Industry Tax Planning and Stock Returns

2019 ◽  
Vol 94 (5) ◽  
pp. 219-246 ◽  
Author(s):  
Shane M. Heitzman ◽  
Maria Ogneva
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Systematic Risk ◽  
Tax Planning ◽  
Equity Returns ◽  
Firm Level ◽  
Industry Level ◽  
Planning Strategies

ABSTRACT We find evidence that equity returns increase with the propensity for tax planning in a firm's industry. This risk premium is imposed on all firms in the industry, even those that are less aggressive than their peers. The industry-based risk premium coexists with a firm-specific discount associated with active tax planning strategies that carry low systematic risk. The discount on tax planning at the firm level, however, is dwarfed by the premium on tax planning at the industry level, and is concentrated in industries that are less likely to attract scrutiny from the tax authority.

scholarly journals Testing the Monthly Calendar Anomaly of Stock Returns in Pakistan: A Stochastic Dominance Approach

2019 ◽  
Vol 58 (1) ◽  
pp. 83-104 ◽  
Author(s):  
Abdul Rashid ◽  
Saba Kausar
Keyword(s):  
High Risk ◽  
Stock Returns ◽  
Stochastic Dominance ◽  
Stock Prices ◽  
Stock Exchange ◽  
Abnormal Returns ◽  
Systematic Risk ◽  
January Effect ◽  
Firm Level ◽  
High Beta

In this paper, we first examine the presence of monthly calendar anomaly in Pakistan Stock Exchange (PSX) using aggregate and firm-level monthly stock returns. Secondly, we classify the sample firms into low-beta, medium-beta, and high-beta firms to examine the monthly anomaly of stock returns for firms having different level of systematic risk. By considering the stochastic dominance approach (SDA), we employ the simulation based method of Barrett and Donald (2003) to identify the dominant month over the period from January 2000 to December 2017. We find significant evidence of the existence of the January effect in both firm and market stock returns. We also find that the January effect exists more prominently in both low-risk and high-risk firms categorised based on their systematic risk. On the other end of the continuum, for moderately risky firms, there is strong evidence of the presence of the December effect. One of possible explanations of the January effect is the yearend bonus received in the month of January. Such bonuses are generally used to purchase stocks, causing the bullish trend of stock prices in January. However, the evidence of the January anomaly in both low-beta and high-beta portfolios returns is puzzling, suggesting that investors may invest in both low- and high-risk stocks when enthusiastically investing in stock market. The findings of the paper suggest that investors may get abnormal returns by forecasting stock return patterns and designing their investment strategies by taking into account the January and December effects and the level of systematic risk associated with the firms. JEL Classification: G02, G12, G14 Keywords: Behavioural Finance, Stochastic Dominance Approach, Monthly Anomaly, January Effect, December Effect, TOY Anomaly, Abnormal Returns, KS Type Test, PSX

scholarly journals Schedule UTP: Stock Price Reaction and Economic Consequences

2012 ◽  
Vol 35 (1) ◽  
pp. 25-48 ◽  
Author(s):  
John L. Abernathy ◽  
Stephan A. Davenport ◽  
Eric T. Rapley
Keyword(s):  
Stock Returns ◽  
Stock Price ◽  
Tax Planning ◽  
Economic Consequences ◽  
Internal Revenue Service ◽  
Price Reaction ◽  
Tax Returns ◽  
Stock Price Reaction ◽  
Planning Strategies ◽  
Tax Benefits

ABSTRACT: In 2010, the Internal Revenue Service (IRS) announced the requirement to disclose uncertain tax positions (UTP) on a new schedule (Schedule UTP) to be filed with federal corporate income tax returns. Schedule UTP could increase a firm's tax burden by providing a roadmap for the IRS to identify firms' tax-planning strategies. We find that stock returns around the development of Schedule UTP are negative, consistent with investors' concern that Schedule UTP would impose costs on firms. However, we document a significant positive stock price reaction to the release of the final draft of Schedule UTP in which the IRS relaxed many of the controversial provisions of Schedule UTP. Additionally, we find this positive reaction is incrementally larger for more tax-aggressive firms. Finally, we find a significant decrease in reported unrecognized tax benefits (UTBs) and additions to UTBs after the adoption of Schedule UTP in 2010.

