We study the intertemporal risk-return tradeoff relations based on returns from 18 international markets. We find striking new empirical evidence that the inclusion of U.S. market returns significantly changes the estimated risk-return tradeoff relations in international markets from mostly negative to predominantly positive. Our results are consistent with the lead-lag effect between U.S. and international markets in the sense of Rapach, Strauss, and Zhou (2013).
Subtopics: International corporate · International investments
We use daily data for a panel of 34 countries to investigate regional differences in sovereign credit default swaps (CDS) spread determinants and the significance of local vs. global market factors. Similar to prior studies, we find a high level of commonality among CDS spreads, but our results show that this effect is stronger in Latin American CDS. The results of our quantile panel regression model show that while global forces drive spreads across the conditional distribution, changes in credit ratings are significant in explaining CDS spreads only in the upper quantiles. We also confirm the existence of regional differences in spread determinants.
The literature widely documents the negative liquidity impact of foreign participation in firms that permit high foreign institutional ownership. This paper employs a unique setting for the limited participation of qualified foreign institutional investors (QFIIs) in China’s A-share market and examines how this impacts on stock liquidity in emerging markets. Contrary to the findings in the literature, foreign investor participation helps enhance the liquidity of affected stocks by promoting trade activities and price discovery. The improvement in liquidity does not occur through the information friction channel, but rather the real friction channel. Our results are robust to endogeneity issue and the possible influence of the global financial crisis, industry effects and the stock exchange. Further, the liquidity improving effects of QFII are even stronger when the analysis is performed on a subsample of QFII firms.
The severity and complexity of the recent financial crisis has motivated the need for understanding the relationships between sovereign ratings and bank credit ratings. This is the first study to examine the impact of the “international” spillover of sovereign risk to bank credit risk through both a ratings channel and an asset holdings channel. We find evidence that confirms both channels. In the first case, the downgrade of sovereign ratings in GIIPS countries leads to rating downgrades of banks in the peripheral countries. The second channel indicates that larger asset holdings of GIIPS debt increases the credit risk of cross-border banks and, hence, the probabilities of downgrade.
We use high frequency data and the “identification through heteroskedasticity” approach of Rigobon (2003) to capture the contemporaneous volatility spillover effects between the US and UK equity markets. We demonstrate the relevance of taking into account the information present during simultaneous trading hours by comparing the results generated by our structural vector
autoregression with those of a traditional reduced-form vector autoregression. Our findings clearly demonstrate that contemporaneous relations matter and that ignoring them leads to inappropriate conclusions regarding the magnitude and direction of volatility spillover.
We empirically examine changes in information asymmetry and informational efficiency of cross-listed stocks in their home market around a cross-listing in the US. We estimate intraday market microstructure measures of information asymmetry and price efficiency, and find that a US cross-listing significantly improves the quality of a firm’s information environment and stock price efficiency in the home market. This improvement is stronger for cross-listings that take place after the adoption of Sarbanes-Oxley Act. Our results demonstrate that stricter disclosure from a US cross-listing is beneficial, in line with the legal and bonding hypotheses.
This study examines the issue of whether managerial social capital, defined as aggregate benefits of social obligations and informal contacts formed through social networks, has an impact on financial development. Utilizing a large cross-country sample for the period 1999-2012, we provide evidence that higher levels of social capital have a positive effect on financial development. We are able to examine different types of social connections for our sample firms and find that informal and non-professional relationships matter the most for financial market development. These findings are robust to alternative model specifications, variable measurement, and estimation techniques.
A stock market should display informational efficiency and, therefore, should appropriately reflect the value of political connections, if any value exists. Using a comprehensive data set that incorporates both obvious and less obvious political connections to firms in Thailand, we provide a longitudinal study which shows that higher realized stock returns are systematically associated with political connectedness. Consistent with the view that such a relationship provides economic rents, this finding is particularly prominent in more regulated industries. The politically connected premium is higher for higher level political connections and when the political bodies hold an equity stake in the firm.
Firms from emerging markets, including China, increasingly seek to raise capital outside of their home markets. We examine the short-term performance of U.S.-bound Chinese initial public offerings (IPOs) and find that these IPOs have significantly lower underpricing than a matched sample of U.S. counterparts. We also find that the magnitude of IPO underpricing for U.S.-bound Chinese firms is positively related to revisions in offer price.
We ask if companies can attract foreign equity capital by improving the transparency of their financial statements. Using a large panel of firms across fifty-one countries outside the U.S., we show that the answer is yes, but only in countries with relatively high levels of investor protection. In countries with poor investor protection, unilaterally increasing firm-level transparency has no effect on foreign ownership. Furthermore, our results indicate that in countries with higher levels of investor protection the positive association between transparency and foreign ownership is stronger following a country’s adoption of the International Financial Reporting Standards.