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Journal Cover Studies in Economics and Finance
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   Hybrid Journal Hybrid journal (It can contain Open Access articles)
   ISSN (Print) 1086-7376
   Published by Emerald Homepage  [312 journals]
  • Mergers and acquisitions: a review (part 2)
    • Abstract: Studies in Economics and Finance, Volume 33, Issue 3, August 2016.
      Purpose This paper reviews the relevant literature on mergers and acquisitions in an attempt to provide a comprehensive account of what we know about mergers and which parts of the puzzle are still incomplete. Design/methodology/approach This literature review consists of three key sections. The first part of this paper summarises the literature on the cyclical nature of mergers referred to in the literature as merger waves. The second section reviews the causes and consequences of takeovers; it first reviews the causes, or drivers, of acquisitions, while focusing on the fact that acquisitions happen in waves and then reviews the consequences of takeovers, with a predominant focus on the impacts of mergers on the economic performance of acquirers. The third part of the review summarises the theories as well as previous empirical studies on determinants of announcement returns and post-acquisition performance of combined firms. Findings • Merger activity demonstrates a wavy pattern, i.e. mergers are clustered in industries through time. • The causes suggested for this fluctuating pattern include industry and economy-level shocks, mis-valuation, and managerial herding. • Market reaction to announcement of acquisitions is, on average, slightly negative for acquirer stocks and significantly positive for target stocks. The combined abnormal return is positive. These findings have been consistent over several decades of investigation. • The prior research also identifies a number of factors that are related to performance of acquisitions. These factors are categorised and reviewed in five different groups: (1) Acquirer characteristics, (2) Target characteristics, (3) Bid characteristics, (4) Industry characteristics, and (5) Macro-environment characteristics Originality/value This review illustrates a number of issues. Prior research is heavily biased towards gains to acquirers and factors that affect these gains. It is also biased towards finding sources of value creation through mergers despite the fact that several theories suggest that mergers can be value-destroying. In fact, value destruction is often attributed to managers’ self-interest (agency problem) and mistakes (hubris). However, the mechanisms through which mergers destroy value are rarely addressed. Aside from that, the possibility of simultaneous creation and destruction of value in acquisitions is not often considered. Finally, after several decades of investigation a key question is not completely answered yet: “what are the sources of value in mergers and acquisitions?”
      Citation: Studies in Economics and Finance
      PubDate: 2016-06-17T11:33:04Z
      DOI: 10.1108/SEF-07-2015-0165
  • Does the sentiment of investors explain differences between predicted and
           realized stock prices?
    • Abstract: Studies in Economics and Finance, Volume 33, Issue 3, August 2016.
      Purpose The objective of this paper is to use the Barberis et al. (1998) valuation model in order to calculate the fundamental value of a stock and examine whether the differences between predicted and realized stock prices are explained both by psychological factors (that affect investor reaction to information) and by key macroeconomic variables. Design/methodology/approach This paper adopts a time-series analysis as well as a panel data approach in order to examine whether the price deviations from fundamental values are due to macroeconomic and psychological factors, using data from the London Stock Exchange. Findings The results indicate that these differences are explained by important macroeconomic variables as well as by the sentiment of investors (that is used as a proxy of the psychological factors). Originality/value Based on the above results, this paper suggests that the price deviations from fundamental values are not treated as model estimation errors as proposed by Penman and Sougiannis (1998) but rather as deviations that are due to psychological factors as well as to macroeconomic conditions.
      Citation: Studies in Economics and Finance
      PubDate: 2016-06-17T11:32:57Z
      DOI: 10.1108/SEF-11-2014-0218
  • Earnings surprises and the response of CDS markets
    • Abstract: Studies in Economics and Finance, Volume 33, Issue 3, August 2016.
