Depressed Stock Prices Research Articles

The Green Stock Market Bubble

One may contend that there are some clear similarities between the market for sustainable assets now and the situation of tech stocks right before the collapse of the dot-com bubble. In fact, before 2000, the risk of the new technology was primarily idiosyncratic because of the limited scale of production and the low likelihood of a widespread adoption. Subsequently, with an increasing probability of adoption, also, the old economy was affected by the new technology and, hence, the wealth of the representative agent. As a result, systematic risk increased, which depressed stock prices, because it pushed up the discount rates in the new and old economies. Similarly, given the high probability of a large-scale adoption of the new “green technology,” it is likely that there is not only a bubble forming in green energy stocks, but the boom is affecting the stock market as a whole. I apply a recently developed recursive testing procedure and dating algorithm that is useful in detecting multiple bubble events. Using S&P 500 stock market data, price-dividend ratios, I identify the well-known historical speculative bubbles and find an explosive movement in today’s market starting in June 2021, which can be associated with the new “green technology.” I find that an explosive movement in green stocks started roughly a year before it was migrating to the whole stock market. I argue that this is a good bubble because it will enable businesses to invest cheaply in green energy, hastening the transition away from fossil fuels and assisting in the fight against climate change.

Pandemic or panic? A firm-level study on the psychological and industrial impacts of COVID-19 on the Chinese stock market

This study presents a thorough investigation of the relationship between the coronavirus disease 2019 (COVID-19) and daily stock price changes. We use several types of COVID-19 patients as indicators for exploring whether stock prices are significantly affected by COVID-19’s impact. In addition, using the Chinese stock market as an example, we are particularly interested in the psychological and industrial impacts of COVID-19 on the financial market. This study makes two contributions to the literature. First, from a theoretical perspective, it shows a novel quantitative relationship between the psychological response to the pandemic and stock prices. In addition, it depicts the mechanism of the shock to the stock market by pointing out the specific functional expression of the impulse reaction. To our knowledge, this is the first theoretical calculation of the impulse of a shock to the financial market. Second, this study empirically estimates the marginal effect of the COVID-19 pandemic on fluctuations in stock market returns. By controlling for stock fundamentals, this study also estimates diverse industrial responses to pandemic stock volatility. We confirm that the COVID-19 pandemic has caused panic in the stock market, which not only depresses stock prices but also inflates volatility in daily returns. Regarding the impulse of the shock, we identify the cumulative level of the pandemic variables as well as their incremental differences. As shown by our empirical results, the terms for these differences will eventually dominate the marginal effect, which confirms the fading impulse of the shock. Finally, this study highlights some important policy implications of stock market volatility and returns to work in the industry.

Political uncertainty and institutional herding

Political uncertainty is a key determinant of investment decisions. Specifically, the uncertainty that surrounds government policy makes beliefs noisier and depresses stock prices. In this paper, we explore whether institutional investors herd, i.e., mimic each other's trades, in response to political uncertainty. Using U.S. institutional investors' quarterly holding data from 1985 through 2019, we find evidence consistent with our conjecture. We also find that the results are stronger in times of low presidential popularity, and among companies that are politically sensitive. Overall, the findings suggest that the effect of political uncertainty on financial markets is larger than previously thought.

When Does a Stock Boycott Work? Evidence from a Clinical Study of the Sudan Divestment Campaign

A stock divestment campaign is a common strategy used by social activists to pressure corporations to abandon undesirable practices. However, evidence on the effectiveness of the strategy remains mixed. In this paper, we examine the effectiveness of an international stock boycott by studying a large sample of institutional investor transactions in four emerging market stocks targeted by the Sudan divestment campaign from 2001 to 2012. We find evidence of a negative relationship between the intensity of the campaign and the ownership breadth of the stocks, suggesting the effectiveness of the campaign in encouraging investors to divest from targeted companies. Additional analysis indicates that investors in countries that are sympathetic towards CSR activities are more responsive to the divestment campaign. Further, we find evidence consistent with higher campaign intensity being associated with more depressed stock prices. Finally, when performing qualitative content analyses of the annual reports and CSR reports, we find evidence about the effects of the campaign on the targeted companies’ corporate policies and activities in Sudan. In sum, our results support the effectiveness of the stock boycott.

