Equity Shocks Research Articles

Do Intra-industry Peer Effects Influence the Debt Financing Policy of Companies Listed in Thailand?

Rational imitation of financial policies, namely peer effects, was documented to prevail among firms within an industry in both developed and top emerging economies. Lacking evidence from medium-sized emerging Asian countries, this study examined intra-industry peer effects, i.e., imitation, on debt financing at Thai listed companies. The sample consisting of the firms listed on the Stock Exchange of Thailand (SET) during the years 2001–2018 was incorporated to discover those effects. Numerous databases associated with the SET (e.g., SETSMART) and the firms’ websites were used to collect financial numbers. With 6,058 firm-year observations, unbalanced panel data was then analyzed by using the random-effects and fixed-effects ordinary least squares models as well as the two-stage least squares regression. The main findings show that a focal firm imitates the long-term debt financing of its industry peers. Using the instrument approach to address endogeneity, the key results are confirmed. Peers’ equity shock as the instrumental variable decreases their financing with debt, subsequently lowering debt levels at a focal firm. This mimicking was operated through peer action, not peer character, i.e., performance. In additional tests, severe market competition was found to strengthen the uniformity of decision-making on debt finance among industry peers. Meanwhile, the high cost of information embedded in innovation-driven businesses has not been found to both promote and reduce peer effects on debt finance. Including the extra control variables at firm-specific levels, the key results remain robust. This study highlights a vein of social learning theory and competition-based theory in discussing herding behaviors toward all member firms in a certain industry. The conclusions enrich the literature on peer effects on debt finance policy.

Does Peer Matters? How Peer Influence Firm Payout Policies: Evidence from Pakistan

Payout decisions are receiving more interest from an investor’s point of view. The purpose of this study is to investigate the effect of peer payout policies on a firm payout policy in Pakistan. This study employs an instrumental variable technique to overcome the endogeneity issue, which is based on peers' idiosyncratic equity shocks. The peers' payout policies have a causal link with a firm payout policy. The effect of peer pressure on firm payout is more evident in companies that compete in a more competitive market and have a good information environment. The firms that are similar in size or resource, especially young and small firms, are more responsive to their industry peers. This study provides channels for managers or policymakers to become more optimistic about formulating the payout policy to attract investors' attention and to compete more fiercely in the market.

Customer–supplier relationships and non-linear financial policy response

We investigate whether changes in the capital structure of major customers play an important role in determining the firm’s financial policy. Following (Leary and Roberts, 2014) and using average customer idiosyncratic equity return shocks, we find that a firm’s leverage ratio is negatively and nonlinearly affected by the leverage ratio of its major customers. This “customer effect” occurs only when the idiosyncratic equity shock to the customer firms is negative. Consistent with the prediction of the modified pecking order theory that firms are more concerned about excessively high leverage ratios than excessively low leverage ratios, supplier firms tend to significantly reduce their long-term debt in response to increases in the leverage ratios of their major customers but are insensitive to the inverse change. Finally, consistent with the stakeholder theory and the dynamic trade-off theory, we find that this capital structure correlation is more pronounced for firms producing specialized or unique products, firms with lower profitability, firms with weaker operational capabilities, firms that take more risks, firms whose customers operate in more competitive industries, and firms whose customers are more financially vulnerable. Our results contribute to identifying the dynamics and determinants of corporate capital structures.

Information shocks and the cross section of expected returns

This paper examines the risk premium associated with information shocks in equity markets. For all stocks traded on Borsa Istanbul between March 2005 and December 2020, we calculate information shocks as unanticipated information asymmetry by focusing on changes in the proportion of the effective spread attributable to adverse selection. Our results indicate a significant return premium for an information shock strategy. Specifically, the return premium associated with the zero-investment information shock portfolios is 72 basis points. After controlling for several factors, we then document a significant predictive relationship between information shocks and future returns. The predictive power and the return premium associated with the information shock strategy are stronger after the initiation of the BISTECH trading system, which enables heterogeneity across investors vis-à-vis trade execution latency. These results suggest that, after the introduction of fast trading, the risks associated with information shocks become systemically important in the cost of equity.

Information shocks, market returns and volatility: a comparative analysis of developed equity markets in Asia.

This research explores the function of information shocks in equity returns and integrated volatility of emerging Asian markets using Swap Variance (SwV) approach on the period of 20years (Feb 2001-Feb 2020). It compares average monthly returns and volatility of shock periods with non-shock periods after separating negative and positive shocks. Findings reveal frequent occurrence of information shocks in all Asian developed equity markets with positive shocks than that of negative shocks. Moreover, highly volatile Asian developed markets earn higher returns during shocks periods, while markets with higher volatility and lower continuous returns are adversely affected during shocks periods. The ratio of total realized volatility and the average ratio of shocks volatility establish that shocks account for a considerable amount of volatility, and integrated volatility is higher during negative shocks phases. The study has implications for all stakeholders of financial markets for rational investment decisions.

