Category Archives: Original Article

Estimating contagion mechanism in global equity market with time‐zone effect

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Abstract

This paper proposes a time-zone vector autoregressive (VAR) model to investigate comovements in the global financial market. Analyzing daily data from 36 national equity markets, we explore the subprime and European debt crises using static analysis and the COVID-19 crisis through a rolling window method. Our study of comovements using VAR coefficients reveals a resonance effect in the global system. Findings on densities and assortativities suggest the existence of the transmission mechanism in all periods and abnormal structural changes during the crises. Strength analysis uncovers the information transmission mechanism across continents over normal and turmoil periods and emphasizes specific stock markets' unique roles. We examine dynamic continent strengths to demonstrate the contagion mechanism in the global equity market over an extended period. Incorporating the time-zone effect significantly enhances the VAR model's interpretability. Signed networks provide more information on global equity markets and better identify critical contagion patterns than unsigned networks.

The consequences of non‐trading institutional investors

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Abstract

We document that institutional investors do not trade a single share, on average, in one of five stocks in their portfolio for an extended period. Investors with high inaction are likely to underperform in the future. Our results show a similar underperformance for stocks with a high non-trading level of institutional investors. We investigate several behavioral biases as potential drivers of the non-trades and find no evidence of distraction, overconfidence, and disposition effects. Institutional investors’ tendency to sell stocks with salient price movements and recency bias best explains their inactions. Overall, the non-trading behavior of institutional investors serves as a unique predictor for their future performance and potential behavioral biases are driving this predictability.

Tick size and price efficiency: Further evidence from the Tick Size Pilot Program

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Abstract

This paper examines whether larger tick sizes improve or hinder price efficiency for small-capitalization stocks using data from implementing and terminating the Tick Size Pilot Program (TSPP). We show that the TSPP led to increases in various liquidity measures, and its termination restored them to their pre-TSPP levels. We also find evidence that the TSPP led to trader migration from the pilot to control stocks. The TSPP implementation (termination) is associated with decreases (increases) in price efficiency, indicating that price efficiency decreases with tick sizes. Liquidity and informed trading are two channels through which the TSPP changes price efficiency.

What happens in Vegas stays in Vegas? Firsthand experience and EDGAR search activity in Las Vegas casino hotels

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Abstract

What role does investors’ firsthand experience have in stock selection, and does this firsthand experience lead to better investment outcomes? Using a unique data set containing the stock research activities of patrons of Las Vegas casino hotels, we find evidence that investors’ firsthand experience motivates interest in Vegas-related travel industry stocks. Additionally, their interest in these stocks predicts strong performance; Vegas interest leads to positive abnormal returns of up to 3.7% (0.4%) over the following year (month), and abnormal returns are highest in industries that are related to Las Vegas.

Overselling corporate social responsibility

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Abstract

We show that firms hype up their corporate social responsibility (CSR) narratives during the turn-of-the-year earnings conference calls to project an overly responsible public image of their firms. This previously unexplored phenomenon does not appear to be related to past, current, and future CSR engagements and cannot be explained by observed time-varying firm attributes and unobserved time-invariant firm and CEO attributes. We find that the fourth-quarter CSR narrative hike is more pronounced among firms that are (ex ante) expected to do more corporate good as well as firms embedded in dirty industries, but less prevalent among firms facing elevated product-market threats. Although elevated CSR narrative is associated with positive short-term market reaction and lower near-term stock price crash risk, such behavior tends to reduce financial report readability and leads to lower equity valuation in the longer term. Our analyses suggest that CSR narrative hike at the turn-of-the-year is a pervasive phenomenon in the corporate landscape and may have valuation and governance implications.

Joint dynamics of stock returns and cash flows: A time‐varying present‐value framework

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Abstract

This paper proposes a novel time-varying present-value model to analyze the joint dynamics of stock returns and cash flows periodically. We use a nonparametric time-varying vector autoregressive model to examine the economic implications of the time-varying present-value model. By conducting several nonparametric tests, we reject the stability of multivariate forecasting models and the null that stock returns and cash flows are simultaneously unpredictable in any given period. Additional bootstrap analyses show that under the null of unpredictable returns, dividend growth is highly predictable. Finally, the proposed time-varying present-value framework holds robustly for both the dividend–price ratio and the earnings–price ratio.

Do State Ownership and Political Connections Affect Precautionary Cash Holdings for Customer Concentration? Evidence from China

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This paper examines whether state ownership and political connections affect the relationship between customer concentration and cash holdings for Chinese listed manufacturing firms. We show that non-state-owned firms, but not state-owned firms, hold more cash as customer concentration increases. In addition, political connections weaken the positive effect of customer concentration on non-state-owned firms’ cash holdings. Our supplemental analyses further show that for non-state-owned firms with limited access to finance—for instance, firms with low analyst following, low institutional ownership, or low government subsidies—the effects of political connections on weakening the positive association between customer concentration and cash holdings are more pronounced. Additional robustness tests support our arguments.

Analysts’ Earnings per Share Forecasts: The Effects of Forecast Uncertainty and Forecast Precision on Investor Judgements

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This study uses controlled experiments to investigate the joint effects of forecast uncertainty and forecast precision on investor judgements. It finds that forecast precision moderates the effects of forecast uncertainty on investors’ forecast reliability judgements such that the effects of forecast uncertainty on investors’ judgements of forecast reliability are more negative when an analyst's point earnings per share (EPS) forecast is rounded than when it is precise. In addition, the relationship between forecast precision and investors’ judgements of forecast reliability is mediated by investors’ perceptions of forecast attributes. The evidence also suggests that while forecast uncertainty exerts a negative effect on investment judgements, forecast precision does not play a role in mitigating these negative effects. Using a supplementary within-participants experiment, the study further finds that investors may not be consciously aware of how forecast precision influences their judgements of forecast reliability.

Diagnostics for asset pricing models

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Abstract

The validity of asset pricing models implies white-noise pricing errors (PEs). However, we find that the PEs of six well-known factor models all exhibit a significant reversal pattern and are predictable by their lagged values up to 12 months. Moreover, the predictability of the PEs can produce substantial economic profits. Similar conclusions hold for recently developed machine learning models too. Additional analysis reveals that the significant PE profits cannot be explained by common behavioral biases. Our results imply that much remains to be done and there is a great need to develop new asset pricing models.

Sea Change? Sensemaking, Firm Reactions, and Community Resilience Following Climate Disasters

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Abstract

Communities around the world face increasing risks of climate disasters such as floods, hurricanes, and droughts. What drives firms’ heterogeneous responses to a climate disaster, and what could be the consequences for community resilience? To address these questions, we theorize how different aspects of sensemaking (sense of place, time, certitude, and loss) affect firm responses. Then, aided by an elaborate thought experiment – a narrative scenario of a future flood hitting the Dutch coast – we theorize how heterogeneity in firms’ initial responses can trigger sensemaking-sensegiving cycles that spiral a community towards reconstruction or unplanned retreat. Our article advances understanding of firms’ heterogenous disaster responses, the drivers of community resilience, and uncovers potential tensions between organizational and community resilience. We also contribute to sensemaking theory by relaxing the popular assumption that sensegiving requires deliberation. Finally, our article showcases how narrative scenarios of future events can expand the methodological toolkit of organization theory and points to new opportunities for future interdisciplinary work.