Market-adjusted Returns Research Articles

Investigating beta anomaly: comparison of Shariah-compliant and conventional stocks

PurposeThe purpose of this paper is to examine the impact of dividend announcements on the stock return of Shariah-compliant and conventional stocks.Design/methodology/approachAn event study methodology is applied to study the beta anomaly. Market-adjusted return model, mean-adjusted return model and market model have been applied to calculate excess returns. Estimation period used in this study is 130 days, and event period consists of 21 days in total, i.e. starting from the day –10 “before the cash dividend announcement” to day +10 “after the cash dividend announcements.FindingsIt has been concluded from the results that dividend plays an informational role in the Pakistan Stock Exchange. As the investors in Pakistan react favorably to the dividend increase announcements and unfavorably to the dividend decrease announcements, they consider dividend increase announcement as good news and dividend decrease announcement as bad news.Practical implicationsThe findings of this study have several implications for different participants of the stock market, such as investors, academicians, researchers, fund managers and policymakers. They can use this information to make decisions while making efficient portfolios. Investors may get abnormal returns by focusing on the dividend announcement patterns. This can influence the attitude of investors toward efficient investments in the stock market and ultimately contribute to the betterment of society. This study is also beneficial for academicians and researchers, as it provides a comparative analysis of Shariah-compliant and conventional stocks and the anomalous effect of dividend announcements on stock return.Originality/valueLimited research in the world’s context and null is available in Pakistani context on the subject matter. The comparative analysis of “Shariah-compliant” and “conventional” stocks provides insight into the asset pricing of Shariah-compliant stocks that have not been explored earlier. This study also uses three different methods (mean model, market model and market-adjusted return models) to compare Shariah-compliant and conventional stocks

Intraday time-series momentum and investor trading behavior

This paper documents intraday time-series momentum in Taiwanese exchange-traded funds, as evidenced by the predictive relationship between the last half-hour return and the first three half-hour returns. A market timing trading strategy that uses trading signals from the second (third) half-hour return outperforms the benchmarks, earning a market-adjusted return of 5.33% (5.27%) per annum. Institutional and foreign investors’ order imbalances over the last half-hour determine concurrent returns and positively respond to early-morning returns, while the predictive effect of the first half-hour return on the last half-hour return disappears after controlling for institutional and foreign investors’ trading behavior. Collectively, we show that institutional and foreign investors’ late-informed trading contributes to intraday time-series momentum.

The Emergence of Covid-19 and Capital Market Reaction: An Emerging Market Scenario Analysis

This paper investigates the capital market reaction to the first detection of the COVID-19 in Bangladesh. Using a sample of 314 listed firms in Dhaka stock Exchange (DSE), this study employed the event study methodology (ESM) to find any abnormal return (AR) associated to the first COVID-19 detection announcement. Three different return models namely mean-adjusted return, market-adjusted return and market model have been used to calculate the abnormal return and test the statistical significance using both parametric crude dependence and standardised cross-sectional T test along with non-parametric generalised sign-test and Corrado rank-test. The findings suggest that, despite the perceived weak market efficiency, the announcement of the first COVID-19 detection has a significant negative impact on overall market return on the event day. Additionally, the result exhibits the indifferent market reaction of different industry segments such as manufacturing, service, financial, non-financial, pharmaceuticals and IT and telecommunication sectors. The results would be useful for investors, industrial and financial analysts in accessing volatile systemic risk and building an optimal portfolio to solve the pandemic dilemma effectively.

Stock Market Reaction on Green-Bond Issue: Evidence from Indian Green-Bond Issuers

