Variation In Stock Returns Research Articles

General Purpose Technologies, International Technology Diffusion, and the Cross Section of Stock Returns

We propose that general purpose technologies (GPTs) — a class of technologies that have pervasive impacts on the domestic economy and spill over internationally — are a source of nondiversifiable technology risk in both the U.S. and the world. We construct an empirical GPT factor using patent data, and find that it predicts future growth rates of U.S. consumption, GDP, and industrial production. Using standard asset pricing tests, we show that GPT risk is priced in U.S. and international stock returns, and exposure to GPT risk explains a substantial fraction of the cross-sectional variation in stock returns.

Value creation in going private transactions

The study empirically analyses the stock price reaction and the determinants of shareholder gains in going private transactions in the Malaysian stock market. A cumulative average excess return of 21.99% is documented for 61-day event period using market adjusted return model. The excess returns earned by target shareholders are attributed to free cash flow, firm size, dividend payout ratio, debt, method of payment and return on equity. The model explains 66.96% of cross-sectional variation in stock returns.

IASB changes on leasing - a study discovering the impact of lease disclosures in the assessment of equity risk

We investigate the relationship between equity risk and operating risk as well as equity risk and financial risk by analysing different levels of leverage, reported debt and earnings volatility of German listed companies. The results suggest that the measurement of equity risk is based on the variability in ROA. For firms that already have higher operating risk, investors include operating leases in the measurement of equity risk in addition to operating risk and reported financial risk. For firms with lower variability in ROA, the assessment of equity risk relates only to reported financial risk and operating risk; in addition, off-balance sheet debt is not significant in explaining variations in stock returns. Since reported debt and off-balance sheet debt are not treated equally, a mandated recognition of all lease contracts is expected to enhance the assessment of equity risk for firms with lower variability in earnings.

The Size Effect in Value and Momentum Factors: Implications for the Cross-Section of International Stock Returns

We propose and test multifactor models that break the conventional value and momentum factors on the basis of firm size and build separate factors comprised of small stocks, which we call “small-stock value and momentum factors”, and big stocks, which we call “big-stock value and momentum factors.” Our augmented models with both small-stock and big-stock factors explain a significant part of common variation in international stock returns and outperform standard benchmark models for local and global test assets both in- and out-of-sample. Small-stock factors are the key driver of this outperformance. Our results indicate the presence of funding liquidity risks related to the profitability of small firms and have important implications for asset allocation decisions in view of the increasing role of small-cap stocks as a vehicle for international diversification.

Influence of auditors' report on variation of stock returns of preference shares of the companies listed on Brazilian Stock Market

The objective of this paper was to verify how returns on preference share of companies listed in the Brazilian stock market react to the announcement of auditors’ opinion. The listed companies’ data was obtained from the database of Economatica and the auditor’s reports from CVM, for an 11-year period. Additionally, we calculated the average rate of the stock returns for 30 days before and after the publication of financial statements. The Wilcoxon test was computed for comparing the average stock returns before and after publication of auditors’ report. Based on our analysis, we concluded that there is an indication that the publication of auditors’ report had effects on the average return of traded shares in the month after the publication of auditors’ reports. The paper drew attention to the pattern of the financial statements of the year in which auditors’ report had impact on the stock returns.

Dynamic Seasonality in Time Series

In this research, a new class of time series models capturing dynamic seasonality is introduced. Unlike traditional seasonal models which focus mainly on the mean process, our approach can accommodate dynamic seasonality in the mean and variance processes. This feature allows us to perform statistical inference of the dynamic seasonality in heteroskedastic time series models. Quasi-maximum likelihood estimation and a model selection procedure are adopted. Simulation study is carried out to evaluate the efficiency of the estimation method. In the empirical examples, our model outperforms deterministic seasonality model and Holt-Winter method in forecasting the monthly domestic electricity consumption in Hong Kong and the intraday stock return variation in out-of-sample analysis.

Managerial Discretion in Accruals and Informational Efficiency

In this paper we examine the relation between managerial discretion in accruals and informational efficiency. We measure managerial discretion in accruals by the absolute value of discretionary accruals. Assuming that efficient prices follow a random walk, we measure informational efficiency by using stock return variance ratios. We find that the absolute value of discretionary accruals is negatively associated with the price deviation from a random walk pattern, estimated in the 12-month period subsequent to the accrual reporting; hence, future informational efficiency increases with the extent to which managers exercise discretion over accruals. The results are consistent with the view that discretionary accruals, on average, convey useful information to investors and facilitate the price convergence to its fundamental value. Our findings are robust to a battery of tests, which we run to validate both our measures of informational efficiency and our measure of managerial discretion in accruals.

