Morgan Stanley Capital International Research Articles

Exploring the asymmetric relationship between macroeconomic factors and corporate profitability in the MSCI Colombia index

PurposeThis study aims to explore the asymmetric effects of macroeconomic factors on the profitability of large-cap companies in an emerging country like Colombia, using the Morgan Stanley Capital International (MSCI) Colombia index as the basis.Design/methodology/approachWe employ a combination of singular spectrum analysis (SSA) and principal component analysis (PCA) to identify and estimate four key macroeconomic factors that account for approximately 47.8% of Colombia's macroeconomy. These factors encompass indicators related to inflation and cost of living, foreign trade and exchange rate, employment and labor force and trade and production in Colombia. We utilize the distributed lag nonlinear model (DLNM) to analyze the asymmetric relationships between these factors and corporate profitability, considering different scenarios and lags.FindingsOur analysis reveals that there are indeed asymmetric relationships between the identified macroeconomic factors and corporate profitability. These relationships exhibit variability over time and lags, indicating the nuanced nature of their impact on corporate performance.Originality/valueThis study contributes to the existing literature by applying a novel methodology that combines SSA and PCA to identify macroeconomic factors within the Colombian context. Additionally, our focus on asymmetric relationships and their dynamic nature in relation to corporate profitability, using DLNM, adds original insights to the research on this subject.

Origin Region Wealth Effect and Inbound Tourism to Europe

Despite the role of wealth in modeling the propensity to consume luxurious goods and services, the literature has so far neglected the role of wealth as inferred from the stock market in modeling tourism inflow. Using 43 European countries over the period 1994???2019, we demonstrate that demand-side wealth effect as inferred from the Morgan Stanley Capital International (MSCI) indexes is an important determinant of inbound tourism. We find that a good financial mood extrapolated from the bullish wealth effect positively influences the inflow of tourists to Europe. The effect of the relationship between external wealth effect and inbound tourism is higher for non-EU member countries and countries in Eastern Europe. Lastly, we find that the wealth effect in the US was an important factor in predicting inbound tourism during the global financial crisis.

The gender and culture effect on the CO2 emission empirical analysis.

In recent years, the world has been facing severe challenges from climate change and environmental issues, with carbon dioxide emissions being considered one of the main driving factors. Many studies have proven that activities in various industries and fields have a significant impact on carbon dioxide emissions. However, few studies have explored the impact of gender on carbon dioxide emissions. This study aims to explore the potential impact of gender diversity on carbon dioxide emissions in the boards of directors of developed and emerging market enterprises. In addition, we also analyzed how board cultural diversity affects carbon dioxide emissions. We searched two European indices provided by Morgan Stanley Capital International (MSCI) from the Bloomberg database and conducted empirical analysis. We selected the MSCI index and MSCI emerging market index from 2010 to 2019 as samples and thoroughly cleaned up the data by removing any observations containing missing information on any variables. Statistical methods such as t-test, ordinary least squares, panel data analysis, regression analysis, and robustness testing were used for statistical analysis. At the same time, differential testing was conducted on sensitive and non-sensitive sectors, and the average representation of female boards in sensitive industries was low. The research results show that the proportion of female members on a company's board of directors is negatively correlated with carbon dioxide emissions. This discovery is consistent with the legitimacy theory advocating for gender equality and environmental sustainability, emphasizing the importance of gender diversity in reducing greenhouse gas emissions. However, agency theory suggests that diversity may lead to internal conflicts within a company, leading to agency costs and information asymmetry. The research results show a negative correlation between board cultural diversity and carbon dioxide emissions, indicating the potential challenge of board cultural diversity. This study provides important insights for decision-makers and managers, not only inspiring corporate social responsibility and environmental policy formulation, but also of great significance for academic research in the field of climate change. Our research findings help deepen our understanding of the factors that affect carbon dioxide emissions in different sectors and countries, while also expanding the research field between gender diversity, cultural diversity, and environmental sustainability. Although this study still needs to be further expanded and deepened, it provides useful insights into the relationship between board gender and cultural diversity and carbon dioxide emissions.

