Information risk, stock returns, and the cost of capital in China

2016 ◽  
Vol 6 (1) ◽  
pp. 77-95 ◽  
Author(s):  
Raheel Safdar ◽  
Chen Yan
Keyword(s):  
Regression Analysis ◽  
Risk Factor ◽  
Stock Returns ◽  
Cost Of Capital ◽  
Factor Model ◽  
Cost Of Debt ◽  
Firm Level ◽  
Cross Sectional ◽  
Content Type ◽  
Information Risk

Purpose – The purpose of this paper is to investigate information risk in relation to cost of capital and, also, whether information risk is a priced risk factor in China. Design/methodology/approach – The authors used accruals quality (AQ) as the measure of information risk and employed multiple regression analysis and Fama-Macbeth regressions to investigate association of AQ with cost of capital and future realized stock returns, respectively. Moreover, two-stage cross-sectional regression analysis is performed, both at firm and at portfolio levels, to test if an AQ factor is a priced risk factor in China. Findings – The authors found poor AQ being associated with higher cost of equity but this relationship is not significant in subsample of state-owned enterprises (SOEs). The results do not support any association between AQ and cost of debt in China. Further, the authors found poor AQ being positively associated with future realized stock returns and the authors also found evidence of market pricing of an AQ factor in addition to existing factors in Fama-French three-factor model in firm level analysis. However, subsample analysis revealed that AQ is not priced in case of SOEs. Research limitations/implications – The study sample is comprised of A-Shares only and the generalization of the findings is limited by the peculiar institutional setup and other unique characteristics of Chinese capital market. Originality/value – This study contributes to literature by providing novel findings on the relationship between information risk and cost of capital in Chinese context and it provides further insight into how and if investors value information risk.

Information risk, stock returns, and asset pricing: Evidence from China

2017 ◽  
Vol 30 (4) ◽  
pp. 379-394 ◽  
Author(s):  
Raheel Safdar ◽  
Chen Yan
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Empirical Literature ◽  
Firm Level ◽  
Cross Sectional ◽  
Market Pricing ◽  
Content Type ◽  
Information Risk ◽  
Accruals Quality ◽  
Three Factor

Purpose This study aims to investigate information risk in relation to stock returns of a firm and whether information risk is priced in China. Design/methodology/approach The authors used accruals quality (AQ) as their measure of information risk and performed Fama-Macbeth regressions to investigate association of AQ with future realized stock returns. Moreover, two-stage cross-sectional regression analysis was performed, both at firm level and at portfolio level, to test if the AQ factor is priced in China in addition to existing factors in the Fama French three-factor model. Findings The authors found poor AQ being associated with higher future realized stock returns. Moreover, they found evidence of market pricing of AQ in addition to existing factors in the Fama French three-factor model. Further, subsample analysis revealed that investors value AQ more in non-state owned enterprises than in state owned enterprises. Research limitations/implications The study sample comprises A-shares only and the generalization of the findings is limited by the peculiar institutional and economic setup in China. Originality/value This study contributes to market-based accounting literature by providing further insight into how and if investors value information risk, and it seeks to fill gap in empirical literature by providing evidence from the Chinese capital market.

Market pricing of liquidity risk: evidence from China

2019 ◽  
Vol 9 (4) ◽  
pp. 554-566
Author(s):  
Raheel Safdar ◽  
Mirza Sultan Sikandar ◽  
Tanveer Ahsan
Keyword(s):  
Risk Factor ◽  
Information Quality ◽  
Factor Model ◽  
Stock Exchange ◽  
Liquidity Risk ◽  
Market Liquidity ◽  
Firm Level ◽  
Cross Sectional ◽  
Market Pricing ◽  
Content Type

Purpose The purpose of this paper is to investigate whether liquidity risk (i.e. the returns’ vulnerability to the unexpected changes in overall market liquidity) is a priced risk factor in China. Moreover, it investigates the potential role of a stock’s information quality in reducing its liquidity risk during the period of post-non-tradable shares reforms in China. Design/methodology/approach The authors collect data of all the A-share issuing firms listed either on the Shanghai Stock Exchange or Shenzhen Stock Exchange during the period 2006–2016. The authors perform two-stage cross-sectional regression testing. First, the authors perform firm-specific time-series regressions of excess returns over Fama–French’s three-factor model and a liquidity factor. Second, to test whether firm-specific liquidity risk is a priced risk factor, the authors apply Fama and MacBeth’s regressions. Findings Firm-level asset pricing tests provide substantial evidence for market pricing of liquidity risk in China. The authors find a significant negative association between information quality and liquidity risk. The authors also find that the reduction in liquidity risk induced by better information quality is substantial enough to reduce required returns. These findings are robust to alternative measures of liquidity risk and information quality. Practical implications The study underscores that a policy initiative to enhance the information environment can significantly reduce the market volatility in China. Originality/value To the best of authors’ knowledge, this is the first study that considers the Shanghai Stock Exchange as well as Shenzhen Stock Exchange to investigate market pricing of liquidity risk in China.

