Chandrasekhar Krishnamurti

Stock exchange governance and market quality

We show that organization structure of a stock exchange matters by utilizing the unique setting prevailing in India. India has two major stock markets, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These two exchanges adopt similar trading systems, trade essentially identical stocks, and follow the same trading hours. However, these exchanges have different organizational structures: BSE is mutualized whereas NSE is demutualized. Using the Hasbrouck [Review of Financial Studies 6 (1993) 191] measure of market quality we show that NSE provides a better quality market than BSE. This result is consistent with the work of Domowitz and Steil [Brookings–Wharton Papers on Financial Services, 1999], who proposed that demutualized exchanges are superior to mutualized in governance. 2003 Elsevier B.V. All rights reserved.

The initial listing performance of Indian IPOs

Describes the environment for making initial public offerings (IPOs) in India and the process itself; and discusses the applicability of various research explanations for underpricing to the Indian Market. Suggests that it will be greater for new firms and issues managed by reputable merchant bankers; and analyses 1992‐1994 data on 386 IPOs to assess their performance. Shows that issues with high risk and/or smaller offer prices are more underpriced; and that returns are strongly correlated with subscription levels. Discusses the underlying reasons for this and the implications for public policy.

Mergers, acquisitions and corporate restructuring

A rigorous and relevant book on mergers, acquisitions and corporate restructuring for students and practitioners of finance. The key features of this work are: - It covers the entire spectrum of activities in a typical merger transaction - starting from searching for candidates to closing the deal. - Topics discussed include rationale for diversification via acquisition, searching for acquisitions, valuation of publicly and privately held companies, design of consideration in acquisitions, crossborder acquistions and empirial data on mergers. - The book covers various forms of corporate restructuring like spin offs, carve outs, targeted stocks, reorganiszation of debt contracts, lay offs and downsizing. - It contains numerous real life examples and summarizes much of the research done in the last 20 years.

INTEGRATING MULTIPLE THEORIES OF CORPORATE GOVERNANCE: A MULTI-COUNTRY EMPIRICAL STUDY.

In this paper we integrate agency, resource dependence, institutional and stakeholder perspectives of corporate governance, to suggest that each theory holds good in a different regulatory and comp...

Corporate governance and risk-taking in New Zealand

We analyse the impact of firm-level corporate governance practices on the riskiness of a firm’s stock returns in a setting that can be considered as less conducive to managerial risk-taking. Our empirical evidence, based on a comprehensive sample of New Zealand firms, shows that firms with large boards are associated with lower levels of risk-taking, ceteris paribus. Furthermore, our results indicate that multiple large shareholders facilitate higher levels of risk-taking by the firm. Finally, our results also show that concentrated shareholdings of inside directors have a negative relation to risk-taking. Our findings are robust to controls for the three potential sources of endogeneity. Since prior work documents results consistent with the view that institutional and market environments largely determine governance outcomes, our work has implications for managers, investors and policy makers, particularly in less developed capital markets with weaker corporate takeover regimes and less performance-oriented managerial compensation.

When is Two Really Company? The Effects of Competition and Regulation on Corporate Governance

In this paper we bring together agency, stakeholder, institutional and resource-dependence theories to study the direct and interactive effects of country regulation and competition on two dimensions of corporate governance: the overall quality of corporate governance of firms in a country, and firm-to-firm variations in corporate governance. Interactive conditions are more representative of the real-world context of corporate governance, and the contradictory pressures that firms face in such interactive conditions are better explained through the use of multiple theories of corporate governance. Using a dataset that spans 15 countries and includes 463 firms, we find that firm corporate governance is better in conditions where either regulation or competition is well-developed, by comparison with interactive conditions. We also find that while regulation enhances within- country convergence, it is likely that competition serves to enhance across-country convergence.

The Issuance of Warrants in Rights Offerings: Agency Costs and Signaling Effects

We examine the issuance choice across rights issues of equity, unit offerings, and standalone warrants and investigate the market reactions to these issue types. We find that agency costs, growth opportunities, and current funding needs relative to assets in place are prime drivers of the type of equity issuance choice. Managers use quality signals such as underpricing, underwriting status, and the proportion of funds raised by exercising warrants in determining the features of the warrant issue. Furthermore, we document that the market reacts more favorably to standalone warrants issues than units and equity during the rights offering period.The Australian financial market is unique in enabling firms to raise new capital via right offerings of standalone warrants in seasoned equity offerings. As such, it provides an ideal environment for examining the validity of the Chemmanur and Fulghieris (1997) signaling model for warrant inclusion in seasoned equity offerings via rights offerings by analyzing across unit offerings, standalone warrants and standalone equity. We provide empirical evidence in support of their models predictions regarding the issuance of warrants to existing shareholders. The quality dimension contained in the signals is associated with a more favorable stock price reaction, ceteris paribus.

