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1 – 10 of 376Liu Liu Kong, Min Bai and Peiming Wang
The purpose of this paper is to examine whether the framework of Prospect Theory and Mental Accounting proposed by Grinblatt and Han (2005) can be applied to analyzing the…
Abstract
Purpose
The purpose of this paper is to examine whether the framework of Prospect Theory and Mental Accounting proposed by Grinblatt and Han (2005) can be applied to analyzing the relationship between the disposition effect and momentum in the Chinese stock market.
Design/methodology/approach
The paper applies the methodology proposed by Grinblatt and Han (2005).
Findings
Using firm-level data, with a sample period from January 1998 to June 2013, the authors find evidence that the momentum effect in the Chinese stock market is not driven by the disposition effect, contradicting the findings of Grinblatt and Han (2005) concerning the US stock market. The discrepancies in the findings between the Chinese and US stock markets are robust and independent of sample periods.
Research limitations/implications
The findings suggest that Grinblatt and Han’s model may not be applicable to the Chinese stock market. This is possibly because of the regulatory differences between the two stock markets and cross-national variation in investor behavior; in particular, the short-selling prohibition in the Chinese stock market and greater reference point adaptation to unrealized gains/losses among Chinese compared to Americans.
Originality/value
This study provides evidence of the inapplicability of Grinblatt and Han’s model for the Chinese stock market, and shows the differences in the relationship between disposition effect and momentum between the Chinese and US stock markets.
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This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.
Abstract
Purpose
This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.
Design/methodology/approach
This paper proposes a gambling activity measure by jointly considering open interest and moneyness of out-of-the-money (OTM) individual equity call options.
Findings
The new measure, CallMoney, captures excessive optimism during the dot-com bubble, the oil price bubble and the pre-GFC stock market bubble. CallMoney robustly and negatively predicts both OTM and at-the-money call option returns cross-sectionally. The option return predictability of CallMoney is stronger when stock price is further from its 52-weeks high, capital gains overhang is lower, and when information uncertainty of the underlying stock is higher. CallMoney also robustly and negatively predicts cross-sectional stock returns.
Originality/value
The gambling measure has the advantages of being economically intuitive, model-free, easy to measure. The measure performs more robustly than existing lottery measures with respect to option and stock return predictability and more reliably captures the overpricing of options and stocks. The work helps understanding the gambling related anomalies in equity option returns and stock returns.
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Syed Aliya Zahera and Rohit Bansal
The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the…
Abstract
Purpose
The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the investors are hesitant to realize the losses and quick to realize the gains, this phenomenon is known as the disposition effect. This paper explains various theories, which have been evolved over the years that has explained the phenomenon of disposition effect. It includes the behavior of individual investors, institutional investors and mutual fund managers.
Design/methodology/approach
The authors have used the existing literatures from the various authors, who have studied the disposition effect in either real market or the experimental market. This paper includes literature over a period of 40 years, that is, Dyl, 1977, in the form of tax loss selling, to the most recent paper, Surya et al. (2017). Some authors have used the PGR-PLR ratio for calculating the disposition effect in their study. However, some authors have used t-test, ANNOVA, Correlation coefficient, Standard deviation, Regression, etc., as a tool to find the presence of disposition effect.
Findings
The effect of disposition can be changed for different types of individual investors, institutional investors and mutual funds. The individual investors are largely prone to the disposition effect and the demographic variables like age, gender, experience, investor sophistication also impact the occurrence of the disposition effect. On the other side, the institutional investors and mutual funds managers may or may not be affected by the disposition effect.
Practical implications
The skilled understanding of the disposition effect will help the investors, financial institutions and policy-makers to reduce the adverse effect of this bias in the stock market. This paper contributes a detailed explanation of disposition effect and its impacts on the investors. The study of disposition effect has been found to be insufficient in the context of Indian capital market.
Social implications
The investors and society at large can gains insights about causes and influences of disposition effect which will be helpful to create sound investment decisions.
Originality/value
This paper has complied the 11 causes for the occurrence of disposition effect that are found by the different authors. The paper also highlights the impact of the disposition effect in the decision-making of various investors.
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– The purpose of this study is to examine the relationship of using derivative financial instruments, tax aggressiveness and firm market value.
Abstract
Purpose
The purpose of this study is to examine the relationship of using derivative financial instruments, tax aggressiveness and firm market value.
Design/methodology/approach
This paper develops analytical models and designs an empirical study.
Findings
Using data from large Canadian public companies, this paper finds that a firm’s realized losses or unrealized gains from using derivatives are negatively associated with its effective tax rate, and a firm’s realized losses or unrealized gains from using derivatives are positively associated with its market value.
Research limitations/implications
This study simplifies the analytical model by separating the firm’s intrinsic market value from the tax-timing option value. In a more general framework, the tax-timing option value could be subsumed in the firm’s market value, and the firm’s market value would be determined endogenously.
