Firm Volatility Research Articles

Consumer Behavior and Firm Volatility

AbstractDispersion in firm‐level growth rates rises during recessions. To date, this has been explained through mechanisms on the firms' side of the economy. In this paper, I show that countercyclical dispersion can arise from changes on the demand side of the economy. Using retail data I find that during recessions demand elasticity rises, the dispersion of firms' growth rates increases, and this increase is larger in markets where the change in consumer behavior is the strongest. I develop a business cycle model with heterogeneous firms and frictions in product markets that highlights the relationship between consumer behavior and firm volatility.

Strategic Debt Restructuring and Asset Substitution

This paper examines whether debt renegotiation mitigates the agency costs of asset substitution. Inspired by the studies of Mella-Barral and Perraudin (1997) and Leland (1998), we have developed an analytical continuous time model of a firm that has the option to switch to a higher risk activity and renegotiate the terms of the debt. Our model creates a trade-off between increasing firm volatility and decreasing growth rate which characterizes the potential for asset substitution. Our findings indicate that, in most cases, debt renegotiation substantially reduces agency costs of asset substitution, whereas non-renegotiable debt is optimal when equity holders have a weak bargaining position and the opportunity cost of their risk-taking incentives is high. Several testable empirical implications regarding the design of debt contracts are developed.

The Anna Karenina Principle and Stock Prices

Abstract The Anna Karenina principle (AKP) based on the opening line of Leo Tolstoy’s Anna Karenina, “All happy families are all alike; each unhappy family is unhappy in its own way” is applied to financial markets. We test the AKP by defining happy firms as positive return firms and unhappy firms as negative return firms and analyse whether happy firms are more “alike” than unhappy firms. We use return correlations, cross-sectional return and cross-sectional volatility dispersion as measures and find for different stock index constituent samples totalling more than 8000 stocks that the AKP does not hold in general. In contrast, we find that the average return volatility of unhappy firms is larger than that of happy firms. This cross-sectional version of volatility asymmetry also implies that unhappy firms are more stressed than happy firms.

Does earnings distribution policy influence corporate stock price instability? Empirical evidence from Tanzanian listed industrial firms

This paper primarily aims at examining the impact of dividend policy on stock price volatility of industrial firms listed in the Dar es Salaam Stock Exchange employing data collected from audited published financial statements for the period 2009–2019. The paper utilized a panel data regression estimation method, and the results show that both measures of dividend policy—dividend yield and dividend payout ratios—have negative significant relationship with stock price volatility. This may indicate that the increase in firm’s dividend yield and dividend payout lowers the stock price volatility, which in return, improves corporate stock price stability. The results, therefore, provide important implications for risk management practices, financial securities valuation and government policy towards stock market development. Also, since both management and investors are concerned about the volatility of stock price, the findings of this paper shed light on the path way to discovering what moves stock price and important factors to be considered by investors before making investment decisions, and managements by establishing their ability to utilize dividend policy as a mechanism of controlling the stock price volatility.

Environmental, social and governance performance and stock price volatility: A moderating role of firm size

This study examines the role of environmental, social and governance (ESG) performance on stock price volatility of textile and apparel firms. This study further examines whether firm size moderates the relationship between ESG and stock price volatility. We consider a global sample of 44 textile and apparel firms available in Refinitiv between 2010 and 2018 and apply the fixed‐effects panel regression model to reduce unobserved endogeneity bias. We find a significant adverse influence of ESG on stock price volatility. However, firm size portrays a non‐significant moderating effect on ESG‐stock price volatility nexus. This study contributes to the research domain of ESG and risk by presenting the significant influence of ESG on stock price volatility in the textile and apparel industry. This study will be a reference point for textile and apparel firms' managers to consider ESG issues seriously as the attention on ESG causes a reduction to stock price volatility. Portfolio managers may invest in high achieving ESG firms to leverage the market volatility of their portfolio.

Reversal returns and expected returns from liquidity provision: Evidence from emerging markets

In this study, we document, for a number of emerging markets, that positive returns can be obtained using a short-term reversal strategy. These returns are higher for small and illiquid firms, and highest for more volatile firms. Overall, the reversal strategy-based alphas are significant when accessed through different asset pricing models. Our results provide, however, an important unexplored explanation; the reversal return is higher, irrespective of firm characteristics, when market volatility is high, and pronounced for the stocks that witness higher active investor exits. These findings reconcile with the notion that the reversal returns proxy the expected returns from liquidity provision in adverse times.

