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1 – 10 of 773Jennifer Itzkowitz and Anthony Loviscek
The purpose of this paper is to determine if there is a significant difference in the investment risks between small-cap manufacturers that heavily depend on one or a few buyers…
Abstract
Purpose
The purpose of this paper is to determine if there is a significant difference in the investment risks between small-cap manufacturers that heavily depend on one or a few buyers, referred to as “dependent-buyers,” and small-cap manufacturers that have a more diversified customer base. If there is a significant difference both statistically and economically, then investors need to be aware of the dependent-buyer effect in their security selection and portfolio construction efforts.
Design/methodology/approach
Using large samples of firm-level data from 2000 through 2011, the authors employ standard risk estimation modeling to compute βs, idiosyncratic risks, and total risks of both dependent-buyer firms and firms with a more diversified customer base.
Findings
The authors find that the βs, idiosyncratic risks, and total risks of dependent-buyer firms are much greater than that of firms not in dependent relationships. These differences are both statistically and economically significant.
Research limitations/implications
Buyer-supplier relationships can change quickly, and so a firm that has a diversified base in one period, for example, could be a dependent-buyer in the next period. Much depends on the reporting accuracy of firms and the ability of the securities exchange commission (SEC) to track the relationships.
Practical implications
First, the risk of individual small-cap stocks is likely to be greater than perceived from macro-level data, leading to the need for more securities if idiosyncratic risk is to be eliminated. Second, small-cap investors have the opportunity to enhance portfolio construction efficiency by referencing data published by the SEC. Third, most investors interested in small-cap manufacturing stocks should find it prudent to allocate a large percentage of their small-cap investments to an index fund. While this may sacrifice higher returns, it also reduces the probability of experiencing an unpleasant small-stock effect.
Originality/value
This is the first study to show that the difference in investment risks between small-cap manufacturers that depend on one or a few firms for their outputs and small-cap manufacturers that have a well-diversified customer base is statistically and economically significant, information that should be valuable to investors in their security selection and portfolio construction efforts.
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A well-documented pattern in the literature concerns the outperformance of small-cap stocks relative to their larger-cap counterparts. This paper aims to address the “small-cap…
Abstract
Purpose
A well-documented pattern in the literature concerns the outperformance of small-cap stocks relative to their larger-cap counterparts. This paper aims to address the “small-cap versus large-cap” issue using for the first time data from the exchange traded funds (ETFs) industry.
Design/methodology/approach
Several raw return and risk-adjusted return metrics are estimated over the period 2012-2016.
Findings
Results are partially supportive of the “size effect”. In particular, small-cap ETFs outperform large-cap ETFs in overall raw return terms even though they fail the risk test. However, outperformance is not consistent on an annual basis. When risk-adjusted returns are taken into consideration, small-cap ETFs are inferior to their large-cap counterparts.
Research limitations/implications
This research only covers the ETF market in the USA. However, given the tremendous growth of ETF markets worldwide, a similar examination of the “small vs large capitalization” issue could be conducted with data from other developed ETF markets in Europe and Asia. In such a case, useful comparisons could be made, so that we could conclude whether the findings of the current study are unique and US-specific or whether they could be generalized across the several international ETF markets.
Practical implications
A possible generalization of the findings would entail that profitable investment strategies could be based on the different performance and risk characteristics of small- and large-cap ETFs.
Originality/value
This is the first study to examine the performance of ETFs investing in large-cap stock indices vis-à-vis the performance of ETFs tracking indices comprised of small-cap stocks.
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Barnali Chaklader and B. Padmapriya
Building on pecking order theory, this study seeks to understand the various financial factors that influence top management's decision regarding the company’s capital structure…
Abstract
Purpose
Building on pecking order theory, this study seeks to understand the various financial factors that influence top management's decision regarding the company’s capital structure. The authors attempt to understand and analyse whether the capital structure of mid‐ and small‐cap firms is affected by cash surplus scaled to total assets. Along with other determinants of capital structure such as liquidity, profitability, tangibility, market capitalisation and age, this is considered one of the major factors. Cash surplus is calculated using data from the cash flow statement. It is defined as the difference in cash from operating activities and that from investing activities and is scaled to total assets. To the best of the authors’ knowledge, this is the first study to regress cash surplus scaled to total assets and other determinants over leverage to examine the impact on mid‐ and small‐cap firms. The pecking order theory was found to hold for firms earning cash surplus.
