Neophytos Lambertides

The Role of Growth Options in Explaining Stock Returns

We extend the Fama-French (1992) model by considering growth option (as well as distress/leverage) variables in explaining the cross section of stock returns. We find that growth option variables, namely growth in capital investment and yet-unexercised growth options (GO), are significantly and negatively related to stock returns. Investors may be willing to accept lower average returns from growth stocks in exchange for a more favorable (positively skewed) risk-return profile. Book-to-market (BM) ratio seems to proxy for omitted distress/leverage variables. When these are explicitly accounted for, BM is not that significant. Our growth options variables have added explanatory power.

Stock price volatility and informational efficiency following the mandatory adoption of IFRS in Europe

Purpose - The aim of this study is to examine the impact of mandatory International Financial Reporting Standards (IFRS) adoption on the informational efficiency, market stability, and price adjustment of underlying stocks in Europe. Design/methodology/approach - This study examines 1,187 stocks from 20 European countries to assess the impact of the mandatory adoption of IFRS on certain aspects of the market quality of the adopting firms. Findings - The observed decrease in the first order autocorrelation and the permanent component of the conditional variance indicates that the mandatory IFRS adoption enhances informational efficiency and contributes to the market stability of the underlying stocks. The authors find no evidence that IFRS adoption affects the role old news has in determining the conditional variance of adopting firms. The effects of IFRS adoption on the equity cost of capital are shown to depend on the country-specific characteristics. Specifically, IFRS adoption is more likely to increase (decrease) the betas of stocks that are listed in the common (civil) law countries. Research limitations/implications - Like any empirical event-study, the validity of the results depends on the absence of confounding events. Originality/value - To the best of the authors’ knowledge, this paper is the first to use GARCH type models to empirically examine the effects of mandatory IFRS adoption on the informational efficiency and market stability of adopting firms.

Losses, Dividend Reductions, and Market Reaction Associated with Past Earnings and Dividends Patterns

This paper examines investors’ reactions to dividend reductions or omissions conditional on past earnings and dividend patterns for a sample of eighty-two U.S. firms that incurred an annual loss. We document that the market reaction for firms with long patterns of past earnings and dividend payouts is significantly more negative than for firms with less-established past earnings and dividends records. Our results can be explained by the following line of reasoning. First, consistent with DeAngelo, DeAngelo, and Skinner (1992), a loss following a long stream of earnings and dividend payments represents an unreliable indicator of future earnings. Thus, established firms have higher loss reliability than less-established firms. Second, because current earnings and dividend policy are a substitute source of means of forecasting future earnings, lower loss reliability increases the information content of dividend reductions. Therefore, given the presence of a loss, the longer the stream of prior earnings and dividend payments, (1) the lower the loss reliability and (2) the more reliably dividend cuts are perceived as an indication that earnings difficulties will persist in the future.

Idiosyncratic Volatility Puzzle: Influence of Macro-Finance Factors

We analyze the cross-sectional relation between expected idiosyncratic volatility and stock returns. The expected idiosyncratic volatility is conditioned on macro-finance factors as well as traditional asset pricing factors. The macro-finance factors are constructed from a large set of macroeconomic and financial variables. Our results show that the negative relation between expected idiosyncratic volatility and stock returns reverses to a positive one when accounting for the macro-finance effects. Portfolio analysis shows that the positive relation is economically important. The relation between expected idiosyncratic volatility and returns is not affected by business cycle variations. The empirical results are highly robust.

Who Are the Losers of IFRS Adoption in Europe? An Empirical Examination of the Cash Flow Effect of Increased Disclosure

Unlike prior studies that examine the denominator effect, this study investigates the cash flow effect of disclosure as captured by firms exhibiting increases in default risk (DR) around the 2005 mandatory International Financial Reporting Standards (IFRS) adoption in Europe. Using the Merton (1973, 1974) option-based probability of default measure (DR) on a data set of 415 winner firms (with decreases in DR) and 295 loser firms (with increases in DR), we show that loser firms exhibit the same or better financial characteristics in the pre-IFRS adoption period compared with the winner sample. However, after IFRS, loser firms exhibit deteriorating characteristics, with smaller increases in their Tobin’s q valuations, greater increases in leverage, and poorer return performance. Logistic analysis suggests that even though in the pre-IFRS period loser firms exhibit greater profitability and analyst following and lower leverage, in the post-IFRS period their profitability is less than that of winner firms while exhibiting similar leverage and analyst following characteristics. Through an examination of the determinants of the change in DR, the results suggest that loser firms incur a greater increase in DR the poorer their home country’s legal enforcement environment, the lower their analyst following, and the greater their propensity to manage earnings. In general, our results are consistent with the existence of a significant cash flow effect for the loser sample.

