Excess Stock Returns Research Articles

Macroeconomic uncertainty and the excess returns of stock

This paper proposes a theoretical model based on traditional ICAPM and dividend growth models but with variance-belief formation features such as overextrapolation and sticky expectation to link the macroeconomic uncertainty (MU hereafter) and stock excess returns. We predict a nuanced, possibly negative, intertemporal MU-return trade-off and a negative contemporaneous relationship between the change in MU and excess returns. The empirical analysis utilizing panel data from 46 stock markets validates our model but also reveals the heterogeneity across markets with different economic levels, financial development, and national culture. The impact of MU is amplified during global and country-specific financial crises. In addition, we also suggest that MU indeed is a significant source of realized variance of excess returns in stock markets.

Return and volatility spillovers between the raw material and electric vehicles markets

This paper investigates the return and volatility spillovers between the upstream electric vehicles (EV) battery raw materials market and the individual downstream EV producers. The study uses the daily stock returns of two lithium producers and a new model in the GARCH family to capture the jump component of volatility in the EV battery raw materials market. Return and volatility spillovers are studied using an EGARCH(1,1) model including the excess stock returns of lithium producers in the mean equation and their jump component intensity in the variance equation. The results indicate that jumps exist in the EV battery raw materials market and that there exist significant return spillovers between lithium and EV producers. However, this paper did not find any strong evidence of the existence of volatility spillovers between these two markets through lithium unexpected news.

THE IMPACT OF FINANCIAL LEVERAGE ON THE PRICING RISK IN THE EGYPTIAN STOCK MARKET

This paper examines the impact of financial leverage on the risk pricing in the Egyptian Stock Exchange (EGX) by adding an additional risk factor reflecting financial leverage to the three factor model of Fama and French. We used monthly excess stock returns of 50 stocks listed on the (EGX) from January 2014 to December 2018 to test Fama and French model before and after adding the financial leverage factor. Total debt to equity ratio was used to calculate the financial leverage. The results do not support Fama and French model before and after adding the financial leverage factor, therefore there is no effect of financial leverage on the risk pricing.

THE HOLIDAY EFFECTS ON AMUSEMENT AND THEME PARK COMPANIES’ STOCK PRICES

This study offers further evidence of the holiday effect on excess stock returns and volatility, and additional insights into its impact on the amusement park and attractions industry in the United States. The generalized auto-regressive conditional heteroscedasticity (GARCH) model and dummy variables are adopted to investigate pre- and post-holiday excess returns and volatility. Empirical results suggest the following: (1) both excess returns and excess volatility happen more frequently in pre-holidays than post-holidays; (2) the frequency of excess volatility is higher than excess returns for the holiday effect; and (3) nearly all significant excess volatilities are negative. We, therefore, conclude that the holiday effect exists in publicly traded amusement and theme parks.

ESG ratings and stock performance in the internet industry

Amidst the escalating emphasis on sustainable development, numerous corporations and organizations have intensified their environmental, social, and governance (ESG) efforts. The internet sector, intrinsically linked to the ESG domain, has consequently garnered amplified scrutiny. This study delves into the correlation between ESG ratings and the stock performance of publicly listed Chinese companies in the internet sector from 2016 to 2020. The findings reveal that initiatives in the ESG sphere significantly and negatively influence stock performance in these firms, assessed through raw stock returns, stock excess returns relative to the market index, Jensen’s one-factor alpha, and the Fama-French three-factor alpha. This inverse correlation between ESG ratings and stock performance is nonlinear and convex, indicating a lessening negative impact at elevated ESG levels. Moreover, this adverse effect is more pronounced in value stocks compared to growth stocks. Predominantly manifesting before 2018, this negative trend diminishes amidst the COVID-19 period. The reverse causality analysis employing lagged ESG ratings suggests that higher ESG ratings precipitate reduced stock performance, as opposed to vice versa. This study bridges a gap in the existing literature concerning ESG and stock performance specific to the Chinese internet industry and proposes recommendations for its sustainable evolution. AcknowledgmentThis research was supported by the Department of Education of Zhejiang Province General Program (Y202249981, Y202353438), the Wenzhou Association for Science and Technology – Service and Technology Innovation Program (jczc0254), the Wenzhou-Kean University Student Partnering with Faculty Research Program (WKUSPF2023004), the Wenzhou-Kean University International Collaborative Research Program (ICRP2023002, ICRP2023004), and the Wenzhou-Kean University Internal Research Support Program (IRSPG202205, IRSPG202206).

