Samuel Mongrut

Persistence in Equity Fund Performance in Brazil

We examine performance persistence in the large and growing Brazilian equity fund market from 2000 to 2012. We find a significant risk-adjusted spread between a portfolio of top- and bottom-performing funds, which supports the idea that performance persists. This spread remains after controlling for market, size, distress, and momentum risk factors and tends to be larger and more significant for a set of small and retail funds. The spread is mostly driven by the underperformance of the bottom decile of funds, which is consistent with the existence of some fund managers with insufficient skills to recover investment costs.

Discount Rates in Emerging Capital Markets

The estimation of the discount rate for an investment project in conditions of risk relies upon two crucial assumptions market completeness and well-diversified investors. Although, these two assumptions are tenable in developed capital markets, they are not suitable in emerging markets. In emerging markets, there are not enough twin securities to obtain a unique stochastic discount factor and therefore one project market value. Hence, investors usually face short selling and borrowing restrictions. Furthermore, these markets are plagued with non-diversified entrepreneurs that invest all their capital to undertake entrepreneurial adventures. In this research, one derives expressions for the project discount rate, using the fundamental pricing equation under incomplete capital markets in two extreme situations when investors hold a well-diversified portfolio, and when they are not diversified at all. Although both situations may apply in developed and emerging capital markets, they apply especially to emerging markets. In fact, well-diversified investors, such as foreign mutual funds, increasingly invest in emerging markets, while the bulk of firms involves either small or medium enterprises owned by a single or a group of non-diversified entrepreneurs. The study concludes that although the Capital Asset Pricing Model (CAPM) cannot hold under incomplete markets, it is still a good approximation for well-diversified investors in emerging markets. At the same time, it is necessary to use a hurdle rate, based on the project total risk for the case of non-diversified entrepreneurs.

Stock splits en la bolsa de valores de lima: ¿afectan el rendimiento y la liquidez de los títulos?

Existe evidencia en mercados desarrolladosque indica la existencia deun rendimiento anormal positivo yun posible incremento de la liquidezaccionaria en las fechas cercanas alanuncio de una particion accionariao stock split. El primer fenomenose debe a que el anuncio de unaparticion accionaria es interpretadocomo un preludio de un anuncio dedistribucion de dividendos, mientrasque el aumento en la liquidez de lostitulos se explica por la disminuciondel precio por accion. En este trabajo,mediante el uso de un estudiode eventos, se analizan los mismosfenomenos para una muestra de 20particiones accionarias ocurridasen la Bolsa de Valores de Lima(BVL) entre los anos 1994-2004. Adiferencia de otros estudios, no seencuentran rendimientos anormalespositivos asociados a las particionesestudiadas, pero si se observa unincremento sustancial en la liquidezde las acciones en dias posteriores ala particion accionaria. Estos resultadosindican que, en promedio, lasparticiones accionarias no poseenmayor contenido informativo en estemercado. Esto es consistente con lacarencia de una politica de dividendosestablecida por las empresas y conun predominio de los inversionistasinstitucionales, a los cuales les interesaprimordialmente la liquidez y elriesgo de sus inversiones.

Waves and Determinants in Mergers and Acquisitions: The Case of Latin America

ABSTRACT This article contributes to the current literature on mergers and acquisitions (M&As) by identifying the existence of waves and the determinants of M&A activity in the economies of Argentina, Brazil, Chile, Colombia, Mexico, and Peru. From a sample of 2,391 M&A announcements reported by Thomson One on these countries, applying the methodology proposed by Harford (2005), evidence of M&A waves is found for the periods 1995–2002 and 2003–2010, as reported for other regions in various international studies. After controlling for economic and business environment variables, as well as for profitability and book-to-market variables at the industry level, we find evidence that supports neoclassical theory as a main explanation for M&A activity but not for the misvaluation effect.

