Higher Stock Returns Research Articles

Uncovering the impacts of structural similarity of financial indicators on stock returns at different quantile levels

The mining industry is the upstream industry of national economic development. In recent years, the mining financial market has rapidly developed. Stock returns have always been a hot topic for investors and researchers. There are many factors affecting stock prices, such as market supply and demand, national policies and the price fluctuations of other financial products. The most essential factor affecting stock price fluctuation is the operating condition of the listed companies that issue shares. A series of financial indicators comprehensively and systematically reflect listed companies' current earnings and future development potential. However, there are few studies on the structure of financial indicators of listed mining companies. Therefore, we take listed mining companies as the research object to explore whether the structural similarity of their financial indicators can uncover their stock returns. The research findings are as follows: (1) The strength of the structural similarity of financial indicators has a significant negative impact on annual returns, so enterprise managers should adjust their business model and attach importance to personalized development. (2) Similar media capabilities have a negative impact on companies with high annual stock returns and a positive impact on companies with low annual stock returns. (3) The impact of similar cohesion on annual returns varies across different networks and it has a positive effect on the earnings of low-returning companies in operation network. A specific analysis should be carried out according to different financial indicator networks to diversify investment.

Market Risk and Stock Return of Listed Financial Service Firms in Nigeria

The trading financial instruments in the capital market by Financial Service Firms (FSF) have generated return arising from changes in the prices of stock which exposed the firms to market risk. An effective market risk decision remains significant to determining stock return level realized from the volume and value of stock traded. This study examines the effect of market risk on stock return of listed FSF in Nigeria. The population of this study consists of fifty-six (56) financial service firms listed in the Nigerian Stock Exchange Market. In arriving at the sample size of twenty-nine (29) firms the purposive sampling technique and filtering criteria were employed. Data were sourced secondarily from the audited annual report of financial service firms, Nigeria Stock Exchange fact book, and other relevant financial service firms’ websites for period of twelve (12) years (2007-2018). Panel multiple regression technique of data analysis was applied using the ordinary least square estimator. The findings of the study revealed that book to market ratio as a proxy of market risk was insignificantly negative on stock return during the period under review. Net interest margin as a proxy of market risk revealed a significant positive effect on stock return during the period of review. Also, the study revealed that control variables of firm size, leverage had significant positive effects on stock return, though; the effect of monetary policy rate was positive but insignificant on stock return. The study concluded that a higher book to market ratio would reduce stock return and to a larger extent the reduction in stock return may not be affected significantly. It also concluded that a higher net interest margin would result to a higher stock return and vice versa. The study recommended that decision-makers and portfolio managers of financial service firms should employ appropriate risk strategies through derivatives, forwards, futures, swaps, options that can mitigate market risk in order to optimize return. Keywords: Financial Services Firms, Stock Returns, Market Risk, Firms Specific Risk factors, Nigerian Stock exchange. DOI: 10.7176/EJBM/13-8-10 Publication date: April 30 th 2021

New evidence on commodity stocks

AbstractThis paper investigates whether commodity‐related equities (commodity stocks) should be included in investors' portfolios. In light of the recent financialization of commodity futures markets, it examines the diversification benefits derived from investing in commodity stocks and compares them with those derived from commodity futures. The empirical evidence indicates that over the prefinancialization period, commodity futures provide superior diversification benefits whereas over the postfinancialization period, commodity stock investing is more profitable. Further analysis on the relationship between commodity futures and stock markets reveals that the investor can use price‐based signals from futures markets to achieve high commodity stock returns.

Accounting conservatism and firm performance during the COVID‐19 pandemic

We explore whether firms with more conditionally conservative accounting practices have higher stock returns than other firms during the Covid‐19 outbreak. We find evidence that Chinese firms listed on the Shanghai and Shenzhen Stock Exchanges applying more conditionally conservative reporting have lower declines in stock return performance during the Covid‐19 outbreak relative to other firms. We also find that the beneficial role of conditional conservatism is higher when firms have greater information asymmetry following the Covid‐19 pandemic. Our results are robust to various model specifications with four different measures of conservatism and an alternative return window.

The Fragility of Organization Capital

AbstractFirms with high levels of organization capital (OK), a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that fragility of OK (i.e., its sensitivity to potential disruptions) is an independently important dimension of this risk. We proxy for fragility by the size of the top management team and show that firms with small teams outperform firms with big teams by 5% annually. The return spread increases in the level of OK and correlates with the outside options of top executives. Further supporting our interpretation, shocks to team composition from unexpected deaths of chief executive officers cause larger value losses in smaller teams.

