The purpose of this paper is to study the dynamic relationship between foreign exchange and stock returns. Specifically, the authors examine the impact of the 2008 financial…
Abstract
Purpose
The purpose of this paper is to study the dynamic relationship between foreign exchange and stock returns. Specifically, the authors examine the impact of the 2008 financial crises on the relation between foreign exchange and stock returns in the MENA region.
Design/methodology/approach
The authors examine the long-run relation between these two variables using VECM and the authors study the volatility behavior of these two variables using the Dynamic VECH–generalized autoregressive conditional heteroskedasticity (GARCH) model. The sample covers the MENA region over the period 2004–2015.
Findings
The results indicate a regime shift in three countries: Egypt, Tunisia and Morocco. In addition, the results assert asymmetric relation between stock returns and changes in exchange rates during pre-crisis and post-crisis periods. Modeling the volatility of the foreign exchange and stock return and their covariance using VECH–GARCH suggests that the persistence in volatility is more prominent in the crisis/post-crisis period as compared with the pre-crisis period. Finally, the authors also find more significant results for the persistence parameter in the covariance between stock return and foreign exchange in the crisis/post-crisis period as compared with the pre-crisis period.
Originality/value
To the best of the authors’ knowledge, the studies by Wong and Li (2010) and Caporale et al. (2014) are the only two that have examined the interaction between stock prices and foreign exchange during the recent financial crisis of 2008. To the authors’ knowledge, none of the previous literature examined the impact of financial 2008 crisis on the relation between foreign exchange and stock prices in the MENA.
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Bin-Hsien Lo, Lon-Fon Shieh, Yi-Cheng Shih and Min-Der Hsieh
This chapter examines the relationship between directors and officers (D&O) liability insurance and stock-price synchronicity by testing competing corporate governance-related…
Abstract
This chapter examines the relationship between directors and officers (D&O) liability insurance and stock-price synchronicity by testing competing corporate governance-related monitoring and moral hazard-related agency conflict hypotheses. Testing a sample of stocks listed on the Taiwan Stock Exchange and the Taipei Exchange for 2008–2020, the empirical results of this study indicate that D&O insurance in Taiwan is negatively correlated to stock-price synchronicity. This negative relation is robust to a battery of tests, including those of fixed-effects regression models, alternative sample periods, alternative synchronicity measures, and alternative insurance measures. Further evidence indicates that this negative relationship is more pronounced among firms with greater agency problems, especially during periods of high market uncertainty. Overall, these findings support the corporate governance-related monitoring hypothesis, which posits that firms with greater D&O insurance are likelier to be characterized by better governance structures and information transparency. Additionally, their stock prices are more likely to reflect firm-specific information in a timely and precise manner, and they are more likely to have lower synchronicity with the industry and market.
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The primary objective of this research is to provide evidence that there are two distinct layers of investor sentiments that can affect asset valuation models. The first is…
Abstract
Purpose
The primary objective of this research is to provide evidence that there are two distinct layers of investor sentiments that can affect asset valuation models. The first is general market-wide sentiments, while the second is biased approaches toward specific assets.
Design/methodology/approach
To achieve the goal, the authors conducted a multi-step analysis of stock returns and constructed complex sentiment indices that reflect the optimism or pessimism of stock market participants. The authors used panel regression with fixed effects and a sample of the US stock market to improve the explanatory power of the three-factor models.
Findings
The analysis showed that both market-level and stock-level sentiments have significant contributions, although they are not equal. The impact of stock-level sentiments is more profound than market-level sentiments, suggesting that neglecting the stock-level sentiment proxies in asset valuation models may lead to severe deficiencies.
Originality/value
In contrast to previous studies, the authors propose that investor sentiments should be measured using a multi-level factor approach rather than a single-factor approach. The authors identified two distinct levels of investor sentiment: general market-wide sentiments and individual stock-specific sentiments.
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The price of a company's stock affects many aspects of its operations, ranging from access to capital to executive compensation to acquisition strategy. Unfortunately, too few…
Abstract
The price of a company's stock affects many aspects of its operations, ranging from access to capital to executive compensation to acquisition strategy. Unfortunately, too few managers understand why stock prices are important and what is a high or low price. The authors provide a model of stock price performance, examine the link to business unit profitability, and suggest some steps to improve your company's market valuation.
Mohammed Bouaddi, Omar Farooq and Neveen Ahmed
This study examines the effect of dividend policy on the ex ante probability of stock price crash and the ex ante probability stock price jump.
Abstract
Purpose
This study examines the effect of dividend policy on the ex ante probability of stock price crash and the ex ante probability stock price jump.
Design/methodology/approach
We use the data of publicly listed non-financial firms from France and the ex ante measures of crash and jump probabilities (based on the Flexible Quadrants Copulas) to test our hypothesis during the period between 1997 and 2019.
Findings
Our results show that dividend payments are negatively associated with the ex ante probability of crash and positively associated with the ex ante probability of jump. Our results are robust across various sub-samples and across different proxies of dividend policy. Our findings also hold when we use ex-post measures of crash and jump probabilities.
Originality/value
Unlike prior literature, we use ex ante measures of crash and jump probabilities. The main advantage of this forward looking measure is that it allows for more flexibility by modeling the dependence between market returns and stock returns as functions of their actual state. Our measure is also consistent with the behavior of investors and market participants in a way that the market participants do not know the future outcome with certainty, but rather they are anticipating the future.
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Ricardo Sellers‐Rubio, Juan L. Nicolau‐Gonzálbez and Francisco Mas‐Ruiz
The purpose of this paper is to estimate the economic value of patent protection and the resulting rivalry.
