Stock Return Volatility Research Articles

Local gender imbalance and corporate risk-taking

We study the effects of local gender imbalance on corporate risk-taking. We find that firms in areas with a higher local male–female ratio have higher stock return volatilities, leverage ratios and capital expenditure, and less corporate hedging. Consequently, such firms face higher loan spreads, more collateral requirements and capital expenditure restrictions, and have more covenant violations. We address endogeneity concerns by using two instrumental variables for the local male-female ratio: the local prostate cancer and breast cancer mortality rates. We further show that local gender imbalance captures local residents’ risk preferences, which influence corporate policies via both local investor and employee channels.

Conservative Financial Reporting and Cost of Equity: Evidence from Korea

Prior studies provided mixed evidence regarding the relation between earnings conservatism and cost of equity. This paper investigated whether earnings conservatism affects the cost of equity capital in emerging Korean market. Further, we explored whether the relation between conservatism and the cost of equity is influenced by the two economic factors, the ownership concentration of the largest shareholder and information asymmetry. Our empirical results showed that earnings conservatism is negatively related to the cost of equity capital and also the relation is more pronounced for the firms with high ownership concentration of the largest shareholders and high information asymmetry proxied by stock return volatility. These results suggested that the positive aspects of conservative financial reporting in the capital market are more strengthened in the poor information environment and more concentrated ownership structure, which is consistent with demand side of conservatism. Keywords: Accounting conservatism, cost of equity, information asymmetry, ownership concentration DOI: 10.7176/EJBM/14-10-12 Publication date: May 31 st 2022

Auditor pricing of abnormal income from sales of available for sale securities: evidence from the banking industry

We examine the relationship between abnormal income from sales of available for sale (AFS) securities and bank external auditor fees. Prior research finds that income from sales of AFS securities is used to achieve financial and regulatory reporting objectives, helpful in predicting future bank income, and assigned a persistent valuation multiple by investors. Building on prior research that suggests real activities management leads to negative outcomes, we predict and find that auditors respond to abnormal income from AFS securities sales with increases in audit fees and the effect is stronger among high risk (i.e. higher stock return and earnings volatility) banks relative to low risk banks. In additional analyses concerning a bank’s limited flexibility to achieve regulatory capital objectives through managing loan loss provisions, we find evidence of higher audit fees for banks with low regulatory capital and aggressive income-increasing AFS security sales. Among other robustness tests, we find higher audit fees as abnormal income from sales of AFS securities increases among banks with liquidity concerns and those approaching failure. Our findings suggest that auditors interpret abnormal income from AFS securities sales as an indicator of increased client business risk.

When does attention matter? The effect of investor attention on stock market volatility around news releases

We empirically investigate how retail and institutional investor attention is related to the way stock markets process information. With a focus on 360 US stocks in the S&P 500 universe, our results show that higher retail investors’ attention around news releases increases the post-announcement stock return volatility, whereas institutional investor attention has a small but negative impact on volatility on days following news releases on average over the cross-section of companies. These findings are in line with the hypotheses that attention of retail investors slows price-adjustments to new information and attention of institutional investors results in the opposite reaction. We show that these effects are heterogeneous in the type of news and the topic of the information being released. A portfolio allocation application highlights that these results are not only statistically significant but also sizeable in economic terms and can lead to an overperformance as large as dozens of basis points.

The Role of Economic Policy Uncertainty in Predicting Stock Return Volatility in the Banking Industry: A Big Data Analysis

