Finance and Financial Management Commons^™

Dissecting Arbitrage Costs, F. Y. Eric Lam, Chishen Wei, K. C John Wei

Research Collection Lee Kong Chian School Of Business

This paper systematically examines the impact of nine popular arbitrage costs measures on cross-sectional mispricing based on ten well-known and robust anomalies. We show that binding arbitrage barriers slowly change over time. In early years with few publications documenting return anomalies, arbitrage costs have tiny impact even though mispricing is present. As anomalies become more widely known, arbitrage costs impact mispricing substantially. Arbitrage risk, ambiguity of fundamental value, round-trip broker’s commission plus bid-ask spreads, and stock loan supply are binding on arbitrageurs. Only arbitrage risk is binding if larger cap stocks are emphasized. In recent years when market quality improves …

Making Financial Disclosure More Readable, Clarence Goh, Poh Sun Seow, Gary Pan

Research Collection School Of Accountancy

There are many benefits tohaving disclosures written in plain English. Investors would be more likely tounderstand the disclosures and to make informed judgments. Investment analystswould also be able to make more timely and accurate recommendations to theirclients if they can understand such disclosures more quickly and easily

Do Security Analysts Learn From Their Colleagues?, Kenny Phua, T. Mandy Tham, Chi Shen Wei

Research Collection Lee Kong Chian School Of Business

We examine how learning from colleagues affects security analyst forecast outcomes. We represent the brokerage house as an information network of analysts connected through industry overlaps in their coverage portfolios. Analysts who are more centrally connected in their brokerage network produce more accurate forecast estimates and generate more influential forecast revisions. Consistent with learning, more central analysts tend to unwind their colleagues’ recent forecast errors in their forecast revisions. Learning appears to benefit all colleagues, as working at more interconnected brokerages (i.e., denser networks) improves forecast accuracy for all analysts.

Developing An Evidence Base For Assessing Natural Capital Risks And Dependencies In Lending To Australian Wheat Farms, Theodor Florian Cojoianu, Francisco Ascui

Research Collection College of Integrative Studies

Farmers are highly dependent on stocks of natural capital, and lenders are in turn exposed to natural capital through their loans to farmers. However, the traditional process for assessing a farmer’s credit risk relies primarily on historical financial data. Banks’ consideration of environmental factors tends to be limited to major risks such as contaminated land liabilities, and to large project and corporate finance, as opposed to the smaller loans typical of the Australian agricultural sector. The relevant risks and dependencies for agriculture vary by sub-sector and geography, and there is a lack of standardised methodologies and evidence to support risk …

The Impact Of Csr On Corporate Financial Performance, David K. Ding

Research Collection Lee Kong Chian School Of Business

We provide one of the first analyses of corporate social responsibility (CSR) and firm performance using only annual financial reports. We document a link between corporate financial performance (CFP) and CSR, although this is not always positive. Specifically, we investigate whether CSR performance can be implied from financial reporting and provide evidence that CSR information implied by financial reports have a significant association with CFP. Furthermore, we provide the first comprehensive study of CSR reporting and link it with CFP in New Zealand.

Analyst Effort Allocation And Firms' Information Environment, Rong Wang, Jarrad Harford, Feng Jiang, Fei Xie

Research Collection Lee Kong Chian School Of Business

We show that a firm’s information environment is significantly impacted by the characteristics of the other firms its analysts cover. Analysts strategically allocate effort among portfolio firms by devoting more effort to firms that are relatively more important for their career concerns. Specifically, controlling for analyst and firm characteristics, we find that within each analyst’s portfolio, firms ranked relatively higher based on market capitalization, trading volume, or institutional ownership receive more accurate, frequent, and informative earnings forecast revisions and stock recommendation changes that contain greater information content from that analyst. Firms’ relative rank across analysts varies widely, so this is …

