Reena Aggarwal

Volatility in Emerging Stock Markets

This study examines the kinds of events that cause large shifts in the volatility of emerging stock markets. We first determine when large changes in the volatility of emerging stock market returns occur and then examine global and local events (social, political, and economic) during the periods of increased volatility. An iterated cumulative sums of squares (ICSS) algorithm is used to identify the points of shocks/sudden changes in the variance of returns in each market and how long the shift lasts. Both increases and decreases in the variance are identified. We then identify events around the time period when shifts in volatility occur. Most events tend to be local and include the Mexican peso crisis, periods of hyperinflation in Latin America, the Marcos-Aquino conflict in the Philippines, and the stock market scandal in India. The October 1987 crash is the only global event during the period 1985–1995 that caused a significant jump in the volatility of several emerging stock markets.

Does Governance Travel Around the World? Evidence from Institutional Investors

We examine whether institutional investors affect corporate governance by analyzing portfolio holdings of institutions in companies from 23 countries during the period 2003-2008. We find that firm-level governance is positively associated with international institutional investment. Changes in institutional ownership over time positively affect subsequent changes in firm-level governance, but the opposite is not true. Foreign institutions and institutions from countries with strong shareholder protection play a crucial role in promoting governance improvements outside of the U.S. Institutional investors affect not only which corporate governance mechanisms are in place, but also outcomes. Firms with higher institutional ownership are more likely to terminate poorly performing CEOs and exhibit improvements in valuation over time. Our results suggest that international portfolio investment by institutional investors promote good corporate governance practices around the world.

Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences

We construct a firm-level governance index that increases with minority shareholder protection. Compared to U.S. matching firms, only 12.68% of foreign firms have a higher index. The value of foreign firms falls as their index decreases relative to the index of matching U.S. firms. Our results suggest that lower country-level investor protection and other country characteristics make it suboptimal for foreign firms to invest as much in governance as U.S. firms do. Overall, we find that minority shareholders benefit from governance improvements and do so partly at the expense of controlling shareholders.

Stabilization Activities by Underwriters after Initial Public Offerings

Prior research has assumed that underwriters post a stabilizing bid in the aftermarket. We find instead that aftermarket activities are less transparent and include stimulating demand through short covering and restricting supply by penalizing the f lipping of shares. In more than half of IPOs, a short position of an average 10.75 percent of shares offered is covered in 22 transactions over 16.6 days in the aftermarket, resulting in a loss of 3.61 percent of underwriting fees. Underwriters manage price support activities by using a combination of aftermarket short covering, penalty bids, and the selective use of the overallotment option. RESEARCHERS ARE STILL TRYING TO UNDERSTAND the price behavior of initial public offerings ~IPOs!. 1 Short-run underpricing and long-run overpricing continue to be a puzzle. Underpricing refers to the initial trading of IPOs above the offer price in the immediate aftermarket, whereas overpricing refers to long-run underperformance. However, finance research has paid little attention to the specific activities of underwriters in the aftermarket that are likely to have an impact on IPO price performance. These interventions by underwriters are not well understood because of both lack of data and lack of transparency in industry practices. The unique data set used in this paper allows for the first time a comprehensive analysis of exactly how these aftermarket activities are conducted, the characteristics of IPOs in which un

The Aftermarket Performance of Initial Public Offerings in Latin America

This study extends the international evidence on initial public offerings (IPOs) and is the first comprehensive analysis examining new issues in the Latin American countries of Brazil, Chile, and Mexico. These countries have been among the best performing markets in the early 1990s and are undergoing major modernization programs and opening their economies. Since Chile uses an auction process to go public, while issues are offered at a fixed price in Brazil and Mexico, interesting comparisons based on the method of going public emerge. Further, both Chile and Mexico have been involved in massive privatization programs, and Brazil has embarked on one as well. A large proportion of the new issues in Chile were privatizations. This allows an examination of IPOs involved in privatization versus nonprivatization programs.