Stock Return Autocorrelation and Individual Equity Option Prices

This study demonstrates empirically the impact of stock return autocorrelation on the prices of individual equity option. The option prices are characterized by the level and slope of implied volatility curves, and the stock return autocorrelation is measured by variance ratio and first-order serial return autocorrelation. Using a large sample of U.S. stocks, we show that there is a clear link between stock return autocorrelation and individual equity option prices: a higher stock return autocorrelation leads to a lower level of implied volatility (compared to realized volatility) and a steeper implied volatility curve. The stock return autocorrelation is more important in explaining the level of implied volatility curve for relatively small stocks. The relation between stock return autocorrelation and option price structure is more pronounced when market is volatile, especially during financial crisis. The stock return autocorrelation is more important in explaining the level of implied volatility curve for relatively small stocks. Thus, stock return autocorrelation can help differentiate the price structure across individual equity options.

Dynamic ownership and private benefits

We quantify private benefits of control by estimating a structural model of optimal shareholding using data on the ownership dynamics of Italian public companies. In the model, shareholders must maintain a minimum stake in the company to extract control benefits, which leads to infrequent trading of large blocks, and which is consistent with the empirical evidence. We estimate that control benefits account for 2% (4%) of the market value of the equity (block), and controlling shareholders earn a sizeable premium from the block holding on top of the market value of the shares. Also, we provide evidence that large block ownership and ownership persistence are associated with higher stock returns.

Is a promise a promise? Analyzing performance commitment in acquisitions and target firm performance

Using the acquisition data in China from 2011 to 2019, we show that acquiring firms are more likely to provide target firms with performance commitment (PC) contracts when they (1) use stocks to pay acquisitions, (2) have low profits, (3) make cross-industry and domestic acquisitions, (4) are young, small, non-stated-owned enterprises and not related parties with target firms, and (5) deal value is high. Although PC increases the takeover premia, acquirers with PC experience high cumulative abnormal stock returns (CARs) during the announcement period. Double PC contracts drive acquirers' CARs even higher. Although target firms with double PC have better profitability than those with single PC during the commitment period, their profit starts to decrease sharply once the commitment period expires, and those with double PC deteriorate even further. Finally, we find that target firms with PC engage in earnings management during the commitment period to meet their promised performance. Overall, we do not support previous studies because PCs engender earnings management and impair the values of acquirers in the post-commitment period.

Determinants of Insider Trading Windows

We use observed insider trading data to estimate the start and end points of quarterly open trading windows, and find that voluntary insider trading restrictions reflect concerns about information asymmetry, the strength of external monitoring, and executives’ liquidity needs. We also identify the existence and determinants of event-specific “ad hoc blackout windows,” where insiders are largely prohibited from trading when firms are engaged in material corporate events. Although these windows are associated with contemporaneously higher information asymmetry, they are followed by increased trading volume and higher stock returns, suggesting investors may not immediately incorporate information conveyed by these unscheduled restrictions.

Boardroom Racial (In)Equality and Stock Returns: Evidence from the Black Lives Matter Protests

We study a cross-section of stock price reactions to the Black Lives Matter (BLM) protests that followed the killing of George Floyd on May 25, 2020. We find that companies with higher representation of black directors on the corporate board are associated with higher stock returns during the mass BLM protests. This exogenous shock (BLM protests) provides an opportunity to evaluate the relationship between boardroom racial diversity and firm value. Using a sample of S&P 500 index companies, we find that before the killing of George Floyd black directors held on average 8.2% of the board seats, with each black director holding on average 1.34 board seats, which is significantly higher than for directors of other ethnic origins. Within one year after the mass BLM protests, the proportion of board seats held by black directors increased to 9.6%, and 31% of the newly appointed directors were black. We find that companies typically add new diverse directors by increasing the board size. Additionally, we show evidence that boards are paying more attention to racial diversity issues in the aftermath of the BLM protests, and only a low correlation exists between talking about racial diversity in proxy statements and actual racial diversity in the boardroom.