      Purpose This paper investigates the informational content of earnings surprises and accounting information in CDS markets. Design/methodology/approach I analyse a sample of 444 US firms and 6,907 earnings announcements. By means of parametric and non-parametric event study analysis, I assess the informational value and the timeliness in the assimilation of earnings surprises by CDS rates. Findings I show that earnings surprises contain material information and that CDS rates are affected by the disclosure of obligors’ financial statements. There is also supporting evidence that positive and negative surprises induce asymmetric reactions on CDS rates, especially after accounting for the credit risk of the obligor and the liquidity of the CDS contract. Finally, and perhaps the most interesting conclusion of the study, there is evidence that earnings disclosed during unstable periods lack informational value, in opposition to normal periods. Originality/value As compared to similar studies, this paper presents three novel contributions. The first concerns the use of non-parametric analysis in parallel with parametric tests to achieve robust conclusions. The second novel contribution resides in assessing whether the liquidity of the CDS contracts affects the information value of earnings surprises or the timeliness at which the information is assimilated into CDS rates. Finally, this paper also contributes to improve our understanding on the relationship between the business cycle and the informativeness of accounting information.
      Citation: Studies in Economics and Finance
      PubDate: 2016-06-17T11:32:56Z
      DOI: 10.1108/SEF-11-2014-0217
  • Noisy information and stock market returns
    • Abstract: Studies in Economics and Finance, Volume 33, Issue 3, August 2016.
      Purpose This paper studies whether noisy public information that investors receive about the expected aggregate dividend growth rate can help better understand the large average equity premium and stock return volatility in the US financial market. Design/methodology/approach We consider a dynamic asset pricing model with a representative agent, who cannot observe the expected growth rate of dividends and must learn its value by using noisy information. In addition, we present a simple model for noisy information calibration. Findings With a coefficient of relative risk aversion below 10 and the time impatience parameter between 0 and 1, our calibrated model is able to yield an average risk-free interest rate, equity premium and stock return volatility that are close to the stylized facts in the US financial market. Originality/value First, we present a different equilibrium model with a simple "catching up with the Joneses" preference and noisy information. Second, we develop a simple calibration procedure to calibrate the information process to study whether the calibrated model can help explain the large average equity premium and stock return volatility in the US financial market data.
      Citation: Studies in Economics and Finance
      PubDate: 2016-06-17T11:32:54Z
      DOI: 10.1108/SEF-04-2015-0101
  • The relative term structure and the Australian-US exchange rate
    • Abstract: Studies in Economics and Finance, Volume 33, Issue 3, August 2016.
      Purpose The purpose is to investigate whether the factors that summarise the information in the yield curves of Australia and the United States can predict changes in the Australian-US exchange rate (i.e. the AUD/USD rate) and Australian dollar excess returns. Design/methodology/approach The paper extracts the three Nelson-Siegel factors (level, slope and curvature) from the relative yield curve of Australia with the United States to predict changes in the bilateral exchange rate and excess returns on the Australian dollar. The full sample regressions allow for a shift in the coefficient on the relative curvature factor which can account for the impact of the Fed’s changed monetary policy to one of quantitative easing. Findings The paper finds that the relative curvature factor strongly predicts changes in the AUD/USD exchange rate and Australian dollar excess returns out to 12-months ahead in the sample that precedes the Fed’s policy of quantitative easing. The relative curvature factor retains its predictive power in the full sample regressions but anticipates smaller exchange rate changes and excess currency returns in in-sample predictions made from August 2007. Practical implications The yield curves of Australia and the US reliably reflect investor’s expectations about prospective monetary policies in each economy. Originality/value The paper investigates the predictive content of the relative Nelson-Siegel factors for changes in the AUD/USD exchange rate and for Australian dollar excess returns over various forecast horizons for a period that covers the Fed’s policy of quantitative easing.
      Citation: Studies in Economics and Finance
      PubDate: 2016-06-17T11:32:42Z
      DOI: 10.1108/SEF-05-2014-0089
  • Equity fund performance: can momentum be explained by the pricing of
           idiosyncratic volatility?
    • Abstract: Studies in Economics and Finance, Volume 33, Issue 3, August 2016.
      Purpose This paper investigates whether idiosyncratic volatility is priced in returns of equity funds while controlling for fund size and return momentum. Design/methodology/approach Following Fama and French (1993), an idiosyncratic volatility mimicking factor and a fund-size factor are constructed. The pricing ability of this idiosyncratic volatility mimicking factor is investigated in the context of Carhart (1997). Findings Idiosyncratic volatility is an important pricing factor even when controlling for fund size and momentum. In addition, idiosyncratic volatility is strongly and positively associated with the momentum effect. Further, when controlling for the association between the momentum effect and idiosyncratic volatility, the explanatory power of the momentum factor almost disappears, which suggests the pricing of idiosyncratic volatility mediates momentum and returns. Originality/value These findings imply that both the idiosyncratic volatility factor and the fund-size factor should not be ignored by fund managers when evaluating performance of the equity funds.