Corporate ESG rating divergence and excess stock returns

ESG rating have progressively become an important reference index within the investment decision-making process. However, divergence might arise among diverse ESG rating agencies when appraising the same company. Such divergence affects investors' perception of a companies' ESG performance, consequently affecting its excess stock returns. This paper delves into the mechanics behind ESG rating divergence on excess stock returns based on the ESG rating data encompassing Shanghai and Shenzhen A-share listed companies in China spanning from 2018 to 2022. The research reveals the following findings: Firstly, ESG rating divergence negatively impact stock excess return rates. Investor sentiment, ESG improvement potential and information transparency play a positive moderating role in the influence of ESG rating divergence on excess stock returns. Secondly, there are heterogeneity characteristics in the impact of ESG rating divergence on excess stock returns. Companies that actively disclose ESG reports, low-carbon companies, companies with QFII, and those with high divergence and high rating experience a greater impact form ESG rating divergence on their excess stock returns. Thirdly, the social rating divergence has the greatest impact on excess stock returns, followed by environmental and governance levels.

Flight-to-Liquidity and Excess Stock Return: Empirical Evidence from a Dynamic Panel Model

This study examines the impact of the flight-to-liquidity (FTL) phenomenon on the excess stock return by applying the previously developed generalised method of moments (GMM) framework. For this purpose, we use the data covering the period from 2004 to 2018 for 122 public companies listed on the Pakistan Stock Exchange (PSX). This study uses six proxies to measure the expected and unexpected illiquidity. The empirical investigation reveals that expected and unexpected illiquidities greatly influence smaller firms more notably than larger ones, which induces FTL phenomena into the market. Moreover, a FTL phenomenon triggered the Pakistani equity market during the financial crisis, when a significant decline appeared and the less liquid stocks were strongly affected. The results reveal that FTL risk is priced in the Pakistan equity market, making large stocks relatively more attractive in times of dire liquidity. These findings further suggest that the market participants in the Pakistan equity market, including policymakers, regulators and investors, should not ignore FTL phenomena while designing their portfolios.

A two-dimensional innovation activity factor and stock pricing: Evidence from the Chinese stock market

This paper confirms that innovation activities can bring about excess stock returns in the Chinese stock market. Using monthly data on A-share stocks from May 2007 to December 2022, we find a significant innovation premium in the Chinese stock market by constructing a composite indicator that includes both innovation input and output. Then, we propose a six-factor model by incorporating the innovation factor into the Fama-French five-factor model. Time-series regressions show that the proposed model works well in explaining the variation of excess stock returns, and the innovation factor makes a significant marginal contribution to the explanatory power. Further tests show that the results remain robust for value-weighted returns, individual stocks, and different boards. The proposed model effectively reduces the root mean square errors compared to traditional pricing models. Our study adds significant evidence verifying the value of innovation in financial markets, and also provides practical implication for better enterprise innovation managment and public services.

The Effect of Market Asset Returns, Economic Conditions, and Firm Fundamentals on Net Lease Capitalization Rates

This study fills a void in the literature by examining real estate capitalization rates for single-tenant net lease (STNL) properties. First, we examine cap rate variation in relation to market and firm-level fundamentals using individual transaction data in a multistage regression approach. Second, our single-tenant dataset, which allows us to control for characteristics such as industry and tenant credit ratings, gives us unique insight into not only the pricing of cap rates, but also their underlying drivers and their relationship to market fundamentals and returns on alternative assets. Using this unique dataset of more than 8,000 single-tenant net lease retail property transactions, we develop a quarterly cap rate index controlling for Metropolitan Statistical Area (MSA) and industry fixed effects, property and lease characteristics, and localized influences such as population density and household income. Third, we examine the effect of excess corporate bond spreads, excess stock returns, stock market indicators, firm financials, and economic and demographic indicators. Finally, we examine the effect on cap rates of MSA characteristics such as size, wealth, poverty, crime, gross domestic product, and growth. The findings show that, besides the systematic risk from stock and bond returns, national and metropolitan economic forces and firm fundamental factors explain variation in cap rates.

