Abstract

This study investigates how voluntary International Financial Reporting Standards (IFRS) adoption impacts information asymmetry in the stock market. We analyze data from firms in Japan, where local accounting standards have substantially converged with IFRS but are more rules-based than principles-based IFRS. These different implementation approaches allow us to investigate how increased accounting flexibility influences recognition and measurement practices, attenuating the effects of accounting standard differences on the level of accounting rule existence or non-existence. We find that information asymmetry increases after voluntary IFRS adoption, which is driven by small- and medium-sized IFRS adopters’ decrease in earnings quality after voluntary IFRS adoption. Additional analyses reveal that firms’ reporting incentives and accounting resources influence these changes. These results suggest that IFRS’s increased accounting flexibility in recognition and measurement practices worsens the information environments of firms with weak incentives to commit to transparent financial reporting or fewer accounting resources (i.e., small- and medium-sized firms).

Introduction

As International Financial Reporting Standards (IFRS) are intended to provide investors with information that enables them to make better investment decisions, information asymmetry in stock markets is a critical potential consequence of IFRS adoption. IFRS adoption worldwide is either voluntary or mandatory. Since the 2005 mandatory adoption for firms listed in EU countries, extensive research has been conducted on the effects of mandatory IFRS adoption. However, voluntary IFRS adoption effects are relatively under-researched, especially in recent years (De George et al., 2016, Leuz and Wysocki, 2016). Understanding the effects of voluntary adoption is also important because a non-trivial number of countries either allow voluntary IFRS adoption or prohibit IFRS adoption (Song and Trimble, 2022). As of 2019, 11 % (22) of 195 countries/territories permit IFRS adoption and 6 % (11) presently prohibit it, although the latter could permit voluntary adoption in the future. This study attempts to further our understanding of how voluntary IFRS adoption affects information asymmetry in stock markets.

Prior research provides mixed evidence on the stock market consequences of voluntary IFRS adoption. Early studies on this topic focus on Germany, where local accounting standards are substantially different from IFRS. These studies provide evidence suggesting that voluntary adopters exhibit lower information asymmetry in the stock market compared to non-adopters (Gassen and Sellhorn, 2006, Leuz and Verrecchia, 2000). However, in international comparisons, Daske et al. (2008) use two proxies for differences between local accounting standards and IFRS and report inconsistent liquidity effect results. Specifically, they observe no change in liquidity after voluntary IFRS adoption in countries with small differences between local generally accepted accounting principles (GAAP) and IFRS, but a decrease in liquidity in countries with IFRS convergence processes. Therefore, how voluntary IFRS adoption affects information asymmetry in stock markets in countries whose accounting standard differences from IFRS are relatively small remains unclear. This study aims to extend this line of research.

Conclusions

Prior research suggests that voluntary IFRS adoption positively affects information asymmetry in stock markets when local accounting standards significantly differ from IFRS and is viewed as a commitment to transparent financial reporting. However, other research obtains inconsistent results for voluntary IFRS adoption effects on information asymmetry in countries with small accounting differences between local standards and IFRS. We looked closer at Japan, where local accounting standards have been converged to IFRS but have a different implementation approach (i.e., small accounting rule differences but large implementation approach differences). We investigated the effect of voluntary IFRS adoption on the stock market (i.e., changes in information asymmetry in the stock market proxied by bid-ask spread) as well as its potential reason (i.e., changes in earnings quality proxied by the absolute value of discretionary accruals). We also examined whether this effect varies according to firm size, which represents firms’ reporting incentives and accounting resources. Our study’s findings and incremental contributions to the literature are as follows.

First, we find an increase in the bid-ask spread after voluntary IFRS adoption. This result suggests that, on average, voluntary IFRS adoption worsens information asymmetry in Japan’s stock markets. Second, we observe deterioration in bid-ask spread only for smalland medium-sized voluntary adopters. Third, we examine changes in IFRS adopters’ earnings quality before and after IFRS adoption to explore a reason for the increased bid-ask spread. We find that small- and medium-sized firms report larger discretionary accruals after voluntary IFRS adoption. These results suggest that the increase in information asymmetry in the stock market results, at least partially, from the decreased earnings quality of small- and medium-sized firms after voluntary IFRS adoption. Finally, we provide some evidence suggesting that firms’ reporting incentives and limited accounting resources deteriorate earnings quality and information asymmetry at the time of voluntary IFRS adoption.