Capital Markets and Firm Performance in Emerging Economies

It is well known that the basic characteristics of emerging markets include a high degree of ownership concentration and illiquid capital markets, and good corporate governance practices are not widespread among companies. This special symposium section is dedicated to further deepen our knowledge of how firms and investors in emerging economies behave in the face of changes in economic and institutional environment. This issue becomes even more relevant because institutional investors in emerging markets now are very important players. For instance, they trade around 70% of the daily market capitalization in Latin American emerging markets, so it is important to better understand the reactions of listed companies and investors due to external changes. Policy makers and regulators are also interested to see the potential reaction and consequences of changes already in place, such as the Latin American Integrated Market (MILA), in order to evaluate the effects of integration on economic activity, This special symposium section includes 10 papers selected based on a thorough review process. In the first paper, Rapp and Udoieva focus on the impact of ownership structures and shareholder’s rights protection on research and development (R&D) outlays. In their cross-country study that includes firms from 24 emerging countries, they find that a more dilute ownership and a greater presence of institutional investor positively affect R&D intensity. This positive effect is enhanced in countries with greater investor protection. An interesting question in the development of Latin American emerging economies is what drives mergers and acquisitions (M&A) in these markets. Cortés, Durán, Gaitán, and Vasco examine this issue and conclude that in emerging markets with available capital, transnational M&A activities do not prosper because companies, operating in Latin America, usually expand their operations through international takeovers. However, industry productivity and high standards of corporate governance in Latin American companies attract transnational M&A activity from companies based on Organization for Economic Cooperation and Development (OECD) countries into the Latin American region. The Latin American Integrated Market (or MILA for its Spanish acronym) started its operations in 2011 and currently includes four markets: Colombia, Chile, Mexico, and Peru. A current issue in the MILA is the harmonization of tax rates for capital gains and dividends, because tax rates are an important determinant of the market value of companies. In the third paper, Vélez-Pareja finds that personal taxes on dividend gains in fact destroy more value than we used to think, based on Miller’s (1977) approach. Hence, it is extremely important to consider the full harmonization of tax rates in the MILA. The fourth paper of the special symposium section, by Feng, Lin, and Wan, discusses the impact of foreign direct investment (FDI) and short-term capital investment on stock and real estate prices in China. A positive shock on net capital inflows positively and contemporaneously affects both housing and stock prices, while an increase in FDI does not have an impact on stock prices but contributes to home price appreciation with some delay.

Illiquidity Premium in the MILA

ABSTRACT This article analyzes the illiquidity premium in the MILA. Using seven proxies for illiquidity, we find a positive and significant illiquidity premium for our sample. A microstructure bias-free portfolio weighting based on past returns is critical in our finding of an illiquidity premium, which is robust to several methodological changes in our portfolio simulations. We also document that the premium is present only in small and high book-to-market stocks. Nonetheless, when we control for size and distress effects, the difference and significance in risk-adjusted returns between portfolios of high and low illiquidity stocks remains.

Waves and determinants in the activity of Mergers and Acquisitions: The Case of Latin America

This paper contributes to the current literature of mergers and acquisitions (M&As) by studying the existence of waves and the determinants of M&A activity in the economies of Argentina, Brazil, Chile, Colombia, Mexico and Peru. From a sample of 2,490 M&As announcements reported by Thomson One for these countries, and applying the methodology proposed by Harford (2005), evidence of M&A waves is found for the periods 1993-2002 and 2003-2010 as reported for other regions in various international studies. After controlling for economic and business environment variables, as well as for profitability and book-to-market variables at industry level, we find evidence in favor of the neoclassical theory as a main explanation for M&As, but not for the misvaluation effect. For this purpose, a Prais-Winsten data model with panel corrected standard errors (PCSE) is used, and the results are confirmed through a negative binomial panel data estimation.

A Framework for Environmental Reporting Through Financial Statements

Since the 1990’s there have been several proposals worldwide concerning environmental reporting, but few of them are related to environmental reporting through financial statements. Nowadays there is still a need for a proposal that encompasses key environmental concepts, underlying principles, qualitative characteristics, and the specific regulatory treatment of environmental costs and liabilities for reporting through annual financial statements.Recently, the Federation of European Accounting Experts (FEE) has made a proposal for a comprehensive conceptual framework (underlying principles and qualitative characteristics) for environmental reporting, while the United Nations Division for Sustainable Development has proposed the use of specific environmental management accounting (EMA) tools for internal and external accounting recognition of environmental costs and revenues.Furthermore, the Commission of European Communities has made a recommendation for the regulatory treatment (recognition, measurement and disclosure) of environmental costs and liabilities through financial statements. In this work, one links the three previous proposals in order to propose a comprehensive process for environmental reporting through financial statements.

Project Valuation Under Incomplete Capital Markets: The Case of Non-Diversified Entrepreneurs

Traditional project valuation usually overlooks the important risk analysis process because it relies in the complete market assumption. In a complete market it will be possible to either find twin securities or elaborate a dynamic investment portfolio to replicate the project risk and payoff in every state of nature at any moment in the future. Furthermore, since one assumes well-diversified investors what matters is the project value as if it were traded in the capital market. Unfortunately, the assumption of complete markets hardly holds in reality, especially in emerging markets full of illiquid securities and where financial mechanisms such as short sales or buying on margin are prohibited or non-existent in practice. In this work one assumes incomplete markets and designs a risk analysis procedure that can be applied whenever there is no tradable benchmark in two situations: when investors hold a well-diversified investment portfolio and when investors are non-diversified entrepreneurs. The former case is important because during the last decade there has been an increase of foreign direct investment in emerging economies, so some global diversified entrepreneurs have put their money in these markets. The latter case is especially important for emerging markets where a high proportion of total enterprises are family business or are owned by a single non-diversified entrepreneur. In either case it is possible to use a clear cut investment rule, such as the Net Present Value, but there is no a single market value for the project. In the case of global diversified investors it is just one possible value and for non-diversified entrepreneurs what matters is the project value given the project total risk that they face.