ESG2PreEM: Automated ESG grade assessment framework using pre-trained ensemble models

Incorporating environmental, social, and governance (ESG) criteria is essential for promoting sustainability in business and is considered a set of principles that can increase a firm’s value. This research proposes a strategy using text-based automated techniques to rate ESG. For autonomous classification, data were collected from the news archive LexisNexis and classified as E, S, or G based on the ESG materials provided by the Refinitiv-Sustainable Leadership Monitor, which has over 450 metrics. In addition, Bidirectional Encoder Representations from Transformers (BERT), Robustly optimized BERT approach (RoBERTa), and A Lite BERT (ALBERT) models were trained to accurately categorize preprocessed ESG documents using a voting ensemble model, and their performances were measured. The accuracy of the ensemble model utilizing BERT and ALBERT was found to be 80.79% with batch size 20. Additionally, this research validated the performance of the framework for companies included in the Dow Jones Industrial Average (DJIA) and compared it with the grade provided by Morgan Stanley Capital International (MSCI), a globally renowned ESG rating agency known for having the highest creditworthiness. This study supports the use of sophisticated natural language processing (NLP) techniques to attain important knowledge from large amounts of text-based data to improve ESG assessment criteria established by different rating agencies.

Stock market openness and audit fees: evidence from the inclusion of China A-shares in the MSCI emerging markets index

This study examines how China’s stock market openness affects audit fees. In May 2018, Morgan Stanley Capital International (MSCI) announced the first wave of listing of large-cap China A-shares in the MSCI Emerging Markets (EM) Index, which marked China’s grand entrance into the global investment benchmark, and sharply expanded its stock market investor base. Using a difference-in-differences approach, we find that audit fees for constituent stocks decrease after the index inclusion. Further analyses suggest that foreign investors can reduce the risk of expropriation by controlling shareholders and mitigate agency conflicts. Our results also show that the effect is more pronounced for firms with weaker internal controls, lower levels of domestic institutional ownership, and those located in less developed markets. Our findings highlight the monitoring effect of stock market openness in improving corporate governance and advance our understanding of the key drivers of audit fees in emerging markets.

Optimisation of the investment strategy of the Norwegian Sovereign Wealth Fund by adjusting the real estate quota

Purpose This paper compares the benefits of direct international real estate investments in a mixed asset portfolio from the perspective of a passive investor with high and low bond allocation.Design/methodology/approach Due to high data availability and its professionalism, the Norwegian sovereign wealth fund was used as a representative example. Real estate indices from 8 countries were used for the portfolio analysis. The data were desmoothed according to Geltners’s 1993 approach.Findings The optimal real estate ratio in the present case is around 20–55%. However, this is strongly dependent on the bond ratio of the multi-asset portfolio. Portfolios with a high equity ratio benefit more from the additional direct real estate investments than portfolios with high bond ratios.Research limitations/implications A rebalancing of individual stocks and bonds was not analysed. Only indexes from MSCI (Morgan Stanley Capital International) were available.Practical implications Concludes that the weighting of stocks and bonds has a strong influence on the optimal real estate ratio and therefore structural changes that affect this weighting.Originality/value The originality of the paper lies in the analysis with different weights of stocks and bonds, the consideration of 8 real estate markets and the observation period. The results of the work highlight areas of interest for further research.

Forecasting stock indices with the COVID-19 infection rate as an exogenous variable.

Forecasting stock market indices is challenging because stock prices are usually nonlinear and non- stationary. COVID-19 has had a significant impact on stock market volatility, which makes forecasting more challenging. Since the number of confirmed cases significantly impacted the stock price index; hence, it has been considered a covariate in this analysis. The primary focus of this study is to address the challenge of forecasting volatile stock indices during Covid-19 by employing time series analysis. In particular, the goal is to find the best method to predict future stock price indices in relation to the number of COVID-19 infection rates. In this study, the effect of covariates has been analyzed for three stock indices: S & P 500, Morgan Stanley Capital International (MSCI) world stock index, and the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). Results show that parametric approaches can be good forecasting models for the S & P 500 index and the VIX index. On the other hand, a random walk model can be adopted to forecast the MSCI index. Moreover, among the three random walk forecasting methods for the MSCI index, the naïve method provides the best forecasting model.