Abstract

The paper examines whether common ownership along supply chains (i.e., vertical shareholding) is associated with better firm performance during supply chain shock. We find that supplier-customer dyads with vertical shareholding report higher combined monthly returns since the outbreak of the COVID-19 pandemic. The dedicated common investors have the most positive effects, followed by the common quasi-indexers.

Introduction

As overlapping institutional ownership becomes more prevalent, it has been heatedly debated whether it plays a positive role in market competition and corporate governance (e.g., Azar et al., 2018; Edmans et al., 2019; Schmalz 2021; Koch et al., 2021; Bebchuk and Hirst 2022). Most studies focus on its effects on industry rivals (i.e., horizontal shareholding). Compared to industry rivals, firms along the supply chain network have more collaborative and interdependent relationships. Hence, overlapping institutional ownership of supplier-customer dyads (i.e., vertical shareholding)1 may have distinct effects, especially in response to disruptive events that could jeopardize collaboration.

We utilize the COVID-19 pandemic as an exogenous supply chain shock to investigate whether vertical shareholding is associated with stock performance. Supply chain disruptions can be devastating to both upstream and downstream firms (e.g., Carvalho et al., 2021) and significantly exacerbate interfirm conflicts as opportunism and information asymmetry increase. Economic theories predict that cross-ownership can address inherent interfirm conflicts, such as the holdup problem (e.g., Klein et al., 1978; Grossman and Hart 1986). Institutional investors simultaneously holding shares of economically connected firms have incentives to prevent either contracting party from making a move that will hurt the value of their portfolios. Hence, they can influence the management of both upstream and downstream firms and thereby encourage information sharing and balance the bargaining power in supply chain contract renegotiations. For example, institutional investors can influence the supplier firms to prioritize the co-owned customer firms during supply shortages (Sheffi 2020).

Conclusion

We show that supply chain dyads with vertical shareholding have significantly better aggregate stock market performance since the COVID-19 pandemic. The effects vary with the incentives of common institutional shareholders. To our knowledge, we are one of the first empirical studies to show that vertical shareholding mitigates negative consequences of supply chain shocks. Our evidence sheds light on the debates over the roles common institutional investors play in interfirm relationships and supply chain risk management.

Abstract

Purpose – Recent studies on the securities market’s differential pricing of earnings components indicate that cash flows from operations are valued more highly than extreme total accruals. However, no previous study has examined whether cash flows from operations have a higher valuation than moderate total accruals. Therefore, this study examines the securities market’s differential pricing of cash flows from operations and both moderate and extreme total accruals

Design/methodology/approach – The study’s sample is divided into two sub-samples: a moderate total accruals sub-sample; and an extreme total accruals sub-sample. To evaluate whether cash flows have a higher valuation when compared to total accruals, for the entire sample and for each of the two sub-samples, the study examines the statistical significance of the difference between slope coefficients of cash flows and total accruals for regression of returns on both unexpected cash flows from operations and unexpected total accruals

Findings – Consistent with prior research, results from the entire sample show a differential higher valuation of cash flows when compared to total accruals. Another finding, consistent with recent studies, is that cash flows from operations have a higher valuation when compared to extreme total accruals. However, there is no higher differential valuation of cash flows over moderate total accruals. These findings support the decomposition of earnings into the components of cash flows from operations and total accruals only when total accruals are extreme (rather than moderate).

Practical implications – A possible explanation for these results is that since accruals predict cash flows, total accruals – when moderate (i.e. not extreme) – are priced similarly to cash flows. These results reveal that when total accruals are moderate, earnings are a better proxy for the underlying cash flows (over the entire future horizon, not just the current period) than is cash flows. However, since total accruals are unlikely to persist in a permanent way over the years, these results indicate that the decomposition of earnings into the components of cash flows from operations and total accruals is consistent with the information set used to value equity securities. Therefore, separate disclosure of cash flows is value relevant. In addition, users of financial statements certainly need the cash flows information as an ex-post validation of the prior earnings.

Originality/value – This study’s contribution stems from its determination of the preferred level of disaggregation of earnings components (i.e. operating cash flows and total accruals). This is expected to help investors in their attempt to enhance the outcome of their informed investment and credit decisions.

Introduction

Reported numbers can be considered informative if they assist investors in making more informed decisions. When stock prices change in response to reported numbers, it can be presumed that investors’ valuation, buying, and selling decisions are influenced by reported numbers. It follows that reported numbers inform their decisions. Earnings can be divided into total accruals and cash flows from operations [1]. Earnings components (i.e. operating cash flows and total accruals) can be considered incrementally informative in relation to total earnings if they assist investors in making decisions that are more informed compared to those made when only the total is known. For example, if investors think that current cash flows are more or less informative when compared to total accruals with respect to their ability to predict future cash flows, then they are likely to be interested in learning about these earnings components and not simply total earnings. Identifying the preferred level of disaggregation regarding the elements of earnings can assist investors in making more effective investment and lending decisions. With these considerations in mind, the present study seeks to investigate the differential price of earnings components in the securities market.