scholarly journals Factors influencing SRI fund performance

2019 ◽  
Vol 3 (1) ◽  
pp. 68-81
Author(s):  
Halil Kiymaz
Keyword(s):  
Regression Analysis ◽  
Factor Model ◽  
Five Factor Model ◽  
Fund Performance ◽  
Factor Models ◽  
Cross Sectional ◽  
Content Type ◽  
Responsible Investment ◽  
Factors Influencing ◽  
Three Factor

Purpose The purpose of this paper is to examine socially responsible investment (SRI) fund performance and investigate the factors influencing fund performance. Design/methodology/approach The study uses return data from the Morningstar database for 152 SRI funds from January 1995 to May 2015. The initial analysis includes the use of various risk-adjusted performance measures, including Sharpe ratio, Treynor ratio, Information ratio, Sortino ratio and M2. The study also uses four factor models, including Jensen single-factor model, Fama–French three-factor model, Carhart four-factor model and Fama–French five-factor model to explain SRI fund returns. Finally, a cross-sectional regression analysis is applied to investigate the determinants of SRI fund returns. Findings The results show that, on average, the SRI funds provide comparable risk-adjusted returns relative to various benchmark market indices. Market factor is significant in explaining SRI fund returns. Examining each factor model, the results do not support Fama–French’s three-factor model as neither size nor value factor is significant. The author finds weak support for Carhart’s momentum factor along with the market factor. Finally, the Fama–French five-factor model shows market, size and operating profit factors explain SRI fund returns. The study also finds the fund performance is stronger for funds with the higher turnover ratio, the larger fund size and more managerial experience and lower for funds with higher expense ratio. Also, funds formed with negative screening perform better than positive or mixed screened funds. Originality/value SRI funds have received considerable attention from investors. This study contributes to the literature by examining SRI fund performance and investigating factors influencing their performance using multiple factor models and cross-sectional regression analysis. The findings are relevant for investors who demand responsible investment opportunities without sacrificing returns for nonfinancial screenings. Findings also suggest that investors should consider fund characteristics when selecting SRI funds.

Information risk, cost of equity and stock returns: evidence from Iranian firms

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ahmad Abdollahi ◽  
Mehdi Safari Gerayli ◽  
Yasser Rezaei Pitenoei ◽  
Davood Hassanpour ◽  
Fatemeh Riahi
Keyword(s):  
Stock Returns ◽  
Capital Market ◽  
Cost Of Capital ◽  
Positive Impact ◽  
Stock Exchange ◽  
Cost Of Equity ◽  
Content Type ◽  
Information Risk ◽  
The Cost ◽  
The Impact

Purpose A long history of literature has considered the role of information risk in determining the cost of equity. The question that has remained unanswered is whether information risk plays any systematic role in determining the cost of equity. One of the fundamental decisions that every business needs to make is to assess where to invest its funds and to re-evaluate, at regular intervals, the quality of its existing investments. The cost of capital is the most important yardstick to evaluate such decisions. Greater information is associated with the lower cost of capital via mitigating transaction costs and/or reducing estimation risk and stock returns. This study aims to investigate the impact of information risk on the cost of equity and corporate stock returns. Design/methodology/approach The research sample consists of 960 firm-year observations for companies listed on the Tehran Stock Exchange from 2009 to 2018. The research hypotheses were tested using multivariate regression models based on panel data. Findings The results reveal that information risk has a significant positive impact on the firm’s cost of equity. However, the impact of information risk on stock returns is not statistically significant. Originality/value To the best of the knowledge, the current study is almost the first of its kind in the Iranian literature which investigates the subject matter; therefore, the findings of the study not only extend the extant theoretical literature concerning the information risk in developing countries including the emerging capital market of Iran but also help investors, capital market regulators and accounting standard setters to make timely decisions.