Temporal Aggregation And Risk-Return Relation, Xing Jin, Leping Wang, Jun Yu

Research Collection Lee Kong Chian School Of Business

The function form of a linear intertemporal relation between risk and return is suggested by Merton's (1973) analytical work for instantaneous returns, whereas empirical studies have examined the nature of this relation using temporally aggregated data, i.e., daily, monthly, quarterly, or even yearly returns. Our paper carefully examines the temporal aggregation effect on the validity of the linear specification of the risk-return relation at discrete horizons, and on its implications on the reliablility of the resulting inference about the risk-return relation based on different observation intervals. Surprisingly, we show that, based on the standard Heston's (1993) dynamics, the linear relation …

Public Hedge Funds, Lin Sun, Song Wee Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Hedge funds managed by listed firms significantly underperform funds managed by unlisted firms. The underperformance is more severe for funds with low manager deltas, poor governance, and no manager co-investment, or managed by firms whose prices are sensitive to earnings news. Notwithstanding the underperformance, listed asset management firms raise more capital, by growing existing funds and launching new funds post listing, and harvest greater fee revenues than do comparable unlisted firms. The results are consistent with the view that, for asset management firms, going public weakens the alignment between ownership, control, and investment capital, thereby engendering conflicts of interest.

Public Hedge Funds, Lin Sun, Song Wee Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Hedge funds managed by listed firms significantly underperform funds managed by unlisted firms. The underperformance is more severe for funds with low manager deltas, poor governance, and no manager co-investment, or managed by firms whose prices are sensitive to earnings news. Notwithstanding the underperformance, listed asset management firms raise more capital, by growing existing funds and launching new funds post listing, and harvest greater fee revenues than do comparable unlisted firms. The results are consistent with the view that, for asset management firms, going public weakens the alignment between ownership, control, and investment capital, thereby engendering conflicts of interest.

Does Financial Education Enhance Financial Preparedness? Evidence From A Natural Experiment In Singapore, Rashmi Barua, Seng Kee Benedict Koh, Olivia S. Mitchell

Research Collection Lee Kong Chian School Of Business

We evaluate how financial education provided to college students influenced their financial knowledge and planning in a quasi-experimental setting where we control for student motivation to enroll in the course. Using a difference-in-difference strategy, we show that financial education led to an increase in financial knowledge and planning. Specifically, we find that financial education improved students’ financial knowledge score by 11%, and financial planning score by 16%. No statistically significant effects are detected for student levels of financial prudence, discipline, or outcomes related to credit card usage.

Reshaping The Financial Order, Christopher Dula, David Kuo Chuen Lee

Research Collection Lee Kong Chian School Of Business

The financial system, which governs and manages the practice of deposits, lending and payments, is in the throes of disruption following the shortcomings of the current regime. Despite US$11 trillion in quantitative easing since 2007, economic growth has been persistently sluggish. The money isn't going where it should be. In 2015, McKinsey reported that global debt had grown by US$57 trillion since 2007. The debt is becoming unsustainable, yet the global debt-to-income ratio continues to rise disproportionally to any deleveraging. The Fed's meandering signaling to nudge up interest rates beyond the near zero range raises concerns that private and even …

Twin Momentum: Fundamental Trends Matter, Dashan Huang, Huacheng Zhang, Guofu Zhou

Research Collection Lee Kong Chian School Of Business

Using both the levels and the time-series trends of a collection of firms' major fundamentals, we find that fundamentals matter after all: they can also generate strong return momentum. A fundamental momentum strategy that goes long stocks with fundamental in the top quintile and short stocks with fundamental in the bottom quintile earns a monthly average return of 88 bps, and is comparable with the popular price momentum but has little correlation. Combining price momentum and fundamental momentum yields a twin momentum, which has an average return more than the sum of both price momentum and fundamental momentum. Twin momentum …

Powerful Blockholders And Ceo Turnover, Chi Shen Wei, Lei Zhang

Research Collection Lee Kong Chian School Of Business

We identify the power of institutional blockholders to influence management using previous occurrences of forced CEO turnover at other firms in the blockholders’ overall portfolio. We create a “powerful blockholder linkage” measure that strongly predicts future forced CEO turnover. These effects are larger when “powerful” blockholders are more motivated to monitor and when they have had valuable monitoring experience. Moreover, firms with powerful blockholders display higher CEO turnover-performance sensitivity, pursue more value-increasing mergers, and have higher firm value. Overall, our results suggest that an identifiable group of powerful blockholders play an important role in corporate governance.