Results

5.1 Stock returns and earnings components for the entire sample Table 2 presents the results regarding the relationship between stock returns and earnings components (i.e. cash flows from operations and total accruals) for the entire sample. The sum of the coefficients for the level and change in cash flows (α1þα3) is 1.218 (t 5 6.743), which is significant and positive at the 1% level. The sum of the coefficients for the level and change in total accruals (α2þα4) is 0.699 (t 5 11.311), which is significant and positive at the 1% level. These results suggest that both cash flows from operations and total accruals have incremental information content beyond each other.

Abstract

Empirical studies found that earnings management (EM) explains firms’ cost of capital both in companies in emerging and developed countries, but until now, it has not been analyzed whether the effect of EM on the financial cost is different among emerging countries inside or outside an economic area (Eurozone). Our results show that the cost of debt and the idiosyncratic component of the cost of equity are related to discretionary accruals and abnormal values of operating cash-flows, that the emerging country effect is more relevant on the cost of debt, that there is a Eurozone effect that makes discretionary accruals more relevant than abnormal values of operating cash-flow and that firms in emerging countries inside the Eurozone benefit from a lower EM penalty on the cost of debt than firms in other emerging European countries.

INTRODUCTION

The literature shows that cost of capital for companies in emerging countries is higher than that for companies in developed countries (González-Sánchez, 2022; Narayan et al., 2014). This means that investments in emerging countries have to achieve higher returns to compensate for this extra financial cost. In this context, our aim is to test whether the earnings management (EM) explains this extra financial cost of capital and, if the EM effect is different for companies in emerging countries if the country is inside or outside of Eurozone.

EM is the ability of the company’s management to manipulate the company’s results, with the intention of obtaining some private gain, but reducing the quality of financial reporting. The literature has analyzed whether EM has a negative impact on the quality of financial reporting, which may reduce the value of the company, causing stakeholders to lose confidence. More specifically, EM has also been analyzed in relation to issues such as the supervisory role of the majority owner in mitigating managers’ opportunistic behavior in EM (Mellado & Saona, 2005), insider trading (Sawicki & Shrestha, 2008), mergers and acquisitions (Zhu & Lu, 2013), debt issuance (Mellado et al., 2017), or bankruptcy risk (Agustia et al., 2020).

CONCLUSIONS

Empirical evidence shows that the financial cost of companies in emerging countries is higher than that of companies in developed countries. In this context, we test whether this difference is due to the way creditors and investors take into account EM in both types of companies or whether their interpretation of earnings manipulation is independent of the extra financial cost in emerging versus developed countries. Our main objective is to study whether there is a different effect for companies in the Eurozone and whether, as a consequence, companies from emerging countries inside the Eurozone have a different effect than other companies from emerging European countries outside the Eurozone.

To study this differential effect, we built a database composed of 4514 companies from 16 developed countries and 3399 companies from 21 emerging countries. The novelty of our sample is that all countries belong to the same geographical area (Europe), so that implicitly the economic, social, and cultural relations (among others) should not show substantial differences in the way EM explains financial cost. Moreover, by including in the sample developed and emerging countries that share a common regulatory framework and a common currency (euro), this difference should be nonexistent. The sample period is from 2012 to 2020.

Abstract

This study examined whether foreign investment flow and overconfidence can influence stock price movement among the publicly listed companies in Indonesia. Subsequently, this study determined whether there was any significant difference in the influence of foreign investment flow and overconfidence on stock price movement before and after the COVID-19 lockdown in Indonesia. This study focused on the manufacturing companies listed on the Indonesian Stock Exchange for the 2020 period of which the data were taken in a period of 10 days before and 10 days after the implementation of the COVID-19 lockdown in Indonesia. Using content analysis on secondary data, this study showed that there was a significant difference between the stock prices before and after the COVID-19 lockdown. However, this study showed that foreign investment flow and overconfidence were not the main factors influencing stock price movement before and after the lockdown. The findings indicate that there are other factors that contribute to stock price movement in Indonesia. This study contributes to the existing literature on whether foreign investment flow and overconfidence influence stock price movement in a pandemic world.

