David T. Ng

Capital market governance: How do security laws affect market performance?

This paper examines the link between capital market governance (CMG) and several key measures of market performance. Using detailed data from individual stock exchanges, we develop a composite CMG index that captures three dimensions of security laws: the degree of earnings opacity, the enforcement of insider laws, and the effect of removing short-selling restrictions. We find that improvements in the CMG index are associated with decreases in the cost-of-equity capital (both implied and realized), increases in market liquidity (trading volume, market depth, and U.S. foreign investments), and increases in market pricing efficiency (reduced price synchronicity and IPO underpricing). The results are quite consistent across individual components of CMG and over alternative market performance measures.

Does Corruption Increase Emerging Market Bond Spreads

We study the relationship between corruption and borrowing costs for governments and firms in emerging markets. Combining data on bonds traded in the global market with survey data on corruption compiled by Transparency International, we show that countries that are perceived as more corrupt must pay a higher risk premium when issuing bonds. The global bond market ascribes a significant cost to corruption: an improvement in the corruption score from the level of Lithuania to that of the Czech Republic lowers the bond spread by about one-fifth. This is true even after controlling for macroeconomic effects that are correlated with corruption. We find little evidence that investors became more sensitive to corruption in the wake of the Asian financial crisis.

Predicting Market Returns Using Aggregate Implied Cost of Capital

Theoretically, the implied cost of capital (ICC) is a good proxy for time-varying expected returns. We find that aggregate ICC strongly predicts future excess market returns at horizons ranging from one month to four years. This predictive power persists even in the presence of popular valuation ratios and business cycle variables, both in-sample and out-of-sample, and is robust to alternative implementations. We also find that ICCs of size and book-to-market portfolios predict corresponding portfolio returns.

Neto1 is an auxiliary subunit of native synaptic kainate receptors.

Ionotropic glutamate receptors of AMPA, NMDA, and kainate receptor (KAR) subtypes mediate fast excitatory synaptic transmission in the vertebrate CNS. Auxiliary proteins have been identified for AMPA and NMDA receptor complexes, but little is known about KAR complex proteins. We previously identified the CUB (complement C1r/C1s, Uegf, Bmpl) domain protein, Neto1, as an NMDA receptor-associated polypeptide. Here, we show that Neto1 is also an auxiliary subunit for endogenous synaptic KARs. We found that Neto1 and KARs coimmunoprecipitated from brain lysates, from postsynaptic densities (PSDs) and, in a manner dependent on Neto1 CUB domains, when coexpressed in heterologous cells. In Neto1-null mice, there was an ∼50% reduction in the abundance of GluK2-KARs in hippocampal PSDs. Neto1 strongly localized to CA3 stratum lucidum, and loss of Neto1 resulted in a selective deficit in KAR-mediated neurotransmission at mossy fiber-CA3 pyramidal cell (MF-CA3) synapses: KAR-mediated EPSCs in Neto1-null mice were reduced in amplitude and decayed more rapidly than did those in wild-type mice. In contrast, the loss of Neto2, which also localizes to stratum lucidum and interacts with KARs, had no effect on KAR synaptic abundance or MF-CA3 transmission. Indeed, MF-CA3 KAR deficits in Neto1/Neto2-double-null mutant mice were indistinguishable from Neto1 single-null mice. Thus, our findings establish Neto1 as an auxiliary protein required for synaptic function of KARs. The ability of Neto1 to regulate both NMDARs and KARs reveals a unique dual role in controlling synaptic transmission by serving as an auxiliary protein for these two classes of ionotropic glutamate receptors in a synapse-specific fashion.

Foreign Investments of U.S. Individual Investors: Causes and Consequences

Using thousands of brokerage accounts of U.S. individual investors, we analyze the motivations and consequences of foreign equity investment. We find that diversification is not the only reason that investors trade foreign securities. While wealthier, more experienced investors enjoy an informational advantage and, thus, are more likely to invest overseas and experience good portfolio performance, other investors appear to venture abroad for the wrong reasons. In particular, behaviorally biased investors often underuse or misuse foreign equity securities and experience poor portfolio performance. Some investors appear to use foreign securities for speculation or to improve upon poor domestic portfolio performance.