The leveraged invisible hand: how private equity enhances the market for corporate control and capitalism itself

What keeps corporate managers from underperforming or disregarding shareholders’ interests? In contrast to most scholars and policymakers who believe legal and regulatory oversight is key, Henry Manne’s “Mergers and the Market for Corporate Control” describes a private or entirely invisible hand mechanism for disciplining managers to work for shareholders. The more underperforming firms have depressed stock prices, the more they become targets for buyouts and restructuring with new management. Funding much of these acquisitions is the private equity industry and its use of leveraged buyouts. Such buyouts concentrate ownership in the hands of private equity managers, and the high amount of leverage they use provides strong incentives for private equity managers to implement beneficial reforms. The expansion of private equity has helped to restructure scores of underperforming firms, has benefited equity and debt investors in this alternative investment space, and has enhanced corporate governance in society. This invisible hand mechanism works well and the recent expansion of control over the private equity industry by the securities and exchange industry is unwarranted.

The Leveraged Invisible Hand: How Private Equity Enhances the Market for Corporate Control and Capitalism Itself

What keeps corporate managers from underperforming or disregarding shareholders interests? In contrast to most scholars and policymakers who believe legal and regulatory oversight is key, Henry Manne's Mergers and the Market for Corporate Control describes a private or entirely invisible hand mechanism for disciplining managers to work for shareholders. The more underperforming firms have depressed stock prices, the more they become targets for buyouts and restructuring with new management. Funding much of these acquisitions is the private equity industry and its use of leveraged buyouts. Such buyouts concentrate ownership in the hands of private equity managers, and the high amount of leverage they use provides strong incentives for private equity managers to implement beneficial reforms. The expansion of private equity has helped to restructure scores of underperforming firms, has benefited equity and debt investors in this alternative investment space,and has enhanced corporate governance in society. This invisible hand mechanism works well and the recent expansion of control over the private equity industry by the Securities and Exchange Industry is unwarranted.

How Moroccan institutional investors view dividend policy

Purpose The purpose of this paper is to examine how Moroccan institutional investors view dividend policy. It discusses the importance these investors attach to the dividend policy of their investee firms, how much influence they exercise in shaping investee firms’ dividend policies, their reactions to changes in dividends, and their views on various explanations for paying dividends. Design/methodology/approach A mail survey provides a respondent and firm profile and responses to 28 questions involving various explanations for paying dividends and 30 questions on different dividend issues. Findings Institutional investors attach substantial importance to dividend policy and prefer high dividend payments. Although liquidity needs are a major driver, taxes play little role in shaping dividend preferences. Respondents agree with multiple explanations for paying dividends giving the strongest support to catering, bird-in-the-hand, life cycle, signaling, and agency theories. Research limitations/implications Despite a high response rate, the number of respondents limits partitioning the sample and testing for significant differences between different groups. Practical implications The lack of communication between Casablanca Stock Exchange (CSE) listed firms and institutional investors may depress stock prices and increase volatility. The results suggest agency problems and a weak governance environment at the CSE. Originality/value This study documents the importance that institutional investors place on dividend policy, their reactions to changes in their investees’ dividend policy, and the methods used to influence these firms. It extends previous research by reporting the level of support Moroccan institutional investors give to various explanations for paying dividends.

Earnings management by controlling shareholders who plan for stock gifts: Korean evidence

We examine whether controlling shareholders who plan for stock gifts would manage earnings in an attempt to depress stock prices prior to gifting stocks to related parties. Gift taxes are levied based on the average market value of the stock transferred for a certain period known as the valuation period. This process enables controlling shareholders to be incentivized to depress stock prices during this period and thereby alleviate tax burden. We discover that the firms that have stock gift transactions in the sample significantly decrease their discretionary accruals in the quarters that precede and/or overlap with the valuation period. Earnings management that decreases income is statistically significant when stock gifts are made for individuals who are the related parties and family members of controlling shareholders. By contrast, we do not observe a similar earnings-management behavior in cases where stock gifts are donated to institutional donees who are not subject to gift taxes.