Introduction

The COVID-19 pandemic has had an effect not only on the health sector but also on the economic sector all over the world (Ghani et al. 2022). Indonesia is not an exception to this situation. The Central Statistics Agency (BPS) revealed that Indonesia’s economic development in the first quarter of 2020 witnessed a growth of 2.97%, which is a significant change from the 5.02% growth that was recorded in 2019. In Indonesia, the pandemic had a negative impact on the capital market including a change in trading hours on the Indonesian Stock Exchange (BEI) (Kusnandar and Bintari 2020) which, consequently, affected stock price movement. On 8 April 2020, the Combined Stock Price Index (IHSG), which shows the aggregate change in the share price of companies listed on the BEI, showed a decrease in stock prices by around 1.34% at 4704.58. However, upon the government’s announcement of imposing the COVID-19 lockdown, trading hours resumed, causing a steady movement in the stock prices. The existence of unstable stock price movement results exposed investors to increasing risk and uncertainty (Kartika 2008).

Results

5.1. Analyses before COVID-19 Lockdown

Table 3 presents the results of the normality test before the COVID-19 lockdown. The Asymp. Sig. (two-tailed) result was 0.346, which is greater than 0.05. Therefore, it can be concluded that the data were normally distributed, or, in other words, the data passed the normality test.

Table 4 presents the results of the normality test after the COVID-19 lockdown. The table shows the value of Asymp. Sig (two-tailed) to be 0.349, which is greater than 0.05. Therefore, it can be concluded that the data were normally distributed, or, in other words, the data passed the normality test.

Abstract

     This study examines the impact of the economic policy uncertainty index (EPU) and macroeconomic variables on the volatility of the Pakistan stock market using the GARCH-MIDAS (mixed data sampling) model. The model allows us to observe whether those variables contain valuable information to forecast stock market volatility. Our empirical findings show several outcomes. First, our out-of-sample results show economic policy uncertainty index has predictive power to forecast Pakistan stock market volatility. Second, among all variables, oil prices are the most powerful predictor of volatility with a higher out of sample R square value. Third, all macroeconomic variables including exchange rate, short-term interest rate, money supply M2, foreign direct investment, gold prices, inward remittances, industrial production, and consumer price index (proxy for inflation) contain useful information for stock market volatility forecasting. However, the long-run interest rate is an ineffective indicator of volatility during the sample period study. Finally, we find that the combination forecast information is also useful for volatility forecasting.

Introduction

     Volatility in financial markets is an issue of great concern. As a risk measure, volatility considers an important state variable for asset pricing and investment. Additionally, the volatility dynamics are associated with portfolio allocation, risk management, hedging, and options pricing (Christoffersen & Diebold, 2000; Chun et al., 2020; Mei et al., 2017; Morales and Callaghan, 2011; Naeem et al., 2019; Wang and Nishiyama, 2015; Zhang et al., 2020). The higher volatility creates widespread panic and results in disorderly market situations that reduce investors’ confidence and that lead to declines in business investments and economic growth. Therefore, understanding the mechanism of economic dynamics and accurately estimating future volatility is essential.

     However, it is prudently observed by financial analysts, policymakers, and market practitioners. Nonetheless, before estimation, it is hard to find the main economic drivers of volatility. The seminal work of SCHWERT and WILLIAM (1989), who posits a time-varying link between stock market uncertainty and macroeconomic variables. Moreover, Paye (2012) examines the strong linear connection between macroeconomic indicators and stock market volatility. Both theoretical and empirical studies confirm that institutional and macroeconomic determinants are potential drivers of financial markets volatility (Engle et al., 2013; Bahloul et al., 2017; Fang et al., 2018; Hsu et al., 2019). The literature shows that financial market volatility and macroeconomic indicators are intrinsically associated (Chen et al., 1986; Mele, 2007; Christiansen et al., 2012).

Conclusion

     This research examines the forecasting ability of macroeconomic variables and economic policy uncertainty index (EPU) for Pakistan stock market volatility. The macroeconomic variables include exchange rate, long-run interest rate, money supply (M2), short-term interest rate, remittances, consumer prices index (proxy for inflation), foreign direct investment, industrial production, global oil prices, and gold prices. We use the GARCH-MIDAS model for forecasting short-and long-run volatility. In our empirical analysis, we find some notable results. First, we find economic policy uncertainty index information is useful for Pakistan stock market volatility prediction. Second, we find global indicators oil prices are more powerful predictor of Pakistan market volatility. Moreover, all macroeconomic variables are effective indicators of Pakistan stock market volatility except long run interest rate. In addition, the combination information for all macroeconomic variables is also useful for forecasting volatility. These findings are in line with the literature (Asgharian et al., 2013; Liu & Pan, 2020). However, the abovementioned studies are not directly involved in forecasting Pakistan’s stock market volatility. In addition, we did not find consistent findings in a longer period, such as two months and three months. Overall, results indicate that macroeconomic variables are significant predictors of stock market volatility in Pakistan. Therefore, the government and policymakers should consider these factors in policymaking and stock market volatility estimation.