Allocation of initial public offerings and flipping activity

There is a general perception that the large trading volume in initial public offerings is mostly due to ‘‘flippers’’ that are allocated shares in the offering and immediately resell them. On average, however, flipping accounts for only 19% of trading volume and 15% of shares offered during the first two days of trading. Institutions do more flipping than retail customers and hot IPOs are flipped much more than cold IPOs. Institutions do not quickly flip cold IPOs to take advantage of price support activities by the underwriter. Explicit penalty bids are rarely assessed against flippers. r 2002 Elsevier Science B.V. All rights reserved. JEL classification: G14; G24; G28; G30

Why initial public offerings are underpriced: Evidence from Switzerland

Abstract The underpricing of initial public offerings is a well documented phenomenon for almost every equity market that has been examined. In Switzerland for a sample of 42 stocks that were issued in the market between 1983 and 1989 a 35.8 percent average initial return between the offering price and the closing price on the first trading day is found. In Switzerland the excess returns from offering price persist for at least three years, however if the purchase is made at the first days closing price then the three year returns are negative. The paper discusses special institutional settings in the Swiss stock market and provides some explanations implying that underpricing can be regarded as an equilibrium situation.

Do U.S. Firms Have the Best Corporate Governance? A Cross-Country Examination of the Relation Between Corporate Governance and Shareholder Wealth

We compare the governance of foreign firms to the governance of similar U.S. firms. Using an index of firm governance attributes, we find that, on average, foreign firms have worse governance than matching U.S. firms. Roughly 8% of foreign firms have better governance than comparable U.S. firms. The majority of these firms are either in the U.K. or in Canada. When we define a firms governance gap as the difference between the quality of its governance and the governance of a comparable U.S. firm, we find that the value of foreign firms increases with the governance gap. This result suggests that firms are rewarded by the markets for having better governance than their U.S. peers. It is therefore not the case that foreign firms are better off simply mimicking the governance of comparable U.S. firms. Among the individual governance attributes considered, we find that firms with board and audit committee independence are valued more. In contrast, other attributes, such as the separation of the chairman of the board and of the CEO functions, do not appear to be associated with higher shareholder wealth.

Did New Regulations Target the Relevant Corporate Governance Attributes

Recent corporate scandals have led to new governance rules that include the Sarbanes-Oxley legislation (SOX) and additional regulations by stock exchanges. This study examines the changes in corporate governance practices during 2001-2005, which covers the period before and after the new regulations. We analyze a comprehensive set of 64 governance attributes for more than 5,200 firms. Our findings indicate that corporate governance practices beyond those mandated by new regulations changed substantially over this period. We find statistically significant differences in governance across firm size and industries. After controlling for size and industry we find a positive and significant relation between governance and firm value. We find that new regulations are associated with higher firm value in firms that adopted the regulations prior to them being mandated. The results are statistically and economically significant. In this sense our findings suggest that the new regulations did target relevant governance attributes. However, the analysis also indicates that the markets were already rewarding firms that had better governance. Therefore, it is not clear that mandatory rules for all firms were required. Clearly the costs of imposing new regulations on certain types of firms, for example, small firms, were potentially too costly. In the post-regulatory period, as expected, the relationship between the regulatory governance attributes and firm value does not exist. We find that the positive relationship between governance attributes not mandated by regulations and firm value continues even in the post-regulatory period.

The rise and fall of the Amex Emerging Company Marketplace

In 1992, the AMEX launched the Emerging Company Marketplace (ECM) to trade the stocks of small but growing companies. After listing on the ECM, stocks experienced dramatic decreases in bid-ask spreads, but showed mixed results on price and trading volume. News coverage of the ECM stocks rose significantly. Yet few firms chose to list on the new ECM, and the AMEX closed it in 1995. What went wrong? A series of scandals tarred the image of the exchange. Furthermore, auction markets historically have not fared well against dealer markets for very small firms. For some companies, it is worthwhile to subsidize the distribution channel for their stock by listing in a higher transaction cost dealer market, which gives dealers incentive to publicize the firm.