High Investor Research Articles

Analyst recommendations, acquirer’s valuation, and M&A performance: evidence from China

ABSTRACT This study investigates the effects of premerger analyst recommendations on mergers and acquisitions (M&A) announcement returns. We find that M&A announcement returns decrease with premerger analysts’ favourable recommendations (PAFR). Furthermore, we find that increasing acquirers’ valuations in the preannouncement period is a possible channel that allows PAFR to reduce M&A announcement returns. We explore three alternative explanations including, ‘analyst information role’, ‘analyst pressure’ and ‘informed trading’ explanations for our main nexus, and our findings are still robust. In an additional analysis, we find that this negative relationship is more pronounced among acquirers with (a) high information uncertainty (b), low media criticism, and (c) high investor attention. Moreover, we identify three sources of conflicts of interest in analyst recommendations: M&A relations, controlling shareholder share pledging, and stock ownership composition. Our research enriches the impact of analysts’ recommendations on M&A outcomes and provides new empirical evidence of analysts’ strengthening of overvaluation.

Investor sentiment and stock market anomalies: Evidence from Islamic countries

Studies of the Ramadan effect argue that higher stock returns in Muslim countries during Ramadan relate to higher investor sentiment. However, Islamic countries rank low on the Hofstede Individualism Index, a proxy for investor overconfidence. Therefore, this study examines the impact of investor sentiment on stock market anomalies in two advanced Islamic finance jurisdictions: Malaysia and Indonesia. It hypothesizes that stock market anomalies are stronger following high sentiment if investors in Malaysia and Indonesia are overconfident. The results show that the long and short legs of the stock market anomalies earn relatively low returns following high investor sentiment, indicating overpricing during high sentiment. Moreover, the short leg earns relatively lower returns than the long leg following high sentiment because the short leg is more overpriced than the long leg when sentiment is high. Therefore, consistent with the hypothesis, the long-short returns of anomalies are stronger following high investor sentiment because of the relatively lower returns of the short leg than the long leg.

Taking matters into their own hands: How Investors' stock preferences affect mutual fund flows in China

We examine the impact of investors' stock preferences in mutual funds' portfolios on fund flows in China. Our results indicate that mutual funds with an investment style consistent with individual investors' stock preferences have higher fund flow. We find that it affects only individual investors' fund flow, not institutional investors' fund flow. This impact is greater during periods of low economic policy uncertainty or high investor sentiment. Moreover, this impact is reduced with larger fund size or longer fund age. The reasonable explanation is that investors infer fund managers' skills by analyzing the stocks in the fund's portfolio. This explanation is further validated by the results using index funds as the control group. Our findings challenge the assumption that mutual fund investors fully delegate decisions to professionals. Further analysis reveals there is no significant correlation between these preferences and future returns. Our findings contribute to the study of mutual fund investor behavior from a fresh perspective.

Trading off managerial and investor uncertainty in firm disclosure: Evidence from R&D investments and management guidance

AbstractClassic disclosure theory suggests that investor uncertainty increases the probability of discretionary disclosure, while managerial uncertainty decreases this disclosure. Because R&D projects are inherently risky, R&D‐intensive firms face high managerial uncertainty as well as high investor uncertainty. This paper empirically examines how R&D intensity impacts the provision, horizon, and content of management earnings guidance. To address endogeneity concerns, state‐level R&D tax credits serve as an instrumental variable for R&D intensity. I find that high R&D firms do not provide less earnings guidance than low R&D firms. However, they issue more quarterly guidance but less annual guidance. This substitution strengthens when there is high managerial uncertainty about the success of R&D projects. Consistent with litigation risk leading to asymmetric disclosure incentives, the decrease in annual earnings guidance is concentrated in positive guidance. Overall, the results imply that firms modify the horizon and content of their earnings guidance by substituting long‐term positive guidance with short‐term guidance when managerial uncertainty discourages the issuance of the former.