The research aims to study the effects of economic policy uncertainty on the return volatility of stocks with data from the largest banking institutions in Greece. Volatility is constructed using intraday data, whereas the research period extends over a period of about thirteen years, more specifically from January 5, 2001, to June 30, 2014. This period includes various phases of the market, such as stock market crashes along with stock market booms (e.g. the financial crisis of 2007 and 2008 in the United States and the European sovereign debt crisis). The estimated regressions were used to indicate the direct effects of economic policy uncertainty on the return volatility of the stocks of the four large Greek banks. The volatility index is constructed based on intraday data, whereas four different estimators of volatility were used. There is a statistically significant "direct" effect of economic policy uncertainty on the volatility of stock returns of the largest Greek banks, which are (a) Alpha Bank, (b) Eurobank, (c) National Bank of Greece, and (d) Piraeus Bank. Such findings are highly important for specific groups of people, such as investors, policymakers, and regulators. This study is the first research that seeks to identify the effect of economic policy uncertainty on the stock return volatility of the Greek banking system, constructed from intraday data. Doi: 10.28991/ESJ-2022-06-03-011 Full Text: PDF

Stock Return Jumps and Tail Risk Assessment: The Case of European Non-Euro Banking Sectors

This study investigates the linkages between stock return jumps, volatilities, and tail risks in European non-euro banking sectors over the period 2005−2020. As a result, our examinations derive the following significant findings. First, for European non-euro banking sectors, in extending EGARCH models, taking bidirectional stock return jumps into consideration is always effective. Second, for European non-euro banking sector stocks, in extending EGARCH models, incorporating skewed and fat-tailed or fat-tailed densities is also effectual. In addition, our additional analyses further find that when taking bidirectional return jumps into account, the volatility estimates from our extended EGARCH models more precisely capture the tail risks in European non-euro banking sector stocks. This signifies that if we ignore bidirectional stock return jumps, we will undervalue the levels of tail risks when stock prices of international banking sectors plunge.

Did ESG Save the Day? Evidence From India During the COVID-19 Crisis

Investors have shown increasing interest in Socially Responsible Investments (SRI) in the past few years, especially during the financial crisis caused due to the outbreak of the COVID-19 pandemic. SRI are evaluated on the basis of Environmental, Social and Governance (ESG) criteria. ESG information allows investors to assess the risks associated with a particular firm and how the firm manages or intends to manage future risks. Amidst the increasing investor interest in ESG products, we attempt to study the value addition of ESG performance to investors during crisis period. Using a sample of ESG rated firms listed on the Bombay Stock Exchange (BSE), we examine the investment performance, trading volumes and return volatility of ESG stocks in an emerging market like India during the COVID-19 crisis. The results of our event study conducted around the important events that have occurred in India during the COVID-19 pandemic provide evidence that investors can use ESG information as a signal of future stock performance. Most importantly, ESG performance provides downside protection during crisis times. Our results show that ESG performance does not prove to be detrimental to investment performance during normal times. Also, ESG performance was found to reduce stock return volatility during the COVID-19 pandemic. Overall, our study attempts to establish an investment case for ESG stocks in emerging markets in India by providing support to the good management hypothesis.

Do stock markets value green operations? Evidence from India

PurposeThis study aims to examine the impact of green operation (measured using the energy intensity of its operations) on the value of corporate firms in stock markets. The authors also examine the channel of such an impact and its implication on a firm's financing choices.Design/methodology/approachThe authors conduct various univariate and multivariate regression analyses on a panel of all non-financial Indian firms listed on the National Stock Exchange from 2010 through 2018. The authors use the sensitivity of investments to the cash flows model to test the financial constraints hypothesis.FindingsThe authors’ analysis shows a positive relationship between energy efficiency (firms that consume a lesser amount of energy per unit of sale) and the value of firms in the stock market. The authors empirically attribute this greater valuation to the lesser volatility of stock returns, measured by the standard deviation of daily stock returns. Finally, the authors observe that investments in energy-efficient firms are less sensitive to their internal cash flows.Practical implicationsThe results suggest that less green firms face greater constraints in accessing finance from external sources and, therefore, depend more on internal than external capital to finance their investments. Hence, managers of such firms can ease their financing pressures by making their operations greener.Originality/valueIn this study, the authors examine the implications of green operations on the financing choices of firms. This aspect of going green is important because managers will have enough incentives to invest in green technologies as that would increase their access to external finance and, hence, decrease their financial constraints.

