Search results

This study aims to examine what underlies the estimated relation between idiosyncratic volatility and realized return.

Idiosyncratic volatility has a dual effect on stock pricing: it not only affects investors' expected return but also affects the efficiency of stock price in reflecting its value. Therefore, the estimated relation between idiosyncratic volatility and realized return captures its relations with both expected return and the mispricing-related component due to its dual effect on stock pricing. The sign of its relation with the mispricing-related component is indeterminate.

The estimated relation between idiosyncratic volatility and realized return decreases and switches from positive to negative as the estimation sample consists of proportionately more ex ante overvalued observations; it increases and switches from negative to positive as the estimation sample consists of proportionately more ex post overvalued observations. In sum, the relation of idiosyncratic volatility with the mispricing-related component dominates its relation with expected return in its estimated relation with realized return. Moreover, its estimated relation with realized return varies with research design choices and even switches sign due to their effects on its relation with the mispricing-related component.

The novelty of the study is evident in the implication of its findings that one cannot infer the sign of the relation of idiosyncratic volatility with expected return from its estimated relation with realized return.

Prior research has documented the role of information uncertainty in the cross-sectional variation in stock returns. Miller (1977) hypothesizes that if information uncertainty is caused by differences of opinion, prices will reflect only the positive beliefs due to short-sale constraints. These anomalous stock price behaviors may result from mispricing. In contrast, Merton (1974) asserts that default risk is a function of the uncertainty in the asset value process. Information uncertainty may be subsumed by credit or default risk. The paper aims to discuss these issues.

The authors employ various sorting techniques and Fama-MacBeth Regressions to test the hypotheses.

The authors provide empirical evidence consistent with Merton’s (1974) default risk hypothesis and inconsistent with Miller’s (1977) mispricing hypothesis.

Risk aversion and not misplacing is the primary factor driving information-related anomalies in equities markets.

It would be quite difficult to find arbitrage opportunities in equities markets because there appears to be little, if any, mis-pricing due to information uncertainties.

This study provides important information about the primary underlying information-related source of certain empirical anomalies in the cross-section of stock returns.

The change in CEO pay after their firms make large corporate investments is examined. Whether the change in CEO pay is a beneficial practice or harmful practice to firms is investigated.

A sample of firms that make large corporate investments is identified. For this sample, we identify the change in CEO pay before and after the investment, and we also measure the pay-for-size sensitivity of these investing firms.

For firms that make large corporate investments, CEOs get significantly more option grants when their firms’ stock returns are negative after the investments and these investing CEOs get more option grants than noninvesting CEOs.

The present study suggests that firms may have to increase CEO pay after large corporate investments to encourage investment. However, the results may also be consistent with an agency cost explanation. Future research should try to distinguish between the two explanations.

The study reveals a potential way to prevent CEOs from underinvesting.

The study provides important insights to shareholders on how to encourage CEOs to get their firms to invest, and on how to view CEO pay increases after their firms invest.

This paper examines the effects of managerial optimism on corporate cash holdings.

The authors construct a novel measure of managerial optimism based on the linguistic tone of annual reports by applying a Naïve Bayesian Machine Learning algorithm to non-numeric parts of Vietnamese listed firms' reports from 2010 to 2016. The paper employs firm and year fixed effects model and also uses the generalized method of moments estimation as robustness checks.

The authors find that the cash holding of firms managed by optimistic managers is higher than the cash holdings of firms managed by non-optimistic managers. Managerial optimism also influences corporate cash holdings through internal cash flows and the current year’s capital expenditures. Although the authors find no evidence that optimistic managers hold more cash to finance future growth opportunities in general, optimistic managers hold more cash for near future investment opportunities than non-optimistic managers do.

The novel measure proposed in this study is expected to provide great potential for future finance studies investigating the relation between managerial traits and corporate policies since it is applicable for any levels of financial market development. In addition, the findings highlight the important role, both direct and indirect, of managerial optimism on cash holdings. Related future research should take this psychological trait into account to gain a better understanding of corporate cash holding.

This paper helps to extend the literature on managerial optimism measurement by introducing a new measure of managerial optimism based on the linguistic tone of annual reports. Furthermore, this is among the first studies directly linking annual report linguistic tone to cash holding. The paper also provides new evidence regarding how managerial optimism affects the relationship between the firm's growth opportunities and cash holding, given that mispricing corrections are naturally uncertain.