Shareholder Valuations of Petroleum Companies and Oilfield Services During the 2008 and 2014 Oil Price Shocks

This study analyzes the impact of the 2008 and 2014 oil price falls on the shareholder returns of diversified oil and gas majors, Canadian oil sands producers, US shale oil and gas producers and oilfield service companies. The 2008 an 2014 oil price shocks lead to capital book losses for investor TSR at year end. In both years, the TSR losses were disproportionately large as compared to the actual slow down (which was very modest) in retained earnings growth. Our recommendation is that investors should not only use P/E ratios to identify value growth stock investment opportunities. An alternative methodology quantifies the degree of speculative valuation involved in the TSR component of capital gains (losses). When negative speculative valuations are large, future TSR growth is most likely. Companies that want to mitigate unwarranted erosion of their market capitalization due to stock price declines should ramp up advertorial efforts and point out value growth opportunities to attract investors, especially in times of depressed stock prices.

The Rise of the Equity Lending Market: Implications for Corporate Financial Policies

Ever increasing competition and search for yield have prompted institutional investors to routinely lend their equity holdings, making them the largest suppliers of stocks used for short selling. Shorting depresses stock prices, making it harder for firms to plan their payout policies, investments, merger deals, and employee compensation. We exploit the framework of institutional investing to show how shifts in the supply of lendable (shortable) stocks affect corporate policies. Firms react promptly to increases in lendable stocks by repurchasing shares and building cash reserves. The relations we document appear to be causal and consistent with the argument that firms shore up defenses against shorting activity. To fund their responses, firms pay fewer dividends, issue debt, and reduce investment spending. Firm responses are more pronounced when stocks are ex-ante more liquid, relatively overvalued, have higher pent-up shorting demand, and whose managers' personal compensation is more sensitive to stock prices.

When Does a Stock Boycott Work? Evidence from a Clinical Study of the Sudan Divestment Campaign

The concept of a stock divestment campaign, a common strategy used by social activists to pressure corporations to abandon undesirable practices, contradicts traditional finance theory that regards a stock’s ownership structure to be irrelevant to its risk and return. In this paper we examine the effectiveness of an international stock boycott by studying a large sample of institutional investor transactions in four emerging market stocks targeted by the Sudan divestment campaign from 2001 to 2012. We find evidence of a negative relationship between the intensity of the campaign and the ownership breadth of the stocks. However, selling by institutional investors is only observed in the U.S., where the campaign operates from. Further, higher campaign intensity is associated with depressed stock prices and thus higher future returns. In sum, our results support the effectiveness of the stock boycott.

Right on Schedule: CEO Option Grants and Opportunism

In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEO's incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firm’s disclosures.

Tunneling and the decision to go private: Evidence from Hong Kong

We examine a sample of going-private transactions in the Hong Kong stock market from 1989 to 2008. Privatized firms experienced large negative abnormal returns prior to the announcement of going private transaction, particularly in those firms with weak corporate governance structure and a high level of related party transactions. The likelihood of a firm to go private is high in those poorly governed firms with large free cash flow. Our evidence suggests that controlling shareholders carry out self-dealings that lead to value losses and depressed stock prices. When remaining public is no longer attractive, controlling shareholders take the firm private by paying a relatively low premium to minority shareholders.

Modelling Macroeconomic Determinants Of Stock Market Prices: Evidence From Namibia

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-pagination: none;" class="MsoNormal"><span lang="EN-GB" style="color: black; font-size: 10pt; mso-ansi-language: EN-GB; mso-themecolor: text1;"><span style="font-family: Times New Roman;">This paper investigates the macroeconomic determinants of stock market prices in Namibia. The investigation was conducted using a VECM econometric methodology and revealed that Namibian stock market prices are chiefly determined by economic activity, interest rates, inflation, money supply and exchange rates.<span style="mso-spacerun: yes;"> </span>An increase in economic activity and the money supply increases stock market prices, while increases in inflation and interest rates decrease stock prices.<span style="mso-spacerun: yes;"> </span>The results suggest that equities are not a hedge against inflation in Namibia, and contractionary monetary policy generally depresses stock prices.<span style="mso-spacerun: yes;"> </span>Increasing economic activity promotes stock market price development.</span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

The Effects of Political Uncertainty on Stock Prices

We show that political uncertainty depresses stock prices and increases volatility. Returns in the Australian stock market are lower and more volatile whenever the Australian federal parliament is in session. An analysis of implied volatilities, moreover, corroborates the volatility-inducing effects of parliamentary activity. These effects respond to the incumbent government’s partisan persuasion. The incumbency of right-leaning parties tends to considerably curtail the impact of political uncertainty on stock prices. Further, political effects appear sensitive to the electorate’s approval of the governing party, though the nature of this relation remains uncertain.