Abstract

     Using a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we document that audit quality is associated with SEO issuance method choice. Specifically, firms with higher quality auditors are more likely to adopt the accelerated offerings issue method instead of using other seasoned equity offering methods. We also identify that audit tenure and industry audit specialization influence the relation between audit quality and the likelihood of undertaking accelerated SEO offerings, and that the relationship is more pronounced in the presence of weaker firm-level information and governance environments. Extending from the conclusion that accelerated offerings serve as a quality certification mechanism, we also find that firms completing accelerated offerings enjoy lower audit fees in subsequent years. These firms also exhibit superior post-SEO-issue long-term abnormal stock performance. Overall, our study shows that the certifying and monitoring role of auditors is valuable to clients, underwriters, and investors in SEO transactions.

Introduction

     It has long been theoretically recognized that the asymmetry of information between firms and outside investors can determine firms’ financing choices because higher information asymmetry results in higher external financing costs (Myers, 1984 and Myers & Majluf, 1984).1 In the literature on seasoned equity offerings (SEOs) where firms raise additional capital from the equity market, the certification hypothesis (Beatty & Ritter, 1986; Booth & Smith, 1986; Carter & Manaster, 1990) proposes that asymmetric information between issuing firms and investors implies that any quality certification mechanism that helps investors verify SEO issuing firms should be especially valuable. Because firms’ financial statements play an important role in reducing information asymmetry in capital markets and auditors provide the key accredited service assuring the integrity of this information, we expect that the quality of audit services serves as an important governance and certification mechanism in SEOs. Furthermore, we propose that this certification mechanism is relevant to SEO issuing firms in terms of increasing the likelihood of successfully completing shorter issue processes through attracting both underwriter and investor participation, with audit quality having an important role in reducing underwriter engagement risk and acting as a substitute for more extensive due diligence assessment of issuing firms. In this study, therefore, we examine the role of firm auditor quality in determining the choice of SEO issue methods as a certification and monitoring mechanism and also aiding in underwriter attraction. We also examine the relation between SEO methods and post-SEO firm outcomes – in terms of audit fees and longterm stock performance.

Conclusion

     Despite the prominence of auditor quality in certifying financial information in the capital market (Blackwell, Noland, & Winters, 1998; Hogan, 1997; Pittman & Fortin, 2004), the relation between auditor quality and the choice of SEO issue method has not been thoroughly examined in the prior literature. Our study provides new insights into the role of auditor status as a certification mechanism in SEOs and the impact of issuance choice of SEOs on audit pricing and long-run performance.

      We document evidence that auditor quality, based on Big 4 auditor status, has a significant association with the design features of SEO offerings. Specifically, firms with high quality auditors are more likely to use the accelerated offering SEO method rather than the traditional firm commitment offer process and other issue methods. We confirm this finding using audit fees, accrual levels and mid-tier audit firms as alternative proxies for audit quality and also find that the role of audit quality in facilitating accelerated offering use is more prominent in cases of shorter audit tenure, the appointment of non-specialist auditors and in the presence of weaker firm-level information and corporate governance environments.

     We also provide support for a certification role for accelerated offerings in the post-SOE period. We document that firms completing accelerated offerings pay lower subsequent audit fees relative to firms using firm commitment and other offering methods. These firms also exhibit higher long-term post-issue abnormal share price performance. This is in stark contrast with the negative signalling implications of equity capital raisings generally documented in the SEO literature.

 Abstract

Keywords

JEL classification

1. Introduction

2. Institutional framework and motivating factors

3. Conceptual framework and literature review

4. Hypothesis development

5. Data and methodology

6. Results

7. Conclusion

Data availability statement

Funding details and disclosure statement

Declaration of competing interest

Acknowledgment

Appendix A. Supplementary data

References

Vitae

Abstract

We investigate the relationship between the transactional activity of asset management companies (AMCs) in the non-performing loan (NPL) market and their corresponding debt issuances in a niche bond market in Borsa Istanbul. We analyze the determinants of the trading volume of AMC bonds to determine whether an issue’s volume can reflect bond-specific factors after controlling for firm-specific information. We employ pooled ordinary least squares and random effects panel data regressions on a monthly data set of 26 bonds traded between 2012 and 2019. We find that higher trading volume is associated with larger issues, older bonds, and issuers of long-term debt only. These results suggest that the trading volumes of such bonds decrease when NPL transactions become rare due to worsening economic and financial conditions, at which point the investor demand for new issuances declines and the AMCs are forced to issue short-term debt instead to raise funds.