Asset growth and the cross-section of stock returns: evidence from Greek listed firms

2017 ◽  
Vol 55 (5) ◽  
pp. 826-841 ◽  
Author(s):  
Georgios Constantinou ◽  
Angeliki Karali ◽  
Georgios Papanastasopoulos
Keyword(s):  
Stock Returns ◽  
Emerging Market ◽  
Balance Sheet ◽  
Firm Level ◽  
Cross Sectional ◽  
Content Type ◽  
Listed Firms ◽  
Asset Growth ◽  
Book To Market Ratio ◽  
Investment Growth

Purpose The purpose of this paper is to examine whether firm-level asset investment effects in returns found for US firms occur within the Greek stock market. Design/methodology/approach The paper utilizes portfolio-level tests and cross-sectional regressions. Findings The authors find that growth in total assets is strongly negatively related to future stock returns of Greek firms. In fact, the relation remains statistically significant, even when the authors control for other strong predictors of future returns (i.e. market capitalization and book-to-market ratio). Furthermore, the authors find that a hedge trading strategy on asset growth rate consisting of a long (short) position in firms with low (high) balance sheet growth generates positive returns, confirming that investment growth has significant predictive power for future returns of Greek listed firms. Originality/value The paper adds to the literature on the generalization of asset pricing regularities attributable to accounting figures in an emerging market.

Is there a priced risk factor associated with conservatism?

2016 ◽  
Vol 17 (5) ◽  
pp. 545-561 ◽  
Author(s):  
Kerstin Lopatta ◽  
Felix Canitz ◽  
Christian Fieberg
Keyword(s):  
Risk Factor ◽  
Stock Returns ◽  
Design Methodology ◽  
Systematic Risk ◽  
Factor Loading ◽  
Related Factor ◽  
Cross Sectional ◽  
Content Type ◽  
Conditional Conservatism ◽  
The Cross

Purpose García Lara et al. (2011) argue that there is a conservatism-related priced risk factor in US stock returns. To put this to the test, the authors aim to analyze whether the conditional conservatism effect comes from the loading on a conditional conservatism-related factor-mimicking portfolio (systematic risk) or the conservatism characteristic itself. Design/methodology/approach The authors form characteristic-balanced portfolios from dependent sorts of stocks on the firm’s degree of conservatism and the firm’s loading on the conservatism-related factor-mimicking portfolio as proposed by Daniel and Titman (1997) and Davis et al. (2000). Findings The tests indicate that it is the conditional conservatism characteristic rather than the factor loading that explains the cross-sectional differences in average stock returns. Consequently, they do not find evidence for a conservatism-related priced risk factor. Originality/value This finding suggests that investors misvalue the conservatism characteristic and casts doubt on the rational risk explanation as proposed by García Lara et al. (2011).

An investor’s perspective on risk-models and characteristic-models

2016 ◽  
Vol 17 (3) ◽  
pp. 262-276 ◽  
Author(s):  
Christian Fieberg ◽  
Thorsten Poddig ◽  
Armin Varmaz
Keyword(s):  
Risk Factor ◽  
Portfolio Optimization ◽  
Stock Returns ◽  
Optimization Approach ◽  
Investment Strategies ◽  
Cross Sectional ◽  
Content Type ◽  
Factor Loadings ◽  
Market Portfolio ◽  
Out Of Sample

Purpose In capital markets, research risk factor loadings and characteristics are considered as opposing explanations for the cross-sectional dispersion in average stock returns. However, there is little known about the performance an investor would obtain who believes either in the characteristics explanation (CB-investor) or in the risk factor loadings explanation (RB-investor). The purpose of this paper is to compare the performance of CB- and RB-investors. Design/methodology/approach To compare the competing strategies, the authors propose a simple new approach to equity portfolio optimization in the style of Brandt et al. (2009) by modeling the portfolio weight in each asset as a function of the asset's risk factor loadings or characteristics. The authors perform an empirical analysis on the German stock market, exploiting the risk factor loadings from the Carhart (1997) four-factor model and the respective characteristics size, book-to-market equity ratio and momentum. Findings The results show that investment strategies relying on characteristics (particularly on momentum) outperform risk-based investment strategies in horse races. These findings hold in- and out-of-sample. Furthermore, the characteristics-based investment strategies outperform a value-weighted market portfolio strategy in- and out-of-sample. Originality/value The authors introduce a portfolio optimization approach that enables investors to directly link portfolio decisions to the firm’s characteristics or risk factor loadings.

