Gishan Dissanaike

Do Stock Market Investors Overreact

This paper investigates the evidence on the stock market overreaction hypothesis (ORH), which holds that, if stock prices systematically overshoot as a consequence of excessive investor optimism or pessimism, price reversals should be predictable from past price performance. The ORH stands in contradiction to the efficient markets hypothesis which is a cornerstone of financial economics. This study is unique in the overreaction literature because it is restricted to larger and better-known listed companies, whose shares are more frequently traded. This restriction more or less eliminates two alternative explanations to the overreaction hypothesis: it minimises the influence of bid-ask biases and infrequent trading, and reduces the possibility that reversals are primarily a small-firm phenomenon. The paper also investigates a third alternative explanation, namely that time-varying risk explains the reversal effect. The study employs unbiased methods of return computation and uses data from 1975 to 1991 for nearly 1,000 UK companies. Overall, the evidence appears to be consistent with the overreaction hypothesis, subject to certain qualifications. Copyright Blackwell Publishers Ltd 1997.

On the computation of returns in tests of the stock market overreaction hypothesis

Abstract A number of recent studies have attempted to find out whether investors overreact. We argue that, in many of these studies, the method used to compute cumulative returns—the arithmetic method—is flawed, and we show that estimates of portfolio performance can be affected. Our findings are relevant not only to tests of the overreaction hypothesis but to other areas in finance, where the arithmetic method and event-study approach are used.

Are stock price reversals really asymmetric? A note

Abstract One of the enigmatic findings about the stock market overreaction effect is that it is ‘asymmetric.’ We argue that this apparent anomaly may be entirely illusory, resulting from the peculiar properties of returns. The test-period return on a contrarian portfolio is not always a satisfactory measure of the strength of price reversals. This also renders interportfolio comparisons about the symmetry of reversals more difficult. We develop an alternative measure, the Reversal Coefficient, which takes account of this deficiency. Some empirical corroboration is also provided.

Corporate Financing in East Asia Before the 1997 Crash

Some argue that corporate finance and governance practices were among the root causes of the Asian crisis. It is alleged that high and increasing corporate debt ratios were partly to blame. This claim is overstated: Only South Korea and arguably Thailand had leverage ratios significantly above the G7 range and only South Korea had an income-gearing ratio higher than the G7. Although the reliance on short-term debt was high, there was no drastic change in the maturity structure of debt before the crash. However, conventional factors are relatively more successful in explaining leverage for firms that were less closely connected to the relationship-based financing system. Our paper links to ongoing research on investor protection, cronyism, connections between business and government, and business groups. It ends by commenting on the 2008 financial crisis, currently engulfing the world, and highlights some similarities and paradoxes.

A Critical Examination of Orthogonal Regression

The method of orthogonal regression has a long and distinguished history in statistics and economics. It has been viewed as superior to ordinary least squares in certain situations. However, our theoretical and empirical study shows that this method is flawed in that it implicitly assumes equations without the error term. A direct result is that it over-optimistically estimates the slope coefficient. It also cannot be applied to testing if there is an equal proportionate relationship between two variables, a case where orthogonal regression has been frequently used in previous research. We offer an alternative adjusted orthogonal estimator and show that it performs better than all the previous orthogonal regression models and, in most cases, better than ordinary least squares.

Does Competition Policy Affect Acquisition Efficiency? Evidence from the Reform of European Merger Control

Merger control exists to help safeguard effective competition. However, findings from a natural experiment suggest that regulatory merger control reduces the profitability of corporate acquisitions. Uncertainty about merger control decisions reduces takeover threats from foreign and very large acquirers, therefore facilitating agency-motivated deals. Valuation effects are more pronounced in countries with stronger law enforcement and in more concentrated industries. Our results suggest that competition policy may impede the efficiency of the M&A market.

Detecting and Quantifying Insider Trading and Stock Manipulation in Asian Markets

This paper focuses on insider trading, where the perpetrators exploit market sensitive information to earn profits or avoid losses. The papers objectives are as follows. First, we seek to examine whether we can detect possible insider trading and stock manipulation and react in almost real time, even though insider trading activity is intended to be evasive. Second, we also estimate the extent of illicit profits (or loss avoidance) that might have been earned. Finally, we analyze, if detection is possible, the appropriate response for regulators and other market participants. We do not restrict our study to cases where corporate events have materialized, as we hope to capture insider trading surrounding market rumors and failed corporate events. Because insider trading is executed with the aim of being evasive and undetected, it is impossible to conclude with certainty. Nevertheless, using a hypothesized model based on how insiders and stock manipulators trade, we detect price patterns that are consistent with their objective to maximize profits and at the same time be evasive.

Do stockmarket 'losers' win more than 'winners' lose?

One of the controversial issues in the stockmarket overreaction literature is the claim that price reversals for losers are more pronounced than for winners. We present new results for the UK which suggest that the opposite conclusion is true. Our results are particularly interesting because some recent studies have chosen to devote more attention to losers.