1. Introduction

Asset management companies (AMCs) help banks free their balance sheets of non-performing loans (NPLs) so that banks can lend more to households and businesses and hence improve their profitability and induce economic growth by facilitating funding mechanisms. Much of the research has focused on the role of AMCs in solving the NPL problem in various countries. For instance, Fell et al. (2017) argue that the pile of NPLs in the European Union, as a financial stability issue, may be effectively resolved with the contribution of state-owned (centralized) and/or privately held (decentralized) AMCs. However, national cases1 show that there is no one-size-fits-all model for AMCs; rather, the best solution often satisfies system-specific issues.

Turkish banking regulations offer a dual approach for managing NPLs: (1) a centralized approach followed by the government and (2) a decentralized approach followed by the private sector. On the government side, the Savings Deposit Insurance Fund (SDIF)—a public legal entity with administrative and financial autonomy—aids in the resolution of banks in distress. In the private sector, banks and even the SDIF itself are entitled to sell NPLs to AMCs established as joint stock corporations. Turkish AMCs have been involved in the NPL business since 2006, when legislation regarding the foundation and operations of AMCs was enacted. Although the number of selling transactions and AMCs has increased over the years, the dynamics in the secondary NPL market have attracted little attention from the research community. What is more interesting is that AMCs have become leading corporate bond issuers in order to finance their NPL purchases, and a niche market has developed to cater to the investment needs of qualified investors who wish to trade these bonds in Borsa Istanbul since 2012. The emergence of this new habitual mode of finance calls for an empirical investigation on the liquidity of the bonds issued by AMCs, which would also shed light on its association with secondary NPL activity.

Abstract

Graphical abstract

JEL classification

Keywords

1. Introduction

2. Methodology

3. The model and results

4. Robustness

5. Conclusion

Author contributions

Declaration of Competing Interest

Acknowledgments

Appendix A

References

Abstract

In this study, we examine the hedging relationship between gold and US sectoral stocks during the COVID-19 pandemic. We employ a multivariate volatility framework, which accounts for salient features of the series in the computation of optimal weights and optimal hedging ratios. We find evidence of hedging effectiveness between gold and sectoral stocks, albeit with lower performance, during the pandemic. Overall, including gold in a stock portfolio could provide a valuable asset class that can improve the risk-adjusted performance of stocks during the COVID-19 pandemic. In addition, we find that the estimated portfolio weights and hedge ratios are sensitive to structural breaks, and ignoring the breaks can lead to overestimation of the hedging effectiveness of gold for US sectoral stocks. Since the analysis involves sectoral stock data, we believe that any investor in the US stock market that seeks to maximize risk-adjusted returns is likely to find the results useful when making investment decisions during the pandemic.

1. Introduction

The literature on the response of financial markets, including the stock market, to the COVID-19 pandemic is fast growing, owing to its grave consequences. Several studies have examined the impact of the pandemic on financial markets (see for example, Ali et al., 2020; Al-Awadhi et al., 2020; Baig et al., 2020; Haroon and Rizvi, 2020a,b; He et al., 2020; Li et al., 2020; Narayan et al., 2020a,b; Mishra et al., 2020; Phan and Narayan, 2020; Prabheesh et al., 2020; Salisu and Akanni, 2020; Salisu et al., 2020a,b; Salisu and Sikiru, 2020; Salisu and Vo, 2020; Sharma, 2020; Zhang et al., 2020; Sikiru and Salisu, 2021; among others)1 and the evidence suggests a negative impact; consequently, the need to hedge against the risk associated with the pandemic becomes crucial.2 This is the motivation for our study. In response to this challenge, we consider gold to be a potential asset that can serve as a good hedge for stocks against the pandemic risk. The pioneering studies on the gold-stocks nexus (see for instance, McDonald and Solnik, 1977; Sherman, 1982; Jaffe, 1989; Chua et al., 1990) indeed support the inclusion of gold in the equities portfolio for the benefits of portfolio diversification and downside risk management.3,4 This continues to be emphasised in the recent literature with pieces of evidence of negative or low correlation of gold in the investment portfolio containing stocks (see for example, Joy, 2011; Reboredo, 2013; Beckmann et al., 2015; Bredin et al., 2015). This strand of the literature also finds support in the conceptual arguments, which suggest stock market hedging qualities of gold when its return is shown to be negative or uncorrelated with the stocks prices (or returns) (see Baur and Lucey, 2010; Baur and McDermott, 2010; Zagaglia and Marzo, 2013).5 In the class of traditional hedging assets, Shahzad et al. (2020), while not particularly considering the COVID-19 pandemic, have shown that gold offers more effective hedging benefits for G7 stock indices.

