Hafiz Hoque

Co‐movement of Bangladesh stock market with other markets: Cointegration and error correction approach

Purpose - The purpose of this paper is to explore dynamics of stock price movements of an emerging market, Bangladesh with that of USA, Japan and India. Design/methodology/approach - The long-term relationships among the markets are analyzed using the Johansen and Juselius multivariate cointegration approach. Short-run dynamics are captured through vector error correction models. Further investigation on short-run dynamics is carried out through impulse response analysis. Findings - There is evidence of cointegration among the markets demonstrating that stock prices in the countries studied here share a common stochastic trend. Impulse response analysis shows that shocks to the US market do have an impact on the Bangladesh market. The evidence of Bangladesh stock market responding to shocks in the Indian market is weak. Shocks to the Japanese market do not generate a response in the Bangladesh market. Research limitations/implications - As these markets share a common stochastic trend no diversification benefit is possible from cross-border investments. Investors could further enhance their understanding of market behaviour by comparing the observations here with those of studies that adopt technical analysis, fundamental analysis and consider financial anomalies. Originality/value - The evidence of cointegration and the short run dynamic relationship help investors in making efficient investment decisions in the Bangladesh stock market.

The Choice and Role of Lockups in IPOS: Evidence from Heterogeneous Lockup Agreements

This paper analyses heterogeneous lockup agreements from the London Stock Market. With hand‐collected data, I compare and contrast absolute‐date lockups with the relative‐date lockups and single lockups versus staggered lockups. This paper tests several potential explanations for the choice of lockup contracts: (i) information asymmetry, (ii) signaling, (iii) agency problem, and (iv) certification. I find strong evidence for information asymmetry and certification (VC and prestigious underwriters) and partial support for agency explanation for the choice of lockups. The insider selling activity and lockup expiration returns are also consistent with asymmetric information, certification and agency hypothesis.

Why Firms Favour the AIM When They Can List on Main Market

It is often argued that the popularity of Alternative Investment Market (AIM) in terms of higher number of listings relative to the Main Market (MM) is mainly due to the strict listing requirements in the MM. During the 1995 to 2014 period, 577 out of 1143 AIM listed firms did not qualify for MM listing, but the rest (566) that raised equity in AIM could have joined the MM. This raises the question why firms that meet the heavier regulatory environment of the MM choose the AIM, a lighter regulatory environment. This paper subjects this question to a comprehensive investigation and finds that the market choice is a self-selection decision. The two markets attract companies with different characteristics, and dissimilar post-listing investment and financing priorities. The evidence also shows that smaller and younger companies choose to be listed on the AIM due to lower listing and on-going costs. Heckman Selection models addressing the important question of what would have been the operating performance if AIM companies joined MM indicate that AIM companies would not perform better had they selected to go public in the MM.

Insider Purchases Talk and Buybacks Whisper

With daily trades of directors’ purchases and share repurchase we find that the former is preceded by larger share price drops and trigger a better short- and long-term market performance. Further, when directors purchase shares with their own wealth they time the market by buying shares at a discount of 1.9% and 6.7% over the two and twelve months, respectively, surrounding these trades. In contrast, directors repurchase shares at a premium of 0.5% which reverts to zero over the two and twelve months, respectively, surrounding these trades, corroborating the price support hypothesis. Even when both trades occur within two days directors still purchase shares at a larger discount of 3% over the twelve months surrounding these trades. Finally, directors’ long-term incentive plans (accumulated shares) increase the likelihood of share repurchasing (directors’ purchasing) but are inversely related to the market valuation of these trades.

Information Content of Aggregate and Individual Insider Trading

We examine the impact of aggregate insider trading on market returns in the UK. We find that, on aggregate, insiders are contrarians, but their trades are not informative, contrary to previous US evidence. We suggest that this discrepancy is related to the regulatory setting in the UK where insiders have to report their trades within six days. Then we analyse the short-run market reaction to insider trades and find that the information content of insider trading is limited to the period surrounding the announcement dates. We show that market-to-book, company size, stock volatility and market volatility have a significant impact on reporting period returns. In addition, we find that the market reaction is much weaker after controlling M/B and size. Finally, we show that insiders time in high volatile stocks, and following high market volatility.

