Euronext Lisbon Research Articles

Parameters that Provide Higher Explanation Estimating Betas in the Portuguese Stock Market¹

During decades, tests have been developed to verify whether the beta is the best tool to explain the returns of securities on the stock market. Moreover, the value of the beta and its coefficient of determination (R-squared) vary with different parameters used for estimating the beta. In this paper, we investigate for the parameters that provide a higher explanation when we estimate the beta on the Portuguese stock market. We use all nine economic groups listed on the Euronext Lisbon and, for each of those groups, determine which company has the highest market capitalization and highest turnover at the same time, measured in millions of Euros and thousands of Euros, respectively. The linear regression and correlation coefficient between each of the companies can be calculated by studying two national indexes (PSI20 and PSI General) to determine if they get better results with respect to a given period, frequency data or index.We conclude that the explanatory power of R-squared in the Portuguese stock market is very low, independent of the parameters used. When analyzing the year 2008 using linear regression, it remains unclear whether it is preferable to use daily returns or weekly returns, since half of the surveyed companies report the highest yield using either method. The explanatory power of R-squared is higher when using extended time periods and monthly returns, and the results become more accurate when doing the regressions with the PSI20 Index.

Evidence of earnings management using accruals as a measure of accounting discretion

A major concern in financial reporting is the extent to which managers engage in earnings management. This paper analyses a specific strategy of earnings management, income smoothing, whose purpose is to reduce income variability over time and it is mentioned in the literature as a rational behaviour that allows accomplishing several purposes in the long term. The aim of this paper is to identify income smoothing practices in a sample of companies listed on the Euronext Lisbon, gathered from SABI database, over a five-year period (2001–2005). The methodology employed, common among Anglo-Saxon studies, differs considerably from those that have been used in Portugal to analyse such practices. It consists of computing several income smoothing measures that use accruals as an earnings management instrument, some of them requiring the estimation of accruals models to obtain its discretionary component. Since this is a preliminary study, these measures were only applied to a particular activity sector — the construction sector. The results of this study provide some insight on the accounting nature of income smoothing, particularly on the use of accruals to report earnings with an artificially reduced variability.

Stock exchange mergers and weak form of market efficiency: The case of Euronext Lisbon

This exploratory paper is among the first to examine the impact of stock exchange mergers on informational market efficiency. We focus on the merger of Bolsa de Valores de Lisboa e Porto (Portuguese Stock Exchange) with Euronext in 2002 (that created Euronext Lisbon). To investigate this question we perform numerous statistical tests: serial correlation test (ACF test), runs test, unit root test ( Kwiatkowski, Philips, Schmidt, & Shin, 1992), multiple variance ratio test (Chow & Denning, 1993) and ranks and signs test (Wright, 2000). The results indicate that the Portuguese Equity Market is inefficient in weak form during pre-merger period implying that investors possessed an opportunity to earn abnormal returns though small in magnitude. The results, sensitive to the methodology used, indicate a mixed evidence of improvement in market efficiency during the post-merger period. Although the findings are mixed, yet most tests show a tendency of improved efficiency.

The association between executive stock options and corporate performance: evidence from Portugal

Stock options are theoretically adopted to better align the interests of the managers and shareholders, thereby reducing agency costs, and consequently increasing corporate performance. The critical question is whether stock options have this impact in practice. Consequently, this study investigates if stock options attribution has impact on corporate performance of Portuguese listed firms on the Euronext Lisbon. The results suggest that stock options grant is negatively related with firm's performance. Hence, this study corroborates the rent extraction hypothesis, the crowding-out hypothesis and the multi-tasking effect, which suggest that stock options may affect adversely firm's performance.

Empirical Analysis of the Hsia Option-Pricing Based Model Cost of Capital

The cost of capital is a fundamental concept in strategic decisions such as capital investments, capital structure, new issues, mergers and acquisitions, spin-offs and other corporate restructurings. This paper explores empirically the option-based model developed by Hsia (1991) for estimating the cost of equity and the cost of capital of the firm. The composition of the sample in this exploratory study is all 17 non-financial companies listed in the Euronext Lisbon that are included in the market index PSI20. The Hsia model is used for estimating the cost of equity and the cost of capital of the firm for these 17 companies and is compared to the estimates obtained from the Capital Asset Pricing Model (CAPM) and the traditional weighted average cost of capital (WACC).The difference between the means of the cost of equity estimated by Hsia model and CAPM is not statistically significant at 1% level and their correlation of 46.2% is statistically significant at 1% level. However, the differences at the individual level are quite large. One of the limitations found in this study was the inconsistency on the computation of the cost of debt. The problem arise from the fact that the cost of debt do not follow the pattern expected in the theory, but we also find that the Hsia model is unable to deal with potential inconsistencies of the financial market.