Stalking Public Information in the Lazy Limit Order Book

In a specialist market public information shocks may generate a sequence of transactions at stale prices, as nimble floor traders pick off obsolete limit orders. We design a test for the importance of public information in price formation around this fact. We find that removing all potentially stale limit order trades from the transactions record has no significant effect on a statistic that links price change to transactions. We use the bootstrap to calibrate this result and demonstrate that public information shocks account for a small portion of stock return variances.

Does Sentiment Risk Persist as Priced Risk Factor? A Multifactor Approach for Stock Return

Much of the academic debate has gone in to exploring the better asset pricing model that can explain the quantification of the trade-off between risk and expected return for the cross section of stock return. Nevertheless this intimidating task becomes more pragmatic given the market structure of emerging markets, liquidity effects, market inefficiency, and more significantly the presence of inherent imperfect rationality or sentiment. The basic objective of this paper is to evaluate the pricing implication of unconditional five factor model to explain the cross sectional stock return behaviour in the context of Indian stock market. Our analysis also aims to examine the pricing nature of aggregate market wide sentiment risk in the presence of other risk factors. We employ Fama and French time series regression approach to examine the impact of market risk premium, size, book-to-market equity, momentum and liquidity as risk factors on stock return. Our empirical results show that given the multidimensional nature of risk the choice of a five factor model is apparently persuasive for consideration in investment decisions. However, inconsistent with prior literature book-to-market equity fails to explain the average return in case of large stocks, and pricing evidence of momentum profits fades in case of winner stocks and momentum strategy retains its value only for the sell side transactions i.e., loser portfolios. With the presence of liquidity factor in the five factor model specification, the results suggest that liquidity is priced and explains a cross sectional variation in stock returns. Our results also suggest that it is naive to argue for the universal pricing implication of sentiment risk in a multifactor model framework, and market wide risk factors resume their importance as rational source of priced risk.

Liquidity Risk and Stock Returns: A Return Decomposition Approach

We study the effect of innovations in liquidity on stock-return volatility under the return-decomposition framework. Using revisions to equity analyst consensus forecasts to measure cash-flow news directly, we contend that both cash-flow news and expected return news correlate with liquidity shocks, and the cash-flow news component is a nontrivial channel through which liquidity correlates with stock returns. Specifically, we find a positive (decrease) liquidity shock for firms that have positive (negative) cash-flow news and expected-return news. Furthermore, since the correlation between liquidity proxies and stock returns also arise from the association of liquidity proxies with the three stock return components, the R^2 from a regression of returns on liquidity proxies may understate or overstate the importance of liquidity as a source of stock-return variance. Finally, liquidity proxies tend to explain stock returns better during negative market liquidity shocks, but this additional explanatory power comes mostly from the increased correlation between liquidity proxies and cash-flow news, while the correlation between liquidity proxies and unexplained stock return variations does not change with market liquidity conditions.

The Role of Investability Restrictions on Size, Value, and Momentum in International Stock Returns

Using monthly returns for over 37,000 stocks from 46 developed and emerging market countries over a two-decade period, we test whether empirical asset pricing models capture the size, value, and momentum patterns in international stock returns. We propose and test a multi-factor model that includes factor portfolios based on firm characteristics and that builds separate factors comprised of globally-accessible stocks, which we call “global factors,” and of locally-accessible stocks, which we call “local factors.” Our new “hybrid” multi-factor model with both global and local factors not only captures strong common variation in global stock returns, but also achieves low pricing errors and rejection rates using conventional testing procedures for a variety of regional and global test asset portfolios formed on size, value, and momentum.

Culture and Stock Price Synchronicity: The Effects of Tightness and Individualism

In this paper, we examine the effect of culture on cross-country differences in stock price synchronicity. We focus on two cultural dimensions. The first, tightness-looseness, relates to the external constraints on investors’ behavior that helps to explain the similarity/diversity in individual behaviors within a country (Gelfand et al., Science, 2011). The second, individualism- collectivism, focuses on the internal attributes that guide investor’s behavior and reflects the degree to which people focus on their internal attributes to differentiate from others (Hofstede, 1980). Together, tightness and individualism influence the inter-personal similarity/diversity of behaviors and the tendency to think holistically/analytically, which are likely to affect stock price synchronicity. Using stock returns of 45 countries from 1990 to 2010, we find a higher stock price synchronicity in countries with a tighter and less individualistic culture. Both market-wide and firm-specific stock return variations are lower (higher) in countries that are culturally tight (loose). On the other hand, individualism just increases firm-specific variations. The marginal effect of culture on stock price synchronicity is comparable to those of previously documented determinants of stock price synchronicity, such as good government index and information opaqueness. We also find that the influence of culture on the stock price co-movement is weaker in countries that are more open to trade and more integrated with the global stock market. Taken together, our study suggests that culture is an important omitted variable in the literature that examines cross-country differences in the stock price co-movement.

