Trial by media: An empirical investigation of corporate reputation and stock returns in Australia

This article examines whether investors are able to generate abnormal risk-adjusted returns in the Australian market based on media-specific firm reputational factors under market uncertainty between 2004 and 2012. The findings suggest that after controlling for crisis-centric time periods and market risk factors, contrarian trading strategies produce abnormal returns for poor corporate reputation firms but not for their good corporate reputation counterparts. Corporate reputation may be a driver of performance for poorly performing Australian firms and could be considered a stimulus for trading activity due to its explanatory capabilities.

Momentum and seasonality in Chinese stock markets

In this paper, we follow Jegadeesh and Titman's (1993, Journal of Finance) approach to examine 25 momentum/contrarian trading strategies using monthly stock returns in China for the period from 1994 to 2007. Our results suggest that there is no momentum profitability in any of the 25 strategies. In contrast, there is some evidence of reversal effects where the past winners become losers and past losers become winners afterward. The contrarian profit is statistically significant for the strategies using short formation and holding periods, especially for the formation periods of 1 to 3 months and the holding periods of 1 to 3 months. The contrarian strategies can generate about 12% per annum on average. Moreover, we follow Heston and Sadka (2008, Journal of Financial Economics) to investigate where there is any seasonal pattern in the cross-sectional variation of average stock returns in our momentum/contrarian strategies. There is no evidence of any seasonal pattern, and the results are robust to different formation and holding periods.

The benefits of tree-based models for stock selection

The identification of the primary drivers of stock returns has been of great interest to both financial practitioners and academics alike for many decades. Influenced by classical financial theories such as the CAPM (Sharp, 1964; Lintner, 1965) and APT (Ross, 1976), a linear relationship is conventionally assumed between company characteristics as derived from their financial accounts and forward returns. Whilst this assumption may be a fair approximation to the underlying structural relationship, it is often adopted for the purpose of convenience. It is actually quite rare that the assumptions of distributional normality and a linear relationship are explicitly assessed in advance even though this information would help to inform the appropriate choice of modelling technique. Non-linear models have nevertheless been applied successfully to the task of stock selection in the past (Sorensen et al, 2000). However, their take-up by the investment community has been limited despite the fact that researchers in other fields have found them to be a useful way to express knowledge and aid decision-making...

Alternative explanations of the volatility trend : Are they really that different?

We analyse the puzzling behavior of the volatility of individual stock returns around the turn of the Millennium. There has been much academic interest in this topic, but no convincing explanation has arisen. Our goal is to pull together the many competing explanations currently proposed in the literature to delermine which, if any, are capable of explaining the volatility trend. We find that many of the different explanations capture the same unusual trend around the Millennium. We find that many of the variables are very highly correlated and it is thus difficult to disentangle their relalive ability to exlplain the time-series behavior in volatility. It seems thai all of the variables that track average volatility well do so mainly by capturing changes in the post-1994 period. These variables have no time-series explanatory power in the pre-1995 years, questioning the underlying idea that any of the explanations currently plesented in the literature can track the trend in volatility over long periods.

Comparing different explanations of the volatility trend

We analyze the puzzling behavior of the volatility of individual stock returns over the past few decades. The literature has provided many different explanations to the trend in volatility and this paper tests the viability of the different explanations. Virtually all current theoretical arguments that are provided for the trend in the average level of volatility over time lend themselves to explanations about the difference in volatility levels between firms in the cross-section. We therefore focus separately on the cross-sectional and time-series explanatory power of the different proxies. We fail to find a proxy that is able to explain both dimensions well. In particular, we find that Cao et al. [Cao, C., Simin, T.T., Zhao, J., 2008. Can growth options explain the trend in idiosyncratic risk? Review of Financial Studies 21, 2599–2633] market-to-book ratio tracks average volatility levels well, but has no cross-sectional explanatory power. On the other hand, the low-price proxy suggested by Brandt et al. [Brandt, M.W., Brav, A., Graham, J.R., Kumar, A., 2010. The idiosyncratic volatility puzzle: time trend or speculative episodes. Review of Financial Studies 23, 863–899] has much cross-sectional explanatory power, but has virtually no time-series explanatory power. We also find that the different proxies do not explain the trend in volatility in the period prior to 1995 (R-squared of virtually zero), but explain rather well the trend in volatility at the turn of the Millennium (1995–2005).

