Long-term Stock Returns Research Articles

Short selling and firms’ long-term stock return volatility: Evidence from Chinese concept stocks in Hong Kong

This paper examines the impact of short selling on the long-term volatility of firms' stock returns, highlighting the moderating effect of corporate governance quality. We analyze a sample of Chinese concept stocks listed in Hong Kong from 2015 to 2023, separating stock volatility into short- and long-term components with a GARCH-MIDAS model and differentiating between noisy and informed short selling. We provide evidence through portfolio and regression analyses that short selling increases stock return volatility, with the most significant impact observed in the long-term component, fueled in part by noisy short selling. However, this effect can be mitigated by managers who invest in improving their firms’ corporate governance quality. Implications of our findings for both research and practical applications are discussed.

Burial objects” or “Birds of a feather”: The contagion effect of financial violations in business groups——The evidence from China

This study explores the conagion effect of financial violations within Chinese business groups from 2012 to 2021. Findings reveal that violations lead to stock price declines in member companies, with contagion primarily driven by irrational investor sentiment (“burial objects”) over the short term. The financial and governance characteristics of infected companies deteriorate (“birds of a feather”), but do not impact their long-term stock returns. Mitigating investor irrationality in infected companies helps curb contagion. This research contributes to business group governance and risk contagion theories, revealing a unique irrational contagion channel of financial violations within business groups in emerging markets.

The cross section of information transmission in news media and stock returns

This paper examines the correlation between the information dissemination cross-section of news media and stock returns by analyzing monthly news coverage data from well-known Chinese newspapers. We show that firms that receive more media attention in the current month experience higher long-term stock returns in the following months, spanning a year, compared to firms with less media coverage. This suggests that media coverage has a significant and positive impact on sustainable stock returns, especially in markets that are largely driven by individuals or inexperienced investors. Further empirical research has found that analyst ratings have an important positive moderating effect in the Chinese stock market.

Deciphering Sustainable Growth: The Influence of Corporate Financial Metrics on SGR and Stock Returns

Abstract In a diligent quest for outperformance in the market, the paper will delve into the complex dynamics of the Sustainable Growth Rate (SGR) and stock prices. According to Higgins’ theory, the SGR is the maximum growth attainable by a company that does not require external funds. It employs Fixed Effects Models and analyses data from 73 major companies in the S&P 500 from 2021 to 2023. The study particularly examines how the factors, including tax and interest burdens, EBIT margin, asset turnover, financial leverage, and retention rate, help shape the SGR after COVID. Most importantly, this study underscores that return on equity (ROE) dominates the effect on SGR, thus stating that profitability and effective equity management are the keys to organizational sustainable growth. Therefore, the influence of the retention rate appears to be less impactful. The findings also challenge the traditional notion whereby long-term growth ensures long-term stock returns, hence more valuable for recommendations in light of this horizon for financial managers and investors, in refining their strategic and investment decisions.

Outward foreign direct greenfield investments and firms predicted long-term stock volatility levels and connectedness. Evidence from China

The paper offers an initial effort to unfold the effect of outward foreign direct greenfield investments (OFDGIs) on firms' long-term stock return volatility levels and connectedness. Within a sample of Chinese firms, in a GARCH-MIDAS model, we offer evidence that OFDGIs investments will reduce firms' long-term stock return volatility. We also introduced a measure of firms' stock return volatility connectedness and studied OFDGIs' effect on firms' dependence on other firms' risks. Implications for theory and practice are discussed.

Relative informative power and stock return predictability: a new perspective from Egypt