Corporate Governance and the Variability of Stock Returns

In this paper, we document the beneficial impact of firm level corporate governance practices on the riskiness of firms’ stock returns. Using a self-constructed corporate governance index, we show that well-governed New Zealand firms experience lower levels of unsystematic risk, ceteris paribus. In particular, our results show that corporate governance components such as board composition, shareholder rights, and disclosure practices are associated with lower levels of unsystematic risk.

No News Is Not Good News: Evidence from the Intraday Return Volatility - Volume Relationship in Shanghai Stock Exchange

Through this research, we find that the asymmetric volatility phenomenon is reversed in the Shanghai Stock Exchange during bull markets. That is, volatility increases more with good news than with bad news. This evidence is inconsistent with the US markets. Further examination of this phenomenon reveals that the positive impact of good news on volatility is driven by the return-chasing behaviour of investors during bull markets. We also find that volatility increases after stock price declines in bear markets. After controlling for liquidity shifts, we observe similar patterns in volatility in both bull and bear markets. We posit that institutional and behavioural factors are the major driving forces of observed volatility patterns in the Chinese stock market.

Behavioral Finance and Investment Strategy

[Chapter Introduction and Objectives]: Many great minds, both academics and practitioners, have examined the financial markets in hopes of finding investment strategies that yield the nest results. And nearly all have based their theories on one assumption that investors always act in a manner that maximizes their returns. Yet volumes of research show that investors are not always so rational. Clearly, not every choice investors make is in their best interest. While emotions like fear and greed play a role in poor decisions, there are other causes of irrational behavior. Behavioral finance is the study of how these emotions and mental errors can cause stocks and bonds to be overvalued or undervalued. It has led to the creation of investment strategies that capitalize on this irrational behavior. This chapter has the following objectives: • Introduce the application of behavioral finance in constructing investment strategies • Describe the typical errors in investors’ information processing • Describe some of the commonly encountered behavioral biases of investors • Explain the limits to arbitrage • Reconcile market efficiency and behavioral finance In the chapters that preceded, we presented two broad approaches to security analysis. Fundamental analysis involves analysis of financial statements, strengths, and management quality of a firm and its competitors and markets. Technical analysis maintains that all information is reflected already in the stock price, so fundamental analysis is a waste of time. Technical analysis does not care what the intrinsic value of the stock is. Its price predictions are extrapolations from historical price patterns. A third branch called behavioral finance has emerged in the recent years as the third approach to investment analysis. It uses psychology to explain investor behavior that cannot be explained with traditional financial and economic theory. Traditional economic theory rests on the sensible assumption that investors make purely rational decisions. A rational decision, as defined by an economist, is one that maximizes an investor’s utility function. This simply means that when presented with a choice an investor will always choose the course of action that will gain the most for expending the least. Thus, it is a decision supported by logic and reason and is, therefore, deemed “rational” by economists. With this assumption made, economists were then free to develop mathematical models that now provide investors with the necessary tools to price assets, optimize portfolios, and quantify and manage risk – all valuable contributions and significant achievements. But was their underlying assumption correct? Do investors actually make purely analytical decisions devoid of emotion? Studies analyzing historical trades generated by both retail investors as well as professional traders reveal that, in fact, they do not. On the contrary, does this mean the pendulum swings completely the other way and the opposite is then true? Do investors make wild, unpredictable, or unexplainable decisions? No, this is not the case either. Behavioral finance, by utilizing the insights of psychology, provides the explanation. In the same way that the fields of macroeconomics and microeconomics simply reflect different scales or cosmoses of activity, man, or the individual investor, is a microcosmof the market as a whole. That is, the rationalization, psychology, and investing behavior of an individual investor is directly related to the thinking, feeling, and acting of all investors. The aggregate of all investors is, of course, the market itself. Thus, the best guide to how markets function is man himself. Indeed, human beings are the sole causal factors of the market. There is nothing in the market that is not a reflection of human behavior. The history of markets can even be seen as a complex set of recurrent human errors. We know the market habitually overreacts or underreacts. Behavioral finance provides an alternative explanation to some of the anomalies outlined in the chapter on market efficiency. It takes into account how real (different) people make decisions. Some of the irrationalities may arise because investors do not always process information correctly, and, hence, derive incorrect future distributions of returns. This results in arbitrage opportunities. Even while knowing the true distribution of returns, investors can make suboptimal decisions. Consequently, arbitrage is limited. Hence, the absence of arbitrage opportunities does not necessarily imply market efficiency. There are three different and distinct symptoms of the market which correspond to how participants feel (psychologicals), think (fundamentals), and act (technicals). By studying and measuring these three components, experts in behavioral finance arrive at a comprehensive analysis of the market. Each of these market functions are always in disequilibria to some degree. These persistent disequilibria result in systemic investing errors. Identifying the errors of other market participants, in turn, leads to investment opportunities. Some central issues in behavioral finance are why investors and managers (and also lenders and borrowers)make systematic errors. It shows how those errors affect prices and returns (creating market inefficiencies). It shows also what managers of firms or other institutions, as well as other financial players, might do to take advantage of market inefficiencies.