The Effect of Institutional Ownership on the Timing of Earnings Announcements: Evidence from the Russell Index Inclusion

Using the annual Russell 1000/2000 index reconstitution as an exogenous shock to institutional ownership (IO), I examine the effect of IO on firms’ decisions regarding the time of day to announce earnings. I argue that firms with high IO strategically choose to announce earnings after hours to facilitate post-announcement price discovery and reduce volatility because the after-hours period is largely dominated by sophisticated institutional investors. I find that firms with greater IO are more likely to announce earnings during after-market sessions (i.e., after hours after the market closes), but not during premarket sessions (i.e., after hours before the market opens). My analysis further shows that transient IO has a stronger influence on the likelihood of after-market announcements relative to quasi-indexer or dedicated institutional holdings and that firms with high IO are even more likely to announce during after-market sessions when firms have bad earnings news or when earnings include large transitory items. Lastly, I find that announcing earnings during after-market sessions indeed facilitates post-announcement price discovery and reduces volatility for firms with high IO. Collectively, my findings suggest that IO is a significant factor in firms’ disclosure timing decisions and that the timing of disclosures affects price discovery and volatility.

Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach

This paper studies characteristics of optimal investment decisions of risk-averse firms who engage in exports under two types of risks: endogenous and background risks. While endogenous risk arises from the fluctuations in spot exchange rate and affects directly the profit of an exporting firm, background risk arises from uncertain changes in firm- and industry-specific domestic and foreign policies. We propose a mean-variance decision-theoretic model to trace out impact of perturbations in the distributions of these uncertainties on the optimal investment strategy. A testable empirical model is derived and applied to a panel of 840 exporting Indian manufacturing firms for the period 1995–2015. Our results suggest that Indian manufacturing exporters depict decreasing absolute risk aversion and that firms’ risk preferences are prone to variance vulnerability.

The impacts of dividend policy and foreign ownership on stock price volatility of Vietnamese listed firms

The paper investigates the effects of dividend policy and foreign ownership on stock price volatility of Vietnamese listed firms by using multivariate regression analysis. Besides, the impact of foreign ownership on the association between the dividend policy and the stock price volatility is also studied. The Baskin's approach is deployed to measure the stock price volatility while dividend yield and payout ratio are proxies for the dividend policy. The data sample includes 420 firms listed on the HSX and HNX for 10 years, from 2009 to 2018. The FEM and PCSE are applied to examine the panel dataset with 4045 observations. The key findings indicate that both dividend yield and payout ratio are negatively correlated with stock price volatility. Besides, the stock price volatility of firms with higher dividend payments and a greater rate of foreign ownership is less volatile than those of other companies. Foreign ownership stimulates the negative relationship between dividend yield and stock price volatility, implying that foreign ownership also plays a crucial role in the stability of the stock price. Finally, the results illustrate that the volatility of earnings and the debt ratio are positively related to stock price fluctuation, while the business size and state ownership indicate negative associations with the variability of the stock price.

R&D Investments and Idiosyncratic Volatility

This paper investigates how R&D investment intensity can infuse information asymmetry about the growth prospects and the idiosyncratic volatility of non-financial firms. Panel Data Method has been employed in order to regress idiosyncratic volatility on R&D investments. Using a sample of research-intensive FTSE-100 and S&P-100 firms having the highest market capitalization between 2008 and 2017, the study finds the evidence of a positive association in between R&D investment intensity and idiosyncratic component of total stock return volatility. The study provides the insight that R&D-led firms should leverage on their R&D related sensitive information to reduce the level of idiosyncratic volatility.

When Does Greenwashing Pay Off?

I construct a neoclassical model of investment for a firm that greenwashes its commitment to corporate social responsibility in exaggerating its minimization of using polluting inputs and maximizing its investment in social capital. I assume that greenwashing allows the firm some pricing power in its output market, but in tradeoff, it results in a dead weight loss due to the risk of being caught greenwashing that acts as a negative call option on the increased value of the firm. I find that there are limited circumstances where greenwashing pays off for the firm: when firm volatility is low, when the time till they expect to be caught is short, when interest rates are high and when their pricing power is high. As a result, without government intervention, the circumstances that favor greenwashing are very limited.