1- Introduction

2- Methodology

3- The effect of dimensionality reduction on stock selection with cluster analysis in different market situations

4- A stock-selection rotation strategy based on the effect of dimensionality reduction

5- Conclusions

References

Abstract

Dimensionality reduction is inevitable in stock selection with cluster analysis. Considering relations among dimensionality reduction, noise trading, and market situations, we empirically investigate the effect of dimensionality-reduction methods–principal component analysis, stacked autoencoder, and stacked restricted Boltzmann machine–on stock selection with cluster analysis in different market situations. Based on the index fluctuation, the market is divided into sideways and trend situations. For the CSI 100 and Nikkei 225 constituent stocks, experimental results show that: (1) In sideways situations, dimensionality reduction hardly improves the performance of stock selection with cluster analysis; (2) the advantage of dimensionality reduction is mainly reflected in trend situations, but whether it is in an up or down trend depends on the market analyzed. More importantly, according to the above findings and assuming that the dimensionality-reduction effect will continue, we propose a rotation strategy with and without dimensionality reduction. The results of experiments show that the proposed rotation strategy outperforms the stock market indices as well as the stock-selection strategies based on dimensionality reduction and cluster analysis. These findings offer practical insights into how dimensionality reduction can be efficiently used for stock selection.

Introduction

Stock selection is a crucial issue in investment management, which determines the return of stock investments (Markowitz, 1952; Ren et al., 2017). There are various stock-selection strategies, including multi-factor models (Carvalho et al., 2010; Fama and French, 2018), momentum and contrarian strategies (Grinblatt et al., 1995; Cooper et al., 2004), style rotation strategies (Lucas et al., 2002; Ahmed et al., 2002), volatility strategies (Chong and Phillips, 2012; Hsu and Li, 2013), and behavior biases strategies (Huang et al., 2011). Among these strategies, multi-factor models are the most studied, mainly including the Fama-French three-factor model (Fama and French, 1992), the Fama-French five-factor model (Fama and French, 2017), factor models based on investor attention (Li and Yu, 2012), and factor models based on fundamental and technical analysis (Peachavanish, 2016). Investors can use these models to analyze stock characteristics from different perspectives. If stock characteristics last for a period, investors would obtain a higher benefit from analyzing stock characteristics than from random selection.

1- Introduction

2- Literature review

3- Methodology

4- Data

5- Findings

6- Conclusion

References

Abstract

This paper investigates the effects of regulation pertaining to information disclosure on the Vietnam stock market. Using the event study methodology, we examine sectoral reactions, in terms of risk and return, following the announcements on information disclosure regulation in Vietnam. To validate the results, we also conduct several robustness tests such as the removal of firm-specific information and the use of a wide variety of ARCH models such as GARCH (1,1). We find evidence indicating that when the market anticipates a piece of regulation on information disclosure, most sectors experience negative reactions two and five days before the first announcement. Positive reactions are observed on the event date, as well as two and five days afterwards. Furthermore, we document a difference between the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) in terms of market reaction. The results also show that the sectors experience changes in short-term systematic risk. Our contributions to the literature are threefold. First, we focus on a complete and more updated set of the Vietnam stock market’s information disclosure regulation. Second, our study examines the effects of a series of events on a single regulation at sectoral and firm levels in an emerging market. Third, in addition to sectoral analysis, we analyse the Vietnam stock market reaction at the firm level.

Introduction

The impact of regulatory announcements on stock market reaction has been examined extensively in the literature. In developed markets, for instance, Sawkins (1996); Antoniou and Pescetto (1997); Dnes et al. (1998); Robinson and Taylor (1998); Morana and Sawkins (2000) and Pescetto (2008) look at the UK market whilst Binder (1985) and Teets (1992) study the US market. In addition, many studies have examined the effects of a single regulation or a series of events pertaining to a single regulation in developed markets. In general, firms tend to face a higher level of risk when a new regulation is introduced (DeLong and Saunders, 2011; Bailey et al., 2006; Eleswarapu et al., 2004). One of the most important regulations on the stock market is information disclosure regulation as this type of regulation directly affects firms as well as investors in terms of information efficiency and transparency (i.e. reducing information asymmetry).