      Citation: Studies in Economics and Finance
      PubDate: 2016-06-17T11:32:31Z
      DOI: 10.1108/SEF-04-2016-0081
  • Industry-specific determinants of shareholder value creation
    • First page: 190
      Abstract: Studies in Economics and Finance, Volume 33, Issue 2, June 2016.
      Purpose Prior studies on determinants of shareholder value creation have reported conflicting and sometimes confusing results. In this study, in order to obtain more refined and industry-specific results regarding variables determining shareholder value creation, an analysis was performed focusing on different categories of firms or industries. Design/methodology/approach Two dependent and 11 independent variables were applied to five different industries to obtain the best set of significant value drivers of shareholder value creation for a particular industry. Findings MVA is a better indicator of shareholder value created compared to a market adjusted return. Accounting-based variables (EPS, ROA and NOPAT) are superior to economic-based variables (EVA and ROCE) in explaining shareholder value creation, but results differ, depending on the dependent variable chosen as shareholder value creation measure. For each industry, there is a unique set of variables that determine shareholder value creation; the industrial goods industry has seven significant value drivers, namely EPS, NOPAT, ROCE, the Spread, EVA, EBEI and REVA, while for the food and beverages industry there were only two significant value drivers (EPS and ROA). Originality/value These findings imply that management, analysts and shareholders should, depending on the specific industry in which their firm operates, take into account a more specific set of variables when making their financial decisions, including compensation or reward structuring.
      Citation: Studies in Economics and Finance
      PubDate: 2016-04-26T01:34:09Z
      DOI: 10.1108/SEF-08-2014-0155
  • Assessing foreign funds geographical focus timing skill
    • First page: 209
      Abstract: Studies in Economics and Finance, Volume 33, Issue 2, June 2016.
      Purpose To study the market timing skill of United States-based foreign open-end mutual funds in their geographical focus market. Design/methodology/approach We use daily fund data and two multi-factor extensions of the Treynor-Mazuy (1966) and Henriksson-Merton (1981) timing models to measure United States-based foreign funds’ market timing skill during 1999 to 2010. In particular, we study fund managers’ skill to time their geographical focus market. Findings We report that, in general, foreign funds do not accurately time their geographical focus market. However, during January 2008 to December 2010, the sub period that includes the 2008 global financial crisis, most foreign funds in our sample not only focused on their domestic market, the United States, but also demonstrated statistically significant, good timing skill. Originality/value Although United States-based foreign funds’ market-timing skill is not an unexplored topic, this study is the first to consider these funds’ skill to time their geographical focus market, a skill that has been studied in the context of hedge funds.
      Citation: Studies in Economics and Finance
      PubDate: 2016-04-26T01:34:26Z
      DOI: 10.1108/SEF-11-2013-0168
  • Foreign currency exposure within country exchange traded funds
    • First page: 222
      Abstract: Studies in Economics and Finance, Volume 33, Issue 2, June 2016.
