UK Investment Research Articles

Interaction between investor sentiment, limits to arbitrage and the returns of stock market anomalies: evidence from the UK stock market

This study investigates the role of two prominent concepts in finance: limits to arbitrage and investor sentiment in stock prices. The study examines how changes in market-wide investor sentiment and limits to arbitrage can affect the performance of nine UK stock market anomalies. The extant literature relating to investor sentiment focuses mainly on the US stock market, whilst research on the UK market typically examines aggregated index-level data. In addition, previous studies have focused on examining investor sentiment and limits to arbitrage separately. Using data from UK-listed companies over the period January 1997 to December 2019, the study finds that five stock market anomalies were related to changes in UK investor sentiment and produced significantly higher returns following periods of high investor sentiment, while the effect of limits to arbitrage was mostly limited. However, the interaction analysis provided support to the limits to arbitrage theory and demonstrated that the effect of high investor sentiment on stock market anomalies was more pronounced when combined with high limits to arbitrage and had less effect during periods characterised by low limits to arbitrage.

The Puzzle of UK (Under‐) Investment: Is Investment Short‐Termism Just a Supply‐Side Problem in Capital Markets?

AbstractInvestors and financial market intermediaries have been blamed for under‐investment, low growth and low rates of innovation in the UK, with their behaviour being attributed to short‐termism. Various reasons for short‐termism have been identified, including undervaluing long‐term earnings, increased financial obstacles associated with longer investment horizons, and the adoption of financial control systems to meet investors’ demands for quarterly earnings reports. As a result, firms may opt for suboptimal short‐term investment projects while neglecting potentially valuable long‐term initiatives. Most research has focused on large corporates, which constitute a small fraction of the economy and involve multiple stakeholders. There is a significant knowledge gap regarding small owner‐managed firms that rely primarily on internal financing and bank debt for investment. Our study fills this gap by analysing a comprehensive UK finance and investment decision‐making survey of 1501 firms across all classes. The survey reveals that investment appraisal relies on a ‘payback’ period. We find that 58.8% of firms choose a payback period of 3 years or less, with shorter payback periods more prominent among the smallest firms. This suggests that financial frictions impact the investment behaviour of the smallest firms, while shareholder‐driven short‐termism influences the largest firms but only in relation to research and development projects.

Die wirtschaftlichen Folgen des Brexits

Abstract The United Kingdom’s exit from the European Union (Brexit) has negatively affected its economic performance in the years after the 2016 referendum. A growing literature on the short-run effects of Brexit has documented that UK economic activity has been affected through a mix of uncertainty and anticipation effects. This literature has shown that UK GDP and investment have been negatively affected and inflation has increased as a consequence of the outcome of the referendum. Comparatively little is known about the effects of the UK’s subsequent exit from the single market and customs union in January 2021, but existing research has documented negative effects on UK trade, in particular UK imports from the European Union. But whether this will lead to subsequent further declines in UK GDP remains to be seen and will also depend on future EU-UK efforts to reduce the trade barriers created by the trade and cooperation agreement (TCA) of 2020.

Die ökonomische Bedeutung des Brexits

Abstract On January 1, 2021, Great Britain (England, Scotland and Wales) left the EU single market and customs union. Although the Trade and Cooperation Agreement between the UK and EU ensures that no tariffs or quotas are to be imposed on traded goods, there are still numerous non-tariff barriers to trade. These added a significant layer of trade complexity that did not exist pre-Brexit and it was thus inevitable that there would be ramifications for the UK economy. Carefully judging this impact is a complicated task, however, as a counterfactual must be used: how would the UK economy have fared if it were still in the EU? This difficulty is exacerbated by two other highly significant events affecting the UK economy at the same time, namely the Covid-19 pandemic and the Ukraine war. Disentangling Brexit from all this and deciding what is and is not a Brexit effect makes the evaluation thereof difficult. Nevertheless, there have been a number of studies published that have attempted such a task. UK-EU trade is widely judged to have taken a significant hit due to Brexit, with smaller firms producing a limited range of products being affected the most. The consensus view is that Brexit has also had a negative impact on UK investment levels and GDP, with the latter judged to be approximately 6 % lower than if the UK had stayed in the EU. In the long run, the UK economy may benefit from more skilled foreign labour due to the post-Brexit immigration rules. Nevertheless, any positive effects are likely to be outweighed by the non-tariff barriers in UK-EU trade, acting as a deterrent in exploiting comparative advantage and widely seen as being the main drag on UK productivity.

