Emerald Group Publishing Limited
New Zealand capital markets
Article Type: Editorial From: Pacific Accounting Review, Volume 26, Issue 3
The importance of strong and efficient capital markets to the economic development of countries cannot be overstated. Vibrant capital markets efficiently reallocate savings from investors to businesses, allowing companies to expand and innovate, leading to higher employment and growth. However, it is questionable whether the New Zealand Stock Exchange (NZX) has been able to fulfil these goals over the period since the crash of 1987. The capital market has remained a fraction of its former self in terms of listing, and much of the increase in market capitalisation has come from the listing of state-owned assets. This has promoted reviews of the regulatory environment to try and improve investors’ confidence in the market, the creation of several alternative exchanges aimed at enticing smaller companies to list and a reasonable amount of media discussion. While 2013 represented an outstanding year for the NZX, more is needed for the market to make up lost ground, and compete with overseas markets, to further aid the economic performance of the country.
Academics have the potential to play an important role in the recovery of the New Zealand capital markets. Relatively speaking, little research has focused on this market. Further, as the burgeoning field examining the impact of institutional settings and cultural issues on financial decision-making of investors and markets has shown, the assumption that the findings of research based in the USA, UK or China is transferrable is questionable. Studies of the New Zealand capital markets have the potential to highlight inefficiencies, offer solutions and recommend changes that may further the development of these markets.
This issue of the Pacific Accounting Review presents some of the studies presented at the first New Zealand Capital Markets Symposium, held at Auckland University of Technology in 2013. The symposium offered a venue for academics to present New Zealand-focused research to regulators and industry with the aim of encouraging local market research and fostering more engagement between academia and industry.
The first paper in this issue, by Hamish D. Anderson and Yuan Peng, considers the impact of reducing the minimum tick size for dual-listed and property stocks in 2011. When the NZX reduced the tick size, it argued that it would increase market liquidity. The authors consider the success of this change by examining the impact on the quoted and effective spreads, volume, depth and the binding-constraint probability. However, the results suggest that the reduction in tick size failed to boost liquidity for most stocks. While the size of the spreads reduced, the authors also observe a reduction in market depth, and especially for the smallest firms, a reduction in trading activity rather than an increase. Overall, the results provide only limited evidence that reducing the tick size would increase liquidity. It appears that alternative strategies need to be explored to improve market liquidity.
The second paper in this issue considers the drivers of price discovery for NZX-listed companies cross-listed on the Australian Stock Exchange (ASX), and ASX companies cross-listed on the NZX. Price discovery offers a relative measure of price leadership between the two exchanges, and is considered by exchanges to be a critical measure of their relative efficiency/competitiveness. The study by Bart Frijns, Aaron Gilbert and Alireza Tourani-Rad estimates annual measures of price discovery for 19 cross-listed companies over a 15-year period, and uses a pooled OLS estimation to determine what drives price discovery. The authors conclude that there is considerable evidence to suggest that the NZX is losing price discovery to the ASX for both New Zealand and Australian firms. Further, it is the relative size of trading activity, volume and spreads that drive price discovery. The implication of this study therefore is that to regain price discovery, the NZX should focus on improving market liquidity and reducing transaction costs.
The third paper looks at the impediments facing venture capitalists in New Zealand accessing additional financing. Access to capital is critical in developing new companies and industries, and for firms requiring in excess of $2 million, venture capital (VC) is the principal source of financing. However, there is an acknowledged chasm between the demand for VC funds and their availability in New Zealand. The authors conduct face-to-face interviews with a number of VC fund managers, investors and intermediaries to look at the impediments to VCs acquiring additional funds. They find that the lack of proven historical returns and local investor fatigue are the principal problems. Specifically, few additional domestic investors are capable or willing to invest further until current funds exit their current investments. The findings support recent initiatives to improve the measurement of VC performance and the NZX efforts to develop an alternative exchange for small-growth companies.
The paper by Annie Claire Zhang considers the role of financial advice in influencing how investors allocate their investments across asset classes. The study uses information on more than 400,000 individual KiwiSaver fund members, the characteristics of these investors and information on whether they had received investment advice from an Authorised Financial Adviser. The study finds that women, older investors and wealthier individuals are more likely to seek financial advice. The study also finds that women tend to hold safer portfolios, investing more in lower-return assets like cash and bonds. However, those investors who receive financial advice were, on average, more likely to invest in riskier portfolios than a similar investor who hadn’t received advice. This conclusion has important implications for policymakers, given expressed concerns around investors not saving sufficiently for their retirement and the role asset allocation plays in KiwiSaver returns.
The final study by Callum Thomas and Claire Matthews presents the findings of a study into the behaviour of KiwiSaver members. Using data collected on KiwiSaver providers from 2009 to 2011, including their performance and fees, the authors seek to explain the flow of funds and changes in membership of the providers. Their findings are broadly consistent with international evidence in that investors seek to invest in better performing funds, while avoiding those with higher fee structures. They also show that expense ratios have decreased over time, while average funds under management per member have increased. However, the authors note several puzzling findings that require further investigation, in particular a positive relationship between performance and fund outflows.
A key conclusion that emerged from the interaction between academics and professionals at the Symposium was that there is high-quality, practice-relevant research being done on the local markets that has the potential to inform policy and improve the quality of the New Zealand capital markets. However, more needs to be done, and the results need to be better communicated to the industry.
Bart Frijns, Aaron Gilbert and Alireza Tourani-Rad