SONOMA: a Small Open ecoNOmy for MAcrofinance

We develop a new small open economy model (SONOMA) in which domestic corporate debt and equities are affected by shocks to both external credit and equity markets. In a novel empirical analysis of several small-but-developed economies, we show that both external debt and equity shocks are important determinants of domestic economic fluctuations, corporate leverage, and net foreign asset positions. SONOMA replicates our empirical facts about asset prices, financial flows, and economic activity.

Money Matters: Global Banks, Safe Assets and Monetary Autonomy

This paper depicts an often neglected channel of transmission of monetary policy, namely international safety appetite, as an important source of production and risk-taking international monetary spillovers. The model features a local economy with exogenous financial frictions that lead firms to need both local and foreign financing to pay for their factors of production. Global and local risk-averse banks supply firms with risky loans while buying safe assets to governments to hedge themselves against equity shocks. Monetary policy shocks of a hegemon currency issuer affect returns obtained by banks for the risky loans they concede, altering these agents' risk pricing and balance sheet composition. Main results outline that global monetary policy tightening reduces the returns of risky global loans, inducing global banks to reduce risky loan creation, ultimately decreasing both production and consumption volatility internationally. Two more secondary results arise. First, local monetary authorities may counteract global monetary policy spillovers, but this will entail a trade-off between boosting production and reducing consumption volatility. Second, both global and local expansive monetary policy increase the demand for global safe assets, relaxing the budget constraint of monopolistic global safe asset issuers. Understanding the international safety appetite mechanism of transmission appears to be of critical importance as it may impact the effectiveness of monetary policy in open economies as well as its optimal design.

Mortgage characteristics and the racial incidence of default

Previous research has shown that relative to White borrowers, Black and Hispanic borrowers taking out mortgages at the height of the early-2000s housing boom experienced significantly higher delinquency rates. In this paper we attempt to gain a better understanding of the factors that gave rise to these racial differences in mortgage delinquency. Using a database of nearly 3 million mortgages originated between 2005 and 2009, we find that minority borrowers were significantly more likely to have mortgages with high-risk contract characteristics, such as prepayment penalties, payment resets, and terms that limit principal paydown. While much of the racial variation in the prevalence of these characteristics can be explained by common measures of borrower creditworthiness, we also provide evidence that even after conditioning on a rich set of borrower controls, minority borrowers were more likely to have several high-risk mortgage characteristics. Results from mortgage default models and a decomposition exercise show that the concentration of minority borrowers in such loans elevated default rates for Black and Hispanic borrowers by 2 and 4 percentage points, respectively, relative to the default rate for White borrowers. The totality of our results suggest that exotic loan characteristics acted as mortgage default accelerants for many minority homeowners that experienced significant income and equity shocks during the Great Recession.

Dynamic linkages among cryptocurrencies, exchange rates and global equity markets

PurposeThe purpose of this paper is to investigate the short- and long-run dynamic linkages between selected cryptocurrencies, several major world currencies and major equity indices. The results show that despite sharing some common characteristics, the cryptocurrencies do not reveal any short- and long-term stochastic trends with exchange rates and/or equity returns. The dynamics of each cryptocurrency with the Chinese Yuan appears to be more turbulent than that with the other exchange rates. Each cryptocurrency appears to follow its own trend in the global financial market and is independent of the exchange rates or the global stock markets, thus making them suitable for inclusion in global investment portfolios.Design/methodology/approachThe cryptocurrencies examined are Bitcoin, Dash, Ethereum, Monero, Stellar and XRP. In addition, data were collected on major exchange rates with respect to the US dollar, namely, the euro, British pound, Japanese yen and Chinese Yuan. Finally, the following major stock market indices were selected: SP500, DAX, DJIA, CAC, FTSE, NIKKEI, Hang Seng and Shanghai. The study applied vector autoregressive (VAR) model and Engle’s (2002) dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) specification.FindingsFirst, it was found that cryptocurrencies do not interact with each other because their correlations are weak and do not share a common long-run path; thus they are not cointegrated. Second, impulse response analysis from the VAR models indicate different reactions of each cryptocurrency to both exchange rate and equity shocks and that cryptocurrencies appear to be isolated from market-driven shocks. Third, the ups and downs in the cryptocurrencies’ dynamic conditional correlations (from the DCC-GARCH models) indicate that all cryptocurrencies were susceptible to speculative attacks and market events.Research limitations/implicationsThis paper examines the dynamic linkages among the most important cryptocurrencies with major exchange rates and equity markets and, to the best of the authors’ knowledge, is the first paper to do so. Thus, interested market agents would gain valuable insights as to whether this new form of asset might be used for conducting monetary policies and portfolio construction on a global setting.Originality/valueThe paper contributes to the scant literature on the dynamic linkages among major cryptocurrencies and global financial assets. In general, given the differential relationships of each crypto with the equity markets, one could infer that they represent a decent short-run investment vehicle within a well-diversified, global asset portfolio (as they may increase the returns and reduce the overall risk of the portfolio).