Fair Deposits Against Double-Spending For Bitcoin Transactions, Xingjie Yu, Shiwen M. Thang, Yingjiu Li, Robert H. Deng

Research Collection School Of Computing and Information Systems

In Bitcoin network, the distributed storage of multiple copies of the blockchain opens up possibilities for double spending, i.e., a payer issues two separate transactions to two different payees transferring the same coins. To detect the doublespending and penalize the malicious payer, decentralized non-equivocation contracts have been proposed. The basic idea of these contracts is that the payer locks some coins in a deposit when he initiates a transaction with the payee. If the payer double spends, a cryptographic primitive called accountable assertions can be used to reveal his Bitcoin credentials for the deposit. Thus, the malicious payer could be …

Hedging And Pricing Rent Risk With Search Frictions, Briana Chang, Hyunsoo Choi, Harrison Hong, Jeffrey Kubik

Research Collection Lee Kong Chian School Of Business

The desire of risk-averse households to hedge rent risk is thought to increase home ownership and prices. While evidence for the ownership implication is compelling, support for the price effect is mixed. We show that an important reason is search frictions. Rent risk reduces outside options, leading to less-picky buyers and worse home/buyer matches. This attenuates the rise in the price-to-rent ratio that would otherwise occur without frictions. Consistent with our model, a house remains on the market for fewer days when rent risk is higher. Accounting for frictions significantly increases the effect of rent risk on home prices.

How To Enable Future Faster Payments? An Evaluation Of A Hybrid Payments Settlement Mechanism, Zhiling Guo, Yuanzhi Huang

Research Collection School Of Computing and Information Systems

In the era of Fintech innovation and e-commerce, faster settlement of massive retail transactions is crucial for business growth and financial system stability. However, speeding up payments settlement can create periodic liquidity shortfalls to banks which would incur high cost of funds in the settlement process. We propose a new hybrid settlement mechanism design that integrates features of real-time gross settlement, deferred net settlement, and central queue management structure. The hybrid mechanism is managed by an intermediary and is particularly suitable to settle large volume of small-value retail payments. We evaluate the mechanism using computer experiments and simulation. We find …

Does Director Interlock Impact The Diffusion Of Accounting Method Choice?, Jie Han, Nan Hu, Ling Liu, Gaoliang Tian

Research Collection School Of Computing and Information Systems

This paper examines the influence of director interlock on firms' discrete accounting method choices from the perspective of behavior diffusion. We argue that firm managers will imitate their interlocked-partner firm's accounting method choices when choosing their own accounting methods. We find that when there is an interlock relationship between two firms, their accounting method choices, including inventory and depreciation methods, are similar to each other, indicating that accounting method choices can diffuse across firms through director interlock. In addition, such similarity is greater the longer the interlock relationship between the two firms is and as uncertainty increases. Further, the interlock …

Effects Of Informal Institutions On The Relationship Between Accounting Measures Of Risk And Bank Distress, Kiridaran Kanagaretnam, Jimmy Lee, Chee Yeow Lim, Gerald J. Lobo

Research Collection School Of Accountancy

We investigate the effects of informal institutions (trust, religiosity and the media) on the relationship between accounting-based risk measures and bank distress. We conduct our analysis in two stages. In the first stage, we extend the prior literature by documenting a link between accounting-based risk measures and bank distress during the 2008-2009 financial crisis. In particular, given the environment characterized by rapid growth in financial innovation and complex financial transactions prior to the crisis, simple accounting-based risk measures continue to predict bank distress during this crisis period. In the second stage, we address our main research question related to the …