Revisiting the Nexus between Turkish Tourism Index Returns and Economic Policy Uncertainty: Partial Wavelet Coherence Analysis

This study reevaluates the well-documented negative relationship between the Turkish tourism index stock returns and economic policy uncertainty (EPU) indices using a wide range of EPU indices that span from 1997 to 2003. The aim of the paper is to find out whether EPU indices a have particular importance for the tourism companies’ stock returns or they end up with the same consequences regardless of the sector. To this end, Partial Wavelet Coherence analysis is conducted using the BIST 100 and the real effective exchange rate indices as conditioning variables. Results show that the negative relationship between the EPU indices and Turkish tourism index returns tends to disappear when controlled for the BIST 100 index returns. EPUs are shown to have no particular effect on the excess stock return performance of Turkish tourism companies. The policy uncertainties in Europe (particularly in France and, to a lesser extent in Germany) become effective only after controlling also for the changes in real effective exchange rates.

The Influence of Institutional Investors' Position on Stock Momentum Phenomenon

Momentum phenomenon is one of the most classic anomalies in the field of securities investment. This paper investigates the influence of institutional investors' opening behavior on stock return momentum phenomenon by using the annual investor shareholding data publicly disclosed by listed companies. The findings are as follows: First, there is a positive correlation between institutional investors' opening behavior and stock excess return in one year; Second, if there is an obvious momentum phenomenon in the stock return in the first two years, then the stock return in the next year still depends on the institutional investor's position behavior, and has nothing to do with the investor's momentum strategy. Under the condition that other conditions remain unchanged, for the positive momentum group, if institutional investors buy portfolios substantially in the next year, the stock momentum phenomenon will continue; On the contrary, stock reversal occurs. A similar conclusion was found for the negative momentum group. In addition, the study also found that the momentum phenomenon is statistically significant, but because stock returns cannot be predicted in advance, it is not meaningful in the actual investment process. Therefore, this paper supports and complements the efficient market hypothesis to some extent.

Six-factor plus intellectual capital in the capital asset pricing model and excess stock return: Empirical evidence in emerging stock markets

Six-factor plus intellectual capital in the capital asset pricing model and excess stock return: Empirical evidence in emerging stock markets

Supervisory stringency, payout restrictions, and bank equity prices

I study investor responses to the 2020 bank stress tests that included restrictions on shareholder payouts. I find that banks subject to the stress tests and payout restrictions experienced both immediate and persistently lower excess stock price returns. In the cross-section, I find that excess stock returns declined with bank size but cannot otherwise be explained by pre-pandemic bank or payout characteristics, suggesting that investors penalized banks likely to experience greater regulatory scrutiny. However, the excess stock return penalties are smaller than those previously estimated in the literature examining voluntary payout reductions that signal bank distress. The results show that using supervisory discretion to take preventative actions in a crisis can be less costly than actions taken once banks are distressed.

The Value Effect of ESG Ratings during the COVID-19 - Empirical Evidence from Chinese A-Share Market

Since 2020, the scale of ESG responsible investment in China has developed rapidly, and during the epidemic, the city was affected by the closure of roads. Although it is difficult to influence consumers' choice in the product market in the short term, investors in the stock market can "vote with their feet" in a timely manner, so how do investors perceive the ESG rating of the company? What is their perception of a company's ESG rating? This paper examines the role of ESG ratings in China's A-share market during the crisis, using the Xin Guan epidemic as an entry point, and concludes that (1) ESG ratings are significantly and positively correlated with short-term cumulative stock excess returns, and that company carbon intensity plays a moderating role in ; (2) in the long run, higher ESG ratings reduce stock price volatility; and (3) the epidemic enhances the correlation between ESG ratings and company stock price volatility. correlation level between ESG ratings and company share price volatility.

Did outside directors’ firm-specific accumulated knowledge benefit the firm’s stock performance during COVID-19?