Sustainability of Leverage Levels in Response to Shocks in Equity Prices: Islamic Finance as a Socially Responsible Investment

This study looks at how firms react to shocks in equity prices based on a classification which arises from social pressures rather than the financial objective of maximizing shareholders’ wealth. In order to meet the objective of the study, a sample of Malaysian firms from the period of 2003 to 2018 was utilized to evaluate the relationship between market and book debt ratios based on a social distinction. The study is based on the theoretical expectation that managers are inclined to adjust book debt ratios to converge with market debt values which arise from changes in equity values over time. We introduce a unique institutional setting into the relationship which is readily observable in the Malaysian capital market given the existence of Shari’ah and non-Shari’ah compliant company classifications on the stock exchange (Bursa Malaysia), as screened by the Securities Commission. The classification forms the basis for distinguishing Socially Responsible Investment options for investors. The findings reveal the existence of asymmetries in how both categories of firms adjust towards shocks in equity prices. The findings document that both compliant and non-compliant firms decrease book debt ratios in line with increases in firms’ equity values. Compliant firms, on the other hand, are more likely to increase book debt ratios during periods of decreases in equity values. Non-compliant firms do not significantly alter book debt ratios during periods of declining equity prices. The findings indicate that whilst firms tend to decrease debt levels in the presence of future growth potential, the response is asymmetric during periods of suppression of share prices. Thus, the screening of compliant versus non-compliant firms allows investors to distinguish sustainable firms in the long run, which further allows diversification when holding socially responsible investment portfolios. Our conclusions have wide reaching implications on a global scale for the development of sustainable capital markets.

Exchange rates, oil prices and world stock returns

This paper examines responses of 14 major currency/USD pairs to two global factors (oil and world equity returns) from January 1999 to July 2017, a period comprising the global financial crisis and oil price boom and collapse. With global equity markets advancing, risk tolerance increases and oil and stock markets impact currencies under two methodologies: transmission of shocks and mean-variance approaches. Vector autoregressions (VARs) suggest large and statistically significant responses: commodity currencies strongly appreciate following positive oil price shocks and depreciate with positive global equity shocks. GARCH models provide similar qualitative results with coefficients typically larger for global equity returns than for oil returns. Emerging market currencies and subsamples for the crisis period are also discussed.

Illiquidity and volatility spillover effects in equity markets during and after the global financial crisis: An MEM approach

Even though the volatility spillover effects in global equity markets have been documented extensively, the transmission of illiquidity across national borders has not. In this paper, we propose a multiplicative error model (MEM) for the dynamics of illiquidity. We empirically study the illiquidity and volatility spillover effects in eight developed equity markets during and after the recent financial crisis. We find that equity markets are interdependent, both in terms of volatility and illiquidity. Most markets show an increase in volatility and illiquidity spillover effects during the crisis. Furthermore, we find volatility and illiquidity transmission are highly relevant. Illiquidity is a more important channel than volatility in propagating the shocks in equity markets. Our results show an overall crucial role for illiquidity in US markets in influencing other equity markets' illiquidity and volatility. These findings are of importance for policy makers as well as institutional and private investors.

Research on the Peer Effect of Firms’ Export Behavior

Because of the information asymmetry and risk uncertainty, export firms will learn to adjust export decisions from their peers. Based on the micro-matching data of China’s customs export products and listed firms, this paper examines the peer effect of firms export activities by introducing equity shock as an exogenous variable. It is found that first, the values, scopes and number of destinations of exporters’ products are positively influenced by their peer firms; second, exporters with lower product quality, growth capability and export intensity will follow those exporters with better export performances to change their behaviors. These asymmetric results prove that peer effect of firms’ export behavior is in accordance with the law of logical imitation; third, CEOs with different demographic characteristics have great impact on the magnitude of export peer effect, showing that risk preferences and cognitive patterns of CEOs are significant for firms’ export behavior.

Is risk shock a key factor driving business cycles in China?

Abstract This paper studies the impact of risk shock on the Chinese economy using a New-Keynesian model with financial frictions. The study shows that risk shock is an important driving force for the fluctuations of GDP, investment, capital, credit, and credit spread in China. However, the role of risk shock in driving China’s business cycles is not as crucial as in the US economy (see Christiano, Motto, and Rostagno 2014). There are three main reasons that explain the different performance of risk shocks in China and the US: the volatility of risk shock, the effect of equity shock, and the influence of macroeconomic policies are all different in China and in the US. Our paper contributes to an understanding of the business cycles in China during the period from 1999 to 2015, particularly in comparison with business cycles in the US.