1- Introduction

2- Data and summary statistics

3- Econometric methodology

4- Out-of-sample forecasting results

5- Extension analysis

6- Robustness analysis

7- Conclusion

References

Abstract

We find that mixing existing forecasting models can significantly improve prediction performance of stock returns. Empirical results suggest that the stock return forecasting by three proposed mixed models are more significant both in statistical and economic terms than the corresponding models in Campbell and Thompson (2008), Wang et al. (2018) and Zhang et al. (2019). This improvement of predictability is also remarkable when we employ the multivariate information to predict stock return. The prediction performance of mixed models is robust to a series of robustness test. Particularly, the three proposed mixed models obtain superior out-of-sample forecasting performance of stock return for business cycles, rolling window predictions and different out-of-sample periods.

Introduction

Stock return prediction is of great significance to asset allocation, risk management and asset pricing. An influential research by Goyal and Welch (2008) indicates that it is difficult to find a predictor or a rational model to accurately forecast out-of-sample stock return. So far, numerous literatures have proposed predictors that could be used to predict stock returns, including interest rates (Ang and Bekaert, 2007; Fama and Schwert, 1977; Campbell, 1987), dividend ratios (Fama and French, 1988, 1989; Goyal and Welch, 2003; Lewellen, 2004), the consumption-wealth ratio (Lettau and Ludvigson, 2001), inflation (Campbell and Vuolteenaho, 2004), stock variances (Guo, 2006; Ludvigson and Ng, 2007), downside variance risk (Feunou et al. 2015; Kilic and Shaliastovich, 2018), the variance risk premium (Bollerslev et al. 2009; Bollerslev Bollerslev et al. 2014), economic policy uncertainty (Chen et al. 2017), investor sentiment (Huang et al. 2015), short interest index (Rapach et al. 2016), news-implied volatility (Manela and Moreira, 2017), technical indicators (Neely et al. 2014; Gao et al. 2018; Zhang et al. 2019), manager sentiment (Jiang et al. 2017), oil-related variables (Chiang and Hughen, 2017; Nonejad, 2018; Wang et al. 2019), and among others.

We develop a dynamic stochastic general equilibrium model to examine how monetary policy shocks affect income inequality and the equity premium. The model features Ricardian and non-Ricardian households and shows that a monetary policy tightening causes an endogenous redistribution of income from non-Ricardians to Ricardians. Ricardians’ consumption comoves more strongly with asset returns, giving rise to high equity premia. We extend our model with several frictions and estimate it with generalized method of moments using US macroeconomic and financial data from 1960 to 2007. We find that the estimated model jointly matches the bond and equity premia. We complement our theoretical model with vector autoregression estimations and show that a tightening of US monetary policy increases equity premia.

Introduction

Following the recent financial crisis, there is a renewed interest in exploring the interactions between monetary policy and income inequality (Coibion et al., 2017; Davtyan, 2017). Traditionally, it has been assumed that the distributional effects of the monetary policy rate net out over the business cycle, and therefore, the interactions between monetary policy and inequality have rarely been examined. However, some recent papers show that monetary policy affects income inequality (Coibion et al., 2017) through various channels, such as financial segmentation. It has also been shown that income inequality can become a monetary policy transmission channel itself through earnings heterogeneity (Auclert, 2019). This is because low-income households typically have a higher marginal propensity to consume, and therefore, these households may benefit from monetary expansion more than rich households do. Although the literature examining the effects of monetary policy on income inequality is growing, the implications of income redistribution from a macro-finance perspective have not received sufficient attention in the literature so far. We try to bridge this gap in this paper. Specifically, our paper measures the effect of income redistribution on matching financial and macroeconomic moments jointly in a model with limited asset market participation (LAMP). Importantly, in our paper, income redistribution occurs endogenously, i.e., it is caused by monetary policy shocks. This approach extends the previous literature, which assumes exogenous redistribution shocks (see, e.g., Lansing (2015)). The current literature examining the effects of monetary policy on equity premia has focused on other issues, for example, on the role of market volatility (Mallick et al., 2017). Our first contribution is to show that monetary policy shocks are the source of the high equity risk premia in a simple model with LAMP. Our model is populated by Ricardian and non-Ricardian households. The former have access to bonds to smooth their consumption (‘optimizers’), while the latter do not. This unequal access implies that a limited share of the population participates in financial markets. NonRicardians receive only labor income, while Ricardians hold equity shares in firms.