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Article
Publication date: 24 September 2020

Mehmet Emin Yildiz, Yaman Omer Erzurumlu and Bora Kurtulus

The beta coefficient used for the cost of equity calculation is at the heart of the valuation process. This study conducts comparative analyses of the classical capital…

Abstract

Purpose

The beta coefficient used for the cost of equity calculation is at the heart of the valuation process. This study conducts comparative analyses of the classical capital asset pricing model (CAPM) and downside CAPM risk parameters to gain further insight into which risk parameter leads to better performing risk measures at explaining stock returns.

Design/methodology/approach

The study conducts a comparative analysis of 16 risk measures at explaining the stock returns of 4531 companies of 20 developed and 25 emerging market index for 2000–2018. The analyses are conducted using both the global and local indices and both USD and local currency returns. Calculated risk measures are analyzed in a panel data setup using a univariate model. Results are investigated in country-specific and model-specific subsets.

Findings

The results show that (1) downside betas are better than CAPM betas at explaining the stock returns, (2) both risk measure groups perform better for emerging markets, (3) global downside beta model performs better than global beta model, implying the existence of the contagion effect, (4) high significance levels of total risk and unsystematic risk measures further support the shortfall of CAPM betas and (5) higher correlation of markets after negative shocks such as pandemics puts global CAPM based downside beta to a more reliable position.

Research limitations/implications

The data are limited to the index securities as beta could be time varying.

Practical implications

Results overall provide insight into the cost of equity calculation and emerging market assets valuation.

Originality/value

The framework and methodology enable us to compare and contrast CAPM and downside-CAPM risk measures at the firm level, at the global/local level and in terms of the level of market development.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 11 July 2008

Chyi Lin Lee, Jon Robinson and Richard Reed

This paper aims to identify and examine the determinants of downside systematic risk in Australian listed property trusts (LPTs).

Abstract

Purpose

This paper aims to identify and examine the determinants of downside systematic risk in Australian listed property trusts (LPTs).

Design/methodology/approach

Capital asset pricing model (CAPM) and lower partial moment‐CAPM (LPM‐CAPM) are employed to compute both systematic risk and downside systematic risk. The methodology of Patel and Olsen and Chaudhry et al. is adopted to examine the determinants of systematic risk and downside systematic risk.

Findings

The results confirm that systematic risk and downside systematic risk can be individually identified. There is little evidence to support the existence of linkages between systematic risk in Australian LPTs and financial/management structure determinants. On the other hand, downside systematic risk is directly related to the leverage/management structure of a LPT. The results are also robust after controlling for the LPTs' investment characteristics and varying target rates of return.

Practical implications

Investors and real estate analysts should conscious with the higher returns from high leverage and internally managed LPTs. Although there is no evidence that these higher returns are related to higher systematic risk, there could be the compensation for higher downside systematic risk.

Originality/value

This study provides invaluable insights into the management of real estate risk in Australian LPTs with implications for REITs in other countries. Unlike previous studies of systematic risk in REITs or LPTs, this is the first study to assess downside systematic risk and explore the determinants of downside systematic risk in LPTs.

Details

Journal of Property Investment & Finance, vol. 26 no. 4
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 2 September 2019

Chao Zhou

The purpose of this paper is to explore how multinationality affects multinational companies’ (MNCs) downside risk and the moderate effects of ownership structure in the…

Abstract

Purpose

The purpose of this paper is to explore how multinationality affects multinational companies’ (MNCs) downside risk and the moderate effects of ownership structure in the setting of emerging markets based on Chinese publicly traded manufacturing MNCs.

Design/methodology/approach

The author derives hypotheses based on real options theory and agency theory, and tests hypotheses by using Tobit model and a unique data set of Chinese A-shared publicly traded manufacturing MNCs in the period of 2010–2016.

Findings

The empirical results suggest that multinationality is positively related to downside risk and this effect is subjected to ownership structure for firms in emerging markets. In particular, multinationality of MNCs with a high level of ownership concentration, managerial ownership and institutional ownership is more likely to reduce downside risk.

Practical implications

The main conclusion of this paper highlights the importance of ownership structure of MNCs in explaining the real options value of multinationality, and conveys to owners of MNCs in China and other emerging markets the need to strengthen firms’ governance if they want to maximize the benefits of multinational operations.