The Neuroscience Behind the Stock Market's Reaction to Corporate Earnings News

Using functional magnetic resonance imaging, we capture neural activity in the ventral striatum — a key area in the human brain’s reward processing circuit — of 35 adult investors learning the earnings per share disclosed by 60 publicly traded companies. Before imaging, investors forecasted each company’s earnings and took either a long or a short position in its stock. We find that striatal activation in investors’ brains explains just as much or more of the variation in risk-adjusted stock returns and abnormal share trading around earnings announcements than the dollar or percentage magnitude of the earnings surprise itself. We also find that, in aggregating investors’ individual reactions, the market seems to weigh more heavily the reactions of investors with greater brain activation, even after controlling for their financial expertise, forecasting ability, investment positions, and overall sensitivity to rewards and punishment.

When Firms Talk, Do Investors Listen? The Role of Trust in Stock Market Reactions to Corporate Earnings Announcements

We examine whether the level of trust in a country affects investors’ perception and utilization of information transmitted by firms through financial disclosure. Specifically, we investigate the effect of societal trust on investor reactions to corporate earnings announcements. We test two competing hypotheses: on the one hand, corporate earnings announcements are perceived as more credible by investors in more trusting societies and therefore elicit stronger investor reactions; on the other hand, societal trust mitigates outside investors’ concern of moral hazard and reduces the value of corporate earnings announcements to them, thereby weakening their reactions to these events. We analyze the abnormal trading volume and abnormal stock return variance during the earnings announcement period in a large sample of firm-year observations across 25 countries, and find that both measures of investor reactions to earnings announcements are significantly higher in more trusting countries. We also find that the positive effect of societal trust on investor reactions to earnings news is more pronounced (1) when a country’s investor protection and disclosure requirements are weaker, suggesting that trust acts as a substitute for formal institutions, (2) when a country’s average education level is lower, consistent with less educated people relying more on trust in making economic decisions, and (3) when firm level information asymmetry is higher, supporting the notion that trust plays a more important role in poorer information environments.

Management Earnings Guidance and Stock Price Crash Risk

Many recent studies have explored how the properties of mandatory disclosure, such as opacity, conservatism, and comparability, are related to future stock price crashes. However, Beyer et al. (2010) estimate that mandatory disclosures account for less than 12% of the total stock return variance explained by financial disclosures, compared to over 55% from earnings guidance. We extend prior studies by investigating the relation between earnings guidance, forecast bias, and crash risk. We find a significant positive relation between guidance and crash risk that is economically large. We show that optimistic guidance drives this positive relation. We also provide the first direct evidence on how the forecast bias gets impounded into price, which leads to future crashes. We conduct a battery of tests to mitigate concerns about endogeneity and alternative explanations. Overall, our findings highlight the agency problem in guidance disclosure and its effects on capital market beyond a short horizon.

Foreign Equity Trading and Average Stock-Return Volatility

We examine whether there is a relationship between foreign equity trading and average total volatility, measured as the value-weighted average of stock-return variances in the Istanbul Stock Exchange. We employ foreign equity purchase and sale data to track changes in foreign equity trading, which not only enable us to capture effective foreign investor participation but also to observe the potential asymmetric effects of incoming and outgoing funds on the average total volatility. Consistent with the implications of the asymmetric information hypothesis, we find that net equity flow is positively associated with average total volatility. Furthermore, we show that net equity flow affects the average total volatility through the local and idiosyncratic volatilities, suggesting that foreign investors engage in firm-specific and market-wide information production.

Stock Price Informativeness and Corporate Governance: An International Study

This study investigates the cross-country relationship between firm-level corporate governance and stock price informativeness. Using firm-level data from 22 developed countries, we find that stock price informativeness, as measured by firm-specific stock return variation and future earnings response coefficients, increases with the quality of a firm's corporate governance. Further analyses show that all mechanisms except board-related governance relate positively to stock price informativeness. Finally, firm-level corporate governance plays a more significant role in strengthening the stock return–earnings associations for firms in countries with strong institutional environments. This evidence highlights the role of country-level legal investor protections in shaping the relationship between firm-level corporate governance and stock price informativeness.