Design/methodology/approach
Data were collected from the CMIE Prowess database of all firms listed on the NIFTY Small cap 250 index and NIFTY Midcap 150 index. The data of non-financial firms belonging to the midcap and small-cap sector, listed on the National Stock Exchange of India from 2012 to 2019 were considered. After cleaning the data, an unbalanced panel of 171 companies totalling 1,362 observations for the NIFTY Small-cap 250 index and another panel of 96 companies with 761 observations for the NIFTY Midcap 150 index was created. Panel data regression analysis was used to determine the effect of cash surplus scaled to total assets on the firms' capital structure.
Findings
This study demonstrates how small- and midcap firms' behave differently in taking capital structure decisions. Pecking order theory was found to hold for firms earning cash surplus as a proportion of total assets (Surplusta).
Research limitations/implications
The study was conducted through data available on secondary sources and database. The study can be better conducted by conducting a primary survey too. Further study may be conducted with a blend of secondary and questionnaire method. The results can be compared to check the similarity in findings.
Practical implications
Managers can benefit from the findings when making decisions on long- and short-term loans. This study can help managers in terms of the financial variables that have a role to play in the financial leverage of the company. The decision of the managers of midcap or small-cap firms would be different. Factors influencing short- and long-term borrowings are different. Academics can discuss whether there is any difference in the influence of capital structure variables of small- and midcap companies and the reasons for such differences. Judicious decisions on capital structure will create wealth for the shareholders as the right decision about leverage would result in a proper cost of capital. The findings also add to the existing literature on the Pecking order theory.
Social implications
Academics can discuss whether there is any difference in the influence of capital structure variables of small- and midcap companies and the reasons for such differences.
Originality/value
The study extends the existing literature by demonstrating that the capital structure of mid and small-cap firms is affected by cash surplus scaled to total assets. The pecking order theory was found to hold for firms earning cash surplus. This study can inform the practitioners about the financial variables that have a role to play in the company's financial leverage. As the results and significance of the variables of the midcap or small-cap firms are different, the decisions of the managers of these firms would be separate for the capital structure of their firms. The study also infers that the factors influencing short and long-term borrowings are different. The study determines whether managers' decision-making in such companies is different in terms of raising short- and long-term loans. The study attempts to guide managers in considering the different variables that would influence their capital structure decisions, particularly the decision to include debt in the capital. Financial variables need not be of equal importance for managers belonging to small- and midcap companies.
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This study aims to examine the cross-sectional variation in risk of US-based micro-cap open-end mutual funds. Micro-cap mutual funds allow investors to access very low-priced…
Abstract
Purpose
This study aims to examine the cross-sectional variation in risk of US-based micro-cap open-end mutual funds. Micro-cap mutual funds allow investors to access very low-priced stocks issued by the smallest of companies. The stock of these firms is usually not traded in major exchanges, and their financial information is not readily available and, thus, regarded as risky investments.
Design/methodology/approach
The author examines the cross-sectional variation in risk and higher moments of US-based micro-cap mutual funds in comparison with that of small-cap and mid-cap mutual funds. Total, systematic and idiosyncratic risk metrics, along with higher moments, are estimated before, during and after the 2008 financial crisis.
Findings
The author finds that, indeed, based on total and idiosyncratic risk metrics, the sample of micro-cap funds is riskier than the size-matched samples of small-cap and mid-cap funds. The author also reports that the sample of micro-cap funds fail to generate higher excess returns than the less risky small-cap and mid-cap funds.
Originality/value
To the best of the author’s knowledge, this is the first time that the risk of small-cap mutual funds has been examined.