Purpose: A green bond is a financial instrument issued by governments, financial institutions and corporations to fund green projects, such as those involving renewable energy, green buildings, low carbon transport, etc. This study analyses the effect of green-bond issue announcement on the issuer’s stock price movement. It shows the reaction of the stock price after the issue of green bonds. Methodology: This study is based on secondary data. Green-bond issue dates have been collected from newspaper articles from different online sources, such as Business Standard, The Economic Times, Moneycontrol, etc. The closing prices of stocks have been taken from the NSE (National Stock Exchange of India Limited) website. An event window of 21 days has been fixed for the study, including the 10 days before and after the issue date. Data analysis is carried out through the event study method using the R software. Calculation of abnormal returns is done using three models: mean-adjusted returns model, market-adjusted returns model and risk-adjusted returns model. Findings: The results show that the issue of green bonds has a significant positive effect on the stock price. Returns increase after the green-bond issue announcement. Although the announcement day shows a negative return for all the samples taken for the study, the 10-day cumulative abnormal return (CAR) is positive. Thus, green-bond issues lead to positive sentiments among investors. Research implications: This research article will help the government issue more green bonds so that the proceeds can be utilized for green projects. The government should motivate corporations and financial institutions to issue more green bonds to help the economy grow. In India, very few organizations have issued a green bond. It will be beneficial if these players issue green bonds, as it will increase the firms’ value and boost returns to the investors. Originality/value: The effect of green-bond issue on stock returns has been analysed in some studies in developed countries. This is the first study to examine the impact of green-bond issue on stock returns in the Indian context, to the best of our knowledge.

Impact of COVID-19 on Different Sectors of the Economy Using Event Study Method: An Indian Perspective

ABSTRACT This research examines the impact of the lockdown announcement imposed by the Indian government on the different leading sectors of the economy such as pharmaceuticals, FMCG, Financial services, banking, energy, etc. Event study method has been used to analyze the data. Lockdown announcement day has been considered as the event for our study. We have taken a 40-day event window, i.e., 20 days before and 20 days after the date of the announcement. Secondary data is used in the study and the same is collected from the NSE website. Using MS Excel, we have applied three methods for analysis—mean-adjusted, market-adjusted, and risk-adjusted abnormal return. Auto, Bank, Financial Services, FMCG, IT, Media, Metal, Pharma, Private bank, PSU Bank, Realty, Oil & Gas, and Energy are sectors of NSE that were taken for the study. Our results indicated that most of the sectors performed positively and gained abnormal returns during 21 days after the announcement. It showed that these sectors recovered their position after going down the market index. This shows that investors were confident that the impact was due to the abnormal condition of the market and not due to the fault or fundamental problems of these sectors. Based on the results, investors may decide to hold their position in the stock that has recovered during the period. Also, investors can diversify their portfolio in those sectors to which abnormal return was positive besides the COVID-19 impact. This is the first study to analyze the effects of the announcement of lockdown due to COVID-19 on the stock market performance of different sectors using the event study method in the context Indian stock market.

Analysis of Polish mutual funds performance: a Markovian approach

Abstract The aim of this study is to determine whether mutual funds provide benefits for their clients. The performance of Polish mutual funds has been evaluated in terms of their efficiency, including their potential inertia over time. Moreover, the use of the phenomenon of economies of scale resulting from assets inflow to the fund by means of the Markovian framework has been examined. The results are consistent with the efficient market hypothesis. When assessing the market-adjusted returns, underperformance was noticed in both small and large funds. The smart money effect, recognised in the literature, is not confirmed here; however, there are some noticeable investor reactions, such as the phenomenon of chasing performance.

Political Insider Trading: A narrow versus comprehensive approach

We examine senators’ electronically filed stock transactions between 2012 and 2019 to assess the extent of politician’s insider trading. Our results suggest that senators use inside political information when investing and earn significant market-adjusted returns. To extend traditional return-based methods, we propose a new comprehensive approach based on abnormal idiosyncratic volatility (AIV), which captures the degree of information asymmetry around their trading dates. We document that senator trades are associated with substantially high levels of AIV, suggesting that they represent only a tip of the iceberg, since the mass of unfiled transactions using the same inside information remains undetected.