A comparison of alternative bankruptcy prediction models

Early models of bankruptcy prediction employed financial ratios drawn from pre-bankruptcy financial statements and performed well both in-sample and out-of-sample. Since then there has been an ongoing effort in the literature to develop models with even greater predictive performance. A significant innovation in the literature was the introduction into bankruptcy prediction models of capital market data such as excess stock returns and stock return volatility, along with the application of the Black–Scholes–Merton option-pricing model. In this note, we test five key bankruptcy models from the literature using an upto- date data set and find that they each contain unique information regarding the probability of bankruptcy but that their performance varies over time. We build a new model comprising key variables from each of the five models and add a new variable that proxies for the degree of diversification within the firm. The degree of diversification is shown to be negatively associated with the risk of bankruptcy. This more general model outperforms the existing models in a variety of in-sample and out-of-sample tests.

International stock market linkages : are overnight returns on the U.S. Market informative?

Based on the theory of international stock market co-movements, this study shows that a profitable trading strategy can be developed. The U.S. market return is considered as overnight information by ordinary investors in the Asian and the European stock markets, and opening prices in local markets reflect the U.S. overnight return. However, smart traders would either judge the impact of overnight information more correctly, or predict unreleased information. Thus, the difference between expected opening prices based on the U.S. return and actual opening prices is counted as smart traders’ prediction power, which is either a buy or a sell signal. Using index futures price data from 12 countries from 2000 to 2011, cumulative returns on the trading strategy are calculated with taking into account transaction costs. The empirical results show that the proposed trading strategy generates higher riskadjusted returns than that of the benchmarks in 12 sample countries. The trading performances for the Asian markets surpass those for the European markets because the U.S. return is the only overnight information for the Asian markets whereas the Asian markets returns are additional information to the European investors.

Predicting stock market returns and volatility with investor sentiment : evidence from eight developed countries

We test the predictive ability of investor sentiment on the return and volatility at the aggregate market level in the U.S., four largest European countries and three Asia-Pacific countries. We find that in the U.S., France and Italy periods of high consumer confidence levels are followed by low market returns. In Japan both the level and the change in consumer confidence boost the market return in the next month. Further, shifts in sentiment significantly move conditional volatility in most of the countries, and in Italy such impacts lead to an increase in returns by 4.7% in the next month.

Compliance with international financial reporting standards (IFRS) and the value relevance of accounting information in emerging stock markets : evidence from Kuwait