Stock Exchange Mergers and Weak Form of Market Efficiency: The Case of Euronext Lisbon

We examine the impact of the stock exchange mergers on market efficiency using the Portuguese Stock Exchange (PSE) while evaluating the overall market efficiency of that market. We examine if daily stock returns on the Portuguese Stock Exchange (PSE) conform to a normal probability distribution, if market returns explain variation in daily stock returns, and if stock price changes represent a random walk against a review of efficiency of international markets. We also examine whether the merger of Bolsa de Valores de Lisboa e Porto (PSE) with Euronext in 2002 (that created Euronext Lisbon) improves the informational efficiency of the Portuguese Stock Market.Our results show that daily stock returns don't follow a normal distribution. Time series of stock returns is stationary and it produces significant “runs”. Single factor market model explains only a small portion of daily stock returns and the returns time series is significantly serially correlated. After the stock exchanges mergers, daily stock returns follow even a less normal distribution compared to the pre-merger situation. The impact of the merger on the explanatory power of the market model and serial returns correlations is mixed. We find evidence of significant runs before and after the merger periods. Also we reject the hypothesis of non-stationary returns series before and after the merger periods. Finally, we conclude that the stock market does not follow a random walk based upon variance ratio tests. After the merger, VR (q) ratio decreases in practically all the cases indicating that the post merger situation is worse in terms of deviation from the random walk hypothesis. Overall results indicate that the Portuguese Equity Market is inefficient in weak form implying that investors have an opportunity to earn abnormal returns though small in magnitude. There is no statistical evidence that the stock exchange mergers enhances the market efficiency.

Board Structure and Modified Audit Opinions: Evidence from the Portuguese Stock Exchange

Prior research has found evidence that some characteristics of the board of directors influence the quality of financial reporting. In this study we extend the literature by analysing a different dimension of financial reporting quality, the probability of a firm receiving a modified audit opinion. To this end, we considered a sample of companies listed on Euronext Lisbon where, unlike the current situation in other markets such as the US, firms can publish financial statements not in accordance with GAAP. Using 171 firm‐year observations for the period 2002–05, the evidence we report is consistent with the hypotheses that firms with more diligent and independent boards are less likely to receive a modified audit opinion. Results are robust to different specifications and also show that the existence of dividend payments, financial health, performance and growth opportunities are additional factors associated with the likelihood of a modified audit opinion. Our analysis also shows that the transition in 2005 to a reporting framework based on international accounting standards is strongly related with better financial reporting quality.

Determinants of executive stock options: Portuguese evidence

The main purpose of this study is to investigate the determinants of stock options attribution. We hypothesize that the equity held by managers, the ownership concentration, the liquidity constraints, the firm risk and the firm size are related to the firm’s attribution of stock options. Using a sample of 44 companies listed in Euronext Lisbon, we find that only equity held by managers and firm size are related to the firm’s attribution of stock options, documenting a positive relationship for both.

Measuring the Impact of International Financial Reporting Standards (IFRS) in Firm Reporting: The Case of Portugal

To increase efficiency of the European finance market, the European Union (EU) recently forced all public companies to publish their financial disclosures with the support of the International Financial Reporting Standards (IFRS), emanated by the International Accounting Standards Board (IASB), beginning January 1, 2005. In this paper, we measure the impact of the application of IFRS to financial information of Portuguese public companies belonging to the Eurolist by Euronext Lisbon. The results show that the Balance Sheet and Income Statement structures of the firms studied suffered relevant accounting conversions in the process of compliance. Nevertheless, we did not find a clear pattern for the accounting variations. IFRS implementation conditioned the measure made to the performance and the financial position of the business companies in Portugal.