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Donald R. Fraser, John C. Groth and Steven S. Byers
This paper examines and updates an earlier study of the liquidity of an extensive array of common stocks traded on NYSE/ASE/NML‐NASDAQ. It reports apparent variances in liquidity…
Abstract
This paper examines and updates an earlier study of the liquidity of an extensive array of common stocks traded on NYSE/ASE/NML‐NASDAQ. It reports apparent variances in liquidity due to trading location and other variables. The paper suggests causes for these differences.
Ming-Chieh Wang and Jin-Kui Ye
The purpose of this paper is to examine whether the conditionally expected return on size-based portfolios in an emerging market (EM) is determined by the country’s world risk…
Abstract
Purpose
The purpose of this paper is to examine whether the conditionally expected return on size-based portfolios in an emerging market (EM) is determined by the country’s world risk exposure. The authors analyze the degree of financial integration of 23 emerging equity markets grouped into five size portfolios using the conditional international asset pricing model with both world and domestic market risks. The authors also compare the model’s fitness on the predictability of portfolio returns by using world and EM indices.
Design/methodology/approach
This study investigates whether large-cap stocks are priced globally and whether mid- and small-cap stocks are strongly influenced by domestic risk factors. The authors first examine the predictability of large-, mid-, and small-cap stock portfolio returns by using global and local variables, and next compare the model fitness by using world and EM indices on the prediction of size-based stock returns. Finally, the authors test whether the world price of covariance risk is the same for different portfolios.
Findings
The authors find that the conditional expected returns of large-cap stocks should be priced by global variables. Mid- and small-cap stocks are influenced by domestic variables rather than global variables, and their returns are priced by local residual risks. The test of the conditional asset pricing model shows that the largest stocks have the smallest mean absolute pricing errors (MAE), and their pricing errors are lower in large markets than in small markets. Third, the EM index offers more predictability for the excess returns of mid- and small-cap stocks than the world market index, but the explanatory power of this index does not increase for large-cap stocks.
Originality/value
EMs in the past were known as segment markets, with local risk factors more important than global risk factors, suggesting significant benefits from adding EMs to global portfolios. It would be interesting to examine whether financial integration differs for various firm sizes in the markets.
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Kenneth E. Scislaw and David G McMillan
Market-based value style equity portfolios do not systematically outperform market-based growth style equity portfolios, despite considerable academic research that suggests that…
Abstract
Purpose
Market-based value style equity portfolios do not systematically outperform market-based growth style equity portfolios, despite considerable academic research that suggests that they should. This is an unresolved puzzle in the long lineage of work on this topic. The purpose of this paper is to question whether portfolio constituency rules employed by active growth and value equity investment managers might explain this puzzle.
Design/methodology/approach
The authors use the traditional research design and methodology of Fama and French (1993) to ensure comparability of results to prior research. Further, the authors adapt the return decomposition method of Keim (1999) to specifically answer the question in the research.
Findings
The authors find that restrictive constituency rules that omit the smallest, most illiquid stocks improve the performance of both value and growth stock portfolios. However, the authors find the impact of constituency rule restrictions on portfolio returns to be asymmetric with respect to value and growth in the small-cap investment space. Growth portfolios benefit from these changes more than value portfolios. Consistent with prior research, the authors find that value and growth style portfolios constructed from more liquid equities to be void of a statistically significant value-minus-growth return premium. The authors suggest these results might go a long way in explaining why market-based growth fund returns generally equal those of their value fund counterparts over time.
Originality/value
The research question central to the research, the value equity premium, has been investigated by researchers around the world over the last 20 years. The 20 year lineage of global published research on the value equity premium does, however, contain several unresolved questions. The paper specifically asks why the premium, long observed in global equity market returns, does not appear in market-based passive or active equity portfolios. This puzzle exists at the heart of the origins of the return premium itself and has serious implications for investment practitioners. If the matter cannot be reconciled, then market participants might rightly view the entire 20 year lineage of published research as irrelevant. The paper is one of few that has now extended the long lineage of research to its application in real markets.