Strategies for Professional Engineering Firms during Economic Recession

Professional engineering firms are exposed to unpredictable business cycles owing to fluctuations in the macroeconomic environment. The National Bureau of Economic Research NBER has monitored U.S. business cycles since 1929 by mapping changes in national economic activity using a complex set of macroeconomic variables. It has been observed that after every long expansion, there is an economic recession, usually lasting 11 to 12 months on average. Thus, every professional engineering practice firm operating in our market economy can expect recessionary conditions sometime during its existence. The Business Cycle Dating Committee of the NBER confirmed that the United States has indeed been in a recession since December 2007. There are clear indications that it will last much longer than the typical recessions of the past half century owing to structural shifts in the economy resulting from the increasing globalization of economic activities. As a consequence, professional engineering firms are likely to see adverse movement in output, employment, and company profits and, eventually, depressed stock prices for the listed companies. As most engineering firms are small businesses, even minor changes in their market niche and economic environment tend to have farreaching impact. A firm cannot meet the challenges of recession using yesterday’s strategy if it expects to be in business tomorrow, and its very survival may depend on the ability to adapt to changes in the external environment. Therefore, engineering practitioners and firm managers need to develop specific tailored strategies to succeed in the marketplace during the recessionary phase of the economic cycle. An economic recession is broadly defined as an overall slowing down of economic activity measured by peak-to-trough declines. One common and often-cited definition characterizes recession as “two consecutive quarters of declining gross national output.” An economic recession affects various stakeholders of a firm, including employees, managers, partners, customers, suppliers, company shareholders, and the community at large. However, a recessionary economy is similar in one way to a booming one: business still needs to create value for its customers and shareholders. The businesses that use economic recession as an opportunity to focus on strategic leadership and to establish competitive advantage usually create higher shareholder value. Building lasting value is both the greatest challenge and opportunity, requiring the leadership to focus on long-term plans, stick to core competency, become cost competitive and more rel-

U.S. EXTERNAL ADJUSTMENT: IS IT DISORDERLY? IS IT UNIQUE? WILL IT DISRUPT THE REST OF THE WORLD?

1. INTRODUCTION AND SUMMARY Observers have raised concerns that a future adjustment--that is, narrowing--of the U.S. current account deficit driven by exchange rate depreciation may prove for financial markets and U.S. economics performance (see, inter alia, Edwards, 2005; Eichengreen, 2004; Roubini and Setser, 2005). In particular, it has been suggested that a fall in the dollar could boost interest rates, depress stock prices, and push the economy in to recession. Such developments, it is argued, could out weigh the stimulus provided by a falling dollar via a rise in net exports, particularly if it took some time for net exports to respond. How likely is the disorderly adjustment scenario to arise in practice? One approach to answering this question has been to examine the record of past external adjustments in industrial economies. By and large, such studies suggest that the experience of external adjustment has been reasonably benign and that exchange rate changes associated with adjustment have not led to economic distress. Freund (2005) found, in 25 episodes of current account adjustment in industrial economies, indications of only moderate in gross domestic product (GDP) growth. Croke, Kamin, and Leduc (2006) revisited Freund's sample and found that in episodes where real exchange rates depreciated, growth was maintained: in episodes where real exchange rates did not depreciate, growth tended to decline but that decline likely was the cause rather than the effect of current account Freund and Warnock (2006) and Debelle and Galati (2005) come to similar conclusions, while Gagnon (2005) finds that currency crashes in industrial economics have generally led to lower, not higher, long-term interest rates. In contrast, Edwards (2005) presents results suggesting more disruptive effects of current account adjustment but his methodology may not adequately control for the endogeneity of the current account with respect to growth. These studies, for the most part, tend to undercut the view that a future U.S. external adjustment will be disruptive. Yet, it is generally acknowledged that owing to the size of its economy and of its external deficits, as well as the role of the dollar as the world's principal vehicle currency, external adjustment in the United States may differ greatly from that in other industrial countries. The episodes studied in the above-mentioned articles include only one U.S. experience, the reduction of the trade deficit in the late 1980s, and accordingly, any inferences drawn from them will be dominated by the experience of foreign economics. The purpose of this article is to characterize the effects of external adjustment on macro-economic performance while focusing more closely on the U.S. historical experience. By so doing, we hope to make our findings as relevant as possible to a future U.S. Using data from the past 35 years, this article compares the economic performance of the U.S. economy during three episodes in which the U.S. nominal trade balance deteriorated significantly with economic performance in two episodes during which the trade balance adjusted. The article then examines the extent to which the behavior of key economic variables differed across the two types of episodes. (1) Throughout this article, we refer to a decline of the trade balance (increase in the deficit) as a deterioration and a rise in the trade balance (narrowing of the deficit) as an adjustment. We would caution that in so doing, we do not mean to convey that surpluses are necessarily good and deficits are necessarily bad. In fact, depending on the evolution of domestic and foreign demand, as well as relative prices at home and abroad, trade deficits may be entirely merited and desirable. Rather, we adopt the deterioration/adjustment terminology mainly for reasons of parsimony and clarity. Rises and declines may be misleading without referring explicitly to trade balance surpluses or deficits; widenings and narrowings are subject to the same problem as well as the problem that arises when referring to an episode where the trade balance moves from surplus to deficit or vice versa. …