Do ESG Ratings of Chinese Firms Converge or Diverge? A Comparative Analysis Based on Multiple Domestic and International Ratings

Since the Chinese economy has transitioned to a sustainable model, the Chinese socially responsible investment (SRI) market has expanded rapidly, which has deeply stimulated the development of environmental, social, and governance (ESG) ratings for Chinese firms. Domestic agencies, such as SynTao, Rankins (RKS), Sino-Securities (SSII), and China Alliance of Social Value Investment (CASVI), and international agencies, such as Bloomberg, FTSE Russell (FTSE), and Morgan Stanley Capital International (MSCI), have launched their own ESG rating systems. These emerging ratings may provide users of information with more diverse references; however, if their results are too divergent, they may also confuse users. To what extent do these ESG rating results in the Chinese market converge or diverge? Aiming to answer this question, we used Hushen 300 index firms in 2019 as the initial sample, and selected 195 firms covered by the above seven ratings for the analysis. Firstly, by comparing the overlap in the top 100 lists of these sample firms, we found that the list overlap rate between each pair of ratings was between 66.36% and 82.35%; however, only 35% of the firms were listed in the top 100 of all seven ratings. Furthermore, the Pearson correlation analysis showed that the correlation coefficients between each pair of ratings ranged from 0.057 to 0.736, and the average was only 0.411. These results suggest a wide divergence in the ESG rating results for Chinese firms. We suggest that information users need to consider a more diverse and comprehensive perspective when utilizing these ratings.

Creating the XLRE: Market Implications for REITs and the Real Estate Sector

On October 7, 2015, State Street Global Advisors launched the first new sector ETF (SPDR) since the inception of these sector funds in 1998. This was just one of many market events spurred by Morgan Stanley Capital International (MSCI) and Standard & Poor’s Dow Jones (S&P DJ) decision to officially give real estate its own market classification. Since this was the first time an event of this kind had taken place, markets were uncertain about the effects such a change could have on the underlying real estate assets. This paper provides a comprehensive study of the real estate sector SPDR (XLRE) launch event and the impacts on the underlying real estate investment trusts (REITs). We find evidence of positive price effects, no significant liquidity effects, and a negative volatility effect. This is the first study combining these effects where others focus on the volatility effects of ETFs on underlying stocks. Since our study contradicts the results of previous volatility studies, we show that further comprehensive analysis of these events is warranted.

Effects of Financial and Trade Globalization on Total Factor Productivity Growth in Emerging Economies

ABSTRACT This article considers the annual sample from 1984 to 2019 in a panel dataset of 20 emerging economies (i.e. Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Peru, the Philippines, Poland, Saudi Arabia, South Africa, Thailand, and Turkey) given by Morgan Stanley Capital International (MSCI), to explore the effects of trade and financial globalization on total factor productivity (TFP) growth. It considers domestic credit to the private sector by banks as a percentage of gross domestic product (GDP), labor force, and total gross fixed capital formation as a percentage of GDP as control variables in the total factor productivity function. The article considers the direct effects of trade and financial globalization. It also checks the moderating impact of domestic credit on TFP. The long-run estimation shows that domestic credit, labor force, and financial globalization reduce TFP growth, whereas investments and trade globalization enhance it. Interestingly, their moderating effect enhances TFP in the long run. The policy implications are also discussed.

Nexus between FinTech, renewable energy resource consumption, and carbon emissions.

An increase in energy crises and environmental degradation has pushed countries to adopt more sustainable practices. In this situation, financial technology has played an important role to lower carbon emissions by integrating renewable energy resources that can help increase renewable energy resource consumption (REC) and lower carbon emissions (CE). To better understand this transmission mechanism, this study has collected a panel dataset of 26 Morgan Stanley Capital International (MSCI) developing countries for the 2011-2021 period. Furthermore, a proxy indicator for financial technology (FinTech) was developed by extracting relevant data from CrunchBase. Pooled ordinary least square and robust fixed effects technique was adopted to analyse the influence of FinTech on renewable energy and carbon emissions for robustness. Results of the study show that FinTech development promotes renewable energy resource consumption (REC) and discourages carbon emissions (CE), moreover, economic growth positively impacts, and carbon emissions (CE). This research emphasizes the importance of adopting financial technology as an important deterrent of further environmental damage. Additionally, in line with the results of this study, policymakers should design and implement an industrial policy which promotes sustainable economic growth which can pave the path for a circular economy model in the future.

