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1 – 10 of over 3000Qingzhong Ma, David A. Whidbee and Wei Zhang
This paper examines the extent to which noise demand and limits of arbitrage affect the pricing of acquirer stocks both at the announcement period and over the longer horizon.
Abstract
Purpose
This paper examines the extent to which noise demand and limits of arbitrage affect the pricing of acquirer stocks both at the announcement period and over the longer horizon.
Design/methodology/approach
An event study approach was adopted to measure announcement-period cumulative abnormal returns. Long-horizon returns are measured using buy-and-hold abnormal returns (BHARs), calendar time portfolios (CTPRs), and subsequent earnings announcement period abnormal returns. Main methodologies include ordinary least squared (OLS) regressions, Logit regressions, and portfolio analysis.
Findings
(1) Acquirer stocks with high idiosyncratic volatility (the proxy for the security level characteristic most directly associated with limits to arbitrage) earn higher announcement-period abnormal returns. (2) The return pattern reverses over the subsequent longer horizon, resembling news-driven transitory mispricing. (3) The mispricing is greater when deal and firm characteristics exacerbate the limits of arbitrage, and it weakens over time. (4) Transactions by higher idiosyncratic volatility acquirers are more likely to fail.
Originality/value
Limits of arbitrage theory have been tested mostly in information-free circumstances. The findings in this paper extend the supporting evidence for limits of arbitrage explaining mispricing beyond the boundaries of information-free circumstances.
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Jianhua Ye and WenFang Li
This paper makes attempt to test the firm‐level long‐term asset growth (LAG) effects in returns by examining the cross‐sectional relation between firm‐level LAG and subsequent…
Abstract
Purpose
This paper makes attempt to test the firm‐level long‐term asset growth (LAG) effects in returns by examining the cross‐sectional relation between firm‐level LAG and subsequent abnormal stock returns. The purpose of this paper is to investigate whether limits‐to‐arbitrage can explain this asset growth anomaly in Chinese stock market.
Design/methodology/approach
Empirical research was carried out.
Findings
The empirical results show that asset growth anomaly in A‐share stock market is significant and robust. The conclusion provides more evidence for the existence of asset growth anomaly. Additionally, arbitrage risk indicated by idiosyncratic risk cannot explain the anomaly, arbitrage risk indicated by accounting information transparency can partly explain the anomaly, and arbitrage cost proxied by Amihud's measure of illiquidity indicator can completely explain the asset growth anomaly in A‐share stock market.
Research limitations/implications
The results of this paper imply that strengthening the disclosure of firm information and improving the liquidity of the market are important to improve the efficiency of the A‐share stock market.
Originality/value
The paper selects the sample of non‐financial listed companies in A‐share stock market to research the asset growth anomaly and investigates whether limits‐to‐arbitrage can explain this anomaly. This paper proves the existence of asset growth anomaly in A‐share stock market and is a good reference for further researches.
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Mattias Ganslandt and Keith E. Maskus
The existence of parallel imports (PI) raises a number of interesting policy and strategic questions, which are the subject of this survey article. For example, parallel trade is…
Abstract
The existence of parallel imports (PI) raises a number of interesting policy and strategic questions, which are the subject of this survey article. For example, parallel trade is essentially arbitrage within policy-integrated markets of IPR-protected goods, which may have different prices across countries. Thus, we analyze fully two types of price differences that give rise to such arbitrage. First is simple retail-level trade in horizontal markets because consumer prices may differ. Second is the deeper, and more strategic, issue of vertical pricing within the common distribution organization of an original manufacturer selling its goods through wholesale distributors in different markets. This vertical price control problem presents the IPR-holding firm a menu of strategic choices regarding how to compete with PI. Another strategic question is how the existence of PI might affect incentives of IPR holders to invest in research and development (R&D). The global research-based pharmaceutical firms, for example, strongly oppose any relaxation of restrictions against PI of drugs into the United States, arguing that the potential reduction in profits would diminish their ability to innovate. There is a close linkage here with price controls for medicines, which are a key component of national health policies but can give rise to arbitrage through PI. We also discuss the complex economic relationships between PI and other forms of competition policy, or attempts to limit the abuse of market power offered by patents and copyrights. Finally, we review the emerging literature on how policies governing PI may affect international trade agreements.