Purpose This paper aims to introduce a new perspective on long-term stock return predictability by focusing on the relative (individual and hybrid) informative power of a wide range of accounting (firm-related), technical and macroeconomic factors while considering the past performance of the stocks using machine learning algorithms. Design/methodology/approach The sample includes a panel data set of 94 non-financial firms listed in Egyptian Exchange 100 index from 2014: Q1 to 2019: Q4. Relativity has been investigated by comparing relevant factors’ individual and combined informative power and differentiating between losers and winners based on historical stock returns. To predict the quarterly stock returns, Gaussian process regression (GPR) has been used. The robustness of the results is examined through the out-of-sample test. This study also uses linear regression (LR) as a benchmark model. Findings The past performance and the presence of other predictors influence the informative power of relevant factors and hence their predictive ability. The out-of-sample results show a trade-off between GPR and LR with proven superiority to GPR in limited experiments. The individual informative power outperforms the hybrid power, in which macroeconomic indicators outperform the remaining sets of indicators for losers, while winners show mixed results in terms of various performance evaluation metrics. Prediction accuracy is generally higher for losers than for winners. Practical implications This study provides interesting insight into the dynamic nature of the predictor variables in terms of stock return predictability. Hence, this study also deepens the understanding of asset pricing in a way that directly contributes to practitioners’ portfolio diversification strategies. Originality/value In concern of the chaos of factors in the literature and its accompanying misleading conclusions, this study takes another look at the approach that studies stock return predictability. To the best of the authors’ knowledge, this is the first study in the Egyptian context that re-examines the predictive power of the previously discovered factors from a different perspective that highlights their relative nature.

In the CEO We Trust: Negative Effects of Trust Between the Board and the CEO

Abstract In this study, we investigate whether and how trust between board members and the CEO (board–CEO trust) affects the performance of mergers and acquisitions. Contrary to conventional wisdom, we find that firms with higher levels of board–CEO trust exhibit poor M&A performance. High trust is associated with low acquisition announcement returns, long-term stock return performance, and post-deal operating performance. This negative effect of board–CEO trust is more pronounced among acquiring companies prone to agency problems. Our results suggest that, in the institutional setting of corporate boards, high trust can be too much of a good thing.

The Effect of the Covid-19 Pandemic on Stock Returns with Moderating Variables of Cash Holding and Earnings Management

This study aims to determine the impact of the COVID-19 pandemic in Indonesia on company cash holdings, earnings management practices, and stock returns. To overcome this, a parameter estimation method can be used by adding weight to each parameter, namely the Generalized Least Square (GLS) method. The results showed that the covid-19 pandemic had a significant negative impact on the company's cash holding as a consequence of the company's decreased ability to generate profits. The value of P>|z| shows the number 0.109 which means that the variable has no significant effect. The results of the hypothesis test show that cash holding significant effect on earnings management. At the same time, the company's long-term stock returns are not significantly affected by the COVID-19 pandemic. Earning management practices are also not proven to significantly affect stock returns.

Long-term adjusted volatility: Powerful capability in forecasting stock market returns

We develop the long-term adjusted volatility (LV_ADJ) by removing the interference information of short-term volatility from the simple long-term volatility and examine the role of LV_ADJ in the predictability of stock market returns. Using a sample from January 2000 to December 2019 and considering 19 popular predictors, LV_ADJ positively predicts the next-month returns of S&P 500 and the univariate model with LV_ADJ has the best forecasting performance with adjusted in-sample r-squared of 3.825%, out-of-sample r-squared of 3.356%, return gains of 5.976%, CER gains of 4.708 and Sharpe ratio gains of 0.394. The predictive information of LV_ADJ is independent of that obtained from the 19 popular predictors. Furthermore, we find that LV_ADJ also has predictive power for long-term (3–12 months) stock returns, and can forecast returns of industry portfolios and characteristic portfolios.

Do CSR awards enhance firms’ market value? Evidence from China

PurposeThis study aims to examine the impact of corporate social responsibility (CSR) awards on firms’ market value considering these awards as a signal and proxy for the effectiveness of CSR practice.Design/methodology/approachThere are 342 announcements of CSR awards in China from 2006 to 2017 screened and analyzed using the event study methodology.FindingsThe stock market reacts significantly negatively to CSR award announcements in the short term. Firms that are state-owned, belong to the manufacturing industry, outside east China, repeatedly win awards and are listed in the Chinese H-share market, experience a stronger stock market reaction. Interestingly, the long-term stock returns of award winners are significantly positive for multiyear holding periods.Practical implicationsThe findings offer stakeholders clear guidelines on how to manage communications in the market to extract enhanced financial performance from CSR award announcements.Originality/valueThis study chooses CSR awards as a proxy for the effectiveness of excellent CSR practice. This study also contributes to the CSR literature by analyzing how investors use the award information to make investment decisions.