      Purpose To consider the implicit effect of the underlying foreign currency exposure on the performance characteristics of country exchange traded funds. Design/methodology/approach To arrive at an overall estimation of the ETF’s tracking error, we calculate the mean of the three measures of tracking error for both the hedged (r_LC) and unhedged (r_NAV) return series. Since tracking error does not capture all the risk inherent in a country index fund, the study extends the analysis using the Sortino and Modified Sharpe ratios. Findings The decision to hedge currency risk should not be taken on the sole basis of historical volatilities. The investor must also factor in transactions costs, the possible roll of futures contracts, and prevailing interest rate differentials. If the rate on the foreign currency is greater than the dollar (euro) rate, the investor will pay for the hedge. If the rate on the foreign currency is less than the dollar (euro) rate, the investor will gain on the trade. Given that hedging entails additional costs, in cases where the neutralization of currency volatility only reduces risk modestly, it would be advisable to leave the exchange rate risk unhedged. We propose two metrics for ETF investors deciding whether to hedge a country ETF’s underlying currency risk. Originality/value The results highlight a key finding: while the majority of country funds accurately track the performance of the underlying foreign index when measured in the local currency, returns in the fund currency can be much more volatile. In breaking down the sources of country fund volatility, the paper demonstrates the impact of the underlying currency movements on overall fund risk. In cases where the currency impact has a significant impact on fund tracking errors, an index-oriented investor benefits from neutralizing the exchange rate effect. Additionally, as the Sortino and Modified Sharpe measures suggest that the underlying currency exposure offers in most cases a better risk-adjusted return for country ETFs in the listing currency, we also calculate the risk minimizing foreign currency exposure for each fund and propose a decision rule based on the net currency variance to decide whether to hedge the ETF’s currency risk. The optimal hedge ratio indicates that U.S.-based investors should only partially hedge the underlying currency risk while European-based investors are better off fully hedging currency risk.
      Citation: Studies in Economics and Finance
      PubDate: 2016-04-26T01:34:07Z
      DOI: 10.1108/SEF-10-2014-0196
  • Analysis of the factors impacting ETFs net fund flow changes
    • First page: 244
      Abstract: Studies in Economics and Finance, Volume 33, Issue 2, June 2016.
      Purpose The purpose of this study is to identify the factors that impact the exchange traded funds net fund flow changes on daily basis. Design/methodology/approach We study 1,212 different exchange traded funds with a proprietary daily net fund flow data and logistic regressions because the majority of the 1,212 exchange traded funds have mostly zero daily net fund flow changes. Findings We document that in the period December 22, 2005 to July 28, 2010 autocorrelation at the daily frequency is not universally present for the 1,212 exchange traded funds that we study, despite the fact that this is the case in the monthly data documented in prior studies. We also fail to find support for the feedback trading hypothesis but find some support for the contrarian investor hypothesis on daily basis, even though the opposite is ascertained for both in the prior literature monthly data. Also, we cannot conclude that tracking error prompts net fund flow changes and thus arbitrage activity. Originality/value The paper contributes to the ongoing analysis of the factors influencing investment companies fund flow changes, which has mostly focused on open-end funds and monthly data so far. Considering the increased scope and relevance of exchange traded funds in today’s financial markets this study fills a void in the fund flow changes literature.
      Citation: Studies in Economics and Finance
      PubDate: 2016-04-26T01:34:12Z
      DOI: 10.1108/SEF-06-2014-0114
  • Labor income risk and households' risky asset holdings
    • First page: 262
      Abstract: Studies in Economics and Finance, Volume 33, Issue 2, June 2016.
      Purpose Financial theory suggests that with increasing labor income risk, the reluctance of households to hold stocks increases. We therefore investigate the determinants of a household's decision on whether to invest in risky financial assets. Design/methodology/approach Income risk is measured as the observed variation of household income over a five-year period. We use both the time and the cross-sectional dimension of the German Socio-Economic Panel in order to control for unobserved heterogeneity. Findings We find that indeed higher variation, i.e. higher income risk, reduces the propensity to invest in risky assets. However, when controlling for household heterogeneity, as well as subjective measures of a household's financial situation (income satisfaction, worries about financial situation), the impact of observed labor income variation vanishes. We therefore conclude that in particular the perception of investment risk and of the riskiness of the environment determines the investment decision to a great extent. Originality/value The paper contributes to a better understanding of a household's investment decision making process. To the best of the authors' knowledge it is the first to fully exploit the panel structure of the data to control for unobserved heterogeneity which leads to novel conclusions with respect to the effect of labor income.
      Citation: Studies in Economics and Finance
      PubDate: 2016-04-26T01:34:28Z
      DOI: 10.1108/SEF-09-2014-0168
  • Quality investing and the cross-section of country returns
    • First page: 281
      Abstract: Studies in Economics and Finance, Volume 33, Issue 2, June 2016.