Board diversity and systematic risk: evidence from emerging markets

Purpose This study aims to investigate the association between board diversity and systematic risk. The theoretical framework used in this study is based on agency and resource dependency theories.Design/methodology/approach Using a panel data set of 788 firms listed in the Morgan Stanley Capital International (MSCI) Emerging Markets index from 2015 to 2020, the authors apply Panel-Corrected Standard Error estimation method to test the three proposed hypotheses and the two-stage least squares method is adopted for the endogenous test.Findings The results suggest that board-specific skills diversity (BSSD) and board independence (BIND) have a negative impact on systematic risk. On the other hand, board gender diversity does not affect systematic risk. The findings reinforce the relevance of board diversity for reducing systematic risk and offer valuable insights for policymakers and investors, suggesting that the presence of directors with specific skills and independent directors could reduce firms’ systematic risk.Research limitations/implications The study extends the scope of agency and resource dependency theories by suggesting that the BSSD and BIND reduce agency costs and bring critical resources to the firm’s survival.Practical implications The findings support policymakers and managers in reducing systematic risk. In addition, the results demonstrate the importance of policies that encourage board diversity and BIND.Social implications The study demonstrates how companies can reduce systematic risk through board diversity and BIND.Originality/value To the best of our knowledge, this is the first study to investigate the association between board diversity and systematic risk only in emerging markets.

Spillover analysis across FinTech, ESG, and renewable energy indices before and during the Russia–Ukraine war: International evidence

AbstractThis study is epicentral to analyze the impact of the Russia–Ukraine war on the financial markets, specifically focusing on the connectedness and spillover dynamics of FinTech, Environmental, Social, and Governance (ESG), renewable energy, gold, and Morgan Stanley Capital International (MSCI) indices in developed and emerging countries. Data are collected from Thomson Reuters, ranging from May 8, 2020, to May 11, 2022, and a time‐varying parameter vector autoregression (TVP‐VAR) and the dynamic conditional correlation (DCC) generalized autoregressive conditional heteroskedasticity (GARCH) t‐Copula (DCC‐GARCH t‐Copula) are used to analyze the data. The results show that FinTech, ESG, and MSCI are net transmitters in developed countries, whereas gold and renewable energy are net receivers pre‐ and during war periods. ESG and MSCI are net transmitters in emerging countries, while FinTech, renewable energy, and gold become net receivers in both periods. The hedging ratio sheds light on the costs and weights of efficient pair investments that might change in the context of each region and under the combined scenario. The study has important implications for merchant bankers, policymakers, investors, hedgers, and risk managers.

Do foreign institutional investors influence corporate climate change disclosure quality? International evidence

AbstractResearch Question/IssueWe examine the association between foreign institutional ownership and climate change disclosure quality from 2006 to 2018 across 34 countries. We find that firms with a higher level of foreign institutional ownership demonstrate better quality climate change disclosures, whereas domestic institutional ownership has immaterial impacts on such disclosures. We utilize a difference‐in‐differences (DiD) analysis using a firm's addition to the Morgan Stanley Capital International (MSCI) index as an exogenous shock to control for endogeneity. Our findings are robust to various other endogeneity controls. We also establish evidence on an indirect effect of climate change disclosure quality in mediating the positive association between foreign institutional investors and firm valuation.Research Findings/InsightsWe find that the positive association between foreign institutional ownership and climate change disclosure quality is more pronounced for (1) firms domiciled in stakeholder‐orientated countries, (2) firms domiciled in countries that adopt emission trading schemes, and (3) firms with a greater level of information asymmetry. Additionally, our results are more robust when foreign investors are domiciled in countries that care more about the environment.Theoretical/Academic ImplicationsOur study contributes to climate change disclosures, corporate governance, and international business literature by showing that foreign rather than domestic institutional investors contribute to improved corporate climate change disclosure quality in their portfolio firms.Practitioner/Policy ImplicationsOur study urges regulators to increase their market oversight, especially in firms with less foreign institutional ownership. This is required because such firms are prone to exhibiting poorer accountability for their climate risk management practices, and their disclosures are bereft of effective external monitoring mechanisms.