Originality/value

This study extends existing studies by taking ownership structure into consideration and highlighting the importance of agency problem in the examination of multinationality and downside risk, which provides a potential explanation for previous mixed evidence. This study also provides new evidence for the relationship between multinationality and downside risk by using a unique sample from China, an emerging market country.

Details

Cross Cultural & Strategic Management, vol. 26 no. 3
Type: Research Article
ISSN: 2059-5794

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Article
Publication date: 28 January 2014

Mohammad Reza Tavakoli Baghdadabad and Paskalis Glabadanidis

The purpose of this paper is to propose a new and improved version of arbitrage pricing theory (APT), namely, downside APT (D-APT) using the concepts of factors’ downside

Abstract

Purpose

The purpose of this paper is to propose a new and improved version of arbitrage pricing theory (APT), namely, downside APT (D-APT) using the concepts of factors’ downside beta and semi-variance.

Design/methodology/approach

This study includes 163 stocks traded on the Malaysian stock market and uses eight macroeconomic variables as the dependent and independent variables to investigate the relationship between the adjusted returns and the downside factors’ betas over the whole period 1990-2010, and sub-periods 1990-1998 and 1999-2010. It proposes a new version of the APT, namely, the D-APT to replace two deficient measures of factor's beta and variance with more efficient measures of factors’ downside betas and semi-variance to improve and dispel the APT deficiency.

Findings

The paper finds that the pricing restrictions of the D-APT, in the context of an unrestricted linear factor model, cannot be rejected over the sample period. This means that all of the identified factors are able to price stock returns in the D-APT model. The robustness control model supports the results reported for the D-APT as well. In addition, all of the empirical tests provide support the D-APT as a new asset pricing model, especially during a crisis.

Research limitations/implications

It may be worthwhile explaining the autocorrelation limitation between variables when applying the D-APT.

Practical implications

The framework can be useful to investors, portfolio managers, and economists in predicting expected stock returns driven by macroeconomic and financial variables. Moreover, the results are important to corporate managers who undertake the cost of capital computations, fund managers who make investment decisions and, investors who assess the performance of managed funds.

Originality/value

This paper is the first study to apply the concepts of semi-variance and downside beta in the conventional APT model to propose a new model, namely, the D-APT.

Details

International Journal of Managerial Finance, vol. 10 no. 1
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 20 July 2015

Mohammad Reza Tavakoli Baghdadabad and Masood Fooladi

The purpose of this paper is to provide the modified measures of risk-adjusted performance evaluation of Malaysian mutual funds using the downside risk concepts, and…

Abstract

Purpose

The purpose of this paper is to provide the modified measures of risk-adjusted performance evaluation of Malaysian mutual funds using the downside risk concepts, and promote the ability of managers and investors in making logical decisions under the market asymmetry condition.

Design/methodology/approach

This study focusses on the performance evaluation of Malaysian mutual funds using eight modified measures of Sharpe, Treynor, M2, Jensen’s α, information ratio (IR), MSR, SPI, and leverage factor. These modified measures use the downside systematic risk and semi-standard deviation instead of systematic risk and conventional standard deviation, respectively, to evaluate the performance of Malaysian mutual funds over the period 2000-2011.

Findings

The results indicate that the conventional measures of performance evaluation do not have a crucial influence on the relative evaluation of mutual funds. Three modified measures of Sharpe, Treynor, and M2 have a high correlation with the conventional Sharpe measure and can be used instead of the conventional Sharpe measure. Since, two modified measures of Treynor and M2 display a high rank correlation coefficient with the conventional Treynor measure, they can be replaced with this traditional measure. In addition, two modified IR and MSR measures along with the modified SPI and conventional SPI show very high rank correlation coefficients in relation to each other. The results also document a modified leverage factor less than one for all funds. It can be concluded that the strategy of un-levering the investor’s holding must be followed.

Practical implications

The empirical evidence of this study can be utilized as inputs in the process of decision-making by different types of investors who are interested in participating especially in Malaysian stock market and generally in global stock market under the market asymmetry condition.

Originality/value

The contribution of this study is to modify five measures of M2, IR, MSR, FPI, and leverage factor in the downside risk framework which is a work on a rather under-researched area.