Forecasting Stock Returns In Good And Bad Times: The Role Of Market States, Dashan Huang, Fuwei Jiang, Jun Tu, Guofu Zhou

Research Collection Lee Kong Chian School Of Business

This paper proposes a two-state predictive regression model and shows that stock market 12-month return (TMR), the time-series momentum predictor of Moskowitz, Ooi, and Pedersen (2012), forecasts the aggregate stock market negatively in good times and positively in bad times. The out-of-sample R-squares are 0.96% and 1.72% in good and bad times, or 1.28% and 1.41% in NBER economic expansions and recessions, respectively. The TMR predictability pattern holds in the cross-section of U.S. stocks and the international markets. Our study shows that the absence of return predictability in good times, an important finding of recent studies, is largely driven by …

Hedging And Pricing Rent Risk With Search Frictions, Briana Chang, Hyunsoo Choi, Harrison Hong, Jeffrey Kubik

Research Collection Lee Kong Chian School Of Business

The desire of risk-averse households to hedge rent risk is thought to increase home ownership and prices. While evidence for the ownership implication is compelling, support for the price effect is mixed. We show that an important reason is search frictions. Rent risk reduces outside options, leading to less-picky buyers and worse home/buyer matches. This attenuates the rise in the price-to-rent ratio that would otherwise occur without frictions. Consistent with our model, a house remains on the market for fewer days when rent risk is higher. Accounting for frictions significantly increases the effect of rent risk on home prices.

Essays On Investor Sentiment In Asset Pricing, Liya Chu

Dissertations and Theses Collection

The dissertation addresses three topics on investor sentiment in asset pricing.

The first essay investigates the impact of market sentiment on the recent debate on equity premium forecasting. Particularly, market sentiment may break the link between fundamental economic predictors and equity premium. We find that economic predictors tend to lose their power and various remedies proposed in recent studies, such as non-negativity constraints, no longer work during high sentiment periods. In contrast, economic predictors actually do have strong performances even without using any such remedies, as long as the sentiment stays low enough so as not to distort the link. …

Essays In Corporate Cash Holdings, Chenxi Liu

Dissertations and Theses Collection

This dissertation addresses three topics in corporate cash holdings. The first paper provides a new determinant of cash holdings by examining the impact of earnings transparency on corporate cash holdings. Motivated by Barth et al. (2013), who show that firms with less earnings transparency tend to have higher cost of equity, this paper shows that the cross-section differences in earnings transparency cause variations in firm cash holdings because firms with less earnings transparency have more incentives to hold cash in order to avoid costly external financing. Using data of US firms from 1980 to 2013, it is found that earnings …

Short Interest, Returns, And Unfavorable Fundamental Information, Ferhat Akbas, Ekkehart Boehmer, Bilal Erturk, Sorin Sorescu

Research Collection Lee Kong Chian School Of Business

Several months before information becomes public, the level of short interest contains value-relevant information about publicly traded corporations. Short interest predicts future bad news, negative earnings surprises, and downward revisions in analyst earnings forecasts. This informational content is stronger for stocks that are harder to short. We also find that nearly half of the well-known cross-sectional relation between short interest and future stock returns is related to future changes in firms’ value-relevant information. Our results suggest that short interest predicts future returns, in part, due to short sellers’ ability to uncover unfavorable information about firms.

Industry Integration And Stock Price Synchronicity, Hao Cheng, Kian Guan Lim, Tien Foo Sing, Long Wang

Research Collection Lee Kong Chian School Of Business

This paper provides an alternative explanation of the negative relationship between price synchronicity and proprietary right protection that are uncorrelated to the information hypothesis. Using empirical data for 40 countries, we show that stock market volatility and firm size have significant impact on stock price synchronicity. We find significant correlations of international R2 disparity with industry structure integrations. The derived industry integration indices that capture industry correlations significantly explain cross-sectional and temporal variations in price synchronicity. The results imply that tighter industry integration leads to higher R2, and also explain away the property rights factor found in the information hypothesis.

