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Volume 55: Issue 2 (April 2000)

Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices

Pages: 529-564  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00219  |  Cited by: 767

Peter Blair Henry

A stock market liberalization is a decision by a country's government to allow foreigners to purchase shares in that country's stock market. On average, a country's aggregate equity price index experiences abnormal returns of 3.3 percent per month in real dollar terms during an eight‐month window leading up to the implementation of its initial stock market liberalization. This result is consistent with the prediction of standard international asset pricing models that stock market liberalization may reduce the liberalizing country's cost of equity capital by allowing for risk sharing between domestic and foreign agents.

Foreign Speculators and Emerging Equity Markets

Pages: 565-613  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00220  |  Cited by: 1192

Geert Bekaert, Campbell R. Harvey

We propose a cross‐sectional time‐series model to assess the impact of market liberalizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns. Liberalizations are defined by regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in equity capital flows to the emerging markets. We control for other economic events that might confound the impact of foreign speculators on local equity markets. Across a range of specifications, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 75 basis points.

Going Public without Governance: Managerial Reputation Effects

Pages: 615-646  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00221  |  Cited by: 336

Armando Gomes

This paper addresses the agency problem between controlling shareholders and minority shareholders. This problem is common among public firms in many countries where the legal system does not effectively protect minority shareholders against oppression by controlling shareholders. We show that even without any explicit corporate governance mechanisms protecting minority shareholders, controlling shareholders can implicitly commit not to expropriate them. Stock prices of such companies are significantly higher and firms are more likely go public because of this reputation effect. Moreover, insiders divest shares gradually over time, at a rate that is negatively related to the degree of moral hazard.

Agency Conflicts in Public and Negotiated Transfers of Corporate Control

Pages: 647-677  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00222  |  Cited by: 106

Mike Burkart, Denis Gromb, Fausto Panunzi

We analyze control transfers in firms with a dominant minority blockholder and otherwise dispersed owners, and show that the transaction mode is important. Negotiated block trades preserve a low level of ownership concentration, inducing more inefficient extraction of private benefits. In contrast, public acquisitions increase ownership concentration, resulting in fewer private benefits and higher firm value. Within our model, the incumbent and new controlling party prefer to trade the block because of the dispersed shareholders' free‐riding behavior. We also explore the regulatory implications of this agency problem and its impact on the terms of block trades.

Can Relationship Banking Survive Competition?

Pages: 679-713  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00223  |  Cited by: 934

Arnoud W. A. Boot, Anjan V. Thakor

How will banks evolve as competition increases from other banks and from the capital market? Will banks become more like capital market underwriters and offer passive transaction loans or return to their roots as relationship lending experts? These are the questions we address. Our key result is that as interbank competition increases, banks make more relationship loans, but each has lower added value for borrowers. Capital market competition reduces relationship lending (and bank lending shrinks), but each relationship loan has greater added value for borrowers. In both cases, welfare increases for some borrowers but not necessarily for all.

Some Evidence on the Uniqueness of Initial Public Debt Offerings

Pages: 715-743  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00224  |  Cited by: 68

Sudip Datta, Mai Iskandar‐Datta, Ajay Patel

Debt initial public offerings (IPOs) represent a major shift in a firm's financing policy by both extending debt maturity and altering the public‐private debt mix. In contrast to findings for seasoned debt offerings, we document a significantly negative stock price response to debt IPO announcements. This result is consistent with debt maturity and debt ownership structure theories. The equity wealth effect is negatively related to the offer's maturity, and positively related to the degree of bank monitoring. We find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response.

Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies

Pages: 745-772  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00225  |  Cited by: 261

Ronald Balvers, Yangru Wu, Erik Gilliland

For U.S. stock prices, evidence of mean reversion over long horizons is mixed, possibly due to lack of a reliable long time series. Using additional cross‐sectional power gained from national stock index data of 18 countries during the period 1969 to 1996, we find strong evidence of mean reversion in relative stock index prices. Our findings imply a significantly positive speed of reversion with a half‐life of three to three and one‐half years. This result is robust to alternative specifications and data. Parametric contrarian investment strategies that fully exploit mean reversion across national indexes outperform buy‐and‐hold and standard contrarian strategies.

Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors

Pages: 773-806  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00226  |  Cited by: 2422

Brad M. Barber, Terrance Odean

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high‐beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.

How Does Information Quality Affect Stock Returns?

Pages: 807-837  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00227  |  Cited by: 282

Pietro Veronesi

Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After fully characterizing expected returns and conditional volatility, I show that (i) higher precision of signals tends to increase the risk premium, (ii) when signals are imprecise the equity premium is bounded above independently of investors' risk aversion, (iii) return volatility is U‐shaped with respect to investors' risk aversion, and (iv) the relationship between conditional expected returns and conditional variance is ambiguous.