scholarly journals The Systematic Risk and Leverage Effect in the Corporate Sector of Pakistan

2000 ◽  
Vol 39 (4II) ◽  
pp. 951-962
Author(s):  
Muhammad Nishat
Keyword(s):  
High Risk ◽  
Stock Returns ◽  
Risk Premium ◽  
Emerging Market ◽  
Systematic Risk ◽  
Institutional Development ◽  
Relative Price ◽  
Accounting Earnings ◽  
Stock Volatility ◽  
Market Portfolio

Poor corporate financing policies, non-competitive role of institutional development, a tendency towards the underpricing of initial offering resulted in high levered stocks in Karachi stock market (KSE). The KSE is termed as high risk high return emerging market where investors seek high risk premium Nishat (1999). The leverage is the most important factor which determines the firms risk premium [Zimmer (1990)]. Hamada (1969) and Bowman (1979) have demonstrated the theoretical relationship between leverage and systematic risk. Systematic risk of the leverage firm is equal to the without leverage systematic risk of the firm times one plus the leverage ratio (debt equity). Bowman (1979) established that systematic risk is directly related to leverage and the accounting beta (covariability of a firms’ accounting earnings with the accounting earnings of the market portfolio). One explanation of time-varying stock volatility is that leverage changes as the relative price of stocks and bonds change. Schwert (1989) demonstrated how a change in the leverage of the firm causes a change in the volatility of stock returns. Haugen and Wichern (1975) analysed the relationship between leverage and relative stability of stock value based on actuarial science1 and found that the duration of the debt is an important attribute in assessing the effect of leverage on stock volatility. If the leverage is persistent, or changing over time due to the issuance of additional debt, or if the firms are trying to return back the debt, this will change the risk of holding common stock. Kane, Marcus, and McDonald (1985) argued that a well defined metric for the advantage of debt financing is the difference in rates of return earned by optimally levered and unlevered firms, net of a return premium to compensate for potential bankruptcy costs.

Predicting Equity Returns in Developed Markets

2021 ◽  
pp. 68-90
Author(s):  
A. Doruk Günaydin
Keyword(s):  
Stock Returns ◽  
Cross Section ◽  
Developed Countries ◽  
Equity Returns ◽  
Market Returns ◽  
Short Term ◽  
Firm Level ◽  
Cross Sectional ◽  
Expected Stock Returns ◽  
The Cross

This chapter examines the relation between various firm-specific variables and the cross-section of equity returns in 26 developed countries. Univariate portfolio analyses using equal-weighted returns show that low beta, book-to-market equity, and momentum analysis are also priced in the cross-section of developed market returns, whereas short-term reversal and downside beta manifest themselves in the opposite direction. Univariate portfolio analysis based on value-weighted returns reveal that the predictive power of book-to-market equity and short-term reversal is driven by small stocks. Multivariate firm-level cross-sectional regression analysis document that momentum, short-term reversal, illiquidity, idiosyncratic volatility, hybrid tail risk, lower partial moment are related to expected stock returns. Overall, the most robust cross-sectional predictor in developed market is found to be return momentum.

scholarly journals The Fundamental Equity Premium and Ambiguity Aversion in an International Context

Risks ◽  
2018 ◽  
Vol 6 (4) ◽  
pp. 128 ◽  
Author(s):  
Minh Ngo ◽  
Marc Rieger ◽  
Shuonan Yuan
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Ambiguity Aversion ◽  
Equity Premium ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Firm Level ◽  
International Context ◽  
International Data ◽  
Premium Puzzle

Stocks are riskier than bonds. This causes a risk premium for stocks. That the size of this premium, however, seems to be larger than risk aversion alone can explain the so-called “equity premium puzzle”. One possible explanation is the inclusion of a degree of ambiguity in stock returns to account for an additional ambiguity premium, whose size depends on the degree of ambiguity aversion among investors. It is, however, difficult to test this empirically. In this paper, we compute the first firm-level estimation of equity premium based on the internal rate of return (IRR) approach for a total of N = 28,256 companies in 54 countries worldwide. Using a survey of international data on ambiguity aversion, we find a strong and robust relation between equity premia and ambiguity aversion.