This study documents that high book‐to‐market (value) and low book‐to‐market (glamour) stock prices react asymmetrically to both common and firm‐specific information…
Abstract
This study documents that high book‐to‐market (value) and low book‐to‐market (glamour) stock prices react asymmetrically to both common and firm‐specific information. Specifically, we find that value stock prices exhibit a considerably slow adjustment to both common and firm‐specific information relative to glamour stocks. The results show that this pattern of diferential price adjustment between value and glamour stocks is mainly driven by the high arbitrage risk borne by value stocks. The evidence is consistent with the arbitrage risk hypothesis, predicting that idiosyncratic risk, a major impediment to arbitrage activity, amplifies the informational loss of value stocks as a result of arbitrageurs’ (informed investors) reduced participation in value stocks because of their inability to fully hedge idiosyncratic risk.
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The purpose of this paper is to discuss the stock price adjustment after a dividend distribution, allowing for different types of investors and market imperfections, including…
Abstract
Purpose
The purpose of this paper is to discuss the stock price adjustment after a dividend distribution, allowing for different types of investors and market imperfections, including taxes and transaction costs.
Design/methodology/approach
An arbitrage model is developed to determine the possible equilibria for the stock price adjustment, after a dividend distribution. The approach is theoretical, providing general results.
Findings
The model shows that, in the presence of different types of investors, a unique equilibrium only exists in the absence of transaction costs. The allowance for market imperfections, such as taxes and transactions costs, implies that there is not a unique equilibrium for the level of stock price adjustment following a dividend distribution event, but rather there is much possible equilibrium. It is showed that the observation of abnormal trading volume around the dividend event may give us some insights on the identification of which investors are present in the market.
Practical implications
On future studies of the stock price adjustment after dividend distributions, it should be taken into account that there is no unique equilibrium.
Originality/value
The main contribution of this paper is to show that the existence of taxes and transaction costs precludes the determination of a unique equilibrium point for the stock price adjustment after a dividend distribution.
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Madhumita Chakraborty and Sowmya Subramaniam
The study examines the cross-sectional and asymmetric relationship of investor sentiment with the stock returns and volatility in India.
Abstract
Purpose
The study examines the cross-sectional and asymmetric relationship of investor sentiment with the stock returns and volatility in India.
Design/methodology/approach
The investor sentiment is captured using a market-based measure Market Mood Index (MMI) and a survey-based measure Consumer Sentiment Index (CSI). The asymmetric effect of the relationship is examined using quantile causality approach and cross-sectional effect is examined by considering indices such as the BSE Sensex, and the various size indices such as BSE Large cap, BSE Mid cap and BSE Small cap.
Findings
The result of the study found that investor sentiment (MMI) cause stock returns at extreme quantiles. Lower sentiment induces fear-induced selling, thereby lowers the returns and high sentiment is followed by lower future returns as market reverts to fundamentals. On the other hand, bullish shifts in sentiment lower the volatility. There exists a positive feedback effect of stock return and volatility in the formation of investor sentiment.
Originality/value
The study captures both asymmetric and cross-sectional relationship of investor sentiment and stock market in an emerging economy, India. The study uses a novel data set (i.e.) MMI which captures the sentiment based on market indicators and are widely disseminated to the public.
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Song Cao, Ziran Li, Kees G. Koedijk and Xiang Gao
While the classic futures pricing tool works well for capital markets that are less affected by sentiment, it needs further modification in China's case as retail investors…
Abstract
Purpose
While the classic futures pricing tool works well for capital markets that are less affected by sentiment, it needs further modification in China's case as retail investors constitute a large portion of the Chinese stock market participants. Their expectations of the rate of return are prone to emotional swings. This paper, therefore, explores the role of investor sentiment in explaining futures basis changes via the channel of implied discount rates.
Design/methodology/approach
Using Chinese equity market data from 2010 to 2019, the authors augment the cost-of-carry model for pricing stock index futures by incorporating the investor sentiment factor. This design allows us to estimate the basis in a better way that reflects the relationship between the underlying index price and its futures price.
Findings
The authors find strong evidence that the measure of Chinese investor sentiment drives the abnormal fluctuations in the basis of China's stock index futures. Moreover, this driving force turns out to be much less prominent for large-cap stocks, liquid contracting frequencies, regulatory loosening periods and mature markets, further verifying the sentiment argument for basis mispricing.
Originality/value
This study contributes to the literature by relying on investor sentiment measures to explain the persistent discount anomaly of index futures basis in China. This finding is of great importance for Chinese investors with the intention to implement arbitrage, hedging and speculation strategies.
