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Article
Publication date: 1 August 2016

Chan Du, Liang Song and Jia Wu

This paper aims to examine how banks’ accounting disclosure policies affect information content in stock prices and stock crash risk.

2444

Abstract

Purpose

This paper aims to examine how banks’ accounting disclosure policies affect information content in stock prices and stock crash risk.

Design/methodology/approach

This paper uses 1996-2013 as the sample period. The final sample includes 10,045 observations in 37 countries. This paper uses stock return synchronicity to measure information content in stock prices. This study uses the frequency difference between extremely negative and positive stock returns to measure stock crash risk. To measure the level of bank accounting disclosure, this research follows Nier and Baumann (2006) to construct an aggregate disclosure index based on inclusions and omissions of a series of items in a bank’s annual accounting reports.

Findings

This paper finds that banks’ stocks have lower stock return synchronicity and fewer extremely negative returns if banks have higher levels of financial statement disclosure. These results suggest that banks’ stocks have higher information content and lower crash risk if banks’ information environment is more transparent.

Originality/value

Overall, this paper provides new insight about how to increase banks’ transparency and the safety of the banking industry, which is beneficial to economic growth. To increase banks’ transparency and reduce the possibility of extremely negative stock returns, one way to regulate banks is to increase their accounting disclosure. In addition, the extant literature (Chen et al., 2006, Durnev et al., 2003, 2004; Wurgler, 2000) demonstrates that firms with lower stock return synchronicity have more transparent information environments and higher investment efficiency. Thus, this paper finds that higher levels of bank accounting disclosure are associated with lower stock return synchronicity, which further reduces banks’ opacity and increases banks’ investment efficiency. Finally, compared to business firms, stock crash risk has much direr consequences because one bank’s stock crash will affect overall financial stability. Thus, it is important for authorities to know the effects of accounting disclosure on bank stock crash risk.

Details

Pacific Accounting Review, vol. 28 no. 3
Type: Research Article
ISSN: 0114-0582

Keywords

Open Access
Article
Publication date: 2 October 2019

Zhixin Kang

The purpose of this paper is to test whether financial analysts’ rationality in making stocks’ earnings forecasts is homogenous or not across different information regimes in…

Abstract

Purpose

The purpose of this paper is to test whether financial analysts’ rationality in making stocks’ earnings forecasts is homogenous or not across different information regimes in stocks’ past returns.

Design/methodology/approach

By treating stocks’ past returns as the information variable in this study, the authors employ a threshold regression model to capture and test threshold effects of stocks’ past returns on financial analysts’ rationality in making earnings forecasts in different information regimes.

Findings

The results show that three significant structural breaks and four respective information regimes are identified in stocks’ past returns in the threshold regression model. Across the four different information regimes, financial analysts react to stocks’ past returns quite differently when making one-quarter ahead earnings forecasts. Furthermore, the authors find that financial analysts are only rational in a certain information regime of stocks’ past returns depending on a certain return-window such as one-quarter, two-quarter or four-quarter time period.

Originality/value

This study is different from those in the existing literature by arguing that there could exist heterogeneity in financial analysts’ rationality in making earnings forecasts when using stocks’ past returns information. The finding that financial analysts react to stocks’ past returns differently in the different information regimes of past returns adds value to the research on financial analysts’ rationality.

Details

Journal of Capital Markets Studies, vol. 3 no. 2
Type: Research Article
ISSN: 2514-4774

Keywords

Article
Publication date: 7 December 2021

Saji Thazhungal Govindan Nair

Equity research in experimental psychology reveals investors' overreactions to bad news events. This study of asymmetric price structures in equity markets investigates whether…

Abstract

Purpose

Equity research in experimental psychology reveals investors' overreactions to bad news events. This study of asymmetric price structures in equity markets investigates whether such behavior predicts stock returns in an emerging market of India.

Design/methodology/approach

The research decomposes Bombay Stock Exchange (BSE) Sensex returns into Extremely Positive Returns (EPR) and Extremely Negative Returns (ENR) based on extreme values at first and then tests their lead–lag relations.

Findings

The empirical finding is consistent with the existing evidence of asymmetric news effects on stock returns in India. In precise, ENR robustly predicts one-month-ahead EPR for the sample period from January 1991 to March 2020. This predictive power persists even in the presence of popular valuation ratios and business cycle variables.

Practical implications

The paper explains the rationale of extreme value modeling in price forecasting. Investors can find additional utility gains from market cycle information while predicting extreme returns in Indian stock market.

Originality/value

The paper is unique to understand business cycle effects in extreme return reversals in emerging markets.

