K.C. John Wei

Underpricing and long-term performance of IPOs in China

Abstract We study the underpricing and long-term performance of A- and B-share initial public offerings (IPOs) issued in China during the 1993–1998 period. The average underpricing for A- and B share IPOs are 178% and 11.6%, respectively. The underpricing of A-share IPOs is positively related to the number of days between the offering and the listing and the number of stock investors in the province from which the IPO comes, and negatively related to the number of shares being issued. None of these characteristics explain the underpricing of B-share IPOs. In the long run, A-share IPOs slightly underperform the size- and/or book/market ( B / M )-matched portfolios while B-shares outperform the benchmark portfolios.

Explaining the Cross‐Section of Stock Returns in Japan: Factors or Characteristics?

Japanese stock returns are even more closely related to their book-to-market ratios than are their U.S. counterparts, and thus provide a good setting for testing whether the return premia associated with these characteristics arise because the characteristics are proxies for covariance with priced factors. Our tests, which replicate the Daniel and Titman (1997) tests on a Japanese sample, reject the Fama and French (1993) three-factor model but fails to reject the characteristic model.

The investment and operating performance of Japanese initial public offerings

Abstract This paper studies long-run stock returns and the operating performance of 180 initial public offerings (IPOs) listed on the Tokyo Stock Exchange during the 1971–1992 period. The aftermarket downward drift is not only confirmed but also found to be large in magnitude relative to a number of benchmarks. In contrast to evidence from the US, the post-issue deterioration in operating performance cannot be attributed to the reduced managerial ownership. This provides strong support for the ‘windows of opportunity’ explanation for the new issue puzzle by Loughran and Ritter (1995, 1996).

Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital

In this paper, we examine the effect of shareholder rights on reducing the cost of equity and the impact of agency problems from free cash flow (FCF) on this effect. We find that firms with strong shareholder rights have a significantly lower implied cost of equity after controlling for risk factors, price momentum, analysts’ forecast biases, and industry and year effects than do firms with weak shareholder rights. Further analysis shows that the effect of shareholder rights on reducing the cost of equity is significantly stronger for firms with more severe agency problems from FCFs.

Political risk and stock price volatility: The case of Hong Kong

Abstract In this paper, we study the impact of political news on the stock market volatility in Hong Kong. Two indices are used: blue-chip shares are proxied by the Hang Seng Index, and China-related stocks are proxied by the Red-Chip Index. The results indicate that political news increases the stock volatility of both blue-chip and red-chip shares. Also, we find that favorable (unfavorable) political news is correlated to positive (negative) returns for the Hang Seng Index. In contrast, political news, good or bad, does not affect the returns of the red-chip shares. We employ a substitution effect to explain our findings and conclude that red-chip stocks can be considered a safe haven from political shocks for investors in Hong Kong.

Intra-industry momentum: the case of REITs

Real estate investment trusts (REITs) provide a good setting to examine intra-industry momentum. The industry is relatively homogenous and well defined, and the industry experienced structural changes that allow us to test alternative explanations for the observed momentum effect. Specifically, we test predictions that relate to investor overconfidence (based on Daniel, Hirshleifer and Subrahmanyam (1998)) and the speed of information diffusion (based on Hong and Stein (1999)). The first predicts a stronger momentum effect in REITs during the post-1990 period than during the pre-1990 period due to more valuation uncertainty in the post-1990 period. The second predicts a more pronounced momentum effect in REITs during the pre-1990 period than during the post-1990 period due to the higher speed of information diffusion in the post-1990 period. Our findings tend to support the first prediction. Specifically, while we do not find a momentum effect in REITs during the pre-1990 period, we find a strong and prevalent momentum effect in REITs in the post-1990 period.

Volatility and price change spillover effects across the developed and emerging markets

Abstract This paper tests the conventional wisdom that short-term volatility and price changes spill over from developed to emerging markets, but not vice versa. We also investigate how degree of market openness affects return and volatility spillovers. Three developed markets, New York, Tokyo, and London, and two emerging markets, Taiwan and Hong Kong, are examined. Two most interesting findings are: first, the Tokyo market has less influence than the New York market over the Taiwanese and Hong Kong markets; and second, the Taiwanese market is more sensitive than the Hong Kong market to the price and volatility behavior of the advanced markets even though Taiwan is not as open as Hong Kong and the Taiwanese dollar is not linked to the U.S. dollar while the Hong Kong dollar is.

The Cross-Section of Expected REIT Returns

In this study, we examine the cross-sectional determinants of expected REIT returns. We examine both the pre- and post-1990 periods, since the structure of the REIT market changed substantially around 1990. The determinants of expected returns differ between the two subperiods. In the pre-1990 subperiod, momentum, size, turnover and analyst coverage predict REIT returns. In the post-1990 period, momentum is the dominant predictor of REIT returns. Given the strength of the momentum effect in the post-1990 period, we examine it in great detail. For the whole period, and for the post-1990 period where the momentum profit is strongest, our evidence is generally consistent with the studies on common stocks other than REITs. The only striking exception is that we find that momentum is stronger for the larger REITs rather than for the smaller REITs. In our multiple regressions that include the characteristics as well as interactions between past returns and firm characteristics, the turnover-momentum interaction effect provides the most significant results. More specifically, momentum effects are stronger for more liquid REITs. Copyright 2003 by the American Real Estate and Urban Economics Association

The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns

We test the implications of anchoring bias associated with forecast earnings per share (FEPS) for forecast errors, earnings surprises, stock returns, and stock splits. We find that analysts make optimistic (pessimistic) forecasts when a firm’s FEPS is lower (higher) than the industry median. Further, firms with FEPS greater (lower) than the industry median experience abnormally high (low) future stock returns, particularly around subsequent earnings announcement dates. These firms are also more likely to engage in stock splits. Finally, split firms experience more positive forecast revisions, more negative forecast errors, and more negative earnings surprises after stock splits.

Market Development and the Asset Growth Effect: International Evidence

A number of studies of U.S. stock returns document what is referred to as the investment or asset growth effect. Specifically, firms that increase investment or total assets subsequently earn lower risk-adjusted returns. This study finds substantial cross-country differences in the asset growth effect. In particular, the asset growth effect is stronger in countries with more developed financial markets, but it does not seem to be associated with corporate governance or the costs of trading. Overall, the evidence is consistent with a q-theory where financial market development captures either managers’ willingness or ability to align investment expenditures to the cost of capital, but it is inconsistent with the hypothesis that the asset growth effect is due to bad governance and overinvestment.