Interaction between investor sentiment, limits to arbitrage and the returns of stock market anomalies: evidence from the UK stock market

This study investigates the role of two prominent concepts in finance: limits to arbitrage and investor sentiment in stock prices. The study examines how changes in market-wide investor sentiment and limits to arbitrage can affect the performance of nine UK stock market anomalies. The extant literature relating to investor sentiment focuses mainly on the US stock market, whilst research on the UK market typically examines aggregated index-level data. In addition, previous studies have focused on examining investor sentiment and limits to arbitrage separately. Using data from UK-listed companies over the period January 1997 to December 2019, the study finds that five stock market anomalies were related to changes in UK investor sentiment and produced significantly higher returns following periods of high investor sentiment, while the effect of limits to arbitrage was mostly limited. However, the interaction analysis provided support to the limits to arbitrage theory and demonstrated that the effect of high investor sentiment on stock market anomalies was more pronounced when combined with high limits to arbitrage and had less effect during periods characterised by low limits to arbitrage.

Capital structure and corporate litigation

This paper selects the data of A-share listed companies in Shanghai and Shenzhen from 2011 to 2022 as a sample to explore the relationship between capital structure and corporate litigation and finds that an unreasonable capital structure increases the litigation risk of enterprises. A reasonable capital structure not only helps enterprises maintain a sound financial position and efficient decision-making mechanism in litigation but also reduces their legal risks and improves their competitiveness; the role of capital structure on corporate litigation risk is more significant in regions with low rule of law than in areas with high rule of law. Firms may be more inclined to choose a robust capital structure to reduce litigation risk in areas with a strict legal environment and high investor protection. On the contrary, in regions with relatively lax legal environments and low levels of investor protection, firms may be more inclined to choose risky capital structures in pursuit of higher returns, but this also increases their exposure to litigation risk; financing constraints play a mediating role in the relationship between capital structure and corporate litigation.

Return volatility and trading volume of GameFi

Focusing on GameFi, we test theories regarding the relationship between return volatility and trading volume. These theories include the Mixture of Distribution Hypothesis (MDH) and the Sequential Information Arrival Hypothesis (SIAH). Empirical results indicate rejection of MDH and support for SIAH. These results are robust to alternative measurements of trading volume and return volatility. Subperiod analysis further reveals that SIAH is more pronounced during periods of high investor attention and low economic uncertainty. The results will be of interest to scholars interested in the robustness of established financial theories for revolutionary financial products.

Factors influencing green bond yield: Evidence from Asia and Latin American countries

Despite numerous studies in the domain of green bonds, a paucity of literature concentrates on emerging countries’ green bonds. To fill this void, this study aims to examine the factors influencing green bond yield in the Asian and Latin American contexts. The data are compiled from the Bloomberg and Fred databases between 2017 and 2022. The panel regression with the Generalized Least Square method was employed. The results reveal that Asian green bonds provide higher yields with less risk to their investors than Latin American green bonds. The regression results of Asian green bonds show negligible effects of all factors, except coupon rate with a positive effect (β = 0.844), indicating its remarkable influence on green bond yield. However, the findings of Latin American green bonds uncover that coupon (β = 0.780), maturity (β = 0.025), and bond rate (β = 2.472) surpass the green bonds yield due to their positive effects, whereas issue size (β = –1.215) causes a reduction in the green bonds yield with their negative effect. Further, Environmental, Social, and Governance disclosure shows a positive (β = 1.611) effect, indicating better yield for investors due to their potential power to vanish greenwashing in these markets. Moreover, interest rate and GDP exert significant positive (β = 0.141) and negative (β = –0.030) effects on green bond yield, respectively. This observation implies that higher lending rates increase bond yield, whereas GDP-led growth provides lower yield due to better economic prospects and high investor demand for the bonds. AcknowledgmentThe authors are grateful to Manipal Academy of Higher Education (MAHE), Manipal, for providing financial assistance in the form of a “JRF Contingency Grant” for this research article.