The international CAPM when expected returns are time-varying

This paper derives a dynamic version of the international CAPM. The exchange-rate risk factors and intertemporal hedging factors are derived endogenously in a model that builds upon Campbell (1993). We provide a theoretical foundation for empirical risk factors often used in international asset pricing, including dividend yields, forward premia and, especially, exchange-rate indices. The model nests the standard CAPM, the international CAPM and the dynamic CAPM. Empirically, the model performs quite well in explaining average foreign-exchange and stock market returns in the US, Japan, Germany and the UK, and exchange-risk and intertemporal hedging factors play some role in pricing these assets. However, while derived in a theoretically sound fashion, these new factors are proportional to covariances with the world market portfolio. Hence, for practical purpose, the model does not perform better than the standard CAPM model. We apply the model to explain returns on portfolios of high book-to-market stocks across countries, and nd that the exchange rate and intertemporal hedging factors do not help to predict these returns. Hence, they cannot account for the two-factor model proposed in Fama and French (1998).

Neto2 is a KCC2 interacting protein required for neuronal Cl− regulation in hippocampal neurons

KCC2 is a neuron-specific K+–Cl− cotransporter that is essential for Cl− homeostasis and fast inhibitory synaptic transmission in the mature CNS. Despite the critical role of KCC2 in neurons, the mechanisms regulating its function are not understood. Here, we show that KCC2 is critically regulated by the single-pass transmembrane protein neuropilin and tolloid like-2 (Neto2). Neto2 is required to maintain the normal abundance of KCC2 and specifically associates with the active oligomeric form of the transporter. Loss of the Neto2:KCC2 interaction reduced KCC2-mediated Cl− extrusion, resulting in decreased synaptic inhibition in hippocampal neurons.

The impact of corruption on financial markets

Purpose –The purpose of this paper is to focus specifically on the role of corruption in affecting financial markets. Recently, there are several studies that examine how one country’s level of corruption might affect asset prices in other countries. The aim of this article is to summarize how corruption may affect the bond and stock markets. Design/methodology/approach - The paper is organized as follows. Section 1 defines corruption and briefly examines the causes of corruption. Section 2 examines various measures of corruption and provides a ranking of countries. Section 3 explains how corruption may affect business and provide anecdotal evidence. Section 4 provides a summary of some empirical evidence of corruption on firm performances. Section 5 concludes. Findings - Across international financial markets, corruption is found to be associated with higher firm’s borrowing cost, lower stock valuation, and worse corporate governance. Originality/value - This paper provides a brief summary on research related to corruption and its impact on financial markets. Anecdotal evidence has shown the disruptive effect of corruption, and theoretical literature largely confirms this effect. Empirical studies show that the cost of corruption is highly significant in many different areas of the economy. In particular, across international financial markets, corruption is found to be associated with higher borrowing cost, lower stock valuation, and worse corporate governance.

Corruption and International Valuation:Does Virtue Pay?

Using firm-level data from 44 countries, the authors investigate the relation between corruption and international corporate values. The analysis shows that firms from more corrupt countries trade at significantly lower market multiples. The effect is both economically and statistically significant. Furthermore, using a two-stage estimation procedure, the authors show that corruption impacts firm value primarily through lower expected future cash flows, most directly captured by firms’ profitability forecasts. Collectively, the evidence shows that corruption has significant economic consequences for shareholder value.

Neto2-null mice have impaired GABAergic inhibition and are susceptible to seizures.

Neto2 is a transmembrane protein that interacts with the neuron-specific K+-Cl− cotransporter (KCC2) in the central nervous system (CNS). Efficient KCC2 transport is essential for setting the neuronal Cl− gradient, which is required for fast GABAergic inhibition. Neto2 is required to maintain the normal abundance of KCC2 in neurons, and increases KCC2 function by binding to the active oligomeric form of this cotransporter. In the present study, we characterized GABAergic inhibition and KCC2-mediated neuronal chloride homeostasis in pyramidal neurons from adult hippocampal slices. Using gramicidin perforated patch clamp recordings we found that the reversal potential for GABA (EGABA) was significantly depolarized. We also observed that surface levels of KCC2 and phosphorylation of KCC2 serine 940 (Ser940) were reduced in Neto2−/− neurons compared to wild-type controls. To examine GABAergic inhibition we recorded spontaneous inhibitory postsynaptic currents (sIPSCs) and found that Neto2−/− neurons had significant reductions in both their amplitude and frequency. Based on the critical role of Neto2 in regulating GABAergic inhibition we rationalized that Neto2-null mice would be prone to seizure activity. We found that Neto2-null mice demonstrated a decrease in the latency to pentylenetetrazole (PTZ)-induced seizures and an increase in seizure severity.