Originality/value
This study develops a framework to show how firms exploit the tax-timing option by using derivatives. It is the first study to conclude that a motive for firms to use derivatives is to exploit the tax-timing option.
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The development of blockchain and cryptocurrency may alleviate the economic strain associated with recession. Economic recessions tend to be aggregate-demand driven, meaning that…
Abstract
Purpose
The development of blockchain and cryptocurrency may alleviate the economic strain associated with recession. Economic recessions tend to be aggregate-demand driven, meaning that they are caused by fluctuations in the supply of or demand for money. Holding monetary policy as solution assumes that stability must arise from outside of the economic system. Under a policy regime that allows innovations in blockchain to develop, blockchain technology may promote a money supply that is responsive to changes in demand to hold money. The purpose of this paper is to suggest that cryptocurrencies present an opportunity to profitably implement rules that promote macroeconomic stability. In particular, cryptocurrency that is asset-backed may provide a means for cheaply attaining liquidity during a crisis.
Design/methodology/approach
The role of cryptocurrency in promoting macroeconomic equilibrium is approached through the lens of monetary theory. Moves away from macroeconomic equilibrium necessitate either a change in the average price of money or a change in the quantity of money, or a change in portfolio demand for money. Cryptocurrency promotes an increase, however this requires the alignment of policy regulating the use of cryptocurrency, reduction in taxes placed on the use of cryptocurrency and cryptocurrency protocol.
Findings
Cryptocurrency is unlikely to become legal tender, but it may alleviate macroeconomic fluctuations as a near money that provides liquidity and whose supply is sensitive to changes in demand to hold money and money-like substitutes. This role might be inhibited if policy stifles the development of cryptocurrencies and blockchain technology.
Research limitations/implications
New financial innovations like cryptocurrencies can be analyzed applying the equation of exchange in light of the mechanics of money creation under conditions of disequilibrium. Monetary disequilibrium may be promoted by policy that causes bottlenecks in financial markets.
Originality/value
Theory of monetary disequilibrium has broad implications for the development and regulation of financial markets. This theory has not been applied to the development of cryptocurrency markets.
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Ons Triki and Fathi Abid
The objective of this paper is twofold: first, to model the value of the firm in the presence of contingent capital and multiple growth options over its life cycle in a stochastic…
Abstract
Purpose
The objective of this paper is twofold: first, to model the value of the firm in the presence of contingent capital and multiple growth options over its life cycle in a stochastic universe to ensure financial stability and recover losses in case of default and second, to clarify how contingent convertible (CoCo) bonds as financial instruments impact the leverage-ratio policies, inefficiencies generated by debt overhang and asset substitution for a firm that has multiple growth options. Additionally, what is its impact on investment timing, capital structure and asset volatility?
Design/methodology/approach
The current paper elaborates the modeling of a dynamic problem with respect to the interaction between funding and investment policies during multiple sequential investment cycles simultaneously with dynamic funding. The authors model the value of the firm in the presence of contingent capital that provides flexibility in dealing with default risks as well as growth options in a stochastic universe. The authors examine the firm's closed-form solutions at each stage of its decision-making process before and after the exercise of the growth options (with and without conversion of CoCo) through applying the backward indication method and the risk-neutral pricing theory.
Findings
The numerical results show that inefficiencies related to debt overhang and asset substitution can go down with a higher conversion ratio and a larger number of growth options. Additionally, the authors’ analysis reveals that the firm systematically opts for conservative leverage to minimize the effect of debt overhang on decisions so as to exercise growth options in the future. However, the capital structure of the firm has a substantial effect on the leverage ratio and the asset substitution. In fact, the effect of the leverage ratio and the risk-shifting incentive will be greater when the capital structure changes during the firm's decision-making process. Contrarily to traditional corporate finance theory, the study displays that the value of the firm before the investment expansion decreases and then increases with asset volatility, instead of decreasing overall with asset volatility.
Research limitations/implications
The study’s findings reveal that funding, default and conversion decisions have crucial implications on growth option exercise decisions and leverage ratio policy. The model also shows that the firm consistently chooses conservative leverage to reduce the effect of debt overhang on decisions to exercise growth options in the future. The risk-shifting incentive and the debt overhang inefficiency basically decrease with a higher conversion ratio and multiple growth options. However, the effect of the leverage ratio and the risk-shifting incentive will be greater when the capital structure changes during the firm's decision-making process.
Originality/value
The firm's composition between assets in place and growth options evolves endogenously with its investment opportunity and growth option financing, as well as its default decision. In contrast to the standard capital structure models of Leland (1994), the model reveals that both exogenous conversion decisions and endogenous default decisions have significant implications for firms' growth option exercise decisions and debt policies. The model induces some predictions about the dynamics of the firm's choice of leverage as well as the link between the dynamics of leverage and the firm's life cycle.