Disruption in the Market for Information: MiFID II and Investor Relations

Our study addresses the complex processes by which actors in the market for information reposition themselves and recalibrate their work in response the introduction of the Markets in Financial Instruments Directive (MiFID) II, which regulated a wide range of issues on information flows and payments for research in capital markets. Using interviews and surveys of UK investor relations (IR) professionals we explore how the activities and practices of IR professionals, and their relations with sell-side analysts and investors, have changed. We find that the operational processes within the market for information have been materially disrupted and observe an increase in the importance and relevance of the IR function both internally (within their organizations) and externally (in the field of investment advice). We provide evidence of extensive ‘jostling for position’ in the field which is perceived to have resulted in the (at least partial) disintermediation of the sell-side and increased direct ‘interlocking’ of investors and IR professionals in their engagement and information communication practices. We report on a changing information market paradigm (sequencing of communication) - where the traditional information and relational intermediation roles of sell-side analysts are now increasingly contested and assumed by IR professionals.

Institutional investor behaviour and the energy transition: A complexity framework for accelerating sustainable finance from UK investors

Despite sustainable investment flows having increased significantly over the past decade for transforming the current energy system, a large investment gap remains. This research explores the complex links between institutional investors' expectations on the speed of the energy transition and their sustainability-related investment behaviours. Through in-depth semi-structured interviews with institutional investors, we construct a complex system model using a causal mapping approach, illustrating complex relationships within the sustainable investment system. Our contribution involves the development of multi-layer cognitive maps for different types of institutional investors, followed by a composite causal map that dissects key investment behaviours and investor expectations. Results reveal interlinked concepts influencing investment behaviour and highlight feedback loops with potential amplifying effects on investor expectations and investment behaviour. Two critical feedback loops emerge: 1) the interplay between political and financial support for the energy transition and the associated cost, and 2) the intricate relationship between sustainability factors and asset valuation. Addressing these interconnected issues simultaneously and monitor negative feedback loops that may curtail sustainable finance flows are vital. The results reveal heterogeneities amongst institutional investors such as fiduciary duties, stranded assets, the importance of fossil fuels in the energy system. In sum, our insights provide a foundation for holistic energy policies and a reference system for evaluating policies aimed at accelerating green finance.

An examination of motivation factors driving investor behaviours towards socially responsible community energy initiatives

Community energy initiatives play a significant role at the grassroots level in the transition to Renewable Energy Communities and a low-carbon economy. However, these initiatives are hampered by multiple barriers at the market, institutional, organisational, and individual level. Funding cuts of state-supported feed-in tariff (FiT) policy in major markets such as Germany, Japan, China and the additional capping of the number of new installations that could be accredited under the FiT scheme in the UK. In light of these market changes and the need to accelerate the development and growth through the creation of new and/or complementary future community energy models consisting of private investors, a detailed understanding of the dynamics of community energy investor characteristics and socio-psychological motivations is increasingly important. First, a review is conducted including the theories that underpin and explain the factors that affect investor behaviour, after which a conceptual framework to examine investor behaviours towards socially responsible community energy initiatives is developed. The framework is used as the basis to construct and administer a survey involving sampling of 295 UK investors in community energy initiatives and the subsequent statistical analysis of the survey data and discussions of the findings. The results first capture the differences among investors with differing regional affect and investment behaviours. The study also provides the needed insight into better understanding the dynamics of investor characteristics and motivations of community energy initiatives. Results also indicate that investors are predominantly ethically-oriented, particularly toward environmental concerns. Additionally, community and social factors also appear to play significant roles in investor participation while financial orientation is least dominant.