CEO overconfidence and investor sentiment in M&A decisions

This study investigates the interactive impact of CEO overconfidence and investor sentiment on merger behavior in U.S. firms. We find that the influence of CEO overconfidence on merger frequency is stronger during periods of high investor sentiment, diminishing in low sentiment times. It suggests that investor sentiment is a more dominant determinant than CEO overconfidence in shaping merger frequency. Furthermore, a bullish market trend motivates overconfident CEOs to pursue diversifying mergers, while a bearish market trend encourages cash payments. Overall, overconfident CEOs adapt their merger behavior based on the economic environment, with investor sentiment playing a dominant role in decision-making.

The Effect of Earnings Persistence and Capital Structure on Earnings Response Coefficient in Indonesia Stock Exchange

This study managed to investigate the effect of earnings persistence and leverage on the Earnings Response Coefficient (ERC) in companies listed on the Indonesia Stock Exchange. Based on the annual report data of 265 companies from 2011 to 2021, we show that earnings persistence has a significant and positive impact on ERC, while leverage has a limited impact on ERC. Further findings demonstrate that higher investor sentiment could lead to a larger impact of earnings persistence on ERC. These results imply that, as high earning quality Attracts high investor sentiment in the trading stock, great news can be processed into the price quickly and the price rises in a short period, while bad news could also lead to immediate price corrections with investors’ attention. Thus, we find that a positive relationship between ROE and ERC, and investor sentiment helps strengthen the relationship. Our study adds the studies on price resilience and expands the understanding of the Indonesia Stock Exchange’s features.

Can Intraday Return Reversals Predict Future Stock Returns?

Based on the research of the US stock market, it is found that the fierce long-short battle between heterogeneous investors with different views is manifested as the high-frequency inversion between overnight returns and daytime returns over a period of time. This kind of long-short battle has an impact on asset prices over time, resulting in pricing anomaly on a cross-section. Based on the research of A-share market, this paper finds that after controlling the characteristics of scale, book-to-market ratio, reversal effect, profitability, turnover rate, etc., the abnormal frequency of opening high and closing low (AB_NR) is significantly positively correlated with the future return of stocks. The hedge portfolio constructed according to AB_NR has excess returns in time series (opening high and closing low anomaly) which cannot be explained by the existing asset pricing model. Further testing shows that the anomaly is significant in the period of high arbitrage cost and high investor sentiment. The empirical results show that the anomaly is due to mispricing rather than risk premium.

Search symbols, trading performance, and investor participation

We investigate the relationships among search symbols, trading performance, and investor participation. We use two specific datasets from Google Trends’ search volume index. The search volume by number ticker significantly predicts high returns and high investor participation when applied by active retail investors investing in large firms. This does not hold true for less active retail investors who use Chinese company name tickers as their search terms. Our results indicate that the heuristic usage of number tickers to search for company information helps active retail investors to obtain better trading performance compared with less active retail investors who use Chinese company name tickers.

The effect of margin-trading and short-selling mechanism on left-tail risk: Evidence from a quasi-natural experiment in China

This research investigates the influence of a margin-trading and short-selling pilot program on the left-tail risk of equities, utilizing A-share stock data in China from January 2004 to July 2020 as a sample. By exploiting the staggered implementation of the pilot program within a difference-in-differences framework, we examine the impact of margin-trading and short-selling mechanism on left-tail risks of equities in China. Firstly, we present empirical evidence that the introduction of margin-trading and short-selling mechanism can significantly mitigate the left-tail risk for the designated stocks. In particular, the effect is mainly from short-selling activities. Secondly, the empirical evidence suggests that the presence of information asymmetry among investors plays a mediating role in the mitigating impact. Thirdly, the findings demonstrate that mitigating effect of the mechanism is particularly pronounced during periods characterized by high investor sentiment and high levels of economic policy uncertainty. Additionally, results are robust to DID models when shell value contamination is removed, an alternative time period and measure of left-tail risk are considered, and placebo tests are conducted.