FİNANSAL OLMAYAN BİLGİLERİN KAMUYA AÇIKLANMASINDA YÖNETİM KURULU YAPISININ ROLÜ: GELİŞMEKTE OLAN ÜLKELER ÖRNEĞİ

Günümüzde işletmeler, finansal bilgilerinin yanı sıra finansal olmayan bilgilerini de paydaşlarına (kamuoyuna) sunarak piyasalardaki etkinliklerini artırmayı hedeflemektedirler. İşletmelerin paydaşlarına sunabileceği ve finansal olmayan başlıca bilgiler çevresel, sosyal ve kurumsal yönetim (ESG) olmak üzere 3 bileşenden oluşmaktadır. Çalışmanın amacı gelişmekte olan ülkeler özelinde işletmelerin yönetim kurulu yapılarının (yönetim kurulu büyüklüğü, yönetim kurulundaki kadın üye oranı, yönetim kurulundaki bağımsız üye oranı ve CEO’ların aynı zamanda yönetim kurulu üyesi olup olmadığı) ESG ve bileşenleri (çevresel, sosyal ve kurumsal yönetim) bakımından kamuyu aydınlatma skorlarına olan etkilerini Morgan Stanley Capital International (MSCI)’ın gelişmekte olan ülkeler sınıflandırmasından hareket ederek irdelemektir. Bu amaçla 21 ülkeden 842 işletmenin 2010-2019 yılları arasındaki toplam 4.973 firma-yıllık veri seti kullanılmış ve panel regresyon analizi yapılmıştır. Buna göre; işletmelerin yönetim kurulu büyüklüğünün, yönetim kurulunda yer alan kadın üye sayısının toplam üye sayısına oranının, yönetim kurulunda yer alan bağımsız üye sayısının toplam üye sayısına oranının ve CEO ve yönetim kurulu başkanı görevlerinin aynı kişi tarafından üstlenilmesinin işletmelerin finansal olmayan bilgiler kapsamında kamuyu aydınlatma düzeyi üzerinde anlamlı etkisi olduğunu göstermektedir. Bu da işletmelerin yönetim kurulu yapısının, finansal olmayan bilgi raporlama davranışını açıklanmasında anlamlı bir faktör olduğunu doğrulamaktadır.

Global hidden factors predicting financial distress in Gulf Arab states: a quantile–time–frequency analysis

PurposeThis study aims to uncover the main predictors of financial distress in the Gulf Cooperation Council (GCC) countries using a wide range of global factors and asset classes.Design/methodology/approachThis study uses novel approaches that take into account extreme events as well as the nonlinear behavior of time series over various time intervals (i.e. short, medium and long term) and during boom and bust episodes. This study primarily uses the conditional value at risk (CoVaR), the quantile multivariate causality test and the partial wavelet coherence method. The data collection period ranges from March 2014 to September 2022.FindingsUS T-bills and gold are the primary factors that can increase financial stability in the GCC region, according to VaRs and CoVaRs. More proof of the predictive value of the oil, gold and wheat markets, as well as geopolitical tensions, uncertainty over US policy and volatility in the oil and US equities markets, is provided by the multivariate causality test. When low extreme quantiles or cross extreme quantiles are taken into account, these results are substantial and sturdy. Lastly, after adjusting for the effect of crude oil prices, this study’s wavelet coherence results indicate diminished long-run connections between the GCC stock market and the chosen global determinants.Research limitations/implicationsDespite the implications of the author’s research for decision makers, there are some limitations mainly related to the selection of Morgan Stanley Capital International (MSCI) GCC ex-Saudi Arabia. Considering the economic importance of the Kingdom of Saudi Arabia (KSA) in the region, the author believes that it would be better to include this country in the data to obtain more robust results. In addition, there is evidence in the literature of the existence of heterogeneous responses to global shocks; some markets are more vulnerable than others. This is another limitation of this study, as this study considers the GCC as a bloc rather than each country individually. These limitations could open up further research opportunities.Originality/valueThese findings are important for investors seeking to manage their portfolios under extreme market conditions. They are also important for government policies aimed at mitigating the impact of external shocks.

