Gongmeng Chen

Stock market linkages: Evidence from Latin America

Abstract This study investigates the dynamic interdependence of the major stock markets in Latin America. Using data from 1995 to 2000, we examine the stock market indexes of Argentina, Brazil, Chile, Colombia, Mexico and Venezuela. The index level series are non-stationary and so we employ cointegration analysis and error correction vector autoregressions (VAR) techniques to model the interdependencies. We find that there is one cointegrating vector which appears to explain the dependencies in prices. The results are robust to sensitivity tests based on translating indexes to US dollars (i.e., a common currency for all the markets) and to partitioning the sample into periods before and after the Asian and Russian financial crises of 1997 and 1998, respectively. Our results suggest that the potential for diversifying risk by investing in different Latin American markets is limited.

The Information Content of Concurrently Announced Earnings, Cash Dividends, and Stock Dividends: An Investigation of the Chinese Stock Market

The firms listed on China’s stock market are less than ten years old and to date there has been relatively little research on the usefulness of their accounting disclosures for investors. This study focuses on the information content of annual earnings and dividend announcements made by listed Chinese companies. Earnings, cash dividends, and stock dividends are announced concurrently in China and so this allows for tests of their information usefulness and of the interactions between the three signals. Based on a data set of up to 1,232 announcements, we find that unexpected earnings, proxied by earnings changes, are positively related to abnormal returns. Thus, earnings are used by investors in setting market prices. Stock dividends corroborate or attenuate the earnings signal. If the sign of the unexpected stock dividend (increase, decrease) is the same as the sign of the unexpected earnings, then the earnings signal is stronger. If the signs are opposite, the earnings signal is weaker. Unexpected cash dividends have little impact on the earnings signal. Stock dividends per se have a small association with stock returns. In contrast, cash dividends have no discernible association with stock returns and this is consistent with dividend irrelevance arguments. Our results are robust across a number of sensitivity tests.

The day-of-the-week regularity in the stock markets of China

Abstract This paper examines the day-of-the-week effect in the stock markets of China. We find negative returns on Tuesday after January 1, 1995. This Tuesday anomaly disappears after taking the non-normality distribution and spillover from other countries into account. The finding suggests that this day-of-the-week regularity in China may be due to the spillover from the Americas. The evidence of the day-of-the-week anomaly in China is clearly dependent on the estimation method and sample period. When transaction costs are taken into account, the probability that arbitrage profits are available from the day-of-the-week trading strategies seems very small. This conclusion is obviously consistent with an efficient market approach.

Earnings forecast errors in IPO prospectuses and their associations with initial stock returns

Abstract Companies making initial public offerings in Hong Kong often include a forecast of the next years profit in the new issue prospectus. The forecast is used by investors to help them value the company, decide whether to subscribe to the new issue, and decide whether to invest on the first day of trading. The accuracy of the forecast is crucial if the forecast is to be a credible signal. Our study uses a number of error metrics to examine forecast accuracy. In general, forecasts appear to be quite accurate and they are far better than the predictions derived from simple time series models. Cross-sectional models are derived to explain variations in accuracies but they have very weak results. Our results also suggest that investors are able to anticipate forecast errors at the time of listing.

The Post-issue Market Performance of Initial Public Offerings in China's New Stock Markets

In this paper, we investigate the post-issue market performance of initial public offerings (IPOs) in Chinas new stock markets. Our analysis focuses on whether and how institutional features unique to China differentially affect IPO performance. These features include the existence of dual-class shares for the same underlying firms (A-shares issued to domestic investors and B-shares issued to foreign investors) and the unusually long time lag between the offering and listing dates. Our sample consists of 277 A-share and 65 B-share IPOs that were listed on Chinas new stock markets during the 1992–1995 period. Our study has a number of interesting results. First, A-share IPOs are much more severely underpriced during the initial return period than B-share IPOs. Second, B-share IPOs underperform A-share IPOs (and the market) during the post-issue periods for up to three years. Third, the results of multivariate regression analyses strongly suggest that economic factors determining the post-issue performance of IPOs differ across the A-share and B-share samples.