Managers' Incentives to Avoid Meeting or Beating Earnings Expectations: The Role of Open Market Repurchases

Prior research on meeting or beating earnings expectations focuses on managers' incentives to keep stock prices inflated by avoiding negative earnings surprises. However, in certain situations, managers may be motivated to depress stock prices in order to maximize their utility. We hypothesize and find evidence suggesting that managers opportunistically avoid reporting earnings that meet or beat analyst expectations to depress stock prices and hence lower the cost of share repurchases. Complementary to this, we find that the decline in meeting or beating among firms repurchasing shares is temporary. Building on results in Gong et al. (2008), we also provide evidence that stock prices decline more substantially and consistently when firms fail to meet or beat relative to merely reporting negative performance-adjusted abnormal accruals, suggesting failing to meet or beat may reflect a more comprehensive and effective strategy to depress prices. Further, we find a substantial incremental downward price effect for failing to meet or beat after controlling for the sign of abnormal accruals. This study complements prior research that focuses on incentives to meet or beat expectations by presenting the other side of the story and therefore provides a more complete picture of managers' opportunistic behavior related to analysts' earnings expectations.

Private Equity and Lodging firm Stock Values: is Beauty in the Eye of the Beholder?

ABSTRACT Over the last five years, the hospitality industry has witnessed an exceptional level of transaction activity, changes in hotel ownership, and new management structure. There is a common belief that the combination of low interest rates, depressed stock prices, and rising corporate profits created ideal conditions for private equity firms to flourish. This study argues why publicly traded lodging companies became the targets for private equity firms, and also discusses why private equity firms place a higher value on hotel firms that possess strong brands and higher degrees of intangible assets. On one hand, some scholars claim that private equity funds invest in hotel real estate as a financial asset, and the main reason for investment is to sell the hotel properties for a higher price in the future. Others contend that the market is completely out of touch with economic reality and unlimited funds in the market are seeking a safe home. This article does not offer a conclusion for the hotel valu...

An Assessment of the Disorderly Adjustment Hypothesis for Industrial Economies*

AbstractMuch has been written about prospects for US current account adjustment, including the possibility of what is sometimes referred to as a ‘disorderly correction’: a sharp fall in the exchange rate that boosts interest rates, depresses stock prices and weakens economic activity. This paper assesses some of the empirical evidence bearing on the plausibility of the disorderly adjustment scenario, drawing on the experience of previous current account adjustments in industrial economies. We examined the paths of key economic performance indicators before, during and after the onset of adjustment, building on the analysis of Freund (2000).We found little evidence among past adjustment episodes of the features highlighted by the disorderly adjustment hypothesis. Although some episodes in our sample experienced significant shortfalls in GDP growth after the onset of adjustment, these shortfalls were not associated with significant and sustained depreciations of real exchange rates, increases in real interest rates or declines in real stock prices. By contrast, it was among the episodes where GDP growth picked up during adjustment that the most substantial depreciations of real exchange rates occurred. These findings do not preclude the possibility that future current account adjustments could be disruptive, but they weaken the historical basis for predicting such an outcome.