Geography, Peer Effects, and Capital Structure

This study investigates the relationship between the location of a firm’s headquarters and its capital structure. Using the equity shock of peers firms, with peers referring to location, this study eliminates endogeneity concerns and shows that average idiosyncratic return of peers firms, firms in the same state, determines variation of firm's leverage ratio. Furthermore, using two measures of location, average leverage of firms in the state where the firm is domiciled and average leverage of firms with distance less than 50 miles from firm's headquarters, the study demonstrates that location has a significant effect on the firm's leverage ratios. The location effect is persistent and extends back to the time of the initial public offering. This work concludes that location of headquarters is an essential component of how a firm defines its peers group.

Mortgage Characteristics and the Racial Incidence of Default

Previous research has shown that relative to White borrowers, Black and Hispanic borrowers taking out mortgages at the height of the early-2000s housing boom experienced significantly higher delinquency rates. In this paper we attempt to gain a better understanding of the mechanisms that gave rise to these racial differences in mortgage delinquency. Using a database of nearly 9 million mortgages originated between 2005 and 2009, we find that minority borrowers were significantly more likely to have mortgages with high-risk contract characteristics, such as prepayment penalties, variable interest rates, balloon structures, and negative amortization periods. Results from mortgage default models and a decomposition exercise show that the concentration of minority buyers in such loans explains a significant fraction of the difference in default rates between racial groups. The totality of our results suggest that exotic loan characteristics acted as mortgage default accelerants for many minority homeowners that experienced significant income and equity shocks during the Great Recession.

How Persistent Are Equity Shock Spillovers?

How Persistent Are Equity Shock Spillovers?

Impact of Peer Firms on Capital Structure of Firm: Evidence from Pakistan

The study explores whether the firm’s financial decisions are affected by the peer firm’s financial decisions. Book leverage is used as a dependent variable against two sets of independent variables; 1) Firm specific characteristics (equity shocks, size, tangibility, profitability and book-market ratio) and 2) peer firms averages (equity shocks, tangibility, profitability and book-market ratio). The results reveal that peer firms equity shocks negatively associated with book leverage but statistically insignificant. This implies that peer effect through the actions of peer firms is not present in Pakistan. Peer firms' market-to-book ratio, profitability and tangibility are significantly and negatively associated with book leverage. These results suggest that the peer firm effect operates in Pakistani selected industries through peer firm characteristics as opposed to peer firm actions (peer firm equity shocks). Among firm specific variables, i.e. profitability, tangibility, market-to-book ratio and size, only profitability has a significant negative relationship with book leverage. It provides evidence that in selected industries more profitable firms follow the suggestions of pecking order theory.

The Recognition of Capital Structure Peer Effect of Chinese Listed Companies

The capital structure of listed companies is significantly affected by that of peer companies in the same industry. This phenomenon is called the peer effect of capital structure. This paper studies the peer effect of capital structures of listed companies in the same industry in the Chinese A-share market. Unlike previous literatures simply using the average industry capital structure as the explanatory variable, by constructing the instrumental variable (equity shock), this paper successfully and accurately identifies the peer effect. Through the empirical analysis, this paper has found the following conclusions: 1. The peer effect’s ability to explain the capital structure of the company itself is more important than the common capital structure influence factors in the previous literatures; 2. Peer firms play an important role for the company’s own capital structure. Specifically, the company’s own capital structure will respond to the capital structures of peer firms, rather than other financial characteristics of peer firms. The conclusion of this paper has certain enlightenment significance on the capital structure theory and capital decision-making behaviors of Chinese listed companies. The capital structure of listed companies in China is not independently decided by the company managers, but in the process of decision-making the capital structures of peer firms is considered as the important reference factor. This will provide a new angle for the research on capital structure. The strong correlation among capital decision-making of peer firms will be considered.

Peer Effects in Capital Structure Adjustments

This study investigates whether there are “peer effects” in capital structure adjustments using an instrumental variable (IV) approach proposed by Leary and Roberts (2014, Journal of Finance). This study finds that firms refer to peer firms’ decisions and characteristics in setting target leverage ratios and in adjusting their leverage toward their leverage targets. This study also finds evidence for “asymmetric” peer effects for over-levered and under-levered firms: (i) over-levered firms increase the speed of the adjustment when adverse equity shocks happen to their peers, while under-levered firms do so when there are positive equity shocks to their peers; (ii) peer effects regarding leverage adjustment speeds are more significant for over-levered firms than for under-levered firms.