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.

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.

(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.

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.

The Mallinson Report, published in 1994, emphasised the need for valuers to develop expertise for the purpose of estimating the worth of property investments. Implicit in attempts to estimate worth is the assumption that the property market displays some level of inefficiency and that, in such a market, price and worth may diverge. It is believed that astute investors can exploit such inefficiencies in the market to add value to their portfolios. This paper reviews the main issues relating to the calculation of worth. Specifically it examines market efficiency, individual and market worth, and the use of risk analysis in the calculation. Finally, it recommends a shorter analysis period in view of the uncertainty in the estimation of the variables.

In this study, we investigate what drives the MAX effect in the South Korean stock market. We find that the MAX effect is significant only for overpriced stocks categorized by the composite mispricing index. Our results suggest that investors' demand for the lottery and the arbitrage risk effect of MAX may overlap and negate each other. Furthermore, MAX itself has independent information apart from idiosyncratic volatility (IVOL), which assures that the high positive correlation between IVOL and MAX does not directly cause our empirical findings. Finally, by analyzing the direct trading behavior of investors, our results suggest that investors' buying pressure for lottery-like stocks is concentrated among overpriced stocks.

The purpose of this article is to assess the pricing of stocks that are traded on both a US stock exchange and a non‐US stock exchange to determine whether interaction exists between the two exchanges.

This article identifies extreme price movements of stocks (winners and losers) in the non‐US stock exchanges that also trade as American depository receipts (ADRs) in the US market, and measure the US market response. Also identifies extreme price movements of stocks (winners and losers) in the US stock exchanges that also trade in the non‐US markets, and measure the non‐US market response.

Finds a significant reversal of winners and losers in the US market, which suggests that the US market attempts to correct the pricing in non‐US markets. Also finds that extreme ADR price movements in the US markets are followed by corrections in the non‐US market.

Market participants appear to monitor unusual stock price movements that just occurred in other markets, and correct for unusual price movements that cannot be rationalized. Such activity in global markets expedites the process by which price discrepancies are corrected. The evidence also suggests that the cost of equity in one market can be influenced by the actions of investors in another market.

This study of non‐US stocks that are cross‐listed in the US in the form of ADRs allows us to examine the interaction of pricing in a stock's local market with pricing in the US market.

The paper's aim is to explore the impact of statistical arbitrage and high-frequency trading as hedge fund investment strategies that have a significant impact on the environment of corporations.

The paper is a meta-analysis of the role of investment strategies within complex systems.

The growth of hedge fund investment activity based on statistical arbitrage tends to produce a vulnerability; more funds using the strategy helps to create the profitable outcomes that the strategy relies upon. However, the growth also reduces the time lines of profitability and produces an underlying instability based on overlapping holdings and the use of leverage. The shortened timelines also create a further impetus towards technological competition and promotes high frequency trading, which then introduces further vulnerabilities based on “stop-loss cascades”.

Much of the trading creates a superficial form of liquidity, which gives a limited sense of market vulnerabilities. The basis of complex interactions between high frequency traders is also not clearly understood. Researchers and agents of policy ought to pay greater attention to the issues than is currently the case.

The area is one that is under-researched.

The purpose of this paper is to provide a comprehensive review of the literature on R&D expenses and subsequent firm valuation and to briefly highlight some gaps and implications for future research.

The approach is a review of studies on R&D and valuation between 1978 and 2007. The valuation issues have been grouped into general topics identified among the overall volume of research: economic characteristics, actual and forecast firm performance, capital structure, risk, and other topics which do not fit into the previous categories.

The paper provides a comprehensive assessment of the literature findings on a variation of valuation topics useful for internal and external users of financial statements of firms intensive in R&D investments. It sheds light on certain literature limitations and thus guides the users of financial statements regarding to which issues they should pay attention when analysing the financial statements of firms intensive in R&D.

Existing research on R&D and valuation focuses mainly on the USA and UK and therefore raises issues of generalisation of the results.

The paper provides a useful guide for the users of financial statements of R&D intensive firms, since it provides information on possible consequences of these expenses regarding a variety of valuation issues.

The paper fills an information gap by addressing a range of valuation issues on R&D and offers relevant information guidance to the users of financial statements.