Essays on stock return comovement and corporate investment

Pao Yue-kong Library Electronic Theses Database

Essays on stock return comovement and corporate investment


Author: Pang, Lei
Title: Essays on stock return comovement and corporate investment
Degree: Ph.D.
Year: 2010
Subject: Hong Kong Polytechnic University -- Dissertations
Stocks -- Prices
Corporations -- Finance
Department: School of Accounting and Finance
Pages: x, 174 leaves : ill. ; 30 cm.
InnoPac Record:
Abstract: This thesis contains three separate essays related to stock return comovement and corporate investment. The first essay examines the role of corporate insiders’ incentives in affecting stock return comovement and tests the empirical implications of Jin and Myers (2006) ["R² around the World: New Theory and New Tests," Journal of Financial Economics 79, 257-292]: Corporate insiders capture a firm's cash flow beyond outside investors' expectation by withholding good news and end up absorbing more firm-specific risk, thereby increasing stock return comovement. Using a total of 2,016 firms from 21 countries in East Asia and Western Europe, I show that the wedge between voting rights and cash flow rights is an important factor influencing the price formation process in which firm-specific good or bad news is differentially incorporated into stock price. Stock returns for high-wedge firms comove less with the market than for low-wedge firms, and control-ownership wedge is significantly and negatively related to the likelihood of positive return jumps but insignificantly related to crash risk. In addition, absolute abnormal returns cumulated over three-and five-day earnings announcement windows increase significantly with the wedge for the good-news subsample but not for the bad-news one. Overall, my evidence supports Jin and Myers (2006) intuition that corporate insiders tend to withhold good news and their incentives for Private control benefits contribute to stock return comovement.
The second essay examines the role of institutional investors in influencing stock return comovement and tests the empirical implications of Veldkamp (2006) ["Information Markets and the Comovement of Asset Prices", Review of Economic Studies 73, 823-845] information-driven comovement theory. In presence of complementarities in information demand and high fixed costs for information production, investors rely on high-demand low-cost aggregate information and their information choices induce excess stock return comovement. Using institutional ownership (for 7,859 non-U.S. firms from 43 countries) as a proxy for the ability to produce firm-specific information, I find that different types of institutional investors affect stock return comovement differently. In particular, foreign (especially U.S.) institutional investors with high stakeholdings or with frequent trading are more effective in reducing stock return comovement. The evidence on the U.S. institutional investors is consistent with Albuquerque, Bauer and Schneider (2009) notion of global private information. Overall, my findings suggest that characteristics of information markets and information choices by investors contribute to stock return comovement, and institutional investors play an important role in enhancing stock price informativeness. The third essay examines the role of corporate insiders' incentives for private control benefits in affecting investment sensitivity to stock price. While prior studies (e.g., Chen, Goldstein and Jiang, 2007) find that stock price informativeness improves firms' learning from the stock market, I offer an alternative agency-cost based explanation for investment sensitivity to stock price. Using a total of 2,861 firms from 22 countries in East Asia and Western Europe, I document a strong negative association between control-ownership wedge and investment sensitivity to stock price, suggesting that controlling shareholders' incentives for private control benefits reduce their propensity to listen to the market. By examining additional factors known to affect the intensity of agency problem, I provide further evidence that control-ownership wedge is an important factor that determines the extent to which corporate investment decisions follow stock prices. In addition, the negative relation between the wedge and investment sensitivity to stock price is concentrated in firms with high stock price informativeness and the wedge reduces the contribution of investment to firm valuation. Overall, my evidence suggests that conflicts between controlling and minority shareholders weaken the importance of the stock market in capital allocation.

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