Bank Level and Country Level Determinants of Bank Capital Structure and Funding Sources

We examine the determinants of capital structure and funding sources of 347 large global banks over 1998-2012 periods from 57 countries around the world. We find bank capital structure corresponds to the pecking order theory. In particular, we find that market to book, size and risk is positively and profitability is negatively related to bank leverage. Banks in countries with higher tax advantage, creditor rights, deposit insurance and bankruptcy codes have more leverage and common law have less leverage. Size and country level factors are important determinants of sources of financing.

Why Do Directors Change Their Ownership During IPO Lockup Arrangements

We test a number of hypotheses to assess changes in director ownership during lockup periods. We find that these transactions are additional signalling devices. Our results also imply that they are contractual arrangements between directors and underwriters, as directors increase their holdings after significant price decline, in line with the price support hypothesis, but they decrease their ownership after price run-up, consistent with the early lockup releases hypothesis. Stock prices decline when directors decrease their holdings, like the seasoned firms. Interestingly, stock prices decline significantly after ownership increases. The overall effect of director purchases is different as compared to seasoned firms, and it reduces the heavy decline in share prices for those IPOs. Our results could imply that the valuation uncertainty of IPOs makes the precision of directors’ information content weak and their profitability low.

Information Disclosure, CEO Traits and Share Buyback Completion Rates

Open market buybacks are not firm commitments and there is limited evidence on whether firms repurchase the intended shares. We employ a comprehensive set of hand-collected data on information disclosure on open market share buyback announcements and the respective buyback trades in UK. We assess whether CEO traits can affect the buyback completion rates. We show that information disclosure is one of the major determinants of buyback completion rates. Like previous studies, we find that large and widely held firms, firms conducting subsequent buyback programmes, and firms which complete their previous programmes, have higher completion rates. Finally, we find that firms with senior CEOs, who hold external directorships and have received a business education, are more likely to complete their buyback programs. Our results suggest there is clear relationship between information disclosure, CEO traits and buyback completion rates.

Insider Trading and the Long-Run Performance of IPOs

We find significant impact of insider trading activity on the long-run performance of IPOs. We show that, at the aggregate, insiders are net sellers in IPOs that generate positive long-run returns, while they are net buyers in those that underperform. When we analyse individual trades, we find that they adopt contrarian strategies, but their information effectiveness is weak. They buy in underperforming IPOs, but while share prices increase significantly on the announcement date, they become negative in the post trade period. These buy trades are consistent with the price support hypothesis, but, since prices do not revert, their signal is not effective. In contrast, they sell in overperforming IPOs, but the announcement and post-event period are mainly insignificant, suggesting that insiders sell when their IPO reaches its optimal value, and the pre-trade returns drive the excess performance of net sell IPOs. Overall, unlike previous evidence, the direction of stock price reaction to insider trading in IPOs is not consistent with the expected performance, because the valuation uncertainty of IPOs makes the precision of the information content of insider trading weak and the profitability of insiders low. Thus, our results do not support strongly the agency conflict, and the trading on private information hypotheses, and in terms of signalling, insider trades reflect more the past than the future performance.

IPO Lockup Arrangements and Trading by Insiders

We document that the average lockup of 365 days in the UK is higher than the US 180 days and many insiders trade within the lockup period. We find that prestigious underwriters and underwriter power (longer lockup) drive their trades. However, they sell in over-performing, large, and low institutional holding IPOs, but buy in underperforming IPOs with lower underpricing and proportion of shares locked. On the lockup expiry dates, there is significant price drop for early buy but not for early sell IPOs. We suggest that this early trading activity is pre-arranged with the underwriters to mitigate information asymmetries.