The impact of news on the volatility of ESG firms

This study provides one of the first empirical investigations of asymmetric volatility for environmental, social, and governance (ESG) investing. Using the Morgan Stanley Capital International (MSCI) indices as proxies for ESG test assets, this study investigates volatility risk for the highest ESG-rated firms through an empirical analysis in assessing how good news and bad news impact the risk of ESG firms. The analysis provides empirical evidence in support of the hypothesis that the impact of news on the volatility of ESG firms is larger for bad news, compared to good news. Employing an EGARCH framework, the analysis also finds that, in response to bad news, the observed volatility increases for small size ESG firms is lower compared to large and mid-cap ESG firms. The findings provide evidence of a slow response by small size firms to news in an ESG context. In modeling the conditional volatility of the ESG test assets, the analysis also provides evidence of higher persistence in the conditional volatility dynamics for small size ESG firms.

Facing Turbulences with Organizational Slacks in a Corporate Scandal: Firm Value and Risks

Corporate scandals happen not only when firms and managers deliberately commit fraud and harm the environment but also when firms have to recall malfunctioning products. Corporate scandals are more frequent than ever. Since information can be accessed easily and spread instantly, local issues quickly become global corporate scandals, which increases their strength and decreases the time for firms to implement a recovery plan. Corporate scandals bring uncertainty to the future of the firm’s financial health. Thus, they decrease expectations for returns and increase volatility of future cash-flows. Organizational slacks are resources detained by a firm to face an unexpected event. We believe they serve as a buffer in a situation of corporate scandal. Our study aims to determine the buffering role of organizational slacks can generate, when a corporate scandal hits a firm. To measure it, we use the event study methodology. We perform both short-term and long-term event study analyses. The former is based on a sample of 362 North American listed firms regarding 1,940 corporate scandals, from 2007 to 2018, and it measures the difference between the normal stock returns of the firms and the stock returns happening on the days surrounding the corporate scandal. The latter is based on 333 North American listed firms regarding 1,719 corporate scandals, from 2007 to 2018, and it determines the fluctuations of the idiosyncratic risk in a period of 252 days following the corporate scandal. Our findings reveal key insights into the role of organizational slacks in a corporate scandal situation. Moreover, we analyze the buffering effect of organizational slacks in an unstable environment by introducing the moderating role of market turbulence. Results show that: (1) a corporate scandal has a negative impact on the firm value and firm volatility; (2) organizational slacks have a positive impact on the scandal’s negative effect on the firm value and firm volatility; (3) and, detaining organizational slacks increases the negative effect of the corporate scandal on the firm value in a turbulent market environment, but mitigates firm volatility in the same environmental conditions. Our primary contribution is to the management-finance literature, in the way that we integrate research on organizational slacks and corporate scandal literature with frequent changes in fit between market and management decisions. Our second contribution is to managers, as we bring novel insights into the ways of mitigating the negative effect of a corporate scandal with organizational slacks.

The asymmetric effects of industry specific volatility in momentum returns

AbstractIn this paper, we look specifically at the effect of industry volatility on momentum returns, a phenomenon that has been overlooked in previous studies. We find that industry volatility has asymmetric effects on the winner and loser portfolios. The cross‐sectional variation in the returns of high and low‐volatility winners is driven primarily by industry volatility. It disappears after controlling for the effect of industry volatility on total firm volatility. However, for firms in the loser portfolios, the differential return between high and low volatile stocks remains even after adjusting for industry volatility. This implies that momentum returns are mainly induced by industry specific news at the winners' level and firm‐specific factors at the losers' level. The results are robust even after controlling for different levels of liquidity.

Re-examining the costs of sanctions and sanctions threats using stock market data

ABSTRACT Are sanctions and sanctions threats costly for the sanctioning state? The costs of sanctions for the sender are an important feature of many theories developed to explain the use and utility of economic sanctions. Despite the prominence of this assumption in existing research, there are only a handful of studies that have endeavored to analyze or estimate the economic consequences of sanctions for sender states. This paper builds a theoretical framework that connects the costs of sanctions for sender firms with a phenomenon that can be observed, stock market data. Sanctions and sanctions threats should create market uncertainty that is reflected in stock price volatility for firms with commercial interests in targeted states. Comparisons are made using stock price data for firms within sectors at the same point in time, within sectors over time, and across sectors over time. The stock prices for firms with commercial interests in targeted states are more volatile than stock prices for comparable firms without commercial interests in targeted states. These spells of uncertainty not only reflect the costs of sanctions and sanctions threats for firms caused by interruptions in commercial activities but represent important costs for firms in-and-of themselves.