Abstract
Purpose
The purpose of this paper is to estimate the economic value of patent protection and the resulting rivalry.
Design/methodology/approach
An event‐study is applied which uses the daily returns of shares on the stock market as an output; and a model is estimated which bases its output on Tobin's q with annual observations.
Findings
The results are determined by the methodology used and the measurement of the output dimensions of company performance. Both methodologies conclude that the patent application date is the determiner of the value of an innovation. The event study methodology reflects the positive value of patent protection.
Research limitations/implications
The generalisation of the conclusions of the study to other economic sectors should be made with caution, given the fact that only the electrical sector was analysed.
Originality/value
The literature available on this subject suggests that empirical evidence can be affected by operational problems related to the measurement of inventive input and output. As a new contribution to the field, the paper discovers the date of input (application or grant of the patent or both) on which the company manifests innovation.
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SEPTEMBER is the month when, Summer being irrevocably over, our minds turn to library activities for the winter. At the time of writing the international situation is however so…
Abstract
SEPTEMBER is the month when, Summer being irrevocably over, our minds turn to library activities for the winter. At the time of writing the international situation is however so uncertain that few have the power to concentrate on schemes or on any work other than that of the moment. There is an immediate placidity which may be deceptive, and this is superficial even so far as libraries are concerned. In almost every town members of library staffs are pledged to the hilt to various forms of national service—A.R.P. being the main occupation of senior men and Territorial and other military services occupying the younger. We know of librarians who have been ear‐marked as food‐controllers, fuel controllers, zone controllers of communication centres and one, grimly enough, is to be registrar of civilian deaths. Then every town is doing something to preserve its library treasures, we hope. In this connexion the valuable little ninepenny pamphlet issued by the British Museum on libraries and museums in war should be studied. In most libraries the destruction of the stock would not be disastrous in any extreme way. We do not deny that it would be rather costly in labour and time to build it up again. There would, however, be great loss if all the Local Collections were to disappear and if the accession books and catalogues were destroyed.
Tianxi Dong, Suning Zhu, Mauro Oliveira and Xin (Robert) Luo
Stock price reactions have often been used to evaluate the cost of data breaches in the current information systems (IS) security literature. To further this line of research…
Abstract
Purpose
Stock price reactions have often been used to evaluate the cost of data breaches in the current information systems (IS) security literature. To further this line of research, this study examines the impact of data breaches on stock returns, information asymmetry and unsystematic firm risk in the context of COVID-19.
Design/methodology/approach
This paper employs an event study methodology and examines data breach events released in public databases, spanning pre- and post-COVID settings. This study investigated 283 data breaches of the US publicly traded firms, and the economic cost was measured by cumulative abnormal returns (CARs), trading volume, bid-ask spread and unsystematic risk.
Findings
The authors observe that data breaches during the COVID pandemic make investors react more negatively to data breach announcements, as reflected in the significantly negative difference in CARs between breached firms before COVID and those after COVID. The findings also indicate that, after the disclosure of data breach incidents, information asymmetry is reduced to a lesser extent compared with that in the pre-COVID setting. The authors also find that data breach events lead to an increase in the unsystematic risk of breached companies in the pre-COVID era but no change in the post-COVID era.
Originality/value
This study is the first effort to examine the economic consequences of data breaches by investigating the effects in the form of trading activities and risk measurement in the COVID setting.
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This paper provides a structural model to value startup companies and determine the optimal level of research and development (R&D) spending by these companies.
Abstract
Purpose
This paper provides a structural model to value startup companies and determine the optimal level of research and development (R&D) spending by these companies.
Design/methodology/approach
This paper describes a new variant of float-the-money options, which can act as a financial instrument for financing R&D expenses for a specific time horizon or development stage, allowing the investor to share in the startup's value appreciation over that duration. Another innovation of this paper is that it develops a structural model for evaluating optimal level of R&D spending over a given time horizon. The paper deploys the Gompertz-Cox model for the R&D project outcomes, which facilitates investigation of how increased level of R&D input can enhance the company's value growth.
Findings
The author first introduces a time-varying drift term into standard Black-Scholes model to account for the varying growth rates of the startup at different stages, and the author interprets venture capital's investment in the startup as a “float-the-money” option. The author then incorporates the probabilities of startup failures at multiple stages into their financial valuation. The author gets a closed-form pricing formula for the contingent option of value appreciation. Finally, the author utilizes Cox proportional hazards model to analyze the optimal level of R&D input that maximizes the return on investment.
Research limitations/implications
The integrated contingent claims model links the change in the financial valuation of startups with the incremental R&D spending. The Gompertz-Cox contingency model for R&D success rate is used to quantify the optimal level of R&D input. This model assumption may be simplistic, but nevertheless illustrative.
Practical implications
Once supplemented with actual transaction data, the model can serve as a reference benchmark valuation of new project deals and previously invested projects seeking exit.
Social implications
The integrated structural model can potentially have much wider applications beyond valuation of startup companies. For instance, in valuing a company's risk management, the level of R&D spending in the model can be replaced by the company's budget for risk management. As another promising application, in evaluating a country's economic growth rate in the face of rising climate risks, the level of R&D spending in this paper can be replaced by a country's investment in addressing climate risks.
Originality/value
This paper is the first to develop an integrated valuation model for startups by combining the real-world R&D project contingencies with risk-neutral valuation of the potential payoffs.
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Adedoyin Isola Lawal, Afees Adebayo Salisu, Russell Olukayode Somoye, Abiola Ayopo Babajide and Joseph Niyan Taiwo