Earnings quality measures and stock return volatility in South Africa

This paper examined the association between various measures of earnings quality and stock return volatility of Johannesburg Stock Exchange (JSE)-listed companies for 10 years from 2009 to 2018. The measures of earnings quality considered were accrual quality, conservatism, earnings persistence, predictability and smoothness. The stock return volatility was measured with idiosyncratic volatility. Multilevel linear regression found that accrual quality and earnings persistence are negatively related to idiosyncratic volatility. Firms with a high value of accrual quality and those with more persistent earnings exhibited a decrease in stock return volatility. Furthermore, it was found that the earnings smoothness positively influenced the idiosyncratic volatility, suggesting that firms with less smooth earnings display an increase in stock return volatility. The conservatism and earnings predictability have no significant effect on stock return volatility. The mixed results of this study supported the noise and information perspective to explain the stock return volatility of JSE-listed companies.

The effect of board independence on firm performance – new evidence from product market conditions

We study the effect of corporate board independence on firm performance under different product market conditions. Using customer–supplier links to identify exogenous downstream demand shocks, we find that firm performance is positively associated with board independence when the firm-specific product demand drops. The results are stronger for smaller firms and firms with high growth and more volatile stock returns. The findings prevail if the firm faces a medium level of product market competition or a medium level of downstream demand shock. We provide suggestive evidence for the board's monitoring function driving the effectiveness of board independence in bad times of idiosyncratic risks, rather than its advisory function.

Constructing a positive sentiment index for COVID-19: Evidence from G20 stock markets

The present study investigates the degree of market responses through the scope of investors' sentiment during the COVID-19 pandemic across G20 markets by constructing a novel positive search volume index for COVID-19 (COVID19+). Our key findings, obtained using a Panel-GARCH model, indicate that an increased COVID19+ index suggests that investors decrease their COVID-19 related crisis sentiment by escalating their Google searches for positively associated COVID-19 related keywords. Specifically, we explore the predictive power of the newly constructed index on stock returns and volatility. According to our findings, investor sentiment positively (negatively) predicts the stock return (volatility) during the COVID-19. This is the first study assessing global sentiment by proposing a novel proxy and its impacts on the G20 equity market.

Impact of Macroeconomic Variables on Stock Return Volatility: Evidence from Sub-Sahara Africa

Impact of Macroeconomic Variables on Stock Return Volatility: Evidence from Sub-Sahara Africa

The Performance of Option Pricing Models Estimating the Marketability Discount in a Pre-IPO Real-World Data Setting: Evidence from Europe

Abstract Valuation analysts adjust prices of private firm’s stock downward from their fully marketable counterparts, reflecting the private firms’ lower level of marketability. This discount for lack of marketability can be substantial in magnitude. This study examines the performance (according to bias and accuracy employing estimation error methodology) of seven popular option pricing models in generating discount estimates to coincide with empirically observed discount benchmarks (based on the pre-IPO methodology) in European Union member countries over the period 2004 until 2018. The results allow for the general conclusion that some option pricing models are superior in most settings, coinciding with their individual benefits and deficiencies. The detailed analysis indicates that (i) the superiority of these option pricing models holds for a wide range of periods of assumed restricted marketability, (ii) segmenting discount benchmarks according to their size improves the performance of the option pricing models, (iii) segmenting discount benchmarks according to both, the underlying volatility of stock returns and dividend yields, does not improve the performance of the option pricing models, and (iv) IPO underperformance has no material impact on relative option pricing model’s performance.

Does equity-based compensation motivate executives to build strong brands?

ABSTRACT To defeat myopic brand management, we need to understand better what motivates executives to invest in brand building. Drawing from agency theory, we argue that a better alignment of executivesʻ and shareholdersʻ interests can help. Tests using longitudinal compensation data of chief executive officers (CEO) from 123 public firms suggest that decreasing the sensitivity of CEOʻs Equity-Based Compensation (EBC) to the firmʻs stock price and increasing its sensitivity to the firmʻs stock return volatility are associated with higher brand equity. Weak governance somewhat offsets these effects. Moreover, we find that the impact of EBC on brand equity is partially mediated through the firmʻs strategic emphasis. Our research highlights the importance of understanding managerial incentives as drivers of brand equity.