scholarly journals Liquidity and Asset Pricing: Evidence from Indian Stock Market

2020 ◽  
Vol 4 (1) ◽  
pp. 109-116
Author(s):  
Sharad Nath Bhattacharya ◽  
Mousumi Bhattacharya ◽  
Sumit Kumar Jha
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Stock Returns ◽  
Risk Premium ◽  
Negative Impact ◽  
Stock Exchange ◽  
Systematic Risk ◽  
Liquidity Premium ◽  
Significant Negative Impact ◽  
Indian Stock Market

In this research article, we present a liquidity premium based asset pricing model and test it in the Indian stock market. Using high-frequency data of stocks listed in the National Stock Exchange, we show that observed illiquidity has a significant negative impact on realized stock returns even after controlling for the up and down market, volatility, and effects of derivatives trading. The illiquidity measure is modified for its time variations, and then the modified measure is used to assess its impact on returns. Using a cross-section of stocks, we show the year wise results of the model and extend it to show that it has some role in explaining returns across industries. Findings show that the down market has contemporaneous systematic risk at higher levels, and the market risk premium is higher in down markets. Finance, utility and real estate sector companies have higher systematic risk in both up and down market and investors of these sectors has relatively higher expected higher returns in comparison to companies from the rest of the segments.

Can Twitter Help Predict Firm-Level Earnings and Stock Returns?

2017 ◽  
Vol 93 (3) ◽  
pp. 25-57 ◽  
Author(s):  
Eli Bartov ◽  
Lucile Faurel ◽  
Partha S. Mohanram
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Future Prospects ◽  
Traditional Media ◽  
Stock Trading ◽  
Firm Level ◽  
Quarterly Earnings ◽  
Announcement Returns ◽  
Twitter Activity ◽  
Original Information

ABSTRACT Prior research has examined how companies exploit Twitter in communicating with investors, and whether Twitter activity predicts the stock market as a whole. We test whether opinions of individuals tweeted just prior to a firm's earnings announcement predict its earnings and announcement returns. Using a broad sample from 2009 to 2012, we find that the aggregate opinion from individual tweets successfully predicts a firm's forthcoming quarterly earnings and announcement returns. These results hold for tweets that convey original information, as well as tweets that disseminate existing information, and are stronger for tweets providing information directly related to firm fundamentals and stock trading. Importantly, our results hold even after controlling for concurrent information or opinion from traditional media sources, and are stronger for firms in weaker information environments. Our findings highlight the importance of considering the aggregate opinion from individual tweets when assessing a stock's future prospects and value.

Discretionary Risk Disclosures

2003 ◽  
Vol 78 (2) ◽  
pp. 449-469 ◽  
Author(s):  
Bjorn N. Jorgensen ◽  
Michael T. Kirschenheiter
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Voluntary Disclosure ◽  
Cash Flows ◽  
Share Price ◽  
Risk Disclosure ◽  
Share Prices ◽  
Ex Post ◽  
Partial Disclosure ◽  
Future Cash Flows

We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multifirm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex post than a nondisclosing firm. Finally, we show that ex ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.

scholarly journals Financial Crises, Macroeconomic Variables, and Long-Run Risk: An Econometric Analysis of Stock Returns Correlations (2000 to 2019)

2021 ◽  
Vol 14 (3) ◽  
pp. 127
Author(s):  
Marco Tronzano
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Financial Crises ◽  
Stock Price ◽  
Financial Risk ◽  
Swiss Franc ◽  
Chinese Stock Market ◽  
Stock Market Index ◽  
Defensive Role ◽  
Long Run

This paper focuses on four major aggregate stock price indexes (SP 500, Stock Europe 600, Nikkei 225, Shanghai Composite) and two “safe-haven” assets (Gold, Swiss Franc), and explores their return co-movements during the last two decades. Significant contagion effects on stock markets are documented during almost all financial crises; moreover, in line with the recent literature, the defensive role of gold and the Swiss Franc in asset portfolios is highlighted. Focusing on a new set of macroeconomic and financial series, a significant impact of these variables on stock returns correlations is found, notably in the case of the world equity risk premium. Finally, long-run risks are detected in all asset portfolios including the Chinese stock market index. Overall, this empirical evidence is of interest for researchers, financial risk managers and policy makers.

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