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The purpose of this paper is to propose an approach to design a national default option to maximize retirement savings in defined contribution superannuation, using a…
Abstract
Purpose
The purpose of this paper is to propose an approach to design a national default option to maximize retirement savings in defined contribution superannuation, using a proportionate shareholding approach (PSA) which minimizes total cost of investing for all investors.
Design/methodology/approach
Through analytic modelling, the author shows how transaction costs in combination with size effects and agency incentives have limited the ability of professional managers to use arbitrage and active investment to create a price‐efficient market. Statistical models show how investors would experience difficulties in understanding fund performances due to inherent noise in the data. The models suggest financial intermediation has created an information asymmetry which reduces the effectiveness of market competition to lower costs in superannuation.
Findings
The authors find that the PSA is a collective optimal strategy and it is also an individual optimal strategy, because of the presence of informational inefficiency. Passive investing does not need commercial indices. PSA is more passive and flexible than standard indexing, and is fully‐scalable and available to all investors.
Research limitations/implications
Professional investment managers have not beaten the market, not because the market is efficient, but because it is inefficient due to a market failure to recognise and resolve principal‐agent conflicts of interest.
Practical implications
The proposed national default option has the potential to substantially increase national savings through low‐cost superannuation.
Originality/value
The paper provides a new rationale for passive investing based on the hypothesis of market inefficiency. It also provides the first formal proof of the “Cost matters theorem.” The proposed idea of a national default option will create a simple, understandable and cost‐effective alternative for all workers and will also provide a performance benchmark to encourage the development of a more competitive and efficient superannuation market.
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Yahui Zhang, Difang Wan and Leiming Fu
Media-effect refers to the phenomenon that stocks with no or low media coverage earn higher returns than stocks with high coverage. This paper aims to explore the existence of…
Abstract
Purpose
Media-effect refers to the phenomenon that stocks with no or low media coverage earn higher returns than stocks with high coverage. This paper aims to explore the existence of media-effect in China stock market and tests the two competing hypotheses explaining this phenomenon.
Design/methodology/approach
The authors construct a research sample based on a media-coverage event: the publications of lists of the most wealthy Chinese individuals; in addition, they identify the stocks of which listed firms are led by a controller who is recognized on the publicized lists. This paper uses event study methodology to test the existence of media effect in China A-share market. The authors employed propensity score matching (PSM) to construct a control group with same number of non-listed stocks. Then compared the returns of the two portfolios to test the risk premium hypothesis, and the abnormal trading volume and price reaction around the event date is explored to test the over-attention underperformance hypothesis.
Findings
Sampled stocks show significantly negative abnormal returns within the event period, but the matched control group formed by PSM shows no significant abnormal return, indicating that the risk premium hypothesis is not supported. Covered stocks show significantly magnified trading volume. The portfolio gains significant positive return before the event date but turns significantly negative afterward, which is consistent with the over-attention underperformance hypothesis.
Originality/value
This paper offers insights into media-effect in China stock market and provides empirical evidence explaining its existence.
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Abobaker Al.Al. Hadood and Farid Irani
This paper considers the role of economic sentiment and economic policy uncertainty (both domestic and European) in explaining the changes in the contemporaneous and future travel…
Abstract
Purpose
This paper considers the role of economic sentiment and economic policy uncertainty (both domestic and European) in explaining the changes in the contemporaneous and future travel and leisure stock index returns in top European Union (EU) tourism destinations, namely, in France, Germany, Spain and the UK.
Design/methodology/approach
The authors conducted the ordinary least square (OLS) regression estimations to investigate the impact of changes in economic sentiment and economic policy uncertainty on travel and leisure stock returns. Furthermore, the authors used predictive regressions to determine whether economic sentiment and economic policy uncertainty are useful predictors over the short- or medium-term for travel and leisure stock returns.
Findings
Empirical results revealed that, in France and Spain, the changes in regional economic sentiments predominantly and positively affected travel and leisure stock index returns. Also, results indicated that changes in European economic sentiment have a strong positive effect on the future travel and leisure stock returns in Spain and the UK over the short run, while in France, changes in European economic policy uncertainty have a weak negative effect on the future travel and leisure stock returns over the medium-term.
Research limitations/implications
This paper provides valuable practical implications for investors who trade travel and leisure stocks. Traders can use economic sentiment and economic policy uncertainty to establish arbitrageur strategies.
Originality/value
This study is the first to examine the effects of economic sentiment and economic policy uncertainty (both domestic and European) on contemporaneous and future travel and leisure stock returns in a top European tourism destination.
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