Krishna Paudyal

Privatisation initial public offerings in Malaysia: Initial premium and long-term performance

Abstract This study addresses four major issues related to privatisation initial public offers (PIPOs) and other initial public offers (IPOs) in Malaysia. First, an analysis of initial excess returns suggests that, on average, Malaysian IPOs are underpriced and PIPOs offer significantly higher initial returns than other IPOs. Second, regression based analysis reveals that over-subscription, market volatility, proportion of shares sold, underwriters reputation, and ex ante risk together explain over three-quarters of the variation in the excess returns offered by Malaysian PIPOs. However, this model can only explain 10% and 36% of other IPOs and the whole sample respectively. Third, the analysis of secondary market performance suggests that neither PIPOs nor other IPOs significantly outperform/ underperform the market over three years. Further analysis reveals that the IPOs with higher initial return underperform the market while those with low initial return outperform. Finally, the paper confirms that IPOs underwritten by reputed underwriters are significantly better long-term investments as compared to the IPOs underwritten by less reputed underwriters.

Corporate Takeovers: Mode of Payment, Returns and Trading Activity

This paper examines the impact of takeover bids and, in particular, the method of payment to the shareholders of the target firms on the returns, trading activity and bid-ask spreads of target and bidding firms traded on the London Stock Exchange. It suggests that the shareholders of target firms benefit substantially from takeover activity while the shareholders of bidding firms do not suffer. The combined value of the firms engaged in takeover activity increases by a small percentage during the event period. However, the benefit from a takeover announcement to the shareholders of the target firm varies from year to year and has declined in the recent past. The magnitude of excess returns available to the shareholders is also dependent on the mode of payment. Prices of target (bidding) firms increase (decrease) most if the shareholders of the target firms are given an option to receive payment in shares or in cash. The findings also reveal that during the event period trading activity in target and bidding companies increases depending on the form in which payments to shareholders are made. In response to this increased liquidity, the bid-ask spreads of target and bidding firms decline during the event period. Copyright Blackwell Publishers Ltd 1999.

Microstructure and Seasonality in the UK Equity Market

This paper explores seasonality in the UK stock market. It examines the impact of alternative company year-ends on returns as well as seasonality in bid-ask spreads and trading activity variables including volume, number and size of trades. Consistent with the evidence elsewhere, seasonal variation in stock returns and trading activity is established although there is little evidence of a seasonal pattern in relative bid-ask spreads. Trading rules based on the seasonal patterns do not suggest that seasonality can be exploited to earn excess profits. Copyright Blackwell Publishers Ltd 1997.

Common stochastic trends between forward and spot exchange rates

Abstract The common trend analyses between the forward rate ( F t ) and the corresponding future spot rate of the same currency ( S t +1 ) have raised several issues: notably, the sensitivity of the cointegrating relation to a constant term and lag lengths and the non-stationarity of the risk premium. This paper addresses these issues more rigorously using the daily exchange rate of the pound Sterling vis-a-vis five major currencies viz. the Canadian dollar, French franc, German mark, Japanese yen, and US dollar. The appropriate deterministic term in the cointegrating space is identified through empirical tests. A robust cointegrating relation is found between F t and S t +1 ; however, the hypothesis of unbiasedness of forward rate could not be sustained. An alternative measure of risk premium is suggested and its stationarity is confirmed.

Non-linear Dependence in Stock Returns: Does Trading Frequency Matter?

The UK has a quote-driven pure dealer market structure that is very different from order driven markets such as the NYSE and Japanese markets. This paper investigates non-linear dependence in stock returns for an exhaustive sample of UK stocks for a 21 year period. The results are analysed on the basis of trading frequency. It is found that non-linear dependence is highly significant in all cases for both individual stocks and stock portfolios formed on the basis of trading frequency. The non-linear dependence is primarily over a one day interval, although statistically significant non-linear dependence exists consistently even up to five trading days. Most of the non-linear dependence is in the form of ARCH-type conditional heteroskedasticity. However, statistically significant non-linearity in addition to an EGARCH(1,1) dependence also appears to be present. This additional non-linearity is greater for individual stocks than for portfolios and greater for smaller, less-liquid portfolios. Non-linear dependence does not appear to be caused by non-stationarity in underlying economic fundamentals or by non-linearity in the conditional mean. However, low dimensional chaos is not generally supported. The limited evidence on chaotic behaviour is stronger for portfolios with long price adjustment delays across component stocks. The main results are consistent with US studies on stock indices, suggesting that the process generating non-linear dependence is not dependent on market microstructure characteristics. Copyright Blackwell Publishers Ltd 1999.

Stock returns and volatility in two regime markets: International evidence

Abstract This paper examines the intertemporal relationship between stock returns and volatility within a two regime framework in five countries namely the UK, USA, Germany, Japan and Italy. We extend previous research by examining the relationship between these two variables in regimes that are dependent on factors both exogenous and endogenous to the model. The exogenous separator is the sign of the observed risk premium while the endogenous separator is the sign of the risk premium predicted by different macroeconomic variables. In a regime characterized by positive risk premium, excess returns and expected volatility are positively associated while there exists a negative relation between unexpected volatility and excess returns. This, in itself, is proof of an ex ante positive relationship between risk and return. In the endogenous model, we find that regardless of the regime, there is a positive relation between expected volatility and expected return and a negative relationship between unexpected volatility and excess return. These results are consistent with the behavior of rational investors implying that while modelling this relationship the effect of the economic environment under which rational investors make investment decisions must be taken into account. The results are qualitatively similar for all countries in the sample.

Returns to style investments in initial public offerings

Publisher Summary Security selection using style analysis is common practice among fund managers and individual investors. Style-based investments are not new, but their rationale derives from the perceived wisdom of practitioners and empirical evidence rather than from formal theoretical modeling. This chapter examines the aftermarket performance of initial public offering (IPO) by using style stock selection methods. It analyzes value, growth, small-cap, and large-cap style IPO portfolios, as well as combinations of these style categories. Holding period returns for value versus growth IPOs, small-cap versus large-cap IPOs, and IPOs marketed by high-quality underwriters versus those marketed by low-quality underwriters are compared. Several conclusions emerge from the comparison of returns of these style portfolios after controlling for risk. First, the value and growth IPOs do not exhibit statistically significant differences in returns for all holding periods. Second, the large-cap IPO portfolio outperforms the small-cap portfolio for up to 4-year holding periods. Third, IPOs sponsored by high-quality underwriters provide significantly higher returns than IPOs marketed by low-quality underwriters. However, after controlling for the quality of the underwriter, value and small-cap IPOs marketed by prestigious underwriters provide significantly higher and positive aftermarket returns.