Measuring Utility and Speculation in Blockchain Tokens

A large segment of cryptoassets consists of tokens—simple code running on programmable blockchains such as Ethereum—that serve as a payment or governance mechanism for an underlying digital platform, usually a peer-to-peer marketplace of various services. An ongoing debate about the viability of the token market is centered on whether tokens are used purely for speculation, or have actual utility on their underlying platforms. The objective of this study is to create and validate a set of granular measures of token utility and speculation. Using disaggregated data on 270 million transactions in 891 tokens hosted on the Ethereum blockchain, we construct three intuitive measures of token utility and speculation: utility turnover (UT), speculative turnover (ST), and DeFi ratio (DF). These measures first reveal a striking decline—of about 90%—in average token utility usage since 2017. This decline coincides with an equally pronounced increase in token speculation, with exchange-based speculation peaking at mid-2020. We show that the emergence of DeFi applications, which offer increasingly levered and complex speculative tools, are crowding out both utility and speculation usages and further extending the increase in token speculation. We provide additional economic validation of our measures by relating them to future market outcomes and show that token utility negatively predicts return volatility in the cross section, while both speculative measures positively predict volatility. Additionally, DeFi activities positively predict future market-adjusted returns. These results suggest that our measures embed value-relevant information about the economic activities in the token-linked platforms, and about the intensity of speculative noise trading in these tokens, thus making them useful outcome or explanatory variables in future empirical analyses of blockchain tokens and platforms.

Disclosures about key value drivers in M&A announcement press releases: An exploratory study

We investigate the association between disclosures about key value drivers (i.e., growth, synergies, human capital, brands, customers and technology) in press releases announcing mergers and acquisitions (M&A) deals and acquirer stock returns upon the announcement. We find that, after controlling for the main characteristics of the deal, acquirers that use more terms about these value drivers in press releases exhibit more negative market returns around the M&A announcement. An increase of 10% in the number of terms used about generic value drivers is associated with a decrease in announcement market-adjusted returns of approximately 43 basis points. The negative association between terms about value drivers and acquirer stock returns is stronger for larger deals. We also find that disclosures about these value drivers in M&A announcement press releases are consistent with the subsequent subjective valuation of intangible assets recognized in acquirers’ financial statements through the purchase price allocation. Our findings are relevant for investors attempting to interpret early signals about the performance of M&As and for managers communicating about these strategic investment decisions.

Stock Market Winners: Conditional Probabilities, Elapsed Times, and Post-Event Returns

Some common stocks display extreme positive performance. Between 1973 and 2020, 3,615 U.S.-listed stocks generated at least a 5x cumulative gross return relative to a prior low point, and also had a minimum inflation-adjusted market capitalization of $500 million. Among these, 29.8% repeated the performance (to achieve a 25x multiple), 9.7% repeated twice (to achieve a 125x multiple), and 2.4% did so a third time (to achieve a 625x multiple). In general, a substantial portion of the superior performance accrued prior to the year in which the multiple was attained. However, stocks that attained these multiples showed little or no evidence of positive market-adjusted returns in subsequent months, implying that the existence of extreme positive performers does not simply reflect long horizon return momentum.

Foreign Direct Investment and Initial Public Offerings: Exploring the Roads Less Travelled

This article examines the performance of initial public offerings (IPOs) issued by the economic sectors in India. It analyses the level of underpricing measured by market adjusted initial return (MAIR), short-run performance measured by market-adjusted abnormal return (MAAR) and long-run performance measured by 3-year buy and hold abnormal return (BHAR) methodology relative to Sensex and Nifty for 40 IPOs approaching the capital market during the period 2006–2016. The selection of IPOs is based on the foreign direct investment (FDI) limit of USD 3,000 million in each economic sector, that is, primary sector, secondary sector and tertiary sector. The long-run analysis is done at the end of the first year, the second year and the third year. It is found using the ordinary least square (OLS) regression that variables like age of the issuing firm and volume traded on the first day of listing have a positive relation with initial returns, while offer size of the IPO has a negative relation with the initial return. Further, this study also finds out that the secondary sector performs poorly in the long run relative to the primary and tertiary sectors. This study can be of importance to investors for assessing different sectors before investing.