Details

Journal of Economic Studies, vol. 49 no. 8
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 5 October 2015

Liang Song

This study aims to examine the effects of firms’ accounting disclosure policies on stock price synchronicity and stock crash risk, using a sample including 13 emerging markets…

3596

Abstract

Purpose

This study aims to examine the effects of firms’ accounting disclosure policies on stock price synchronicity and stock crash risk, using a sample including 13 emerging markets. Furthermore, this research investigates how these relationships are affected by country-level investor protection and firm-level governance rankings.

Design/methodology/approach

This paper uses accounting disclosure measures constructed based on survey questions by Credit Lyonnais Securities Asia (2001, CLSA). The accounting disclosure measure is used to explain the two dependent variables, stock price synchronicity and stock crash risk. The stock price synchronicity measure is defined as the logistic transformation of R2 following Hutton et al. (2009) and Jin and Myers (2006). R2 is taken from the estimation of an extended market model. The stock crash risk variable is measured as the frequency difference between extremely negative and positive stock return residues following Jin and Myers (2006). These stock return residues are taken from the estimation of an extended market model. Because the CLSA firm-level disclosure data are from 2000, this paper matches other data taken from the same year, for consistency. The final sample includes 204 observations in 13 emerging countries.

Findings

This paper finds that firms’ stocks are less synchronized with the entire market and have less crash risk if firms have superior accounting disclosure policies. These results suggest that the cost to collect firm-specific information may be decreased for investors if firms are more transparent. Thus, these firms’ stocks have more firm-specific information content. These results also suggest that management is less likely to hide some negative information and release such negative information suddenly in the future if firms have higher levels of accounting disclosure. Thus, these firms’ stocks are less likely to crash. In addition, the influences of firms’ accounting disclosure policies on stock price synchronicity and crash risk are more significant for firms with superior country-level investor protection and firm-level governance rankings. These results imply that external investors place more value on accounting disclosure by well-governed firms because firms with superior governance standards are less likely to intentionally disclose misleading information. Thus, these firms’ stocks can incorporate more firm-specific information and have less crash risk.

Originality/value

The current study is the first to show that the effects of accounting disclosure on stock price synchronicity and crash risk are more pronounced for firms with superior country-level investor protection and firm-level governance standards. Thus, this research extends the literature by providing a comprehensive picture of the influences of accounting disclosure on stock markets. In addition, the existing literature (Chen et al., 2006; Durnev et al., 2004) shows that firms with lower stock price synchronicity are associated with higher investment efficiency because managers invest based on the information in stock prices. Obviously, higher stock crash risk is highly related to higher bankruptcy risk for firms. Thus, examining the effects of accounting disclosure on stock price synchronicity and stock crash risk is of obvious importance to policy makers.

Details

International Journal of Accounting & Information Management, vol. 23 no. 4
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 23 July 2019

Edimilson Costa Lucas, Wesley Mendes-Da-Silva and Gustavo Silva Araujo

Managing the risks associated to world food production is an important challenge for governments. A range of factors, among them extreme weather events, has threatened food…

Abstract

Purpose

Managing the risks associated to world food production is an important challenge for governments. A range of factors, among them extreme weather events, has threatened food production in recent years. The purpose of this paper is to analyse the impact of extreme rainfall events on the food industry in Brazil, a prominent player in this industry.

Design/methodology/approach

The authors use the AR-GARCH-GPD hybrid methodology to identify whether extreme rainfall affects the stock price of food companies. To do so, the authors collected the daily closing price of the 16 food industry companies listed on the Brazilian stock exchange (B3), in January 2015.

Findings

The results indicate that these events have a significant impact on stock returns: on more than half of the days immediately following the heavy rain that fell between 28 February 2005 and 30 December 2014, returns were significantly low, leading to average daily losses of 1.97 per cent. These results point to the relevance of the need for instruments to hedge against weather risk, particularly in the food industry.

Originality/value

Given that extreme weather events have been occurring more and more frequently, financial literature has documented attempts at assessing the economic impacts of weather changes. There is little research, however, into assessing the impacts of these events at corporate level.

Propósito

O gerenciamento de riscos associados à produção mundial de alimentos é um desafio importante para governantes. Diversos fatores, entre eles os eventos climáticos extremos, têm ameaçado a produção de alimentos nos últimos anos. Neste artigo nós analisamos o impacto de eventos de chuvas extremas na indústria de alimentos no Brasil, um dos maiores produtores mundiais.

