Contemporaneous Stock Returns Research Articles

Do Indian stock market sentiments impact contemporaneous returns?

PurposeThe purpose of this paper is to analyse the impact of Indian investor sentiments on contemporaneous stock returns of Bombay Stock Exchange, National Stock Exchange and various sectoral indices in India by developing a sentiment index.Design/methodology/approachThe study uses principal component analysis to develop a sentiment index as a proxy for Indian stock market sentiments over a time frame from April 1996 to January 2017. It uses an exploratory approach to identify relevant proxies in building a sentiment index using indirect market measures and macro variables of Indian and US markets.FindingsThe study finds that there is a significant positive correlation between the sentiment index and stock index returns. Sectors which are more dependent on institutional fund flows show a significant impact of the change in sentiments on their respective sectoral indices.Research limitations/implicationsThe study has used data at a monthly frequency. Analysing higher frequency data can explain short-term temporal dynamics between sentiments and returns better. Further studies can be done to explore whether sentiments can be used to predict stock returns.Practical implicationsThe results imply that one can develop profitable trading strategies by investing in sectors like metals and capital goods, which are more susceptible to generate positive returns when the sentiment index is high.Originality/valueThe study supplements the existing literature on the impact of investor sentiments on contemporaneous stock returns in the context of a developing market. It identifies relevant proxies of investor sentiments for the Indian stock market.

Investor sentiment and the cross-section of stock returns: new theory and evidence

We extend the noise trader risk model of Delong et al. (J Polit Econ 98:703–738, 1990) to a model with multiple risky assets to demonstrate the effect of investor sentiment on the cross-section of stock returns. Our model formally demonstrates that market-wide sentiment leads to relatively higher contemporaneous returns and lower subsequent returns for stocks that are more prone to sentiment and difficult to arbitrage. Our extended model is consistent with the existing empirical evidence on the relationship between sentiment and cross-sectional stock returns. Guided by the extended model, wen also decompose investor sentiment into long- and short-run components and predict that long-run sentiment negatively associates with the cross-sectional return and short-run sentiment positively varies with the cross-sectional return. Consistent with these predictions, we find a negative relationship between the long-run sentiment component and subsequent stock returns and positive association between the short-run sentiment component and contemporaneous stock returns.

Does financial reporting above or below operating income matter to firms and investors? The case of investment income in China

We explore a unique regulatory change in China in 2007 that moves investment income in an income statement from below the line of operating income to above the line. We find that, post-regulatory change, firms report high investment income when core earnings (operating income excluding investment income) are low and vice versa. Investment income and core earnings exhibit a significantly negative correlation every year post regulation, in contrast to a significantly positive correlation beforehand. We also find that investors do not fully see through the change. Before the regulation, both core earnings and investment income are positively correlated with contemporaneous stock returns and uncorrelated with future stock returns, suggesting appropriate pricing of the information. However, afterward, the results on core earnings are similar to those in the pre-regulation period, but investment income is negatively correlated with future stock returns, implying that the stock market overreacts to the information in investment income in the contemporaneous year.

Does Financial Reporting Above or Below the Operating Income Matter to Firms and Investors? The Case of Investment Income in China

We explore a unique regulatory change in 2007 that moves investment income from below the line of operating income to above the line in the income statement. We find that post regulatory change, firms tend to report high investment income when core earnings (operating income excluding investment income) are low and vice versa. Investment income and core earnings exhibit a significantly negative correlation every year in the post-regulation period, in contrast to a significantly positive correlation in the pre-regulation period. We also find that investors do not appear to fully see through the change in the information content in investment income. In the pre-regulation period, both core earnings and investment income are positively correlated with contemporaneous stock returns and uncorrelated with future stock returns, suggesting that the market appropriately prices the information in core earnings and investment income. However, in the post-regulation period, the results on core earnings are similar to those in the pre-regulation period, but investment income is negatively correlated with future stock returns, implying that the stock market over-reacts to the information in investment income in the contemporaneous year. Overall, our evidence not only highlights potential mis-valuation from change of locations of income statement items, but also sheds light on the real impact regulatory change has on firm behavior.