Firm‐specific determinants of intangibles reporting: evidence from the Portuguese stock market

PurposeThis paper seeks to identify factors that influence the voluntary disclosure of intangibles information in annual reports of Portuguese listed companies.Design/methodology/approachAn index of the voluntary disclosure of intangibles is constructed based on analysis of the Management Report and Chairman's Letter of all 56 companies listed on Euronext Lisbon at 31 December 2003. Several hypotheses about associations between that index and eight firm‐specific variables are tested.FindingsThe voluntary reporting of intangibles is found to be influenced significantly by size, ownership concentration, type of auditor, industry and listing status in univariate analysis; and by size, industry, type of auditor, and ownership concentration (and listing status to a lesser extent) in multivariate analyses.Research limitations/implicationsThis study focuses on annual reports only, and is cross‐sectional. The use of content analysis and the subjective judgment involved in constructing the index cannot be view uncritically. The small sample size is inevitable because of the small Portuguese capital market.Practical implicationsAccounting regulators will be better able to understand the factors that explain the voluntary disclosure of intangibles by firms and use this in developing future recommendations.Originality/valueThe paper validates some previous research and also provides insights to the firm‐specific factors that explain voluntary disclosure of intangibles by companies operating in the small share market of a European country in which capital market fund raising is not regarded to be an important source of financing.

Explaining Share Price Performance of Football Clubs Listed on the Euronext Lisbon

The literature concerning the effects of sporting performance on football shares is scarce. Football clubs used to be non-profit organisations and their members had different rights and views from those which affect today's shareholders' perspectives and analysis. We were particularly concerned with sporting performance and how it impacts on share price returns for football clubs. Using the football shares quoted in Euronext Lisbon Stock Exchange and the ARCH and GARCH methodology we found a positive relationship between stock price returns and sporting performance. Therefore, we could provide empirical evidence for immediate impact of victories, draws or defeats on price returns. We also found that impact to be related to the approach of the end of the season. This is in line with previous research on the topic, although using a different methodology. When we look at volatility, apart from showing strong clustering signs, a critical variable seems to be the trading volume around the stock that comes with the end of the season.

The Dividend Policy of the Portuguese Corporations Evidence from Euronext Lisbon

Dividend policy behaviour of corporations is significantly different from country for country. Although dividend policy has attracted a great deal of research, it is not satisfactory explained why corporations distribute a portion of their earnings as dividends or why investors pay attention to dividends. The research and theory on the “dividend puzzle” (Black, 1976) have also been influenced by the empirical observations of the market corporate and investor attitude towards the dividend policy. Lintner (1956) observes that corporations trading in developed capital markets follow stable dividend policies and pay out a substantial part of their earnings as dividends. The focus of this study is to study how the corporations that trade in the Lisbon Stock Exchange (Euronext Lisbon), a small European stock market, set their dividend policies in a different institutional environment and research empirically whether the Euronext Lisbon corporations follow stable cash dividend policies as in developed markets where dividend smoothing is a management tendency. For testing dividend stability and institutional effects we use the dividend policy model of Lintner (1956). The data are from Euronext Lisbon and excluded financial institutions, since these corporations are governed by different regulations in regard to their dividend policies. The sample is an unbalanced panel data. We estimate the Lintner model by using panel data regressions which are significantly different from the estimation methodologies used in Linter’s and Fama and Babiak’s studies. In panel data regression, time-series and cross-sectional observations are combined and estimated. The main advantage of pooling is that it is possible increase the number of observations, which is important when each individual crosssection sample is so small that sample size effects affect the degrees of freedom adversely. The panel data methodology is also important to eliminate heterogeneity, namely the unobservable characteristics of the contracting environment. In the research we use the three common techniques for estimating models with panel data, which are: pooled ordinary least squares, the fixed effects model and random effects model. Subsequently, we use proper test statistics, namely the F-statistic and the Hausman test to choose the most appropriate model for the particular sample. The F-statistic tests the null hypothesis that the efficient estimator is the pooled ordinary least squares compared to the fixed effects model. The Hausman statistic tests the null hypothesis that random effects model is appropriated for the particular sample compared to the fixed effects model. This study provides evidence from the Euronext Lisbon, a European stock market, and analyses empirically whether the Portuguese corporations follow stable cash dividends. The empirical results show that the Euronext Lisbon corporations follow a relatively stable cash dividend policies and the main factors that determines the dividends is the earnings of the firm in that year and the lagged dividends.