Diseño/metodología/enfoque

Empregamos a metodologia híbrida AR-GARCH-GPD para verificar se chuvas extremas afetam o preço das ações das empresas de alimentos. Para isso, coletamos os preços de fechamento diário de 16 empresas do setor de alimentos listadas na Bolsa de Valores do Brasil [B]3, em janeiro de 2015.

Resultados

Os resultados sugerem que esses eventos exercem impacto significante sobre o retorno das ações: em mais da metade dos dias imediatamente posteriores à chuva extrema ocorrida entre 28/02/2005 e 30/12/2014, os retornos foram significantemente baixos, levando a perdas médias diárias próximas de 1,97%. Esses resultados apontam para a relevância da necessidade de instrumentos para proteção contra riscos climáticos, particularmente na indústria de alimentos.

Originalidad/valor

Tendo em vista que eventos climáticos extremos têm ocorrido com uma frequência cada vez maior, a literatura de finanças tem documentado tentativas de avaliar os impactos econômicos das mudanças climáticas. No entanto, nota-se a carência de pesquisas para avaliar os impactos desses eventos no nível das empresas.

Details

Academia Revista Latinoamericana de Administración, vol. 32 no. 2
Type: Research Article
ISSN: 1012-8255

Keywords

Article
Publication date: 18 July 2022

Yuri Gomes Paiva Azevedo, Lucas Allan Diniz Schwarz, Hellen Bomfim Gomes and Marcelo Augusto Ambrozini

The purpose of this paper is to examine the effect of stock price crash risk on the adoption of poison pills.

Abstract

Purpose

The purpose of this paper is to examine the effect of stock price crash risk on the adoption of poison pills.

Design/methodology/approach

The authors estimate logit and probit regressions. Their sample includes 185 Brazilian public firms for the period 2010–2018. Following previous studies, the authors use the negative skewness of firm-specific weekly returns and the down-to-up volatility of firm-specific weekly returns as measures of firm's stock price crash risk. As proxies of poison pills, the authors employ the “conventional” poison pills in their baseline models and the “eternity” poison pills, which prevent the removal of poison pills from bylaws, in additional models.

Findings

The authors find that stock price crash risk measures are not associated with poison pill adoption. However, although stock price crash risk does not lead to poison pill adoption as a complementary corporate governance mechanism that protects firms against hostile takeover attempts, further results show that managers do not draw on stock price crash risk as a pretext to entrench themselves. Additional analyses also highlight that CEO power seems to play a role in moderating the relationship between stock price crash risk and eternity poison pill adoption.

Originality/value

The authors contribute to the literature on stock price crash risk, which calls for research in international contexts to better understand the effect of stock price crash risk on country-specific idiosyncratic features. The authors discuss a controversial anti-takeover mechanism that has been debated by Brazilian policymakers.

Details

International Journal of Managerial Finance, vol. 19 no. 3
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 9 April 2018

Haiwei Chen, James Estes and William Pratt

The purpose of this paper is to investigate how healthcare funds differ from healthcare exchange-traded funds (ETFs) in terms of delivering positive alpha, beta, and hedging…

Abstract

Purpose

The purpose of this paper is to investigate how healthcare funds differ from healthcare exchange-traded funds (ETFs) in terms of delivering positive alpha, beta, and hedging against a market downturn risk. The authors consider which vehicle is more effective in providing diversification within the healthcare sector and to what extent can investors gain by diverting a portion of their holdings in the S&P 500 index fund into either a value-weighted healthcare fund portfolio or ETFs.

Design/methodology/approach

Pooled and individual regressions are employed to estimate single and four-factor models of 132 healthcare mutual funds and 43 healthcare ETFs over the past four decades. The authors performed additional regressions to test the performance of mutual funds and ETFs relative to market volatility, market downturns, and policy influence.

Findings

The authors find that both healthcare funds and ETFs provide significantly positive average alpha and hedge against a market downturn risk. Holding an all-stock portfolio such as the S&P 500 index fund can be improved by simply adding a value-weighted healthcare portfolio, resulting in both a higher return and a lower standard deviation. However, returns for these funds and ETFs perform poorly in a very volatile market. ETF returns increased with the passing of the Obamacare. Healthcare sector funds and ETFs declined with the recent criticism from Donald Trump since he became the apparent GOP nominee in July of 2016.

Originality/value

Extending the literature in both sample size and scope of issues, this paper provides investors and financial advisors with practical guidance for achieving higher portfolio return while lowering standard deviation. Additionally, this study documents policy influence on the returns of healthcare mutual funds and healthcare ETFs.