Commodity price volatility and stock market returns in an emerging economy

AbstractThe paper examined commodity price volatility and stock returns on the Ghana Stock Exchange (GSE). Utilising Threshold Generalised Autoregressive Conditional Heteroskedasticity (TGARCH) estimation technique, the study also evaluated the likely leverage effect on the stock market and further interrogated if autocorrelation existed in the daily stock returns series, for how many days and on what day does it disappear by specifying an autoregressive model as a mean equation. The study concludes that changes in commodity prices and their volatilities on the international market exert a significant level of diverse impact on daily stock returns and return volatility on the GSE. For instance, whilst coffee price changes result in reduction in daily stock returns, changes in crude and gold prices result in an increment in returns on the GSE. The study also confirms the existence of autocorrelation in the daily stock returns for up to seven days, fading out on the eighth day as well as the existence of the leverage effect on the GSE. This result should influence investment decisions in respect to trading on the GSE. Observance of changes in price of these key commodities could enhance predictions and lead to the formulation of strategies to maximise revenues on the GSE

Analysis of Volatility Spillover in African Stock Markets: Evidence from Nigeria, Ghana, and South Africa

The purpose of this paper was to analyze stock market return volatility spillover between in Sub-Sahara markets using Nigeria, Ghana and South Africa monthly data from January 2000 to December 2017. Preliminary analyses from descriptive statistics show that show mean monthly returns are positive for all the stock markets. Skewness coefficients show that the stock returns and interest rates distribution of all Sub-Sahara Africa stock markets are negatively skewed but inflation rate is positively skewed for Nigeria and South Africa, and flat for Ghana. Excess kurtoses are positive for all the stock markets and macroeconomic indicators, and Jarque-Bera statistics indicate the stock markets’ series and macroeconomic indicators are not normally distributed. The Unit roots tests results indicate that all the stock markets and macroeconomic indicators are first difference stationary. The results of multivariate BEKK-GARCH (1,1) model show evidence of volatility spillover in Sub-Sahara Africa stock markets. We therefore recommend amongst others that stock market authorities should formulate and implement policies that would mitigate any negative effect of stock return volatility on the wealth of retail investors so as to sustain investors’ confidence in the African stock markets. This will eliminate the destabilising impact on the investors’ confidence on the markets.

A Comparative Analysis of the Nature of Stock Return Volatility in BRICS and G7 Markets

Through globalization and financial market liberalization, the opening up of markets has increased cross-border investments as investors search for higher risk-adjusted returns. This ability to invest internationally has raised the attention given to emerging markets that offer higher risk-adjusted returns relative to developed markets. However, despite the growing importance of emerging markets, the literature on the nature of volatility in global markets is typified by generalizations of findings from developed markets. To fill this gap, this study comparatively examined the nature of stock return volatility in developed G7 and emerging BRICS markets. Broad market index data and GARCH models over the period 2003:01–2020:08 were employed. The study found evidence of volatility persistence, asymmetry, mean reversion and weak evidence of a risk premium in both emerging and developed markets. There was also evidence of significant differences in the nature of volatility within the two sets of markets. These volatility patterns in both groups cast doubt on the assertion that developed markets are more informationally efficient than emerging markets. Thus, markets in the same group may not always have the same nature of volatility, especially in the wake of structural events such as the COVID-19 global pandemic.