Idiosyncratic Return Volatility, Uncertainty, and Asset Pricing Implications

In this study, we decompose idiosyncratic stock return volatility (IVOL) into uncertainty and residual volatility, and find that the negative IVOL-return relation primarily comes from the uncertainty component. Further analysis indicates that firm uncertainty increases are associated with negative contemporaneous stock returns. High uncertainty firms also have lower firm values and higher expected returns, and exhibit more asymmetric price responses to good/bad market states. All of these are consistent with ambiguity aversion modeled by Epstein and Schneider (2008). Our study documents novel valuation and return patterns associated with the uncertainty content embedded in IVOL. Our findings suggest that uncertainty offers a new channel to explore the IVOL puzzle. It may also help interpret the common factor in IVOL documented in the recent literature.

Investor recognition and stock returns: evidence from China

PurposeMerton’s model of capital market equilibrium under incomplete information predicts that contemporaneous stock returns are positively related to investor recognition and that future stock returns are negatively related to investor recognition. The purpose of this paper is to empirically investigate whether Merton’s theory holds true for the Chinese stock market.Design/methodology/approachThis paper proposes the degree of shareholder base growth (SBG) as a proxy for investor recognition and examines the relationship between investor recognition and stock returns through a univariate analysis and Fama-Macbeth cross-sectional regressions based on A-Share listed firms.FindingsThe results show that investor recognition is nonlinearly and positively related to contemporaneous stock returns and is negatively related to future stock returns in contrast to the conclusions of Merton’s theory. A long-short trading strategy that involves buying stocks with the lowest SBG rate and that sells stocks with the highest SBG rate will earn an average monthly return of 3.615 percent.Research limitations/implicationsThough Merton’s theory is not fully reflected in the Chinese stock market, investor recognition is considered an important risk factor in the Chinese stock market.Originality/valueNo works have yet investigated the validity of Merton’s “investor cognition hypothesis” in relation to the Chinese stock market. This paper strives to fill this gap.

The impact of FinTech start-ups on incumbent retail banks\u2019 share prices

BackgroundThis study aims to clarify the role of FinTech digital banking start-ups in the financial industry. We examine the impact of the funding of such start-ups on the stock returns of 47 incumbent US retail banks for 2010 to 2016.MethodsTo capture the importance of FinTech start-ups, we use data on both the dollar-volume of funding and number of deals. We relate these to the stock returns with panel data regression methods.ResultsOur results indicate a positive relationship exists between the growth in FinTech funding or deals and the contemporaneous stock returns of incumbent retail banks.ConclusionsAlthough these results suggest complementarity between FinTech and traditional banking, we note that our results at the banking industry level are not statistically significant, and that the coefficient signs for about one-third of the banks are negative, but not statistically significant. Since the FinTech industry is young and our sample period short, we cannot rule out that our findings are spurious.

Discretionary accruals: signalling or earnings management in Australia?

AbstractWe investigate the signalling effect of discretionary accruals (DAC). Although we find that discretionary accruals are insignificantly related to contemporaneous stock returns, we uncover that income‐increasing discretionary accruals of GAAP‐complying growth firms are significantly and positively related to contemporaneous stock returns. Furthermore, we find that this positive effect is stronger among firms with better corporate governance mechanisms, such as Board of Directors Independence, Audit Committee Independence and Large Shareholders’ Ownership. In addition to contemporaneous stock returns, we also find similar results with the future increase in dividends. Our findings are consistent with the argument that corporate governance can enhance the signalling effect of reported earnings of GAAP‐complying growth firms.

The informational feedback effect of stock prices on management forecasts

Using management earnings forecasts over the period 1996–2010, I find that the sensitivity of forecast revisions to contemporaneous stock returns is increasing in the amount of investors’ private information in prices. This effect remains after controlling for various confounds and is robust to the use of mutual fund redemptions as a shock to price changes that is exogenous to fundamental news. Furthermore, investors’ private information helps managers improve their forecast accuracy. Together, these findings suggest that stock prices contain information that managers do not otherwise have regarding firms’ fundamentals, and that managers incorporate this information in their earnings forecasts.

