Cameron Truong

Individualism, Uncertainty Avoidance, and Earnings Momentum in International Markets

This study examines whether cultural dimensions such as individualism and uncertainty avoidance can explain the variation in the profitability of the earnings momentum strategies in international markets. Using the time-varying cultural indices of Tang and Koveos (2008) for 30,383 firms from 41 countries over the period 1995–2008, we show that the level of individualism in a country is positively associated and the level of uncertainty avoidance is negatively associated with earnings momentum profits. Our findings are robust to the inclusion of a comprehensive set of control variables and alternative cultural metrics. The central message is that we emphasize the necessity to go beyond the assumption of perfect rationality and to account for innate differences among international investors to explain how accounting information is incorporated into stock prices. We recommend that cultural dimensions be included in cross-country research to account for innate differences among international investors.

Options Trading and the Extent that Stock Prices Lead Future Earnings Information: OPTIONS TRADING, STOCK PRICES AND EARNINGS INFORMATION

We examine the relation between options trading and the extent that stock prices lead future earnings information in the period 1998–2009. In a firm specific approach, we find that stock prices reflect future earnings information to a greater extent in firms’ post�?options�?listing period than in their pre�?options�?listing period. In a cross�?sectional setting, we find that stock prices of firms with readily available options trading reflect future earnings information more and earlier than those of firms without available options. In a sub�?sample containing only firms with listed options, we find that stock prices of firms with a high level of options trading volume reflect future earnings information more and earlier than those of firms with a low level of options trading volume. Findings in this study support the proposition that options trading results in more current information that is relevant for predicting future earnings being impounded into stock prices. Consistent with this proposition, we also document an inverse relation between options trading and the amount of new information provided by earnings announcements.

Strategic Timing of Earnings Announcements

Using firm-specific regressions, I show that earnings response coefficient differ across firms. However, there is no evidence of differential earnings response coefficient to a certain earnings announcement time. By switching to a different announcement time from its preferred time, a firm does not gain a softer market reaction. I compare research results from a firm-specific method and from a pooled time-series and cross-sectional method and demonstrate that they differ significantly due to large heterogeneity across firms. I suggest that researchers should adopt a firm-specific approach to avoid misleading results and to achieve improved estimations.

CEO risk-taking incentives and the cost of equity capital

In this paper, we show that the sensitivities of an executives wealth to changes in stock prices (deltas) decrease the implied cost of equity capital while the sensitivities of an executives wealth to changes in stock volatility (vegas) increase the implied cost of equity capital. Our findings demonstrate that shareholders understand the risks of firms’ future projects as embedded in executive compensation and price these risks into the cost of equity capital accordingly. The findings have strong implications for optimal executive compensation contract design, project evaluation and cost of capital estimation.

Information Content of Earnings Announcements in the New Zealand Equity Market, a Longitudinal Analysis

We compute abnormal return variance and abnormal trading volume in the 3‐day window surrounding earnings announcements to examine the information content of earnings announcements in the New Zealand equity market over the past 16 years. We find that the information content of earnings announcements has increased significantly over time, and this finding holds true for both interim and preliminary earnings announcements. We find evidence that earnings announcements with June year‐ends exhibit a higher level of information content and experience a more pronounced rising trend as compared to earnings announcements with non‐June year‐ends. Several firm characteristics appear to relate to the level of the information content of earnings announcements as well as to compound the trend over time. We document an important finding that the information content of earnings announcements increases remarkably in the period after the adoption of the International Financial Reporting Standards (IFRS).

National Culture and Cash Holdings Around the World

This paper examines whether cultural dimensions explain the variation in corporate cash holdings around the world as well as within the United States. We establish four major findings. First, in an international setting, corporate cash holdings are negatively associated with individualism and positively associated with uncertainty-avoidance. Second, individualism and uncertainty avoidance influence the precautionary motive for holding cash. Third, firms in individualistic states in the United States hold less cash than firms in collectivistic states. Fourth, we show that individualism is positively related to the firm’s capital expenditures, acquisitions, and repurchases while uncertainty avoidance is negatively related. Our findings remain unchanged after controlling for governance factors, firm attributes, and country characteristics.

Delayed Price Discovery and Momentum Strategies: Evidence from Vietnam

This paper investigates the effectiveness of momentum strategies for equities listed on the Vietnam Stock Exchange. It also investigates the roles of trading volume and price limits to examine the profitability of momentum strategies. Our paper finds evidence of significant momentum profits during the period 2000-2006 and our findings are robust to various tests, risk adjustments and market microstructure biases. We also show that trading volume is particularly important in generating momentum returns. We further document that price limits significantly hinder market liquidity. This fact, to a large extent, accounts for the strong price continuity of the Vietnam Stock Exchange.

The January Effect, Does Options Trading Matter?

This study examines the effect of options trading on the January effect in the period 1996–2009. The options market offers investors an alternative trading venue that circumvents several trading limitations in the equity market and hence enables a higher level of arbitrage activities. In a cross-sectional setting, we find that optioned stocks exhibit significantly lower risk-adjusted returns in January than non-optioned stocks. This effect is not attributed to firm size, illiquidity, or transaction costs. We also find that the January effect is not only smaller but also considerably more short-lived for optioned stocks than for non-optioned stocks. In a firm-specific setting, January risk-adjusted returns are found to be significantly lower in the post-options-listing period than in the pre-options-listing period. These findings support the proposition that options trading enhances information-based trading activities and hence improves the informational efficiency of the equity market. JEL classifications: G10, G11, G12, G14

Individualism, Uncertainty Avoidance and the Profitability of Momentum Strategies in International Markets

Prior research shows that momentum returns are unlikely to be explained by risk-based theories. Daniel, Hirshleifer, and Subrahmanyam (1998) show that momentum effect can be explained by investors overconfidence and self-attribution bias while Barberis, Shleifer, and Vishny (1998) and Hong and Stein (1999) document that momentum effect can be explained by investors under-reaction to information. Chui et al. (2010) document that cultural differences influence the returns of momentum strategies. Motivated by these studies, we examine the relationship between cognitive biases and the profitability of price and earnings momentum strategies in international markets. Specifically, we address two questions. First, we investigate the relationship between individualism, uncertainty avoidance and price momentum returns. Second, we investigate the relationship between individualism, uncertainty avoidance and earnings momentum returns. Using data from 41 countries we show that (1) the level of individualism in different countries is positively associated with the profitability of price and earnings momentum strategies, (2) the degree of uncertainty avoidance is negatively associated with the earnings momentum profits, but not correlated with price momentum profits. Collectively, our findings suggest that the variation in the profitability of price and earnings momentum strategies can be attributed to cognitive biases.

Drought Risk in Private Debt Contracts

This study investigates the effect of climate change risk – proxied by Palmer Drought Severity Index (PDSI) – on private debt contracts. We raise a very simple yet important question: Do banks include drought risk in their pricing model of business loan contracts? The result indicates that banks indeed do take into account drought risk in their pricing model. Intuitively, the effect is most pronounced among food industry borrowers where drought has a direct impact. We find that for food industry borrowers, banks increase loan spreads by 6 basis points for every one-step increase of drought level in the 12 months prior to the loan commencement. The magnitude of this effect drops to 2 basis points for non-food borrowers. We also report that covenant intensity increases for borrowers in the food industry when the drought level is higher in the 12 months before loan origination. These results point towards drought risk being viewed as a systematic risk by credit providers. It adds a new dimension to credit risk evaluation and attracts a price premium whose magnitude is stronger for food industry borrowers.