The Market and Investors Reactions to Mariana’s and Brumadinho’s Environmental Disasters: Sentimental or Rational Decisions?

This research carried out event studies to analyze the reactions of the market and investors in Vale S.A. to the collapses of the Mariana and Brumadinho dams. It also assessed the extent to which the causes attributed to the market reactions to major disasters in previous research has helped to explain the reactions of the market and investors to the collapses of these dams. The analyses have shown that, in the case of the Fundão dam, there was a relevant reduction in the abnormal cumulative returns of common stocks and ADRs at the end of the eleven days of the collapse, despite the fact that the daily abnormal returns were not statistically significant. However, the abnormal trading volumes of these securities in the eleven days after the dam failure were generally negative and all statistically significant. In contrast, concerning the collapse of the Brumadinho dam, the abnormal returns on common stocks and ADRs were negative, relevant, and statistically significant, and, after the eleven days, the losses were considerable. The abnormal trading volumes of the securities were all positive and statistically significant, but the reactions of ADR investors were more intense than those of investors in common stocks. Examining the causal attributions made previously, there are indications that the market and investor reactions to the failures of the two dams were probably derived from the expectation that Vale and the other companies involved would incur severe losses and high contracting costs in political processes that would follow to the disasters, and from the difficulty the investors have had to assess the magnitude of these losses and costs.

Illiquidity risk and equity trading performance: A statistical analysis

Subject. The article considers the development of special statistical methods for estimating and analyzing the liquidity risk. Objectives. The purpose is to improve the methodology for statistical appraisal and analysis of risk in equity trading. Methods. The study rests both on well-known methods for equity risk analysis and my own development results (calculation of equity annual illiquidity ratio, formation of illiquidity risk factor). The data analyzed in this paper come from the Moscow Exchange (MOEX) and cover January 2011 to May 2021. The sample included all common stocks traded on MOEX and issuers’ financial statements. I also apply analysis and synthesis, induction and deduction, and methods of comparison and grouping. Results. I calculated monthly illiquidity factor as zero-investment long-short portfolio. I examined the impact of illiquidity risk on the return dynamics of size, book-to-market ratio sorted portfolios. Conclusions. The study shows that expected equity returns are related cross-sectionally to the illiquidity factor. The evidence strongly supports the hypothesis that the illiquidity risk factor is priced. The premium for this risk is positive and offers higher expected returns in equities with strong illiquidity. However, for liquid equities no significant premium is revealed. The offered approach to the factor equity risk analysis based on illiquidity risk enables a true picture of how the risks impact the equity trading performance and how they can be improved in the future.

Determinants of underpricing initial public offerings (IPOs) of BRICS companies

The purpose of this article is to identify the nature of the influence of crucial factors on the short-term underpricing of initial public offerings of common stocks of companies in the BRICS countries. Based on a sample of 1,141 companies from the BRICS countries that conducted IPOs (using Bloomberg and World Bank databases), we tested the influence of decisive factors on the underpricing of the shares of these companies. The empirical study is based on testing OLS models for different periods: for the period 2001–2018 and separately for the periods 2001–2008 and 2010–2018. The study shows that, firstly, with an increase in the volume of the placement of shares, their underestimation in an IPO decreases. In addition, having an auditor from the Big Four also reduces the underestimation of shares. Secondly, we revealed that the underpricing of shares in the course of the IPO increased with GDP growth. Besides, if companies place their shares on a foreign exchange, the underestimation of their shares increases. At the same time, such IPO parameters as the number of underwriters, the reputation of underwriters, and the deviation of the offer price from the middle of the price range during the placement period do not affect the underestimation of shares for companies from the BRICS countries. Taking into account the results of an empirical study, the article formulates recommendations for improving the efficiency of initial public offerings for companies from the BRICS countries.

The Odds of Profitable Market Timing

This statistical study refines and updates Sharpe’s empirical paper (1975, Financial Analysts Journal) on switching between US common stocks and cash equivalents. According to the original conclusion, profitable market timing relies on a representative portfolio manager who can correctly forecast the next year at least 7 times out of 10. Four changes are made to the original setting. The new data set begins and ends with similar price-earnings ratios; a more accurate approximation of commissions is given; the rationality of assumptions is examined; a prospective and basic Monte Carlo analysis is carried out so as to consider the heterogeneous performance of a number of portfolio managers with the same forecasting accuracy. Although the first three changes improve retrospectively the odds of profitable market timing, the original conclusion is corroborated once more.

Investor Sentiment and Price Discrepancies between Common and Preferred Stocks in Korea

We examine whether investor sentiment affects price discrepancies between preferred and common stocks, based on a sample of Korean firms that issue preferred stocks. While most research has focused on corporate finance features such as voting rights, we examine price discrepancies as a behavioral finance feature from a new perspective. Based on the investor sentiment index, as investor sentiment increases, price discrepancies between preferred and common stocks widen in the KOSPI market. These findings confirm that investor sentiment—not merely voting premiums, cash flow rights, and liquidity—is a significant factor in explaining price discrepancies between preferred and common stocks in Korea.

Justifying Mean-Variance Portfolio Selection when Asset Returns Are Skewed

We show that, in the presence of a risk-free asset, the return distribution of every portfolio is determined by its mean and variance if and only if asset returns follow a specific skew-elliptical distribution. Thus, contrary to common belief among academics and practitioners, skewed returns do not allow a rejection of mean-variance analysis. Our work differs from Chamberlain's [Chamberlain G (1983) A characterization of the distributions that imply mean-variance utility functions. J. Econom. Theory 29(1):185–201.] by focusing on the returns of portfolios, where the weights over the risk-free asset and the risky assets sum to unity. Furthermore, it extends Meyer's [Meyer J, Rasche RH (1992) Sufficient conditions for expected utility to imply mean-standard deviation rankings: Empirical evidence concerning the location and scale condition. Econom. J. (London) 102(410):91–106.] by introducing elliptical noise into their generalized location-scale framework. To emphasize the relevance of our skew-elliptical model, we additionally provide empirical evidence that it cannot be rejected for the returns of typical portfolios of common stocks or popular alternative investments. This paper was accepted by Kay Giesecke, finance.

Initial Public Offering Investment: The General Investors’ Perspective

This study aims to explore the views of general investors on their IPO investments in the primary market. Using a judgemental sampling, the views of 109 general investors who actively participated in the primary market has been employed in the study from Pokhara City. The study revealed that banking and finance followed by hydropower are the most preferred sectors of buying common stocks in the primary market with the expectation of long term returns. There is a significant different perception on both risk and return from IPO investment between male and female investors. The study also found that government’s policy announcements followed by the size of the firm that issues IPOs are the major determinants of IPO return and risk among investors. Increasing paid up capital for business expansion is the important reason for issuing IPOs by the companies while creating exit route for existing shareholders is the least.