Effects of the Covid-19 Pandemic on Islamic and Conventional Financial Markets

The recent global Covid-19 pandemic is resentfully affecting global financial markets which including both Islamic and conventional stock markets. This study conducted an empirical examination to investigate the extent to which Covid-19 result on both Islamic and conventional financial markets, particularly the interconnections within the market activities. Data were collected from several national sources from 6 June 2020 to 27 September 2022, in two main periods. The study determined wavelet correlations among different variables to examine the effects of the pandemic. The findingsshow that the number of Covid-19 deaths was a significant determinant factor within the Islamic stock markets, contrary to conventional stock markets. Moreover, the results showed a positive link between the number of Covid-19 deaths and the Morgan Stanley capital International (MSCI) emerging market Asia Islamic index and the MSCI emerging Asia index. The link between exchange rates and crude oil in MSCI Gulf Corporation Council (GCC) countries combined was uncertain. However, this had a weak effect on Islamic indices and a strong effect on conventional indices. These findings contribute to assisting both investors and the market in optimising investment and market strategies.

ESG and volatility risk: International evidence

AbstractThis study examines the volatility risk for firms that are rated high on environmental, social, and governance (ESG) dimensions in emerging markets and developed markets outside the United States and Canada. Employing the Morgan Stanley Capital International (MSCI) ESG Leader indices, this study investigates the impact of good news and bad news on the volatility risk for the highest ESG‐rated firms through multivariate DCC‐EGARCH modeling. This study finds that the impact of a negative news shock of size 2 standard deviations is approximately 45% higher than that of a positive news shock of the same size for the case of the developed markets under interest. With respect to emerging markets, this study reports that the impact of a negative news shock of size 2 standard deviations is 41% higher than that of a positive news shock of the same size. The results provide empirical evidence in support of the hypothesis that the volatility impact of news for high ESG‐rated firms in developed markets and emerging markets is larger for bad news compared to good news, and the results are robust across time. The empirical findings underline the importance of reporting‐related disclosures of ESG initiatives, and provide seminal evidence of a slow response to news by high ESG‐rated firms in emerging markets.

Do environmental, social and governance practices affect portfolio returns? Evidence from the US stock market from 2002 to 2020

PurposeThis paper aims to investigate whether environmental, social and governance (ESG) practices influence stock returns in the US stock market, looking at the period from 2002 to 2020.Design/methodology/approachThe authors quasi-replicate two reference articles that found that socially responsible funds used to underperform, but that this underperformance tendency has disappeared in more recent periods.FindingsUsing US data, the authors show that independent of the ESG database used, portfolios of neutral stocks present consistently higher systematic risk (beta) than ESG portfolios, although this difference decreases over time. This may be due to the significant increase in demand for ESG portfolios in the past decade, and their consequent price inflation and increase in volatility. However, concerning risk-adjusted returns and contrary to the authors’ reference literature, the results are highly dependent on the rating provider used, and neither support underperformance nor indicate a tendency over time. These inconsistent results suggest that the “ESG label” is not a determinant of portfolio performance.Research limitations/implicationsIf ESG ratings are a legitim benchmark for sustainability, then the costs of going sustainable in stock portfolios might be marginal for fund managers.Originality/valueTwo different ESG-rating agencies, Morgan Stanley Capital International (MSCI) and Thomson Reuters, are used to identify sustainable stocks. Different from the literature, the authors selected stocks for their portfolios stochastically following a uniform probability distribution, thus avoiding fund manager bias.

İSLAMİ HİSSE SENEDİ PİYASALARINDA TAKVİM ANOMALİLERİNİN İNCELENMESİ: HAFTANIN GÜNÜ ETKİSİ

The aim of this study is to investigate the day-of-the-week effect of calendar anomalies on the All Country World Index (ACWI), which represents the global capital index from Morgan Stanley Capital International (MSCI) Islamic indices. For this purpose, MSCI Islamic ACWI index was analyzed by EGARCH method developed by Nelson (1991), one of the conditional heteroscedasticity models. As a result of the study, the day-of-the-week effect in the MSCI Islamic ACWI index was found only on Monday. This result also shows that there is no effect of Friday, which is considered to be more important for Muslims. Thus, it can be considered that this market deviates from the theory of Efficient Markets Hypothesis (EMH), and it is possible to obtain an extraordinary return in this market with appropriate investment timing.