Details

International Journal of Emerging Markets, vol. 10 no. 3
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 30 January 2019

Fangzhou Huang

This paper aims to investigate patterns in UK stock returns related to downside risk, with particular focus on stock returns during financial crises.

Abstract

Purpose

This paper aims to investigate patterns in UK stock returns related to downside risk, with particular focus on stock returns during financial crises.

Design/methodology/approach

First, stocks are sorted into five quintile portfolios based on the relevant beta values (classic beta, downside beta and upside beta, calculated by the moving window approach). Second, patterns of portfolio returns are examined during various sub-periods. Finally, predictive powers of beta and downside beta are examined.

Findings

The downside risk is observed to have a significant positive impact on contemporaneous stock returns and a negative impact on future returns in general. In contrast, an inverse relationship between risk and return is observed when stocks are sorted by beta, contrary to the classic literature. UK stock returns exhibit clear time sensitivity, especially during financial crises.

Originality/value

This paper focuses on the impact of the downside risk on UK stock returns, assessed via a comprehensive sub-period analysis. This paper fills the gap in the existing literature, in which very few studies examine the time sensitivity in relation to the downside risk and the risk-return anomaly in the UK stock market using a long sample period.

Details

Review of Accounting and Finance, vol. 18 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Content available
Article
Publication date: 30 April 2020

Farrukh Naveed, Idrees Khawaja and Lubna Maroof

This study aims to comparatively analyze the systematic, idiosyncratic and downside risk exposure of both Islamic and conventional funds in Pakistan to see which of the…

Abstract

Purpose

This study aims to comparatively analyze the systematic, idiosyncratic and downside risk exposure of both Islamic and conventional funds in Pakistan to see which of the funds has higher risk exposure.

Design/methodology/approach

The study analyzes different types of risks involved in both Islamic and conventional funds for the period from 2009 to 2016 by using different risk measures. For systematic and idiosyncratic risk single factor CAPM and multifactor models such as Fama French three factors model and Carhart four factors model are used. For downside risk analysis different measures such as downside beta, relative beta, value at risk and expected short fall are used.

Findings

The study finds that Islamic funds have lower risk exposure (including total, systematic, idiosyncratic and downside risk) compared with their conventional counterparts in most of the sample years, and hence, making them appear more attractive for investment especially for Sharīʿah-compliant investors preferring low risk preferences.

Practical implications

As this study shows, Islamic mutual funds exhibit lower risk exposure than their conventional counterparts so investors with lower risk preferences can invest in these kinds of funds. In this way, this research provides the input to the individual investors (especially Sharīʿah-compliant investors who want to avoid interest based investment) to help them with their investment decisions as they can make a more diversified portfolio by considering Islamic funds as a mean for reducing the risk exposure.

Originality/value

To the best of the author’s knowledge, this study is the first attempt at world level in looking at the comparative risk analysis of various types of the risks as follows: systematic, idiosyncratic and downside risk, for both Islamic and conventional funds, and thus, provides significant contribution in the literature of mutual funds.

Details

ISRA International Journal of Islamic Finance, vol. 12 no. 1
Type: Research Article
ISSN: 0128-1976

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Article
Publication date: 11 May 2012

Nicholas V. Vakkur and Zulma J. Herrera‐Vakkur

This study seeks to evaluate, in a global context, the impact of Sarbanes Oxley Act on a particular risk measure of importance to investors (risk‐adjusted returns), and…

Abstract

Purpose

This study seeks to evaluate, in a global context, the impact of Sarbanes Oxley Act on a particular risk measure of importance to investors (risk‐adjusted returns), and two measures of risk due to asymmetry (upside and downside risk). A unique dataset permits a dual evaluation of the law's impact on such measures in leading non‐US economies as well (i.e. “ripple effects”).

Design/methodology/approach

Hypotheses are empirically evaluated on a sample (n=712) of the largest US and European firms (control) using daily return data from 1993 through 2009 – one of the most extensive data sets employed in the literature on this topic to date. The reliability of the risk measures is carefully evaluated using multiple approaches, including Fama‐MacBeth regressions. A series of difference‐in‐difference analyses is then employed to empirically assess Sarbanes Oxley's impact on equity risk.