Special Challenges and Opportunities in the (Equity) Financing of Protech Start-Ups

This paper analyzes the difficulties that PropTech start-ups face in raising capital by utilizing equity financing as a source of finance. PropTech is an intrinsic marriage of technology and real estate in a single platform, making this platform very demanding and hugely capital-intensive for procurement, adaptation to new ideas, and intensification. Current research fails to provide in-depth information on the financial circumstances of the PropTech startups, presenting a gap for research. Several startups have succeeded in striking a balance by exploring opportunities in smart partnerships and using advanced technology to accelerate processes and investor networks. Government grants and tax concessions are useful tools that can be used to lighten the financial stress and the promoting of innovations. Looking at digital trends, investments like Airbnb, WeWork, and Compass companies can guide to efficiently adapt to challenges and conserve leadership in the global markets. While equity financing presents significant opportunities and challenges for PropTech start-ups, those that effectively leverage these strategies can achieve sustainable growth and success in a competitive market. Through the implementation of the literature review, case studies, and expert opinion techniques, this research closely explores the topic of equity financing for PropTech companies. The findings suggest introducing investors into strategic partnerships they need, promoting credibility among stakeholders, providing a means of raising funds, and ease of exit strategies. Still, on the contrary, it also brings to light the challenges of ownership dilution risk, complex valuations, and high investor expectations.

Sources of financing Islamic commercial banks rise from benefits, costs, opportunities and risks through Sukuk issuance

The purpose of this study is to pinpoint many elements that support Sharia Commercial Banks (BUS) in expanding their funding sources. Small capital and limited industrial and individual bank scale are among the problems facing sharia banking, according to the 2015–2019 Sharia Banking Roadmap Guidelines. Out of the 13 BUS, only one fell into the BUKU 3 category (capital IDR 5-30 trillion) in terms of capital as of December 2016. Compared to conventional banks, which have 32,730 office units, Islamic banks only have 2,201 office units. This makes it harder for sharia banks to collect deposits from the general population. This suggests that there are funding source issues for Islamic banking as well. Due to a lack of funding, the duty of intermediary cannot be performed as effectively as possible. Sukuk issuing is one way that sharia banking might enhance financial sources. It is vital to take into account the advantages, possibilities, costs, and dangers when issuing sukuk in order to develop a suitable plan for funding increases. The following are contributing aspects to the advantages of issuing sukuk: a source of financing for business expansion; market analysis and sharia benchmarks; many contracts, coupons, and periods; and enhanced liquidity, efficiency, and profitability. Sub-factors for opportunity include: few issuers; high investor demand; robust regulatory backing; and a large investment base. Cost sub-factors include guarantee fees, emission charges, capital expenses, and loan costs. Sub-risk elements include interest rate risk, default risk, sharia compliance risk, and asset loss risk.

The alphabet and idiosyncratic volatility

AbstractWe find that stocks with names earlier in an alphabetic ordering exhibit greater idiosyncratic volatility. Stocks whose names are in the first 5% of an alphabetic ordering have 4.5% higher idiosyncratic volatility relative to other stocks. To address potential concerns about early‐alphabet firms being different, we study name changes. Idiosyncratic volatility is 7% higher when a name change causes a stock to move into the first 5%. We attribute these results to noise traders being more active in early‐alphabet stocks because of heuristic‐based investing. In support of this explanation, we find that the effect is strongest during periods of high investor sentiment and among stocks with high turnover. Our results provide evidence that noise traders contribute to the idiosyncratic volatility of stocks.