PENGARUH TINGKAT KESEHATAN BANK DAN STRUKTUR MODAL TERHADAP RETURN SAHAM (Studi pada Perusahaan Perbankan yang Terdaftar di Bursa Efek Indonesia Periode 2015-2017)

-

A Re-examination of the Holiday Effect in Stock Returns: The Case of Vietnam

This paper provides empirical evidence of the holiday effect in stock return and the implications of the holiday effect. The research finds that there are existing the high stock return before the Lunar new year on the Ho Chi Minh Stock Exchange during the period 2002-2018. This paper using the GARCH, Modified-GARCH, GARCH-M, and EGARCH models to test the holiday effect on stock return. The results indicate that there is evidence of holiday such as Chinese New Year in Vietnam which is called Lunar new year effect on stock return. Specifically, the stock return before the Lunar new year is usually higher than after the Lunar new year on the Ho Chi Minh Stock Exchange.

Is the Presidential Premium Spurious

A hotly debated question in finance is whether the higher stock returns under Democratic presidencies relative to Republican presidencies represent abnormal return, risk premium, or mere statistical fluke. This paper investigates whether this presidential premium is due to spurious-regression bias, data mining, or economic policy uncertainty. Decomposing the presidential premium into expected and unexpected components, we find that over two-thirds of the premium is unexpected, which is inconsistent with the spurious regression bias explanation. The presidential premium is not explained by data mining given that it persists in the post-publication period, and remains robust even if we purge returns of their covariation with economic policy uncertainty.

Investor attention and market correction

PurposeThis study disentangles the investor-base effect and the information effect of investor attention. The former leads to a larger investor base and higher stock returns, while the latter facilitates the dissemination of information among investors and impacts informational trading.Design/methodology/approachUsing positive volume shocks as a proxy for increased investor attention, this study evaluates the impacts of the investor-base effect and the information effect of investor attention on market correction following extreme daily returns in the US stock market from 1966 to 2018.FindingsThis study finds that the investor-base effect increases subsequent returns of both daily winner and daily loser stocks. The information effect leads to economically less significant return reversals for both the daily winner and daily loser stocks. These two effects tend to have economically more significant impacts on the daily loser stocks. The economic significance of these two effects is also related to firm size and the state of the stock market.Originality/valueThis study is the first to disentangle the investor-base effect and the information effect of increased investor attention. The evidence that the information effect facilitates the dissemination of new information and impacts stock returns contributes to the strand of studies on the impact of investor attention on market efficiency. This evidence also contributes to the strand of studies analyzing the impact of informational trading on stock returns. In addition, this study provides evidence for market overreaction and the subsequent correction. The results for up and down markets contribute to the literature on the investors' trading behavior.

Does Financial Performance Matter? Evidence on the Impact of Liquidity and Firm Size on Stock Return in Indonesia

In the modern era, stock investment can attract domestic investors or foreign investors. The objective is to invest their funds at the capital market that expect higher stock returns. The study aims to analyze factors that can affect stock returns and know the mediating effect of return on equity. The object of this research is the property and real estate sector that is listed on the Indonesia Stock Exchange from 2013 to 2018. This research used debt to equity ratio, current ratio, total asset turnover, firm size as independent variables and stock returns as dependent variables. Path analysis is used as reseach method tools with SMART PLS.The result says that debt to equity ratio and return on equity has a positive significant relationship with stock return, meanwhile firm size has a significant negative significant relationship with stock returns. Furthermore, return on equity can mediate the relationship between debt and equity ratios to stock returns.

It’s who you know that counts: Board connectedness and CSR performance

We examine whether and how board connections affect the firm's corporate social responsibilities (CSR). Grounded in the agency, resource dependence, and social network theory, our research predicts and finds that board connectedness is positively associated with CSR performance. This result is robust to a quasi-natural experiment, alternative measurement specifications, and an instrumental variable approach. Our findings suggest firms that operate in a complex business environment or require more advising (i.e. where demand for information is greater) benefit more from a well-networked board. Also, firms that are poorly governed, have high stock return volatility, low market capitalization, or low institutional ownership tend to benefit more from the well-connected board when the cost of acquiring information is higher. In addition, we show that independent directors’ abilities to gather information and resources from their networks can facilitate the transmission of information. Collectively, our study documents the informational advantage of a network as the predominant channel that allows a well-connected board to improve a firm’s CSR performance.

Is the presidential premium spurious?