UK invests £2bn, as Rolls-Royce tests new air fuel system

UK invests £2bn, as Rolls-Royce tests new air fuel system

Impact of Behavioural Biases on Investment Performance: A Comparative Analysis of Investors from India, USA and UK

This study presents evidence towards the existence of behavioural biases while analysing the impact of such biases on the investors’ investment performance in India, the USA, and the UK. Further, the study aims to investigate the moderating role of financial literacy on the relationship between behavioural biases and investment performance. It reveals that behavioural biases like affect heuristic, herding and status quo positively impact the investors’ investment performance amongst Indian investors whereas loss aversion, overconfidence, availability, and representativeness biases positively impact the investors’ investment performance amongst UK investors; and affect heuristic bias amongst USA investors. The findings divulge the negative impact of anchoring bias and mental accounting amongst Indian investors; availability bias, disposition effect, and overconfidence bias amongst USA investors; and affect heuristic and herding amongst UK investors. The study finds that a few of the behavioural biases impact investment performance positively, though less often. Hence investors should be cautious as these biases generally lead to irrational decision-making and might adversely influence the investors’ investment performance in the long run. The study further concludes that financial literacy significantly moderates the relationship between anchoring bias and individuals’ investment performance in India and affect heuristic in the USA. Interestingly, in the UK scenario, no significant moderating impact of financial literacy was found between any of the behavioral biases and investment performance.

Is voluntary risk disclosure informative? The role of UK firm-level governance

PurposeThe study investigates how firm-level governance (FL_G) affects the disclosure of voluntary risk information. Likewise, it explores the influence of FL_G on the informativeness of voluntary risk disclosure (VRD). Specifically, it examines how FL_G shapes the nexus between VRD and firm value.Design/methodology/approachIt uses a sample of non-financial firms from the FTSE350 index listed on the London Stock Exchange between 2010 and 2018. The authors utilise an automated textual analysis technique to code the VRD in the annual reports of these firms. The firm value, adjusted for the industry median, is a proxy for investor response to VRD.FindingsThe results suggest that UK firms with significant board independence and larger audit committees disclose more risk information voluntarily. Nevertheless, firms with larger boards of directors and higher managerial ownership disseminate less voluntary risk information. Besides, VRD contains relevant information that enhances investors' valuation of UK firms. These results are more pronounced in firms with higher independent directors, lower managerial ownership and large audit committees.Practical implicationsThe study rationalises the ongoing debate on the effect of FL_G on VRD. The findings are helpful to UK policy-setters in reconsidering the guidelines that regulate UK VRD and to the UK investors in considering risk disclosure in their price decisions and thus enhancing their corporate valuations.Originality/valueIt contributes to the risk reporting literature in the UK by presenting the first evidence on the effect of a comprehensive set of FL_G on VRD. Besides, it enriches the existing research by shedding light on the role of FL_G on the informativeness of discretionary risk information in the UK.

Do Female Fund Managers outperform their Male Counterparts? A Quantitative Analysis of UK Retail Funds

Abstract Why are there so few women in finance and even fewer managing funds? There is a major discrepancy between the number of female and male fund managers worldwide. The aim of this paper is to ascertain if gender is a contributing factor to fund managers’ performance. This is examined through analysis of data from 2012-2022 attained from eight major IA sectors of funds (Asian, European, North American, UK All Companies and UK Income equity funds; Targeted Absolute Return, Sterling Corporate Bond and 40-85 Sector funds) which are available to UK retail investors. This paper aims to compare the performance of all funds in the data pool with funds that involve one or more female managers through a quantitative and qualitative analysis. There is no significant research on the performance of women fund managers for UK investors. The authors intend to fill this gap with this paper. We find that funds managed by women or mixed teams produce similar and sometimes better risk-adjusted returns than male-only managed funds but are few in numbers and find it difficult to raise significant amounts of assets. JEL classification numbers: D61, G11, G14, J16, M14. Keywords: Gender, Investment, Asset Management, Wealth, Diversity.