Shades Of Darkness: A Pecking Order Of Trading Venues, Albert J. Menkveld, Bart Zhou Yueshen, Haoxiang Zhu

Research Collection Lee Kong Chian School Of Business

We characterize the dynamic fragmentation of U.S. equity markets using a unique data set that disaggregates dark transactions by venue types. The "pecking order" hypothesis of trading venues states that investors "sort" various venue types, putting low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint dark pools in the middle, and lit markets at the bottom. As predicted, following VIX shocks, macroeconomic news, and firms' earnings surprises, changes in venue market shares become progressively more positive (or less negative) down the pecking order. We further document heterogeneity across dark venue types and …

Liquidity In A Market For Unique Assets: Specified Pool And To-Be-Announced Trading In The Mortgage-Backed Securities Market, Pengjie Gao, Paul Schultz, Zhaogang Song

Research Collection Lee Kong Chian School Of Business

Agency mortgage-backed securities (MBS) trade simultaneously in a market for specified pools (SPs) and in the to-be-announced (TBA) forward market. TBA trading creates liquidity by allowing thousands of different MBS to be traded in a handful of TBA contracts. SPs that are eligible to be traded as TBAs have significantly lower trading costs than other SPs. We present evidence that TBA eligibility, in addition to characteristics of TBA-eligible SPs, lowers trading costs. We show that dealers hedge SP inventory with TBA trades, and they are more likely to prearrange trades in SPs that are difficult to hedge.

Banking The Unbanked In The Philippines, Singapore Management University

Perspectives@SMU

The Ayala Group brought together two of its subsidiaries, Globe Telecom and Bank of the Philippines Island, to bring banking services to 80 percent of the country

Crowdfunding: Financing Ventures In The Digital Era, Srinivas K. Reddy, Yee Heng Tan

Research Collection Lee Kong Chian School of Business

Over the past few years, digital platforms have emerged as a new way to disrupt industries. These platforms not only connect riders and drivers, like Uber, or hosts and guests, like Airbnb, but also ventures and funders. Crowdfunding platforms like Lendingclub or Kickstarter have gained widespread visibility and acceptance in recent years. Crowdfunding was virtually non-existent until 2010 but has been growing exponentially since 2010. In 2015, the volume rose to US$34.4 billion, slightly surpassing the venture capitalist industry and is expected to continue growing quickly.

Variance Risk Premiums Of Commodity Etfs, Chyng Wen Tee, Christopher H. A. Ting

Research Collection Lee Kong Chian School Of Business

We propose a model-independent method to account for the early exercise premiums in American options on non-dividend paying stocks. We find that our estimates of early exercise premium are generally larger than the estimates by existing methods. Given the American options on the Exchange-Traded Funds (ETFs) of gold, silver, natural gas, and crude oil, we find strong empirical evidence of variance risk premiums for these commodities, over a volatility term structure up to 18 months. Furthermore, we show that volatility indexes constructed by using existing methods tend to overestimate the risk-neutral variance, and consequently the magnitude of variance risk premium.

The Value Of Trading Relations In Turbulent Times, Marco Di Maggio, Amir Kermani, Zhaogang Song

Research Collection Lee Kong Chian School Of Business

This paper investigates how dealers’ trading relations shape their trading behavior in the corporate bond market. Dealers charge lower spreads to dealers with whom they have the strongest ties and more so during periods of market turmoil. Systemically important dealers exploit their connections at the expense of peripheral dealers as well as clients, charging higher markups than to other core dealers. Also, intermediation chains lengthened by 20% following the collapse of a flagship dealer in 2008 and even more for institutions strongly connected to this dealer. Finally, dealers drastically reduced their inventory during the crisis.