COVID-19 Impact on Nifty Banks: An Event Study Methodology

The financial sector, because of its catalytic role in the economy, has always been in the eye of the storm in economic difficulties. Due to the pandemic, the stock market had lost about 27 percent by April 2020 and bank nifty has had a lion’s share in pushing the index down to this level. Uncertainty arose as the containment of the disease and the availability of vaccines remain uncertain; this contributed to the plunge in investor confidence. Because of the central role of banks in the development initiatives of the governments, COVID-19 has become a significant threat to the sustainability of the banks globally, especially in developing economies. However, we believe every downfall brings in new opportunities for the investors. Therefore, the present study attempted to study both the gloom and boon and observed that there were short-term abnormal returns to the investors of nifty banks in two different periods - the detection of the first case of COVID-19 in India and the lockdown periods in India. The impacts of both the events are calculated by applying Market and Risk Adjusted model, Market Adjusted Return model and Mean Adjusted Return model. The paper concludes that the impacts were insignificant during the first period and was quite significant in the subsequent period. Nifty banks have earned negative abnormal returns during the pre-lockdown period and positive abnormal returns during post lockdown period which indicates that the markets reacted positively as India implemented the first lockdown.

The Smart Beta Mirage

We document and explain the sharp performance deterioration of smart beta in- dexes after the corresponding smart beta ETFs are launched for investment. While smart beta claims to deliver excess returns through factor exposures, the market-adjusted return of smart beta indexes drops from about 3% “on paper” before ETF listings to about −0.50%~−1% after ETF listings. This performance decline cannot be explained by variation in factor premia, strategic timing, or diminishing returns to scale. Instead, we find strong evidence of data overexploitation in constructing smart beta indexes, which helps ETFs attract flows as investors respond positively to stellar backtests.

Can Random Auction Ending Curb Market Manipulation?

This paper examines whether a randomized auction ending time reduces market manipulation. Using the random auction ending rule implemented on the Singapore Exchange, we examine changes in indicators of market manipulation and market efficiency. We find that end of day price swings and price dislocation probability both declined, suggesting a lower risk of market manipulation. In addition, the variance ratio and market-adjusted return volatility measures have decreased indicating a more efficient and less volatile price discovery process. We do note that there are still telltale signs of manipulation in the pre-auction opening and pre-closing phase suggesting that the length of time of this phase is important. Overall, our results indicate that the randomized auction ending can curb market manipulation and improve price efficiency.

Stock market reaction to cash dividends: evidence from the Nigerian stock market

PurposeVery little is known about the effect of dividend announcements on stock prices in Nigeria, despite the country’s unique institutional environment. The purpose of this paper is, therefore, to provide empirical evidence on this issue by investigating the stock price reaction to cash dividends by companies listed on the Nigerian Stock Exchange.Design/methodology/approachStandard event study methodology, using the market model, is employed to determine the abnormal returns surrounding the cash dividend announcement date. Abnormal returns are also calculated employing the market-adjusted return model as a robustness check and to test the sensitivity of the results to β estimation. The authors also examine the interaction between cash dividends and earnings by estimating a regression model where announcement abnormal returns are a function of both dividend changes and earnings changes relative to stock price.FindingsThe study find support for the signaling hypothesis: dividend increases are associated with positive stock price reaction, while dividend decreases are associated with negative stock price reaction. Companies that do not change their dividends experience insignificant positive abnormal returns. The results also suggest that both dividends and earnings are informative, but dividends contain information beyond that contained in earnings.Research limitations/implicationsThe sample for the study includes only cash dividend announcements occurring without other corporate events (such as interim dividends, stock splits, stock dividends, and mergers and acquisitions) during the event study period. The small firm-year observations may limit the validity of generalizations from these conclusions.Practical implicationsThe findings are useful to researchers, practitioners and investors interested in companies listed on the Nigerian stock market for their proper strategic decision making. In particular, the results can be used to encourage transparency and good governance practices in the Nigerian stock market.Originality/valueThis paper adds to the very limited research on the stock market reaction to cash dividend announcements in Nigeria; it is the first of its kind employing a unique cash dividends data.

The Impact of Clawback Adoption on Executive Cash Compensation Structure

Prior research suggests an asymmetric relation between CEO cash compensation and firm performance as measured by market-adjusted stock returns. As discussed by Leone et al. (2006), the underlying rationale for this asymmetry is the difficulty in the ex post settling- up of cash compensation. We examine a later period (2007-2014) and find asymmetry between cash compensation (for CEOs and CFOs) and firm performance as measured by market-adjusted stock returns as well as accounting-based measures. Further, we find that clawback adoption is followed by reduced asymmetry in this relation, a finding consistent with clawback’s ex post settling-up characteristics. We contribute to the literature by showing that clawback adoption has had a favorable impact on the structure of CEO/CFO compensation consistent with Holmstrom (1979).