Climate Change and Asian Stock Markets: A GARCH-MIDAS Approach

This study investigates the effect of climate change on Asian stock markets using Generalized Autoregressive Conditional Heteroskedasticity variant of Mixed Data Sampling (GARCH-MIDAS) model. The results reveal that long-term stock return volatility of about 40% of Asian stock markets are unaffected by climate change. This implies that about 40% of investments in the Asian stock markets are insensitive to climate change financing. More awareness about investment in climate-oriented stocks is recommended.

Forecast combinations for benchmarks of long-term stock returns using machine learning methods

AbstractForecast combinations are a popular way of reducing the mean squared forecast error when multiple candidate models for a target variable are available. We apply different approaches to finding (optimal) weights for forecasts of stock returns in excess of different benchmarks. Our focus lies thereby on nonlinear predictive functions estimated by a fully nonparametric smoother with the covariates and the smoothing parameters chosen by cross-validation. Based on an out-of-sample study, we find that individual nonparametric models outperform their forecast combinations. The latter are prone to in-sample over-fitting and in consequence, perform poorly out-of-sample especially when the set of possible candidates for combinations is large. A reduction to one-dimensional models balances in-sample and out-of-sample performance.

Does risk disclosure influence mergers and acquisitions? A textual analysis

ABSTRACT Using textual analysis and the data of China’s A-share listed companies from 2010 to 2020, this study examines how risk disclosure in annual reports influences subsequent mergers and acquisitions (M&A). The empirical results show that the risk disclosure tone of annual reports is positively associated with the probability of engaging in M&A deals and bid premium, but is negatively associated with long-term stock returns. Furthermore, the level of risk disclosure in annual reports exerts a negative impact on the probability of all-cash bids and bid premium, but positively associated with the long-term M&A performance, indicating that risk disclosure helps alleviate the information asymmetry between acquirers and targets. The empirical evidence highlights the value relevance of risk disclosure content in annual reports, and the importance in strengthening the supervision of qualitative information disclosure.

One way out of the share pledging quagmire: Evidence from mergers and acquisitions

Share pledging by controlling shareholders is accompanied with a risk of control transfer when stock price decline triggers a margin call. This situation motivates controlling shareholders and firms to initiate value-enhancing activities to manage the pledging quagmire. Using a sample of Chinese listed firms, we find that firms with pledging controlling shareholders are more likely to implement mergers and acquisitions (M&As) than other firms. Their M&As also perform better, regardless of whether using short- or long-term stock returns or operating income as the performance measure. Furthermore, the positive effect of share pledging on M&As is more pronounced in non-state-owned enterprises, firms with individual controlling shareholders (especially families), firms with better governance, and firms with higher financial capabilities. Additional analyses on deal types also show that firms with pledging controlling shareholders are more likely to engage in diversified, non-affiliated, and cash-financed acquisitions. These results consistently suggest that M&As may effectively eliminate firms' pledging risks and that share pledging mitigates shareholders' conflict of interest regarding M&A decisions.

The value added by private equity in mergers and acquisitions by financial institutions

ABSTRACT We compare and contrast (i) mergers and acquisitions (M&As) by financial institutions (FIs) that had the involvement of one or more private equity firms (PE) with (ii) acquisitions with no private equity involvement. We find that the M&A announcement abnormal stock returns are higher for acquisitions with- than without private equity involvement. Likewise, the post-announcement long-term annual stock returns are higher for deals with PE involvement. These deals also produce higher operating performance, and their stocks exhibit less volatility in the months following the announcement after controlling for a host of confounding variables. Our results are robust to year fixed effects, industry (i.e. business line) effects, and self-selection bias.