Use it or lose it: fiscal year-end corporate investment around the world

PurposeIt is documented that companies and government agencies in the USA invest more in the fourth fiscal quarter without having higher investment opportunities. While previous studies focus on the agency conflicts and information asymmetry within organizations, this study is motivated by Scharfstein and Stein's (2000) two-tiered agency model and aims to examine how firms' external business environment affects the “fourth quarter effect.”Design/methodology/approachThe authors implement this study in a sample of 41 countries and observe similar seasonality in firm investment as documented in the US market.FindingsMore importantly, using country characteristics, this study finds that firms from countries with better investor rights and protection, and more developed financial markets show less severe over-investment in the fourth fiscal quarter.Originality/valueThis paper contributes to the literature of law and finance, and the internal capital market, by investigating the quarterly investment patterns of firms from 41 countries. The authors find that similar to the results in earlier studies on the US market, firms in the global market increase their capital expenditure in the fourth fiscal quarter, indicating that the internal agency conflicts between the headquarters and divisional managers are widespread across the world. The authors also find that firms that operate in countries with higher investor rights and protection, and more developed financial markets, tend to show less severe “fourth quarter effect”.

Do Capital Markets Punish Managerial Myopia? Evidence from Myopic Research and Development Cuts

AbstractThe literature provides conflicting arguments and mixed results regarding whether capital markets punish managerial myopia. Using managers cutting research and development (R&D) investments to meet short-term earnings goals as a research setting, this study reveals that capital markets penalize managerial myopia, especially for firms with high investor sophistication. Moreover, the negative market reactions to managerial myopia are weaker for firms with overinvestment problems than for those without such problems. Overall, the results support the notion that security markets are not shortsighted. In further analysis, we document that compensation, especially earnings-based compensation, may cause managers to behave myopically. Our study contributes to the literature, reconciling previously mixed findings by capturing managers’ myopic behavior in a more targeted way and showing that markets punish myopic R&D cutting.

Research on Investor Sentiment and Its Impact on the Market for Stocks

Both individual and institutional investors are affected by investor sentiment to varying degrees. Based on this, the research theme for this paper is the interaction between investor sentiment and the market for stocks. It begins with defining and quantifying the idea of investor sentiment and then analyzes how investor sentiment and the market for stocks are related, including stock market yield, stock price crash risk, and stock market bubble aspects. It is found that the definition of investor sentiment mostly revolves around the perspectives of "expectation" and "deviation", and the quantitative indicators of investor sentiment are mainly divided into three parts: objective, subjective, and network big data. Investor sentiment is highly predictive of changes in stock market yields in the short term, and high investor sentiment is more likely to lead to stock price crash risk or stock market bubbles. Finally, this paper points out the shortcomings of existing research, and puts forward the future prospects of relevant research conclusions, so as to provide a reference for subsequent scholars to conduct research on investor sentiment and the stock market.

Long-term earnings growth forecasts: investor sentiment or valuation difficulty?

PurposeThis article analyzes the hypothesis that analysts issue higher long-term earnings growth (LTG) forecasts following a market-wide investor sentiment.Design/methodology/approachThis study analyzed 193 publicly traded Brazilian firms listed on B3 (Brasil, Bolsa, Balcão), totaling 2,291 observations. To address the potential selection bias resulting from analysts' preference for more liquid firms, this study used the Heckman model in the analysis with samples with only one analyst and the entire sample. The study also applied other robustness tests to ensure the reliability of the findings.FindingsThe results suggest that market-wide investor sentiment influences LTG when the firm's stocks are difficult to value. Market optimism did not reflect five-year profit growth after the forecast issue, suggesting lower forecast accuracy during high investor sentiment values.Practical implicationsVolatile-earnings firms have relevant implications in LTG forecasts during bullish moments. According to the study’s evidence, investors' decisions and policymakers' and regulators' rules should consider analysts' expertise as independent information when considering LTG as input for valuation models, even under market optimism.Originality/valueThis paper contributes to the literature on the influence of investor sentiment on analysts' forecasts by incorporating two crucial elements in the discussion: the scenario free from herding behavior, as usually only one analyst issues LGT forecast for Brazilian firms, and the analysis of research hypotheses incorporates the difficulty of pricing a firm given the uncertainty of its earnings as an explanation to bullish forecast.