Sentiment, order imbalance, and co-movement: An examination of shocks to retail and institutional trading activity

Using order flow imbalance as a measure of sentiment we show that positive and negative shocks to sentiment lead to lower co-movement between portfolio and market returns in the post-shock period. Furthermore, an asymmetry is present as positive shocks to sentiment have less impact on co-movement changes than negative shocks. Moreover, shocks to retail sentiment and the sentiment of two types of institutional investors lead to a reduction in co-movement. Positive shocks to institutional order flow imbalance lead to smaller reductions in co-movement than associated with retail shocks. These effects exist even after controlling for firm-specific and market-wide news.

The Relative Efficiency Of Maritime Firms: Evidence From Container Lines

It has been stated that the meaning of higher efficiency is equivalent to being more competitive and profitable for enterprise operations. Using insights from fundamental analysis, the purpose of this study is to investigate the relative operational performance and market efficiency of liner shipping firms. The paper applies Data Envelopment Analysis (DEA) to calculate an efficient frontier that corresponds to the optimal relationship between financial data and market value. Stocks at the frontier are optimally priced in the market. Stocks falling behind the frontier are valued less favorably. The models developed incorporate inputs and outputs related to operating performance and market efficiency consistent with the prior financial accounting literature. Our sample consists of 18 major (leading) international liner shipping firms that have been found to exhibit average market efficiency and a high degree of operational performance.

Idiosyncratic volatility puzzle : influence of macro-finance factors

We analyze the cross-sectional relation between expected idiosyncratic volatility and stock returns. The expected idiosyncratic volatility is conditioned on macro-finance factors as well as traditional asset pricing factors. The macro-finance factors are constructed from a large set of macroeconomic and financial variables. Our results show that the negative relation between expected idiosyncratic volatility and stock returns reverses to a positive one when accounting for the macro-finance effects. Portfolio analysis shows that the positive relation is economically important. The relation between expected idiosyncratic volatility and returns is not affected by business cycle variations. The empirical results are highly robust.

Tourism Stocks in Times of Crises: An Econometric Investigation of Unexpected Non-macroeconomic Factors

The relationship between the tourism industry and unexpected nonmacro incidents has received limited academic coverage. As a result, the quantifiable impact of such events on tourism-specific stock values, both in terms of returns and volatility, remains grossly underexamined. Motivated by the reasoning that the well-established features inherent to the tourism industry may trigger a different pattern of stock price movement compared with other industries, and by using econometric methodology, this article investigates the reaction of five hospitality/tourism stock indices to 150 incidents, depicting major Acts of Terrorism, natural catastrophes, and War conflicts that have taken place since the year 2000. Empirical findings underscore the effect of such incidents on stock indices, with distinctive differences among the types and specificities of each event under investigation. This article contributes to the extant literature and enhances our conceptual capital pertaining to the tourism industry’s current financial practices related to stock performance and behavior.

Tourism, Instability and Regional Interdependency: Evidence from the Eastern-Mediterranean

ABSTRACT Over the last three decades, we have widely witnessed the peculiar relationship between tourism and incidents of political instability. Responding to the urgent call for additional empirical inquiries, we conducted an econometric study, using the VAR-EGARCH-DCC model, on the regional tourism interdependency (volatility) between four Eastern Mediterranean countries, namely Greece, Turkey, Cyprus and Israel. Monthly arrival data from 1987 to 2012, along with a series of political instability variables collected from machine-coded databases, were utilized to model effects and to add empirical substance to contemporary and emerging theories. Our findings are relevant to industry stakeholders in that they explore tourism demand and volatilities. The findings indicate a positive effect on tourism demand in the presence of verbal or material cooperation between a destination country and others. In contrast, when investigating verbal conflict between a destination country and others, our findings reveal a negative impact on tourist arrivals and an increase in volatility in the destination country. Finally, in our investigation of incidents of material conflict, we saw a strong negative impact on tourist arrivals in all four destinations, accompanied by a significant increase in volatility.