Findings

The findings suggest Sarbanes Oxley decreased both risk‐adjusted returns and upside risk, whereas downside risk fails to explain the cross section of returns for the largest US firms. From a global perspective, it is suggested that the enactment of Sarbanes Oxley's in the USA motivated leading non‐US economies to adopt similar regulatory measures, which caused “ripple effects” – e.g. effects similar to those documented in this paper – in leading non‐US economies.

Practical implications

The findings suggest that comprehensive financial regulations, such as Sarbanes Oxley Act, are properly envisaged at the global level, as their impact is not confined to the home country. In an increasingly globalized economy, investor welfare is likely to be influenced – directly as well as indirectly – by economic and financial regulation(s) enacted in foreign economies. Arguably, this suggests the pivotal importance of effective mechanisms of global governance, such that a purely domestic approach to regulation may be short‐sighted. In either case, the findings of this study are entirely relevant if regulators are to consider the broader, global impact of regulation on investor welfare.

Originality/value

This is the first study to empirically analyze, within a global framework, Sarbanes Oxley's risk implications without relying on a series of simple mean variance analyses. Substantive research documents that the methodological approach employed is more precise, reliable as well as “investor relevant”. Furthermore, the authors seek to assess the law's impact on leading non‐US equity markets, a first for the literature. Consequently, this study provides a robust evaluation of the law's (international) impact on firm (equity) risk, making an important contribution to the literature.

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Book part
Publication date: 21 July 2020

Stefan Linder and Johanna Sax

Today, long-term success requires firms to sense changes in their environments early and react efficiently to them. Increasing middle managers’ participation in…

Abstract

Today, long-term success requires firms to sense changes in their environments early and react efficiently to them. Increasing middle managers’ participation in decision-making about market-related and product-related questions has been suggested as one way of enhancing this strategic responsiveness; abandoning formal planning, such as annual budgets, has been another. Yet, empirical evidence on the matter is scarce and conflicting. Drawing on data from Denmark’s 500 largest firms, we show that participation of middle managers in decision-making about new products and markets to serve, in-deed, increases firms’ strategic responsiveness as assessed by a reduction in firms’ downside risk. However, this effect is not a direct one. Nor does it interact positively or negatively with the emphasis put on formal planning as submitted in literature. Our evidence suggests that emphasis on planning mediates the relation between stronger participation of middle managers in decision-making and the increase in firms’ strategic responsiveness. This has implications for ongoing theory building and practice.

Details

Adapting to Environmental Challenges: New Research in Strategy and International Business
Type: Book
ISBN: 978-1-83982-477-7

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Article
Publication date: 15 March 2011

Torben Juul Andersen

Multinational structure has been linked to operational flexibilities that can improve corporate adaptability and a knowledge‐based view suggests that multinational…

Abstract

Purpose

Multinational structure has been linked to operational flexibilities that can improve corporate adaptability and a knowledge‐based view suggests that multinational resource diversity can facilitate responsive opportunities. The enhanced maneuverability from this can reduce earnings volatility and hence the corporate performance risk. But, the internationalization process may also require irreversible investments that increase corporate exposures and leave the risk implications of multinational enterprize somewhat ambiguous. Hence, the purpose of the paper is to present an empirical study of the implied relationships between the degree of multinationality and various risk measures including downside risk, upside potential, and performance risk.

Design/methodology/approach

The paper provides a brief literature review, develops hypotheses, and tests them in two‐stage least square regressions on archival data to control for pre‐selection biases.

Findings

The analyses indicate that multinationality is associated with lower downside risk as well as higher upside potential and leads to reduced performance risk. The study finds no trace of diminishing effects from higher degrees of multinationality.

Research limitations/implications

The empirical study uses a sample of large US‐based corporations, which could affect the generalizability of results. However, this is consistent with other studies and eases comparability of findings.

Practical implications

The findings add to the ongoing debate about the risk effects of a multinational corporate structure and confirms that a diverse multinational presence is associated with positive risk outcomes.

Originality/value

The paper complements a limited number of studies with equivocal results and adopts alternative risk outcome measures. The study extends the industry scope by introducing a comprehensive sample of firms operating in different manufacturing and service businesses.

Details

International Journal of Organizational Analysis, vol. 19 no. 1
Type: Research Article
ISSN: 1934-8835

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