Details

Managerial Finance, vol. 44 no. 4
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 8 May 2009

Ulf Nielsson

The purpose of this paper is to discuss two important extensions to the well‐known value‐at‐risk (VaR) methodology, namely extreme value theory (EVT) and expected shortfall (ES)…

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Abstract

Purpose

The purpose of this paper is to discuss two important extensions to the well‐known value‐at‐risk (VaR) methodology, namely extreme value theory (EVT) and expected shortfall (ES). Both of these extensions address the weaknesses of VaR, in particular the methodology's tendency to systematically underestimate risk of extreme market events.

Design/methodology/approach

The theory of VaR and the two extensions are reviewed and the methodology is evaluated in light of the Basel II regulatory framework that calls for the use of VaR by financial institutions.

Findings

The paper clarifies the use of VaR and its extensions to make practitioners more aware of the pitfalls and how to address them. It is recommended that the two extended measures of extreme event risk (i.e. EVT and ES) be included into every risk manager's information pool.

Originality/value

A compact review of these approaches and their regulatory connection has not previously been compiled. This review is of particular value to risk managers and policy markers given the turbulent market conditions of the past year.

Details

Journal of Financial Regulation and Compliance, vol. 17 no. 2
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 6 June 2023

Kitty Mo Kong and Hedy Jiaying Huang

This paper investigates whether the audit fees of Chinese listed firms are associated with the share pledging practice of the firm’s controlling shareholders.

Abstract

Purpose

This paper investigates whether the audit fees of Chinese listed firms are associated with the share pledging practice of the firm’s controlling shareholders.

Design/methodology/approach

This study uses the audit pricing model to estimate the association between the share pledging of listed firms and audit fees. Cross-sectional analysis is conducted on a large sample of Chinese listed firms during the period 2004 to 2019. The authors further test the moderating effects of listing on the Main Board, state ownership and abnormal audit report lag on the association between share pledging and audit fees. The results remain robust to various endogeneity tests including two-stage least squares instrumental variable analysis, entropy balancing analysis and difference-in-difference analysis.

Findings

The study finds that audit fees are positively associated with the proportion of shares pledged by the listed firm’s controlling shareholder in China. The results also provide new evidence that the positive association between audit fees and the share pledging of controlling shareholders could be mitigated if the firm is listed on the Main Board and/or it is a state-owned enterprise. In contrast, pledged firms with abnormal audit report lag are found to have higher audit fees than their pledged counterparts without the excessively long audit delay.

Practical implications

Findings of this study have important practical implications to those charged with governance, as boards need to comprehensively understand the adverse consequences of share pledging when pursuing it as the firm’s major source of financing. The study also has policy implications for stock market regulators such as the China Securities Regulatory Commission in China. Regulators could consider developing a threshold-based share pledging disclosure and pledge ratio requirements based on factors such as a firm’s listing status and ownership structure.

Originality/value

This study provides new evidence on the audit-related consequences of share pledging in a significant capital market. Findings of this study also enrich the existing audit literature by introducing the share pledging activities of controlling shareholders into the audit pricing decision-making model.

Details

Pacific Accounting Review, vol. 35 no. 4
Type: Research Article
ISSN: 0114-0582

Keywords

Open Access
Article
Publication date: 29 March 2023

Christian Hugo Hoffmann

The purpose of this study is to showcase that the valuation of startups is still considered to be more “art than science”. Moreover, such non-rigorous approaches often lead to…

Abstract

Purpose

The purpose of this study is to showcase that the valuation of startups is still considered to be more “art than science”. Moreover, such non-rigorous approaches often lead to valuations, which turn out to be too high, which in turn has become a well-known phenomenon to a broader audience due to shining examples such as We Work. This is reason enough to revisit the important topic of where we stand today with startup valuation procedures and methodologies.

Design/methodology/approach

Literature synthesis and exploratory analysis.

Findings

While some studies describe sound results about how to assess startups, what the authors found was that many questions remain open or have not been covered at all. This is the reason why the authors needed to apply a substantial amount of reasoning in the analysis of studies, which do not exactly deal with startup companies. The authors provided some interesting impulses for future research.

Originality/value

Based on an original overview of the current state of research about the valuation of startup companies, this paper makes the following principal contribution to both the literature and practice: on the one hand, the authors assess four impact factors on startup values critically; on the other, the authors provide an outlook on promising future research avenues.

Details

Journal of Ethics in Entrepreneurship and Technology, vol. 3 no. 1
Type: Research Article
ISSN: 2633-7436

Keywords

1 – 10 of over 19000