Comparative Testing of Capital Asset Pricing Model (CAPM) and Shari’a Compliant Asset Pricing Model (SCAPM): Evidence from Karachi Stock Exchange - Pakistan

CAPM is most widely used economic model for pricing of securities, although criticized on different basis and alternative CAPM’s were developed in the hope of better explanatory power. Islamic finance has shown remarkable performance and growth in first decade of 21st century. In order to increase liquidity Islamic finance practitioners have entered in stock market and by 2008 nine Islamic indexes are operating worldwide. Risk free return is not accepted in Islamic financial literature hence traditional CAPM is not suitable for security valuation for Sharia compliant investments. Hanif (2011) presented a Sharia compliant asset pricing model (SCAPM) for valuation of Sharia compliant securities. The purpose of this study is to test the CAPM and SCAPM comparatively on KSE-100 to document the results and present findings as which of the model explain more variation in stock returns. Study period covers nine years (Jul 2001- Jun 2010). For calculation of returns historical prices of securities and market index is used. Portfolio technique (based on market capitalization) was used for analysis and results obtained through OLS. Findings of the study are very interesting to researchers as well. No significant results found in higher and lower capitalization portfolios under any of the model, however results were statistically significant for middle capitalization portfolio and explanatory power of SCAPM was better than CAPM.

Leverage and Returns in Three Countries of Southern European Region

1. Introduction This paper aims to shed light on the propositions put forward by Modigliani and Miller (1958, 1963) in their seminal work concerning the relationship between firm value and the financing decision. Debt is one of the principle sources of financial risk. Rational, risk-averse investors should demand a leverage premium, indicating an expected positive relationship between firm's leverage and stock returns. The vast majority of the studies in the area of capital structure investigate either the determinants of leverage or the existence of on optimal capital structure. Also, there are a few studies that examine the relationship between leverage and stock returns, with contradictory results, mainly in the USA and UK market oriented economies. The aim of the present paper is to provide additional empirical evidence in the relationship between leverage and stock returns, which up to know has attracted limited attention in the literature. In doing so, we treat leverage as an independent factor, in line with previous work (Hamada, 1969; Bhandari, 1988; Korteweg, 2004; Dimitrov and Jain, 2006; George and Hwang, 2010), and examine whether leverage is an asset pricing factor that can explain stock return variability. Furthermore, we perform our analysis both on a full sample basis and on an industry basis in order to investigate if the impact of leverage on stock returns varies as to the firm's industry classification, since, industry class is generally considered as an important risk factor. By using leverage as an independent factor the results of the present study can be converted to a practical tool, that is to say a successful investment (leverage) strategy. It is an aspect where limited work has been undertaken, and to the best of our knowledge it is the first to be undertaken in the Continental European, bank-oriented environment. The completely different politico-economical, legal, and institutional framework (the arm's length system of USA and UK vs. the control-based system of Continental Europe, Drobetz and Pensa 2007) the few previous studies have been carried out, justify the necessity of further exploration of the above relationship. Thus, the main objective of the present paper will be investigated with the use of a dataset from Greece and Italy, i.e. two countries from Continental Europe that has a bank oriented economy, contributing by this way the necessary accumulation of non-US and non-UK research. The importance of country specific characteristics on the capital structure theme has been emphasized in the literature (Rajan and Zingales, 1995; Psillaki and Daskalakis, 2009; Oztekin, 2009; Brounen et al., 2006; Andritzky, 2003; Alves and Ferreira, 2011). Specifically, Antoniou et al. (2008) examined firms operating in capital market oriented economies and bank oriented economies and concluded that the capital structure decision of a firm is not only the product of it's own characteristics, but also the result of the environment and traditions in which it operates. Jong et al. (2008,) give evidence that creditor right protection, bond market development and GDP growth rate have a significant influence on capital structure issues, highlighting the importance of country-specific factors in the corporate finance field. Moreover, literature on the corporate governance issues suggest that there may be strong differences in corporate objectives between the Anglo-American' and the Continental European Financial systems-the maximization of shareholders vs. the maximization of all stakeholders objective, Bancel and Mittoo (2004). Furthermore, the objective of the present paper will be tested in a different market environment as Greece and Italy have differentiating characteristics from other countries of the Eurozone. Specifically, the above mentioned countries, while members of the Euro zone, have a medium stock market compared to other European stock exchanges in terms of market capitalization, number of firms listed and turnover volume. …

Are large banks less risky?

This study decomposes the unconditional stock return volatility into two categories: systematic versus idiosyncratic risk, to re-examine the link between size and risk in the banking industry. The feasibility of the model is tested using data for US banks from 1998 to 2007. The evidence uncovered suggests that the practice of size-related diversification obtained with large banks reduces the firm-specific risk, and thus weakens stock return variances. However, rather than eliminating firm-specific risk, it is being transformed into systematic risk. Additionally, our empirical findings can potentially explain why a bank's size-related diversification does not result in a reduction in its unconditional stock return volatility reported in Demsetz and Straha [Historical patterns and recent changes in the relationship between bank size and risk. Federal Reserve Bank of New York Economic Policy Review, 1(2), 13–26 (1995); Diversification, size, and risk at bank holding companies. Journal of Money, Credit, and Banking, 29, 300–313 (1997)].