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The purpose of this study was to examine whether the use of financial derivatives by business enterprises can avoid taxes and whether tax authorities can detect and effectively…
Abstract
Purpose
The purpose of this study was to examine whether the use of financial derivatives by business enterprises can avoid taxes and whether tax authorities can detect and effectively enforce measures regarding this emerging tax avoidance method.
Design/methodology/approach
Using panel data from the Shanghai and Shenzhen Stock Exchange listed companies from 2008 to 2019, this study used the Heckman self-selection two-stage model and a cross-sectional analysis to test a total of 22,578 samples. Moreover, propensity score matching (PSM), instrumental variable and Heckman MLE methods were conducted in the robustness test.
Findings
The results showed that enterprises could use financial derivatives to avoid taxation. The greater the tax effort is, the more obvious the effect of the company's use of financial derivatives for tax avoidance, which proves challenging for tax authorities to identify and manage.
Originality/value
This study expands on research on corporate tax avoidance and provides a new perspective for the study of financial derivatives. Moreover, it improves relevant research in the field of tax regulation, offering practical guidance for tax authorities to govern the use of financial instruments to prevent potential risks effectively.
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Catherine D'Hondt, Rudy De Winne and Aleksandar Todorovic
This paper examines whether target returns act as specific goals that impact risk-taking when individuals make investment decisions.
Abstract
Purpose
This paper examines whether target returns act as specific goals that impact risk-taking when individuals make investment decisions.
Design/methodology/approach
Using an experimental setting, the authors assign either a low or a high target return to participants and ask them to make independent investment decisions as the risk-free rate fluctuates around their target return and, for some of them, becomes negative.
Findings
Building on cumulative prospect theory, the authors find that the prevailing reference point of participants is the target return, regardless of the level of the risk-free rate. This result still holds even when the risk-free rate is negative, suggesting that (1) the target return drives risk-taking more than does a zero-threshold and (2) negative rates are limited as a tool to stimulate appetites for risk. In a follow-up study, the authors show that these conclusions remain valid when the target return is endogenously determined.
Originality/value
The authors' original approach, which pioneers the use of target returns in both the positive and negative interest rate contexts, provides insightful results about the “reach for yield” among regular people.
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Private investment in advanced economies contracted sharply during the downturn that followed the global financial crisis. A substantial debt overhang has been one proposed…
Abstract
Purpose
Private investment in advanced economies contracted sharply during the downturn that followed the global financial crisis. A substantial debt overhang has been one proposed explanation for this development. This paper evaluates the role of debt overhang for the slow recovery in investment in Denmark, a country in which levels of private debt rapidly increased before the crisis.
Design/methodology/approach
Based on firm-level panel data, this paper evaluates the links between debt and investment dynamics for individual firms during the downturn that followed the global financial crisis.
Findings
High leverage contributed to a slow recovery in investment during the downturn that followed the financial crisis, in particular for small and medium-sized enterprises. The effect cannot solely be attributed to mean reversion in investment.
Research limitations/implications
Results point to the existence of a separate leverage or “balance sheet” channel with implications for macroeconomic volatility and financial stability.
Practical implications
Macroprudential or microprudential measures to counteract the build-up of excess leverage during upswings may contribute to reducing macroeconomic volatility and improving financial stability.
Originality/value
In contrast to previous studies, the panel dimension of data is used to take mean reversion in investment into account. The large, nationally representative panel data set allows to assess the macroeconomic relevance of the results, as well as enables subsample splits which are used to gain insights into potential mechanisms through which debt overhang impacts investment.
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This paper aims to examine the nexus between hedging, which reduces the volatility of corporate assets, and the anomaly of debt overhang, whereby corporate management is motivated…
Abstract
Purpose
This paper aims to examine the nexus between hedging, which reduces the volatility of corporate assets, and the anomaly of debt overhang, whereby corporate management is motivated to reject positive net present value (NPV) projects. The question of whether hedging ameliorates or aggravates debt overhang is addressed.
Design/methodology/approach
The Black–Scholes isomorphism between common shares and call options is exploited to determine the allocation of a project’s NPV between debt- and stock-holders. The effect of hedging on this NPV-partitioning is then gauged to determine the resulting likelihood of debt overhang.
Findings
If the volatility of corporate assets is below a critical maximum, hedging ameliorates debt overhang consistent with extant theoretical research. However, above that critical value of volatility, hedging aggravates debt overhang.
Originality/value
The novel result of this note, namely, hedging may exacerbate debt overhang, is demonstrated both analytically and intuitively. The latter is explained by allusion to a second agency-theoretic conflict between debt- versus stock-holders, namely, risk shifting. The disparate effects of hedging on debt overhang imply a non-monotonic relationship between metrics for these two variables, which is a phenomenon that extant empirical studies have failed to take into account.
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