High and sustainable growth: persistence, volatility, and survival of high growth firms

In most developed countries, high growth firms (HGFs) are disproportionately responsible for net job creation, yet there is little information about how well such firms sustain their performance over time. Using GMM on a panel of 79,200 Romanian SMEs from 2000 to 2012, this paper evaluates the extent to which HGFs register stable and sustained growth over time, accounting for a variety of definitions for “high growth” that have been used in academic and policy literatures. Our results indicate that high growth SMEs are unable to maintain high growth rates for long, but do register lower volatility in growth rates and higher chances of survival. Identification of HGFs and results regarding growth volatility and persistence vary significantly with the specific definition of “high growth” used, as well as with the specific variable used to measure growth (e.g., revenue, employees, profit, productivity). Our findings have direct implications for growth policies and programs that depend on identifying HGFs.

Trump vs. Paris: The Impact of Climate Policy on U.S. Listed Oil and Gas Firm Returns and Volatility

We explore the stock market and option implied volatility response of the oil and gas industry to four policy events associated with the Paris Agreement and the election of Donald Trump. Our results show that the signing of the Paris Agreement had a large negative impact for the Oil and Gas sector (CAAR -8.4%), with Exploration and Production (CAAR -12.2%) and Drilling (CAAR -10.5%) most severely affected. This is further supported by an increase in implied volatility and by a structural break in option trader sentiment around the signing of the agreement. In general, the Paris Agreement had a much stronger impact on firms that had primarily U.S.-focused operations. Contrary to expectations, the election of Donald Trump and the announced withdrawal of the U.S. from the Paris Agreement negatively affected some sub-sectors (transport and integrated) and the sector overall. We attribute this to (1) Trump’s policies supporting domestic production (benefitting unlisted independent producers at the expense of listed competitors with import and international assets), and (2) on “We Are Still In” efforts by U.S. states, cities and companies to continue to meet Paris Agreement goals. Overall, our results indicated that investors are pricing current policies when examining climate risk and that, in this respect, the Paris agreement trumped Trump.

Do momentum and reversal matter in the Singapore stock market?

ABSTRACT This paper shows the presence of positive momentum return in the short run but no subsequent price reversal in the Singapore Market. Rather, price momentum continues in the long run. It also demonstrates that momentum profit is higher for the small and highly volatile firms rather than the large stable firms. Both portfolio level and firm-level cross-sectional analyses are used to show the relationships.

Heterogeneous beliefs and return volatility around seasoned equity offerings

We investigate the dynamics of heterogeneous beliefs and link them to the volatility pattern throughout the seasoned equity offering (SEO) event window. In sync with a reduction in information asymmetry related to management information releases around the SEO event, belief heterogeneity declines. Moreover, heterogeneity in beliefs, proxied by either analyst- or institutional-trade-based measures, is a robust and salient determinant of SEO firm volatility, which provides an explanation for the volatility timing “puzzle” identified in the SEO market. Furthermore, the relation between heterogeneous beliefs and return volatility weakens as short sale constraints tighten, suggesting a potential causal link.

Firms in financial distress: evidence from inter-firm payment networks with volatility driven by ‘animal spirits’

This paper elaborates an agent-based model of a pure market economy to provide theoretical evidence on how volatility-induced changes in inter-firm payment networks affect the financial distress of firms. This volatility is driven by ‘animal spirits’ in that it arises from the feelings of optimism/pessimism independently of rational decision-making, and influences the liquidity available to each firm through the inter-firm payment network; consequently, some firms may enter financial distress. The model first determines the inter-firm payment network. Then, a mean-reverting square-root process introduces volatility into the inter-firm payment network through firms’ propensity to pay suppliers according to the payments that firms expect to receive from customers. The model is calibrated for compatibility with relevant macro- and microeconomic stylized facts. According to computational experiments, financial distress in the business sector is minimized when feelings of optimism/pessimism generate the lowest volatility in firms’ propensity to pay suppliers. In addition, this volatility must materialize around an intermediate value of firms’ propensity to pay suppliers, and firms must keep this intermediate value over time.