Does Income Equality of Export IPO Firms Hurt Their Market Returns in Korea?: Using Fama-French 5 Factor Model

Purpose - This study investigates the effects of income inequality across provinces of export firms on their initial and long-term stock returns in the Korean initial public offering (IPO) market. Design/Methodology/Approach - Using 520 IPO firms listed on the Korea Exchange (KRX) from 2002 to 2016 and financial and accounting, regional population data and IPO information, we study the effects of income inequality, measured in relative Gini coefficients over provinces of Korea, of export firms on initial returns (IR) and their long-term cumulative abnormal returns (CARs). Findings - The Gini income inequality index is found to have a positively significant effect on the IR of IPO for the whole and the export firm sample, but without statistical significance for the non-export firm sample. Second, the level of exports has a negative and significant effect on the initial returns of IPO for the pooled sample. Third, the income inequality not only affects IR, but also affects the long-term CARs. Fourth, the export ratio does not show any statistically significant effect on the long-term CARs for all the samples in the CAPM model. Fifth, the income inequality index also has a significant positive effect on all the three measures of CARs in the Fama-French 3, 4 and 5 factor models. Research Implications - We propose to allocate IPO shares based on income level, hopefully more shares to be assigned to lower income investors.

Institutional Investors and Hedge Fund Activism

Abstract Hedge fund activists have ambiguous relationships with the institutional shareholders in their target firms. While some support their activities, others counter their actions. Due to their relatively small holdings in target firms, activists typically need the cooperation of other institutional shareholders that are willing to influence the activists’ campaign success. We find the presence of “activism-friendly” institutions as owners is associated with an increased probability of being a target, higher long-term stock returns, and higher operating performance. Overall, we provide evidence suggesting the composition of a firm’s ownership has significant effects on hedge fund activists’ decisions and outcomes. (JEL: G13, G23, G34) Received March 12, 2020; editorial decision July 13, 2020 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Long-Term Stock Forecasting

It is well-known that there is a strong correlation between valuation ratios and long-term returns on certain stock-market indices such as the S&P 500. Scatter-plots of valuation ratios versus long-term stock-returns often show a characteristic downwards slope, where higher valuation ratios correspond to lower future stock-market returns, and vice versa. But a formal explanation of this phenomenon has never been given until now. In this paper we show how to properly decompose stock-returns into three components: Dividend yield, change in valuation ratio such as the P/E or P/Sales ratio, and the change in Earnings or Sales Per Share. Together with the basic formula for calculating annualized returns, this explains the characteristic curves we often see in scatter-plots of long-term stock-returns. We also derive formulas that let us forecast the mean and standard deviation for the future stock-returns from these three components. This is demonstrated on real-world data for both individual stocks as well as entire stock-market indices such as the S&P 500, 400 and 600 for U.S. stocks, and various Exchange Traded Funds (ETF) for international stock-market indices.

Long-term financial performance of corporate social responsibility

We conduct an empirical investigation of the relationship between corporate social responsibility (CSR) and long-term stock performance in Japan. This study is set in the Japanese context. We find, first, that CSR activities are positively related to long-term stock returns. Second, shareholders and financial institutions that have long-term investments with strong governance promote CSR activities. Third, discussion with stakeholders, such as loyal well-socialized consumers in developed countries, supports firms' CSR activities, especially environmental issues in Europe and governance in North America. Finally, short-term CSR investment does not yield good stock performance. By applying robust methodology to over 10 years of data, our study supports the hypothesis that investors in the Japanese market are significantly concerned about the social activities of firms, and that these concerns are reflected in the markets. This study provides quantitative evidence of the positive effect that CSR has on long-term stock investments in the Japanese market. In addition, it concludes that CSR has the potential to be a tool to moderate myopic short-termism.

Institutional Investors and Hedge Fund Activism

Hedge fund activists have ambiguous relationships with the institutional shareholders in their target firms. While some support their activities, others counter their actions. Due to their relatively small holdings in target firms, the activists typically need the cooperation of other institutional shareholders that are willing to influence the activist’s campaign success. We find the presence of “activism-friendly” institutions as owners is associated with an increased probability of being a target, higher long-term stock returns, and higher operating performance. Overall, we provide evidence suggesting the composition of a firm’s ownership has significant effects on hedge fund activists’ decisions and outcomes.