      Purpose The main objective of this study is to examine the role of quality as a determinant of a cross-sectional variation in country-level stock returns. The study attempts to address the question: Is there any special premium for top-quality stock markets with decent profitability, indebtedness and liquidity ratios? Design/methodology/approach The computations are based on the listings of 66 country portfolios over the period between 2000 and 2013. Long/short country portfolios from sorts on characteristics related to quality are examined with asset pricing models. Findings The inter-market variation in returns may be explained with profitability and debt ratios: the more profitable and the less indebted is stock market, the better is its performance. Moreover, the performance of country-level value, size and momentum strategies may be improved by double-sorting on quality characteristics. Practical implications The practical implications include such issues as the global asset allocation, the development of investment products, asset pricing and investment performance measurement. The country selection strategies based on leverage and profitability prove a useful tool for investors with global investment mandate. Furthermore, additional sorting on quality metrics may markedly improve the performance of inter-market value, size and momentum strategies. Originality/value This paper examines the role of quality metrics related to financial leverage, profitability and liquidity in explaining the cross-sectional variation in country returns.
      Citation: Studies in Economics and Finance
      PubDate: 2016-04-26T01:34:16Z
      DOI: 10.1108/SEF-06-2014-0119
  • Business lending and bank profitability in the UK
    • First page: 302
      Abstract: Studies in Economics and Finance, Volume 33, Issue 2, June 2016.
      Purpose The purpose of this paper is to investigate the importance of business lending as a source of bank profits in the UK banking system. The paper also examines whether the profitability of business lending is mostly driven by heterogeneous characteristics of individual banks or whether it is affected by systematic characteristics such as bank size and ownership structure. Design/methodology/approach The study uses bank level data from BankScope for a total sample of 83 UK banks and building societies. The period under consideration extends from 2005 to 2009. Econometric estimation is by panel fixed effects. Findings Our empirical results show that business lending is a statistically significant determinant of bank profits. However, this average effect masks important systematic differences among banks. In particular, we find strong size effects: the profitability of business lending is considerable for small banks but negligible for large banks. In contrast, we could not detect any ownership effects for domestic and foreign banks. These findings persist when the occurrence of the financial crisis is accounted for. Research limitations/implications Interestingly, our study relates these findings to the process of financialisation. Yet, the extent of the latter and its impact on various groups of banks (i.e., large, small, domestic and foreign banks) have not been examined. Further research in this area would make an important contribution to the literature.. Practical implications Our findings suggest that business lending is not a driving factor of profitability for large banks. One possible policy implication – which may be of interest especially to regulators and policy makers – is that capital injections into the larger banks per se are unlikely to lead to an expansion of credit to business. Originality/value There is very little research in the literature on the questions addressed in this paper, especially for the UK banking system. Moreover, the process of financialisation, which motivates the enquiry of this paper, is a growing area of research. Thus, the contribution of this paper is twofold.
      Citation: Studies in Economics and Finance
      PubDate: 2016-04-26T01:34:20Z
      DOI: 10.1108/SEF-04-2015-0097
  • Household micro-data, regulation and financial stability: The case of
           Denmark in the 1950s
    • First page: 320
      Abstract: Studies in Economics and Finance, Volume 33, Issue 2, June 2016.
      Purpose The 1950s was characterised by pronounced stability of the banking sector in many countries, which the existing literature has attributed to tight regulation. However, other factors than regulation are important for financial stability. This paper considers the case of Denmark and investigates whether the absence of banking crises was due to robustness of the banking sector's customers rather than tight regulation. Design/methodology/approach The paper analyses the resilience of Danish wage and salary earners to adverse economic shocks in the 1950s based on household-level data on income, consumption, savings and wealth from the Danish Expenditure and Saving Survey of 1955. Findings The paper finds that the Danish household sector in the 1950s had a high debt payment ability and was very robust to even large income shocks. The results indicate that the stability of the Danish financial sector was not only due to tight regulation but also reflected a high credit quality of the banking sector's loan portfolio. Originality/value During the last decade or so, a micro-data-based framework has become the "state of the art" approach among central banks to analyse the financial robustness of the household sector. However, such an approach has so far not been applied in studies on historical financial-stability issues. The paper adds to the literature by using granular household-level data to assess the financial resilience of the Danish household sector in the 1950s.
      Citation: Studies in Economics and Finance
      PubDate: 2016-04-26T01:34:24Z
      DOI: 10.1108/SEF-07-2015-0176
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