Stock liquidity and free float: evidence from the UK

2018 ◽  
Vol 44 (10) ◽  
pp. 1227-1236 ◽  
Author(s):  
Ghaith El-Nader
Keyword(s):  
Regression Analysis ◽  
Stock Market ◽  
Design Methodology ◽  
Firm Characteristics ◽  
Firm Level ◽  
Cross Sectional ◽  
Stock Liquidity ◽  
Content Type ◽  
Data Regression ◽  
The Uk

Purpose The purpose of this paper is to investigate the interactions between free float and stock liquidity in the UK stock market over the period 2002–2016. Design/methodology/approach This paper is conducted using cross-sectional data regression analysis. The sample consists of 15,650 firm-level observations from the UK stock market. Findings The findings suggest that stocks with higher levels of free float are associated with higher levels of liquidity. This relation is significant regardless of the liquidity measure used, and is evident even after controlling for firm characteristics. Originality/value This paper contributes to the existing literature by presenting further evidence on the significance of free float in capital markets and its effect on stock liquidity, particularly for UK firms as the minimum free float requirements as announced by the FTSE group in 2011 increased from 15 to 25 percent.

Regulation and information asymmetry

2008 ◽  
Vol 16 (1) ◽  
pp. 59-76 ◽  
Author(s):  
Robyn McLaughlin ◽  
Assem Safieddine
Keyword(s):  
Information Asymmetry ◽  
Stock Returns ◽  
Operating Performance ◽  
Cost Benefit ◽  
Future Research ◽  
Information Asymmetries ◽  
Cross Sectional ◽  
Industrial Firms ◽  
Content Type ◽  
Regulated Utilities

PurposeThis paper seeks to examine the potential for regulation to reduce information asymmetries between firm insiders and outside investors.Design/methodology/approachExtensive prior research has established that there are substantial effects of information asymmetry in seasoned equity offers (SEOs). The paper tests for a mitigating effect of regulation on such information asymmetries by examining differences in long‐run operating performance, changes in that performance, and announcement‐period stock returns between unregulated industrial firms and regulated utilities that issue seasoned equity. The authors also segment the samples by firm size, since smaller firms are likely to have greater asymmetries.FindingsConsistent with regulated utility firms having lower levels of information asymmetry, they have superior changes in abnormal operating performance than industrial firms pre‐ to post‐issue and their announcement period returns are significantly less negative. These findings are most pronounced for the smallest firms, firms likely to have the greatest information asymmetries and where regulation could have its greatest effect.Research limitations/implicationsThe paper does not examine costs of regulation. Thus, future research could seek to measure the cost/benefit trade‐off of regulation in reducing information asymmetry. Also, future research could examine cross‐sectional differences between different industries and regulated utilities.Practical implicationsRegulation reduces information asymmetry. Thus, regulation or mandated disclosure may be appropriate in industries/markets where information asymmetry is severe.Originality/valueThis paper is the first to compare the operating performance of regulated and unregulated SEO firms.

Does uncertainty boost overconfidence? The case of financial analysts' forecasts

2014 ◽  
Vol 40 (3) ◽  
pp. 300-324 ◽  
Author(s):  
Véronique Bessière ◽  
Taoufik Elkemali
Keyword(s):  
Stock Returns ◽  
Private Information ◽  
High Tech ◽  
Cross Sectional ◽  
Forecast Dispersion ◽  
Content Type ◽  
The Public ◽  
Public Announcement ◽  
Before And After ◽  
Sectional Analysis

Purpose – This article aims to examine the link between uncertainty and analysts' reaction to earnings announcements for a sample of European firms during the period 1997-2007. In the same way as Daniel et al., the authors posit that overconfidence leads to an overreaction to private information followed by an underreaction when the information becomes public. Design/methodology/approach – In this study, the authors test analysts' overconfidence through the overreaction preceding a public announcement followed by an underreaction after the announcement. If overconfidence occurs, over- and underreactions should be, respectively, observed before and after the public announcement. If uncertainty boosts overconfidence, the authors predict that these two combined misreactions should be stronger when uncertainty is higher. Uncertainty is defined according to technology intensity, and separate two types of firms: high-tech or low-tech. The authors use a sample of European firms during the period 1997-2007. Findings – The results support the overconfidence hypothesis. The authors jointly observe the two phenomena of under- and overreaction. Overreaction occurs when the information has not yet been made public and disappears just after public release. The results also show that both effects are more important for the high-tech subsample. For robustness, the authors sort the sample using analyst forecast dispersion as a proxy for uncertainty and obtain similar results. The authors also document that the high-tech stocks crash in 2000-2001 moderated the overconfidence of analysts, which then strongly declined during the post-crash period. Originality/value – This study offers interesting insights in two ways. First, in the area of financial markets, it provides a test of a major over- and underreaction model and implements it to analysts' reactions through their revisions (versus investors' reactions through stock returns). Second, in a broader way, it deals with the link between uncertainty and biases. The results are consistent with the experimental evidence and extend it to a cross-sectional analysis that reinforces it as pointed out by Kumar.

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