Abstract A hotly debated question in finance is whether the higher stock returns under Democratic presidencies relative to Republican presidencies represent abnormal return, risk premium, or mere statistical fluke. This paper investigates whether this presidential premium is due to spurious-regression bias, data mining, or economic policy uncertainty. Decomposing the presidential premium into expected and unexpected components, we find that over two-thirds of the premium is unexpected, which is inconsistent with the spurious regression bias explanation. The presidential premium is not explained by data mining given that it persists in the post-publication period, and remains robust even if we purge returns of their covariation with economic policy uncertainty.

Impact of emerging technologies in banking and finance in Europe: A volatility spillover and contagion approach1

The empirical evidence suggests that stock returns in the emerging technology environment exhibit high stock return volatility. The fundamental aim of the article is to investigate the dynamic, time series properties of the correlations between daily log returns and magnitude of the volatility transmissions from the emerging technologies environment to the Spanish banking sector, the Spanish market portfolio and the finance industry in the EU area. Using daily log returns for the performance variables and an equally weighted index was constructed as proxy to represent the emerging technology phenomena covering a period from the 7th of July of 2015 to the 20th of September of 2019. The study applies generalized autoregressive conditional heteroskedasticity GARCH followed by the diagonal BEKK approach. One key finding is that the emerging technology environment is important in capturing volatility of Spanish banking sector, the Spanish market portfolio and the finance industry in the EU area through significant volatility clustering, volatility spillover and volatility persistence. Results exhibit very large GARCH and relatively low ARCH effects indicating a long persistence of resulting shocks over volatility. Broadly, the Spanish banking sector seems to be the most exposed to volatility spillover. Nevertheless, it is the finance industry across the EU which is more affected by the volatility persistence from emerging technology shocks in terms of volatility and cross – volatility point of view. Additionally, high volatility periods provide insights about an increased integration and volatility spillover. From an investor perspective, one important implication is that adding stocks from different emerging technologies to a portfolio does not necessarily lead to risk reduction.

Government Debt, Dividend Growth, and Stock Returns

This paper documents that the increase in public debt can lead to higher dividend payout to shareholders, which suggests public debt can be a strong cash flow predictor which helps better predict future stock returns. Specifically, the higher public debt-to-GDP ratio can predict both higher dividend growth and higher stock returns, and the predicted changes are in the same magnitudes. The finding is consistent with Lettau and Ludvigson's (2005) argument that there exists a common component among stock returns and dividend growth. We argue that i) public debt can drive the co-movement among returns and dividend growth, and the existence of a common component can resolve the US asset pricing puzzle as emphasized by Cochrane (2007, 2011) that the dividend-price ratio can only predict discount rates but not cash flows; ii) the strong cash flow predictability of the public debt-to-GDP ratio can not be consumed by the popular consumption-to-wealth ratio (cay) and many other macroeconomic states variables; iii) future stocks returns can be better out-of-sample predicted after controlling for public debt. The empirical evidence documented in the US aggregate market can also be extended to the US cross-section and the international markets, especially for the advanced financial markets, which helps to explain the weak cash flow predictability recently documented by Rangvid et al. (2014) and Maio et al. (2015). To rationalize the finding, we propose a production-based asset pricing model incorporating cash-retention friction on the corporate sector. The model can produce testable predictions that the increase in public debt moves both dividend payment and the cost of capital in the same direction, resulting in the capture of the common component.

Funding conditions and insurance stock returns: Do insurance stocks really benefit from rising interest rate regimes?

AbstractWe examine funding conditions and U.S. insurance company stock returns. Although constrained funding conditions, signaled by restrictive Federal Reserve monetary policy, correspond with increases in the future payouts of fixed‐income securities held by insurance firms and potentially provide value through the liability side of insurer balance sheets, they also decrease the values of securities currently held in insurer portfolios. Prior research finds that restrictive policy has a negative effect on equity returns in general. Our results suggest the negative impacts of constrained funding environments outweigh the potential positives, as insurance company stock returns are significantly lower during periods of constrained funding. This effect varies within a given funding state and also across insurer type. The effect is strongest during the first 3 months of a constrained funding environment and for life and health insurers—insurer types with longer portfolio durations. For property and liability (P&L) insurers, lower stock return performance only exists in the first 3 months of a constrained funding environment. In the subsequent months, P&L insurers actually have higher stock returns during constrained periods, consistent with their typically shorter duration asset portfolios, which are more quickly rolled over into new higher‐yielding securities.