Since the 1960s, the value relevance of accounting information has been an important topic in accounting research. The value relevance research provides evidence as to whether accounting numbers relate to corporate value in a predicted manner (Beaver, 2002). Such research is not only important for investors but also provides useful insights into accounting reporting effectiveness for standard setters and other users. Both the quality of accounting standards used and the effectiveness associated with implementing these standards are fundamental prerequisites for high value relevance (Hellstrom, 2006). However, while the literature comprehensively documents the value relevance of accounting information in developed markets, little attention has been given to emerging markets where the quality of accounting standards and their enforcement are questionable. Moreover, there is currently no known research that explores the association between level of compliance with International Financial Reporting Standards (IFRS) and the value relevance of accounting information. Motivated by the lack of research on the value relevance of accounting information in emerging markets and the unique institutional setting in Kuwait, this study has three objectives. First, it investigates the extent of compliance with IFRS with respect to firms listed on the Kuwait Stock Exchange (KSE). Second, it examines the value relevance of accounting information produced by KSE-listed firms over the 1995 to 2006 period. The third objective links the first two and explores the association between the level of compliance with IFRS and the value relevance of accounting information to market participants. Since it is among the first countries to adopt IFRS, Kuwait provides an ideal setting in which to explore these objectives. In addition, the Kuwaiti accounting environment provides an interesting regulatory context in which each KSE-listed firm is required to appoint at least two external auditors from separate auditing firms. Based on the research objectives, five research questions (RQs) are addressed. RQ1 and RQ2 aim to determine the extent to which KSE-listed firms comply with IFRS and factors contributing to variations in compliance levels. These factors include firm attributes (firm age, leverage, size, profitability, liquidity), the number of brand name (Big-4) auditing firms auditing a firm’s financial statements, and industry categorization. RQ3 and RQ4 address the value relevance of IFRS-based financial statements to investors. RQ5 addresses whether the level of compliance with IFRS contributes to the value relevance of accounting information provided to investors. Based on the potential improvement in value relevance from adopting and complying with IFRS, it is predicted that the higher the level of compliance with IFRS, the greater the value relevance of book values and earnings. The research design of the study consists of two parts. First, in accordance with prior disclosure research, the level of compliance with mandatory IFRS is examined using a disclosure index. Second, the value relevance of financial statement information, specifically, earnings and book value, is examined empirically using two valuation models: price and returns models. The combined empirical evidence that results from the application of both models provides comprehensive insights into value relevance of accounting information in an emerging market setting. Consistent with expectations, the results show the average level of compliance with IFRS mandatory disclosures for all KSE-listed firms in 2006 was 72.6 percent; thus, indicating KSE-listed firms generally did not fully comply with all requirements. Significant variations in the extent of compliance are observed among firms and across accounting standards. As predicted, older, highly leveraged, larger, and profitable KSE-listed firms are more likely to comply with IFRS required disclosures. Interestingly, significant differences in the level of compliance are observed across the three possible auditor combinations of two Big-4, two non-Big 4, and mixed audit firm types. The results for the price and returns models provide evidence that earnings and book values are significant factors in the valuation of KSE-listed firms during the 1995 to 2006 period. However, the results show that the value relevance of earnings and book values decreased significantly during that period, suggesting that investors rely less on financial statements, possibly due to the increase in the available non-financial statement sources. Notwithstanding this decline, a significant association is observed between the level of compliance with IFRS and the value relevance of earnings and book value to KSE investors. The findings make several important contributions. First, they raise concerns about the effectiveness of the regulatory body that oversees compliance with IFRS in Kuwait. Second, they challenge the effectiveness of the two-auditor requirement in promoting compliance with regulations as well as the associated cost-benefit of this requirement for firms. Third, they provide the first known empirical evidence linking the level of IFRS compliance with the value relevance of financial statement information. Finally, the findings are relevant for standard setters and for their current review of KSE regulations. In particular, they highlight the importance of establishing and maintaining adequate monitoring and enforcement mechanisms to ensure compliance with accounting standards. In addition, the finding that stricter compliance with IFRS improves the value relevance of accounting information highlights the importance of full compliance with IFRS and not just mere adoption.

Modeling conditional correlations of asset returns : a smooth transition approach

In this paper we propose a new multivariate GARCH model with time-varying conditional correlation structure. The time-varying conditional correlations change smoothly between two extreme states of constant correlations according to a predetermined or exogenous transition variable. An LM–test is derived to test the constancy of correlations and LM- and Wald tests to test the hypothesis of partially constant correlations. Analytical expressions for the test statistics and the required derivatives are provided to make computations feasible. An empirical example based on daily return series of five frequently traded stocks in the S&P 500 stock index completes the paper.

Interdependence between Greece and other European stock markets: A comparison of wavelet and VMD copula, and the portfolio implications

The interdependence of Greece and other European stock markets and the subsequent portfolio implications are examined in wavelet and variational mode decomposition domain. In applying the decomposition techniques, we analyze the structural properties of data and distinguish between short and long term dynamics of stock market returns. First, the GARCH-type models are fitted to obtain the standardized residuals. Next, different copula functions are evaluated, and based on the conventional information criteria and time varying parameter, Joe-Clayton copula is chosen to model the tail dependence between the stock markets. The short-run lower tail dependence time paths show a sudden increase in comovement during the global financial crises. The results of the long-run dependence suggest that European stock markets have higher interdependence with Greece stock market. Individual country’s Value at Risk (VaR) separates the countries into two distinct groups. Finally, the two-asset portfolio VaR measures provide potential markets for Greece stock market investment diversification.