Earnings news, expected earnings, and aggregate stock returns

In contrast to firm-level relations, researchers have found that aggregate earnings changes and aggregate stock returns are negatively related. In this paper, we construct new measures of aggregate earnings news based on revisions in analyst forecasts. The findings suggest aggregate earnings news is positively related to contemporaneous stock returns. The results also show that aggregate stock returns are positively related to unexpected aggregate forecast errors, and negatively associated with expected aggregate earnings growth. Taken together, these findings suggest the negative relation between aggregate earnings changes and aggregate contemporaneous stock returns results from the expected component of aggregate earnings, rather than aggregate earnings surprises.

REIT Stock Market Volatility and Expected Returns

We study the relation between REIT stock volatility and future returns, focusing particularly on the financial crisis period of 2007–2009. There is ongoing debate about whether stock volatility can forecast future returns. Our findings suggest that REIT‐implied volatility is negatively related to contemporaneous stock returns; there is a significant positive relationship between REIT implied volatility and future stock volatility; and there is a significant negative relation between REIT implied volatility and future stock returns. Lastly, we develop trading rules based on REIT implied volatility to test whether these relationships are exploitable. The result suggests a potentially profitable trading strategy.

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Daily short covering activity and the weekend effect: Evidence from Taiwan

By using a unique dataset of daily short covering volumes obtained from the Taiwan Stock Exchange, we first examine, in general, what drives daily short covering activity in the cross-section and its return predictability; we then investigate, in specific, the relation between short covering and the weekend effect. In general, we find that short covering activity is positively related to short selling activity; and short sellers on average are contemporaneous contrarians. Large-cap stocks, growth stocks, high-price stocks and stocks with high institutional ownership generally have greater short-selling and short-covering activities. We present evidence that regardless of firm characteristics, short-sellers are capable of identifying stocks whose prices tend to decline when they initiate short positions. However, the ability of short sellers to successfully cover their positions is less clear. In specific tests of the weekend effect, we find that when short covering activity is relatively high, Friday returns are more negative. Furthermore, firms with high short selling activity have a larger Monday return compared to firms with low short selling activity. Our findings are contrary to the hypothesis proposed by Chen and Singal (2003), but consistent with the notion that short sellers are contrarian in contemporaneous stock returns.

FOREIGN INSTITUTIONAL OWNERSHIP ANDSTOCK RETURN VOLATILITY IN INDONESIA

This paper examines the impact of foreign institutional ownership on contemporaneous stock return volatility in Indonesia. In this study, return volatility is measured as standard deviation of daily stockreturns. The dynamic panel data results based on System GMM (S-GMM) estimation, confirm that foreign institutional ownership tend to linearly and convexly increase monthly stock return volatility.The linear impact seems to be weaker for stocks with higher market capitalization, but stronger for stocks with higher turnover.Furthertest reveals that foreign financial institutional ownershiplinearly contributes to return volatility upsurge, while foreign non-financial corporation ownership convexly contribute to return volatility increase.The additional test also uncovers that domestic financial and non-financial institutionalownerships do not impact return volatility.

Market Reaction to Intangible Asset Value: Evidence on SG&A Expenditure

In this paper we investigate the stock market reaction to intangible asset value created by selling, general and administrative (SG&A) expenditure (excluding R&D and advertising expenditure). GAAP requires SG&A expenditure to be expensed immediately as a period cost to recognize using up of economic benefits, assuming that the benefits of SG&A expenditure is tangible and fully recognized in the current period. However, prior studies show that current SG&A expenditure generates future economic benefits, suggesting that current SG&A expenditure creates intangible asset value. We find that although contemporaneous stock returns are negatively associated with SG&A expenditure, investors do not view all of SG&A expenditure as an expense in the current period, but rather seem to recognize some of the asset value implicit in SG&A by differentiating it from the remaining components of earnings. We also document that positive excess returns can be earned in subsequent periods on firms with high asset value created by SG&A, suggesting that the contemporaneous stock prices may not fully recognize the intangible asset value created by SG&A expenditure. Furthermore, we find that analyst forecast errors are larger for firms with higher SG&A asset value, indicating that analysts fail to fully incorporate the intangible asset value contained in SG&A into their forecasts. Overall, the evidence suggests that the capital market fails to fully recognize the intangible asset value contained in SG&A expenditure due to its expensing for financial reporting purposes.

