on empirical specifications that fail to recognize the potential impact of adjustment costs on a firm's observed leverage. Likewise, few researchers have incorporated the effect of share price changes on market-valued leverage. We estimate a relatively general, partial-adjustment model of firm leverage decisions, and conclude that firms do have target capital structures. The typical firm closes more than half the gap between its actual and its target debt ratios within two years. 'Targeting' behavior as opposed to market timing or pecking order considerations explains a majority of the observed changes in capital structure.

Accounting for Employee Stock Options

Accounting for employee stock options is affected by whether outstanding options are viewed as equity or liabilities. The common perception is that the FASB's recommended treatment (per SFAS No. 123), which is based on the options-as-equity view, results in representative financial statements. We argue that this treatment distorts performance measures for three reasons. First, the deferred taxes associated with nonqualified options should also be included as equity, but are not. Second, since unexpected share price changes affect optionholders and equityholders differently, combining their interests provides an average earnings effect that is not representative for either group. We show that efforts to isolate the interests of common stockholders via diluted earning per share calculations (per SFAS No. 128) are inherently incapable of identifying wealth transfers between stockholders and optionholders. Finally, projections of future cash flow statements prepared under SFAS No. 95 overstate cash flows to current equityholders by the pretax value of projected option grants. We show that these distortions can be avoided simply by accounting for options as liabilities at grant and thereafter recognizing changes in option values (similar to the accounting for stock appreciation rights). Our analysis of stock option accounting leads to two, more general implications: (1) all securities other than common shares should be treated as liabilities, thereby simplifying the equity versus liability distinction, and (2) these liabilities should be recorded at fair values, thereby obviating the need to consider earnings dilution.

Earnings Per Share and Cash Flow Per Share as Determinants of Share Prices in Different Phases of the Economic Business Cycle as Measured By the Bootstrap Applied to Demsetz’S Method

Demsetz’s method is used to contrast the ability of earnings per share (EPS) and cash flow per share (CPS) to explain changes in share prices. A comparison is made of the relative ability of these two determinants of changes in share prices during a period of economic decline as well as in a subsequent upswing in the economic cycle. Bootstrap methods are used for constructing standard errors and confidence intervals associated with the statistics derived for describing the differential behaviour of EPS and CPS as determinants of changes in share prices both in an upswing and decline phase of economic activities. Density estimates of these statistics are also shown. It is concluded that the relative merits of EPS and CPS in explaining changes in share prices do not remain stable when the economic cycle changes from a decline to an upswing phase. Therefore, when Demsetz’s method is applied over a period that includes both upswing and decline phases of the economic cycle this could lead to misleading and inaccurate conclusions.

Investment and share prices: fundamental versus speculative components

This paper uses quarterly U.S. data from 1953(6) to 2000(6) to investigate the effects of share-price changes on investment. We focus on the distinction between speculative and fundamental components of share-price movements and we contribute to the literature by evaluating four alternative methods of decomposing share-price movements into these two components. The four methods are: (1) a decomposition based on regressing share returns on a set of variables designed to capture fundamentals; (2) the use of the price-earnings ratio; (3) the use of the dividend yield and (4) a structural vector-autoregressive model based on the dividend-discount equation. We find that, no matter what the method of decomposition is, shocks to both fundamental and speculative components have positive effects on investment and that, in contrast to the earlier literature, the effect of the speculative shock is at least as large as that of a shock to fundamentals.

Are Economically Significant Stock Returns and Trading Volumes Driven by Firm‐specific News Releases?

This paper explores whether firm‐specific information events drive economically relevant positive and negative stock price changes and trading volume and, if so, the nature of such information. We find that no less than 65% of significant price changes and trading volume movements in our sample of FTSE 350 companies can be readily explained by public domain information contradicting the thesis that corporate news is not a primary driver, and that share price changes and trading volume activity are driven by factors unrelated to information flows per se. In addition, we find that a parsimonious set of news categories represent the key drivers. Sell‐side analyst stock recommendations and earnings forecast revisions as a class, unaccompanied by other news releases, dominate all other news categories in terms of significant market reaction. However, taking into account the relative magnitude of market response to different news releases, firms’ formal accounting disclosures dominate within this domain. As such, we conclude these are not fully anticipated by apparently more timely market disclosures, and that the existence of news services and the activities of the sell‐side analyst are not substitutes for a firm's interim and preliminary results.