The Accuracy of Profit Forecasts and their Roles and Associations with IPO Firm Valuations

Chinas recent economic reforms include the corporatization and listing of formerly state-owned enterprises. In order to sell shares to both domestic and foreign investors, IPOs have to overcome significant asymmetric information problems. Prospectuses for new issues in China contain forecasts of corporate profits for the next year and these forecasts can be used by investors to value companies and to make investment decisions. The study sets out to assess the accuracy of these forecasts and hence the credibility that can be attached to them. In addition to calculating various measures of accuracy and forecast superiority, we also examine the bias and rationality of the forecasts. The results show that profit forecasts are moderately accurate and they are better than time series extrapolations of historical profits. Explaining cross-sectional differences in accuracy measures proves to be difficult. Finally, the results indicate that profit forecasts are related to company valuations and that investors predict the sign, and to some extent the magnitude, of forecast errors.

The Effectiveness of Price Limits and Stock Characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges

We examine the effectiveness of price limits on Chinese A shares and investigate the characteristics of those stocks that hit their price limits more frequently. We find that the effect of price limits is asymmetric for the A shares in upward and downward price movements and different for bullish and bearish sample periods. During a bullish period price limits effectively reduce stock volatility for downward price movements, but not for upward price movements; while during a bearish period price limits effectively reduce stock volatility for upward price movements, but not for downward price movements. Second, price limits delay efficient price discovery for upward price movements, but not for downward price movements. However, we do not find evidence to suggest that price limits harmfully interfere with the stock trading processes in the Chinese A share markets. Finally, we find that actively traded stocks hit their price limits more often and tend to hit the lower limit more frequently when overall market conditions are bearish. Stocks with high book-to-market values of equity hit their upper price limits more frequently, while stocks with a high ratio of tradable shares tend to hit their price limits less frequently.

The use of accounting information for the valuation of dual-class shares listed on China's stock markets

Abstract This study examines whether accounting data are useful in helping explain the market value of listed firms in China. In particular, we focus our investigation on companies that have issued dual-class shares sold to domestic investors (A-shares) and foreigners (B-shares). Domestic accounting standards (DAS) are used for the financial statements of A-shares while international accounting standards (IAS) are used for B-shares. Our results show that IAS earnings information is incorporated in the prices and returns of B-shares. In contrast, A-share investors appear to place most weight on DAS earnings and only recently has there been an association with IAS information. Book values are value relevant for B-share prices but not for A-share prices. Sensitivity tests show that accounting information is more likely to be impounded in share prices and returns for firms with high individual (i.e. non-government) share ownership. Based on our results, we argue that Chinas move towards the adoption of IAS will be useful for A-share investors, especially in light of the countrys recent accession to the WTO and the consequent opening-up of the economy.

The Price-Volume Relationship in China's Commodity Futures Markets

This study examines the relationship between returns and trading volume of four actively traded commodity futures contracts in China. Correlation analyses and Granger causality tests are used to investigate contemporaneous and lead-lag relationships between trading volume and both signed and absolute return. We find that the contemporaneous correlations between return and trading volume are not significantly different from zero, and there is no linearly significant causality following from trading volume to return or from return to trading volume. However, the contemporaneous correlations between absolute return and trading volume are significantly positive in all futures markets, and there is a significant relationship of causality following from absolute return to trading volume, which contradicts the mixture of distributions hypothesis and supports the sequential information arrival hypothesis in all of the futures markets examined except for aluminum futures. We also find a significant causality following from trading volume to absolute settlement-to-settlement return in the copper (subsample 1) futures market, but not in the copper (subsample 2) futures market.

An Analysis of the Underreported Magnitude of the Total Indirect Costs of Financial Distress

In this paper we examine 1,041 ongoing firms over the time period 1982–92. Using quarterly data for the detection and measurement of the magnitude of the indirect costs of financial distress, we find three important explanatory factors: (a) the distinctiveness of the pattern of increasing financial distress over time, (b) the degree of leverage in the capital structure and (c) the size of the firm. For those firms with a distinctive pattern of increasing financial distress over time, the average annual losses as a percentage of market value is −10.3%. The maximum loss is −76%. Even if the firm never fails, its market value can be severely impacted by the presence of the indirect costs of bankruptcy over time. This study finds a significantly positive relationship between Altmans Z-score and the firm capital investment growth rate. This relation holds after controlling for other variables such as leverage, firm size and market/book ratio. This implies that lost investment opportunities may be also an important part of the total indirect costs of financial distress, which appear now to be much larger than previously recorded.