Warren Bailey

Foreign ownership restrictions and stock prices in the Thai capital market

Abstract We study the effects of barriers to capital flows using data from the Stock Exchange of Thailand, which segments local and foreign trading of securities that have reached foreign ownership limits. Cross-sectional differences between local and foreign prices are correlated with proxies for the severity of foreign ownership limits, liquidity, and information availability. Time-series variability in the spread between local and foreign returns is consistent with differences in risk exposures and expected risk premiums, suggesting effective capital market segmentation. The results have numerous implications for portfolio and direct investment activity in developing countries.

Risk and return on China's new stock markets: Some preliminary evidence

Abstract This paper looks at the brief history of Chinese stock markets since they opened to the world with the listing of ‘B’ shares targeted at non-Chinese investors. B share returns exhibit little or no correlation with international stock index returns or returns on China-related stocks traded in Hong Kong and the United States. However, instruments for international risk premiums have some power to forecast B share returns. Discounts at which B shares trade relative to ‘A’ shares available to Chinese citizens are correlated across firms and related to similar premiums in other Asian markets. However, they exhibit little association with instruments for international risk premiums. The results suggest that B shares have considerable diversification value but are not entirely segmented from global financial conditions.

Exchange Rate Fluctuations, Political Risk, and Stock Returns: Some Evidence from an Emerging Market

We study the impact of exchange rate fluctuations and political risk on the risk premiums reflected in cross-sections of individual equity returns from Mexico, a country that has experienced significant monetary and political turbulence. Indicators from Mexicos currency and sovereign debt markets are employed as proxies for exchange rate and political risks. We find some evidence of equity market premiums for exposure to these risks. The results suggest common factors in emerging market equity, currency, and sovereign debt markets, and have several implications for corporate and portfolio management and for the use of emerging market data by researchers.

Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-Border Investments?

We study the impact of barriers to international capital flows with stock price data from 11 countries whose stock markets feature shares restricted to locals and otherwise identical shares available to foreigners. Large price premiums for unrestricted shares relative to matching restricted shares are typically observed. Although basic notions of international asset pricing offer a straightforward explanation for the price premiums, we find little evidence that the price premiums are explained by lower foreign required returns. Alternative concepts and theories centering on foreign investor demand and the supply of shares explain some of the time-series and cross-sectional variation of price premiums. More specifically, premiums for unrestricted shares are positively correlated with foreign investor demand in the form of international mutual fund flows, sentiment implicit in matching closed-end country fund premiums, market liquidity, and information reflected in press coverage, country credit rating, and firm size.

Stock Market Liberalization and the Information Environment

We document beneficial associations between openness to foreign equity investors and the information environment in emerging stock markets. Openness is reflected in legal, regulatory, and cross-listing events, the fraction of stock available to foreign investors, and the size of U.S. portfolio flows. We find that firm-specific information, analyst coverage, and value-added by analysts increase with openness to foreign equity investment while earnings management tends to decline. Large changes in earnings-related information variable are attributed to foreign analysts who increase their presence, activity, and contribution after openness increases. Across a detailed sample of Korean firms, however, such effects are dampened for firms that rate poorly on governance.

The Pricing of Stock Index Options in a General Equilibrium Model

This paper analyzes the pricing of stock index options in a simple general equilibrium model. In this model, the volatility of the stock index and the spot rate of interest are functions of a stochastic variable. The paper investigates the biases that arise when using the Black-Scholes model with the assumed volatility and interest rate dynamics. It is shown that the model can, in principle, explain the biases observed in empirical work on stock index options.

Bank Loans with Chinese Characteristics: Some Evidence on Inside Debt in a State-Controlled Banking System

We study a transitional economy where state-controlled banks make loan decisions based on noisy inside information on prospective borrowers, and may lend to avert unemployment and social instability. In China, poor financial performance and high managerial expenses increase the likelihood of obtaining a bank loan, and bank loan approval predicts poor subsequent borrower performance. Negative event study responses occur at bank loan announcements, particularly for borrowers measuring poorly on quality and creditworthiness, or for lenders or borrowers involved in litigation regarding loans. Our results highlight dilemmas in a state-led financial system and the local stock market’s sophistication in interpreting news.

Foreign Investments of U.S. Individual Investors: Causes and Consequences

Using thousands of brokerage accounts of U.S. individual investors, we analyze the motivations and consequences of foreign equity investment. We find that diversification is not the only reason that investors trade foreign securities. While wealthier, more experienced investors enjoy an informational advantage and, thus, are more likely to invest overseas and experience good portfolio performance, other investors appear to venture abroad for the wrong reasons. In particular, behaviorally biased investors often underuse or misuse foreign equity securities and experience poor portfolio performance. Some investors appear to use foreign securities for speculation or to improve upon poor domestic portfolio performance.

Money Supply Announcements and the Ex Ante Volatility of Asset Prices

Previous empirical studies have documented more volatile money grow th and money surprises, more volatile asset price changes, and increased responsiveness of asset prices to money surprises since the October 1 979 change in Fed policy. This paper studies the associations between money announcements and the ex ante volatility of asset prices in th e recent past. Results indicate that revisions of ex ante asset price volatility, as measured from prices of stock index, government debt, gold, and foreign currency options, are significantly correlated with the surprise component of the weekly M1 release. There is also evidence that money releases reduce volatility by resolving uncertainty. Copyright 1988 by Ohio State University Press.

Risk and return in the Philippine equity market: A multifactor exploration

Abstract The Philippine equity market is attracting increasing attention given the prospects of the Philippine economy and the increasing flow of foreign investment to Southeast Asia. We examine the ability of a set of economic factors to explain cross-sections of monthly Philippine stock returns. Given the significant turbulence the country has experienced in recent years, we include indicators from Philippine currency and money markets to proxy for currency and political risks. Conventional tests cannot detect significant premiums for market risk and three other factors during the past decade. Other evidence suggests that more complex models allowing time-varying risk exposures or additional risk factors may be needed to explain Philippine equity pricing.