Top management team gender diversity and firm risk-taking in the hospitality industry

PurposeThe purpose of this study is to investigate the link between top management team (TMT) gender diversity and firm risk-taking in hospitality companies. The study also links female leadership to risk-taking. Finally, this study examines the moderating effects of TMT incentive pay and TMT age on the relationship between TMT gender diversity and firm risk-taking.Design/methodology/approachThis study uses an unbalanced data set of 81 hospitality firms and 888 firm-year observations over the period of 1992–2020. The study uses fixed-effects regression estimation for primary analyses and addresses potential endogeneity concerns via two-stage least square regression with firm fixed-effects instrumental variable regression. Risk-taking is measured by total firm risk (i.e. the annualized volatility of daily stock returns). Main results are supported with alternative measures of firm risk and estimation methods.FindingsThe study finds that increasing TMT gender diversity leads to a reduction in firm risk-taking in the hospitality industry. Moreover, the study finds that hospitality firms led by a female CEO experience lower firm risk compared to firms led by a male CEO. Finally, the study finds evidence that the relationship between TMT gender diversity and firm risk is contingent on the level of incentive pay awarded to TMT members and the age of TMT members. Increasing incentive pay and aging executive teams decrease the risk reduction effect of TMT gender diversity.Practical implicationsThe findings of this study recommend that firm risk-taking in the hospitality industry is related to gender diversity in TMTs. Hence, the board of directors should pay attention to gender composition for executive positions for risk management. Moreover, the results also suggest that care should be exercised when using incentive pay to align the interests of managers and shareholders. Finally, the board of directors needs to consider both gender diversity and age of the TMT members for TMT composition to manage executives’ risk-taking behavior.Originality/valueThis study fills a research gap in the hospitality literature by providing empirical evidence for the link between TMT gender diversity and firm risk-taking. Additionally, the study introduces incentive pay and age of TMT as contingency factors for the link between TMT gender diversity and firm risk-taking.

Impact of risk disclosure on the volatility, liquidity and performance of the UK and Canadian insurance companies

PurposeThis paper aims to investigate the impact of risk disclosure practices (voluntary, mandatory and risk disclosure index) on stock return volatility, market liquidity and financial performance for insurance companies in the UK and Canada, before and after the International Financial Reporting Standards (IFRS) adoption.Design/methodology/approachThe panel data analysis covers 14 insurance companies in the UK and 12 in Canada over a six-year period, three years before and three years after the implementation of IFRS. The authors collected risk disclosure data manually from the annual reports and analyzed it through QSR NVivo software for each country. The other variables are secondary data collected from Thomson Reuters Eikon and Datastream.FindingsThe results reveal that mandatory risk disclosure practices positively influence stock return volatility for UK insurers but not Canadian ones. Moreover, both mandatory and voluntary risk disclosures increase market liquidity for UK insurers. The outcomes also show a negative influence of risk disclosure practices on financial performance for both the UK and Canadian insurers. The adoption of IFRS enhances the impact of risk disclosure practices in both countries on market liquidity and financial performance.Research limitations/implicationsThe findings rationalize the impact of risk disclosure practices on volatility, liquidity and financial performance of UK and Canada insurers, and the effect of IFRS in triggering those results.Practical implicationsThe findings highlight the diverse effects of voluntary and mandatory risk disclosure practices in enhancing market discipline and mitigating information asymmetry problems to investors. Regulators and policymakers could rely on the findings to amend and develop disclosure standards more frequently to assure their effectiveness. The authors also offer insights to managers to determine the levels of mandatory and voluntary disclosure practices and disclosure strategies to gain their stakeholders’ confidence.Originality/valueThis study contributes to the literature of risk disclosure in the insurance industry for both the UK and Canada where scarce studies are conducted. It also offers interesting implementations to investors, managers and policymakers.

Forecasting stock return volatility: The role of shrinkage approaches in a data‐rich environment

AbstractThis paper employs the prevailing shrinkage approaches, the lasso, adaptive lasso, elastic net, and ridge regression to predict stock return volatility with a large set of variables. The out‐of‐sample results reveal that shrinkage approaches exhibit superior performance relative to the benchmark of the autoregressive model and a series of competing models in terms of the out‐of‐sample R‐square and the model confidence set. By using shrinkage methods to allocate portfolio, a mean–variance investor can obtain significant economic gains. Overall, our findings confirm that shrinkage approaches can effectively improve stock return volatility forecasting in a data‐rich environment.