Insights into UK investment firms’ efforts to comply with MiFID II RTS 6 that governs the conduct of algorithmic trading

PurposeThe purpose of this paper is to examine the effectiveness of UK investment firms’ implementation of the requirements in Commission Delegated Regulation 2017/589 (more commonly known as “Regulatory Technical Standard 6” or “RTS 6”) that govern the conduct of algorithmic trading activities.Design/methodology/approachA qualitative examination of 19 semi-structured interviews with practitioners working for, or with, UK investment firms engaged in algorithmic trading activities.FindingsThe paper finds that practitioners generally have a good understanding of the requirements in RTS 6. Some lack knowledge of algorithms, coding and algorithmic strategies but have used best efforts to implement RTS 6. However, regulatory fatigue, complacency, cost pressures, governance in international groups, overreliance on external knowledge and generous risk parameter calibration threaten to undermine these efforts.Research limitations/implicationsThe study’s findings are limited to the participants’ insights. Some areas of the RTS 6 regime attracted little comment from participants.Practical implicationsThe paper proposes the introduction of mandatory algorithmic trading qualification requirements for key staff; the lessening of the requirements in RTS 6 for automated executors; and the introduction of a recognised software vendor regime to reduce duplication and improve coordination between market participants that deploy algorithmic trading systems.Originality/valueTo the best of the author’s knowledge, the study represents the first qualitative examination of firms’ implementation of the algorithmic trading regime in the second Markets in Financial Instruments Directive 2014/65/EU.

The Italian Investment Manager Exemption: All That Glitters Is Not Gold

At the end of 2022, Italy has implemented new safe harbour rules on permanent establishments for investment managers, which have close similarities with the UK Investment Manager Exemption rules. These provisions, although commendable, seem to require some fine tuning.

Setting out a path to the future

There are significant concerns about current UK activity in Research, Development and Innovation (RDI) We should build on current structures – ‘revolution through evolution’ UK investment is well below the OECD average More focus needs to be placed on full funding costs Permeability between different research institutes should be increased.

Risk taking in the context of financial advice: does gender interaction matter?

This study tests a gender threat hypothesis whereby having a financial advisor of the opposite gender results in gender stereotypical risk attitudes in portfolio choice. We employ a unique dataset of 1,621 advised UK investors, combined with information on the gender of their financial advisors. Confirming the hypothesis, our results show that men advised by a woman take more risk than when advised by a man. Women advised by a man adopt a more cautious approach than when advised by a woman. When the gender threat is alleviated, that is when women are advised by women, and men are advised by men, we found no gender gap in risk-taking.

Network Granger Causality Linkages in Nigeria and Developed Stock Markets: Bayesian Graphical Analysis

ABSTRACT This study investigates the interdependent structure between Nigeria and developed stock market using directed acyclic graph with Bayesian estimation techniques for the period of March 11, 2020 to July 31, 2021. The dynamic Granger causal test of both the contemporaneous and autoregressive estimation were done using the Markov Chain Monte Carlo (MCMC) simulation method with Metropolis-Hasting (MH) sampling technique. The graphical structure of the instantaneous and autoregressive results shows returns correlation for Nigeria’s stock market and both China and India’s stock market while absence of return correlation are found for both US and UK stock market. The result implies that Nigeria’s stock market has potential diversification benefit for the US and UK investors during pandemic crises. In addition, US stock market returns is found to depend on China stock market returns while volatility spill over runs from the US stock market to China’s stock market. Last, UK stock market tends to depend on India’s stock market. The implication of the study is that Nigeria’s stock market is integrated with China and India’s stock market while China’s stock market is linked to the US stock market such that any financial shock from the lead stock markets is transmitted to the lagged stock markets.

Correction to: Venture capital activities under uncertainty: US and UK investors behavior

Correction to: Venture capital activities under uncertainty: US and UK investors behavior

Fund management in the interwar period: UK investment trust portfolio asset allocation in the 1920s

Abstract This study investigates the portfolio asset allocation of UK investment trusts between 1914 and 1928 using a unique hand-collected dataset of 41 companies, which comprises 40,875 portfolio holdings. UK investment trusts not only survived WWI without major losses but also had a remarkable performance in the 1920s, which led to a wave of new incorporations. The 1920s was a period of significant shifts in investment trust portfolio composition and our analysis examines the main reasons for this. We show that investment trust managers were able to adjust quickly to the new socioeconomic circumstances and secure high profitability for their shareholders.

Understanding the Lack of Ethnic and Gender Diversity in the UK Investment Sector

Understanding the Lack of Ethnic and Gender Diversity in the UK Investment Sector

Correction to: Venture capital activities under uncertainty: US and UK investors behavior

Correction to: Venture capital activities under uncertainty: US and UK investors behavior