Option Prices, Implied Price Processes, and Stochastic Volatility

Pages: 839-866  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00228  |  Cited by: 650

Mark Britten‐Jones, Anthony Neuberger

This paper characterizes all continuous price processes that are consistent with current option prices. This extends Derman and Kani (1994), Dupire (1994, 1997), and Rubinstein (1994), who only consider processes with deterministic volatility. Our characterization implies a volatility forecast that does not require a specific model, only current option prices. We show how arbitrary volatility processes can be adjusted to fit current option prices exactly, just as interest rate processes can be adjusted to fit bond prices exactly. The procedure works with many volatility models, is fast to calibrate, and can price exotic options efficiently using familiar lattice techniques.

Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups

Pages: 867-891  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00229  |  Cited by: 1624

Tarun Khanna, Krishna Palepu

Emerging markets like India have poorly functioning institutions, leading to severe agency and information problems. Business groups in these markets have the potential both to offer benefits to member firms, and to destroy value. We analyze the performance of affiliates of diversified Indian business groups relative to unaffiliated firms. We find that accounting and stock market measures of firm performance initially decline with group diversification and subsequently increase once group diversification exceeds a certain level. Unlike U.S. conglomerates' lines of business, and similar to the affiliates of U.S. LBO associations, affiliates of the most diversified business groups outperform unaffiliated firms.

Demand Curves for Stocks Do Slope Down: New Evidence from an Index Weights Adjustment

Pages: 893-912  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00230  |  Cited by: 269

Aditya Kaul, Vikas Mehrotra, Randall Morck

Weights in the Toronto Stock Exchange 300 index are determined by the market values of the included stocks' public floats. In November 1996, the exchange implemented a previously announced revision of its definition of the public float. This revision, which increased the floats and the index weights of 31 stocks, conveyed no information and had no effect on the legal duties of shareholders. Affected stocks experienced statistically significant excess returns of 2.3 percent during the event week, and no price reversal occurred as trading volume returned to normal levels. These findings support downward sloping demand curves for stocks.

Trading Volume and Cross‐Autocorrelations in Stock Returns

Pages: 913-935  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00231  |  Cited by: 446

Tarun Chordia, Bhaskaran Swaminathan

This paper finds that trading volume is a significant determinant of the lead‐lag patterns observed in stock returns. Daily and weekly returns on high volume portfolios lead returns on low volume portfolios, controlling for firm size. Nonsynchronous trading or low volume portfolio autocorrelations cannot explain these findings. These patterns arise because returns on low volume portfolios respond more slowly to information in market returns. The speed of adjustment of individual stocks confirms these findings. Overall, the results indicate that differential speed of adjustment to information is a significant source of the cross‐autocorrelation patterns in short‐horizon stock returns.

Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows

Pages: 937-958  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00232  |  Cited by: 342

Prem C. Jain, Joanna Shuang Wu

We examine a sample of 294 mutual funds that are advertised in Barron's or Money magazine. The preadvertisement performance of these funds is significantly higher than that of the benchmarks. We test whether the sponsors select funds to signal continued superior performance or they use the past superior performance to attract more money into the funds. Our analysis shows that there is no superior performance in the postadvertisement period. Thus, the results do not support the signaling hypothesis. On the other hand, we find that the advertised funds attract significantly more money in comparison with a group of control funds.

A Model of Returns and Trading in Futures Markets

Pages: 959-988  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00233  |  Cited by: 38

Harrison Hong

This paper develops an equilibrium model of a competitive futures market in which investors trade to hedge positions and to speculate on their private information. Equilibrium return and trading patterns are examined. (1) In markets where the information asymmetry among investors is small, the return volatility of a futures contract decreases with time‐to‐maturity (i.e., the Samuelson effect holds). (2) However, in markets where the information asymmetry among investors is large, the Samuelson effect need not hold. (3) Additionally, the model generates rich time‐to‐maturity patterns in open interest and spot price volatility that are consistent with empirical findings.

Arbitrage and the Expectations Hypothesis

Pages: 989-994  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00234  |  Cited by: 33

Francis A. Longstaff

This paper shows that all traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage if markets are incomplete. A key implication is that the validity of the expectations hypothesis is purely an empirical issue; the expectations hypothesis cannot be ruled out on a priori theoretical grounds.

Book Review

Pages: 995-996  |  Published: 4/2000  |  DOI: 10.1111/1540-6261.00235  |  Cited by: 0

Robert J. Elliott and P. Ekkhard Kopp (eds.), Mathematics of Financial Markets

Book Review

Pages: 995-996  |  Published: 4/2000  |  DOI: 10.1111/1540-6261.t01-1-00235  |  Cited by: 0


Pages: 997-998  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00236  |  Cited by: 0


Pages: 999-1001  |  Published: 4/2000  |  DOI: 10.1111/1540-6261.00237  |  Cited by: 0

Association Meetings

Pages: 1003-1004  |  Published: 4/2000  |  DOI: 10.1111/0022-1082.00238  |  Cited by: 1