Analysts’ recommendations and the market impact of the valuation methods

Despite its importance, the informative value of the analysts’ valuation methods has not been thoroughly examined in the literature. Such an issue is relevant with regard to the concerns on analysts’ objectivity. We test whether investors’ reaction is jointly influenced by recommendations and target revisions and mainly by valuation method used because it summarizes the information considered to be relevant by the analysts. We analyse the market reaction to recommendation revisions with an event study methodology, calculating market-adjusted abnormal returns at the report release date. We run regressions to test the market impact of recommendations and target price revisions, as well as their interaction, and we then focus on testing several models to discern market reaction to distinct valuation methods. We show that market reaction is influenced by the valuation methods used in their reports. The majority of previous studies relying on commercial databases report the market reaction in relation to analysts’ recommendations, target prices or earnings forecasts, often overlooking the content of the reports and the methodology used therein. This is due to an information constraint of commercial databases, normally including only the above-mentioned synthetic variables. A notable exception is Asquith, Mikhail, and Au (2005) who find no relation between the market reaction and the valuation methods used by analysts. Compared to Asquith et al. (2005), our research uses a larger database and finds a different result. We show the market reacts differently to distinct valuation methods, without favouring the theoretically more correct ones based on discounting cash flows. We also find that the market reaction is larger when the analysts support their recommendation with more than one valuation method. Our research shows that the market pays attention to the content of the reports and analysts can be more influential when they use more valuation methodologies to cross-check their estimates.

Analyst Days, Stock Prices, and Firm Performance

We construct a comprehensive dataset of 3,890 analyst days, which are firm-hosted gatherings where information is disclosed to equity analysts and institutional investors. We demonstrate that firms holding these events have significantly higher abnormal returns after these events, despite the Regulation Fair Disclosure requirement that such information be simultaneously disclosed to the public. A buy-and-hold strategy that holds these stocks for 20 days earns a market-adjusted return of 1.6%, and a similar calendar-time portfolio has a one-month, four-factor alpha of 1.8%. We find no evidence of mean reversion or change in risk exposure after analyst days, and abnormal returns remain significantly positive for up to six months. We classify analyst days into four major types---product announcement, review of results, discussion of strategy, and technology and markets---according to the textual content of their announcements, and we show that product- and market-related analyst days earn significantly higher returns than events reviewing past financial results. Finally, firms holding analyst days have significantly higher revenue growth, earnings per share, and dividend yields up to two years after these events. Analyst coverage, earning estimates, and price targets also increase, and these estimates have lower dispersion. Our results thus suggest that firms use analyst days to convey positive incremental information that has not been incorporated in their stock prices, and market participants significantly underreact to this information.

Fund Size and Performance: Evidence from Daily Returns

Using daily mutual fund returns data from January 2000 to December 2017, we find that smaller funds perform better on Mondays, Tuesdays and Wednesdays whereas larger funds perform better on Thursdays and Fridays in terms of market-adjusted return, CAPM alpha, 3-Factor alpha and 4-Factor alpha. Overall, smaller funds perform better than larger funds. These patterns are not fully explained by the characteristics of fund holdings including stock size measured by market equity, Amihud illiquidity and bid-ask spread of stocks in fund portfolios. The results persist even after controlling for Active Share of funds and using benchmark-adjusted returns.

Anomalies in Finance Stocks Market: Momentum Effect and Return Reversal

This study applies relative strength trading rule to analyse momentum effect and return reversal in the finance sector of Malaysia for the period of January 1997–December 2014. We construct J/K overlapping portfolios consisting of finance stocks over 1–12 months short investing horizons The estimated average cumulative monthly excess returns from momentum strategy portfolios are in the range of 0.017–0.023, while contrarian strategy portfolios are between 0.023 and 0.029 (in percentage). The market-adjusted returns cannot be explained based on the market risk factor of Capital Asset Pricing Model (CAPM). The findings indicate short-run inefficiency in the weak-form sense.