We examine whether outside directors’ firm-specific accumulated knowledge in the forms of human and internal social capital benefitted the firm during COVID-19. Using a sample of 754 US firms during the COVID-19 collapse period, we find an inverted U-shaped relation between outside directors’ average board tenure and cumulative excess stock returns. Our result suggests that firms experienced optimal cumulative excess stock returns during COVID-19 when outside directors’ average board tenure is 10 years. We also find that the curvilinear relation is profound for outside directors with more internal social capital, suggesting that outside directors’ internal social capital plays a prominent role in enhancing board effectiveness during a crisis. Furthermore, we use several robustness checks to confirm the results. JEL Classification: D83, G30, G34, M41

The Continued Forecasting Effectiveness of a Real Earnings Model of the Equity Premium

This article empirically demonstrates the continued forecasting effectiveness of a simple theory modeling expected stock returns as the sum of the earnings yield on the S&P 500 (measured as the highest past annual earnings on the index divided by the current index value) and a market-based forecast of the inflation rate. Besides having retained its significant one-to-one relationship with subsequent excess annual stock returns, this model’s estimate of the equity premium is discovered to have a correlation of 0.85 with S&P 500 excess returns over subsequent five-year intervals ever since market data for the estimator became available in 1997.

Market reaction to firms' investments in CSR projects

PurposeThe purpose of this paper is to determine the impact of corporate investments in corporate social responsibility (CSR), measured by the environmental, social and government (ESG) rating, on the market valuation of a firm's stocks and to explain the regional differences in the degree of this influence.Design/methodology/approachThe empirical study uses linear and non-linear panel regression models for a panel sample of 951 firms listed in Asia, North America and Europe operating in innovative industries.FindingsThe CSR score was found to be significant in terms of stock excess return on the regional level. However, this finding cannot be extrapolated to the global scale. ESG rating is priced by the European and North American markets negatively, while in the Asian market, it is positive. This penalty (negative influence) is greater than the reward for one point increase in ESG rating.Practical implicationsThe results of this empirical study could be used by firms' managers to adjust strategies aimed at stock value growth and by investors to select an investment strategy to maximize return.Originality/valueThe impact of investments in CSR on stock excess return over a defined benchmark is assessed. The study reveals regional differences in the impact of CSR investment using a sample of Asian, European and North American firms. The authors apply a more advanced lagged CSR performance (d.ESG) assessment based on the methodology of Zhang and Rajagopalan (2010).

Quantifying investor narratives and their role during COVID‐19

SummaryThis paper elicits and quantifies narratives from open‐ended surveys sent daily to US stockholders during the first wave of the COVID‐19 pandemic. Using textual analysis, we extract 13 narratives and measure their prevalence over time. A validation analysis confirms the behavioral and economic relevance of the retrieved narratives. Moreover, we find that the narratives contain predictive information for future excess stock and bond returns, and this predictability remains when controlling for contemporaneous information stemming from news and social media. Finally, we find evidence that political identity is reflected in the narrative tone.

HOW DO EMPLOYEE SALARY/BENEFITS AND CSR/ESG PERFORMANCE AFFECT EMPLOYEE PRODUCTIVITY AND FIRM PERFORMANCE-EVIDENCE FROM STEEL INDUSTRY LISTED FIRMS IN TAIWAN

ABSTRACT Based on the data of 45 listed firms in the steel industry on the Taiwan Stock Exchange and the Taipei Exchange Market from 2000 to 2020, this study examines how employee’s salary/benefits and firm’s corporate social responsibility (CSR) performance affect employee productivity and firm performance. Employee salary/benefits is measured by the salary/benefits per employee, the ratio of salary/benefits to net sales, and the ratio of salary/benefits to net income. CSR is measured by social contribution value, social return on assets and social contribution value per share, current CSR performance, cumulative CSR performance and repeated CSR performance. Employee productivity is measured by net sales per employee, gross profit per employee, after tax net income per employee, and yearly change in market value of common equity per employee. Firm performance is measured by return on assets, return on equity, earnings per share, annualized gross stock return, annualized excess stock return, and Tobin's q. Through correlation analysis and multiple regression estimation, evidence shows that larger employees salaries/benefits and better CSR performance are associated with superior performance on employee productivity and firm performance. Additional tests through various dimensions on CSR performance and ESG ratings show similar outcomes. Keywords Employee Salary/Benefits, CSR, ESG, Employee Productivity, Firm Performance

Bank funding constraints and stock liquidity

This paper examines the relationship between bank marginal funding constraints and stock liquidity. Using bank credit default swap (CDS) spreads we show that increased funding constraints weaken bank stock liquidity (as measured by liquidity tightness, depth, and resilience). This effect strengthens during crises periods. Deteriorating bank stock liquidity is in turn priced into excess stock returns. In addition, we find that during liquidity crises, monetary expansion can break the relationship between funding costs and stock liquidity. Heightened monetary policy uncertainty, however, strengthens this relation.