To Follow or not to Follow - An Analysis of the Profitability of Portfolio Strategies Based on Analyst Consensus EPS Forecasts

We measure the profitability of investment strategies relying on analyst forecasts. We introduce two measures of stock undervaluation, which relate analyst forecast momentum to the contemporaneous stock returns. Employing a 35-year window and a highly liquid US stock universe, we analyze portfolio strategies based on these two measures and show that self-financing trading strategies yield annualized Carhart alphas of up to 8.8%. These strategies clearly outperform existing pure earnings forecast momentum strategies and remain profitable after transaction costs.

Does Limited Attention Constrain Investors’ Acquisition of Firm‐specific Information?

AbstractAccording to the framework outlined in Peng and Xiong (), attention‐constrained investors tend to process more market‐ and sector‐level information. We empirically test this theory. We find that firms with higher media coverage have lower contemporaneous stock return synchronicity. Such an effect is robust to analyses within size deciles, inclusion of firm fixed effects, estimation using a matched sample, and a two‐stage least squares approach. The effect becomes less pronounced during the financial crisis period when both the quantity and quality of firm‐specific information decrease. Further, the attention from media coverage has a spillover effect on the firm's industry peers without media coverage. Finally, investors of firms with higher media coverage are more efficient in incorporating future firm performance into current stock prices. Collectively, our findings support the theory in Peng and Xiong () that investors increase their acquisition of firm‐specific information when a firm captures their attention.

No-arbitrage conditions and expected returns when assets have different β’s in up and down markets

We present a model of expected returns when assets have different β’s in up and down markets. Using no-arbitrage argument, we show that upside and downside β’s are priced separately, and their risk premiums can be expressed in terms of the price and expected payoff of a call and a put option, respectively, on the market index. For the upside β, the higher the price of the call option relative to its expected payoff, the smaller the risk premium; but for the downside β, the higher the price of the put option relative to its expected payoff, the larger the risk premium. Our model provides a useful perspective on what systematic risks are and how they are priced. Empirical evidence shows that contemporaneous stock returns are strongly correlated with downside β’s, but weakly correlated with upside β’s.

An empirical examination of corporate websites as a voluntary disclosure medium

Standards-setters, regulators and academics believe that corporate websites may enhance the flow of voluntary disclosure to the capital market and other stakeholders. Management’s use of corporate websites for investor relations purposes is a common practice, yet we know little about how these websites affect investors. In this study, we analyse seven corporate websites disclosures categories to examine their predictive ability and their value relevance. The results show that the key non-financial statistics, projected information, information on intangible assets, social and environmental information, are associated with future revenue, future earnings and contemporaneous stock return. The paper contributes to the growing literature on websites disclosure and more generally to the literature on voluntary and strategic disclosure.

기업의 사회책임과 재무성과: 한국기업의 MSCI ESG 평가를 중심으로

This study investigates how the Corporate Social Responsibility (CSR) performance of a firm is associated with its financial performance in the stock market. Prior studies provide mixed evidence on the relation between CSR and financial performance. This study sheds some lights on the positive effect of CSR on firms' financial performance. Using a unique set of data on CSR performance of Korean firms provided by Morgan Stanley Capital International (MCSI), we find that firms' CSR performance is positively associated with their contemporaneous stock returns and Tobin's Q in the Korean market. This finding suggests that stock market participants value firms' CSR activities. This is the first study that provides empirical evidence on the existence of the positive association between the CSR performance of Korean firms and their financial performance using MCSI data which is considered more reliable than the data used in the prior CSR studies in Korea.