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Dimitrios Kyrkilis, Athanasios Koulakiotis, Vassilios Babalos and Maria Kyriakou
The purpose of this paper is to examine the hypothesis of feedback trading along with the short-term return dynamics of three size-based stock portfolios of Athens Stock Exchange…
Abstract
Purpose
The purpose of this paper is to examine the hypothesis of feedback trading along with the short-term return dynamics of three size-based stock portfolios of Athens Stock Exchange during the Greek debt crisis period.
Design/methodology/approach
To this end, the authors employ for the first time in the literature two well-known models while the variance equation is modeled by means of a multivariate EGARCH specification. As a robustness test an innovative nested-EGARCH model is also employed.
Findings
The assumption that positive feedback trading is an important component of the short-term return movements across the three stock portfolios receives significant support. Moreover, the volatility interdependence, both in magnitude and sign, is almost similar across the three models. Finally, bad news originating from the portfolio of small stock appears to have a higher impact on the volatility of large and medium size stock returns than good news during the Greek debt crisis period.
Originality/value
The methodology is innovative and the authors test for the first time the feedback trading hypothesis across different size stocks. The authors believe that the results might entail significant policy implications for investors and market regulators.
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This paper examines the Random Walk Hypothesis (RWH) for aggregate New Zealand share market returns, as well as the CRSP NYSE‐AMEX (USA) index during the 1980‐2001 period. Using…
Abstract
This paper examines the Random Walk Hypothesis (RWH) for aggregate New Zealand share market returns, as well as the CRSP NYSE‐AMEX (USA) index during the 1980‐2001 period. Using several indices, we rely on the variance‐ratio test and find evidence to support the rejection of the RWH with some evidence of a momentum effect. However, we find evidence to suggest the behaviour of share prices to be time‐dependent in New Zealand. For example, we find the indices tested were closer to random after the 1987 share market crash. Further analysis showed even stronger results for periods subsequent to the passage of the Companies Act 1993 and the Financial Reporting Act 1993. We also find evidence that indices based on large capitalisation stocks are more likely to follow a random walk compared to those based on smaller stocks. For the USA index, we find stronger evidence of random behaviour in our sample period compared to the earlier period examined by Lo and Mackinlay (1988)
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Sharon Kay Lee, William Bosworth and Franklin Kudo
Recently all major stock exchanges issued a requirement that listed companies have 100 percent independence on audit committees of the board of directors but now the focus has…
Abstract
Purpose
Recently all major stock exchanges issued a requirement that listed companies have 100 percent independence on audit committees of the board of directors but now the focus has turned to compensation committees. Does 100 percent independence on compensation committees make a difference in firm performance? The paper aims to discuss these issues.
Design/methodology/approach
Only 1 percent of the S & P 1,500 firms are not in compliance with the new 100 percent independence requirement for compensation committees. This presents an opportunity to examine characteristics of these firms and if this noncompliance may harm firm performance. Industry-adjusted ROA and Tobin’s Q measures are collected as well as firm size, debt ratios, and the presence of a classified board.
Findings
Findings are as follows: S & P 500 firms with lower levels of debt, have classified board, but do not perform significantly worse than firms in compliance in the same industry; mid-cap firms with debt levels similar to complying firms, have classified boards, and perform significantly worse, and lastly, small-cap firms with lower levels of debt, have classified boards, and perform significantly worse.
Research limitations/implications
Results imply that non-complying mid-cap and small-cap firms may be protecting under-performing management through maintaining classified boards, low levels of debt to avoid scrutiny of the debt markets, and less objectivity (i.e. overall and committee independence) on boards.
Originality/value
Existing corporate governance literature provides evidence that overall board independence may promote shareholder wealth maximization. The latest focus regarding independence has recently been on compensation committees. Should independence on compensation committees matter to shareholders? It is appears that noncompliance should matter in the case of small- and mid-cap firms.
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