Oliver M. Rui

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 dynamic relationship between stock returns and trading volume: Domestic and cross-country evidence

Abstract This paper examines the dynamic relations – causal relations and the sign and magnitude of dynamic effects – between stock market trading volume and returns (and volatility) for both domestic and cross-country markets by using the daily data of the three largest stock markets: New York, Tokyo, and London. Major findings are as follows: First, trading volume does not Granger-cause stock market returns on each of three stock markets. Second, there exists a positive feedback relationship between trading volume and return volatility in all three markets. Third, regarding the cross-country relationships, US financial market variables, in particular US trading volume, contains an extensive predictive power for UK and Japanese financial market variables. Fourth, sub-sample analyses show evidence of stronger spillover effects after the 1987 market crash and an increased importance of trading volume as an information variable after the introduction of options in the US and Japan.

Public governance and corporate finance: Evidence from corruption cases

Cross-sectional research finds that corporate financing choices are not only affected by firm and industry factors, but also by country institutional factors. This study focuses on the roles of public governance in firm financing patterns. To conduct a natural experiment that avoids endogeneity, we identify 23 corruption scandals involving high-level government bureaucrats in China and a set of publicly traded companies whose senior managers bribed bureaucrats or were connected with bureaucrats through previous job affiliations. We report a significant decline in the leverage and debt maturity ratios of these firms relative to those of other unconnected firms after the arrest of the corrupt bureaucrat in question. These relations persist even if we only focus on the connected firms that were not directly involved in the corruption cases. The relative decline in firm leverage is associated with negative stock price effects. We also examine the possibility that rent seekers are efficient firms and that corruption does not thus result in capital misallocation, but fail to find evidence to substantiate this postulation. Journal of Comparative Economics 36 (3) (2008) 343-364.

Ownership and the Value of Political Connections: Evidence from China

Research has found that political connectedness can have both positive and negative effects on firm value. To resolve these mixed findings, we investigate the impact of political ties conditional on ownership for a sample of Chinese firms over the period 1999–2006. We find that private firms with politically connected managers have a higher value and obtain more government subsidies than those without connected managers, whereas local state-owned enterprises with connected managers have a lower value and employ more surplus labour than those without connected managers. Our results indicate that the effect of political ties is subject to firm ownership.

Does Trading Volume Contain Information to Predict Stock Returns? Evidence from China's Stock Markets

This paper examines empirical contemporaneous and causal relationships between trading volume, stock returns and return volatility in Chinas four stock exchanges and across these markets. We find that trading volume does not Granger-cause stock market returns on each of the markets. As for the cross-market causal relationship in Chinas stock markets, there is evidence of a feedback relationship in returns between Shanghai A and Shenzhen B stocks, and between Shanghai B and Shenzhen B stocks. Shanghai B return helps predict the return of Shenzhen A stocks. Shanghai A volume Granger-causes return of Shenzhen B. Shenzhen B volume helps predict the return of Shanghai B stocks. This paper also investigates the causal relationship among these three variables between Chinas stock markets and the US stock market and between China and Hong Kong. We find that US return helps predict returns of Shanghai A and Shanghai B stocks. US and Hong Kong volumes do not Granger-cause either return or volatility in Chinas stock markets. In short, information contained in returns, volatility, and volume from financial markets in the US and Hong Kong has very weak predictive power for Chinese financial market variables.

Return and volatility behavior of dually-traded stocks: the case of Hong Kong

Abstract This paper investigates how returns and volatilities of stocks are correlated for dually-traded stocks on two non-synchronous international markets. Using daily data for the period from October 1996 to July 2000, we provide evidence of returns and volatility spillovers from Hong Kong to London, and from London to Hong Kong. We also observe that the Asian financial crisis has a significantly negative impact on most of the dually-traded stocks in the sample. Finally, we find that our results are robust across two time periods, namely before and after the Hong Kong government’s intervention in the financial markets during August 1998.

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.

Time-Series Behavior of Share Repurchases and Dividends

Given the growth in the importance and popularity of share repurchases, we use an alternative time-series approach to test two hypotheses on the motives for share repurchases and dividends: the flexibility hypothesis and the substitution hypothesis. By investigating both share repurchase and dividend payout policies in the context of a time-series vector autoregression, we account for the dynamic and multi-dimensional nature of the two payout policies. We find that share repurchases are associated with temporary components of earnings, whereas dividends are not, and that share repurchases and dividends are imperfect substitutes.

Corporate Governance and CEO Compensation in China

This paper contributes to the international corporate governance literature by examining factors that affect CEO compensation in China. In particular, we develop models of CEO pay based on an understanding of the unique economic and structural reforms undertaken by the partially privatized state owned Enterprises (SOEs). We find that corporate governance factors have a significant impact on CEO compensation but they do so in ways that differ from those in other countries. Our conclusions are robust across different formulations of the basic model and they have public policy implications for China and other transitional economies that are moving away from state ownership of business enterprises.

The Effects of Political Connections and State Ownership on Corporate Litigation in China

We examine the effects of corporate lawsuits in China and find that litigation announcements depress the stock prices of both defendant and plaintiff firms. Financially distressed defendants suffer lower stock returns. We find that politically connected defendants are favored in the judicial process: they have higher stock returns and are more likely to appeal against adverse outcomes and to obtain a favorable appeal result. State-controlled defendants fare better than privately controlled defendants when it comes to appeals but do not have higher stock returns. The evidence suggests that there is bias in the judicial process.