The Stock Market and Investment: Evidence from FDI Flows

Foreign direct investment offers a rich laboratory in which to study the broader economic effects of securities market mispricing. We outline and test two mispricing-based theories of FDI. The cheap assets' or fire-sale theory views FDI inflows as the purchase of undervalued host country assets, while the cheap capital' theory views FDI outflows as a natural use of the relatively lowcost capital available to overvalued firms in the source country. The empirical results support the cheap capital view: FDI flows are unrelated to host country stock market valuations, as measured by the aggregate market-to-book-value ratio, but are strongly positively related to source country valuations and negatively related to future source country stock returns. The latter effects are most pronounced in the presence of capital account restrictions, suggesting that such restrictions limit cross-country arbitrage and thereby increase the potential for mispricing-driven FDI.

Motivations for Public Equity Offers: An International Perspective

This paper examines the extent to which investment financing and market-timing explanations motivate public equity offers. We consider a sample of 16,958 initial public offerings and 12,373 seasoned equity offerings from 38 countries between 1990 and 2003. We provide estimates of the change in each accounting variable for each dollar raised in an equity offer, and for each dollar of internally generated cash. Our estimates imply that firms invest 18.8 cents in R&D and 7.3 cents in capital expenditures for an incremental dollar raised in an equity offer during the year following the offer, rising to 84.8 cents and 14.3 cents when the change is measured over a four-year period. These findings are consistent with one motive for the equity offer being to raise capital for investment. However, firms also hold onto much of the cash they raised, and this fraction is higher when the firm has a high q. In addition, firms are more likely to issue secondary shares, which are usually sold by insiders, when q is high, enabling insiders to benefit personally from potential overvaluation. These results suggest that market timing as well as investment financing is a motivation for equity offers.

Institutional Investors, Earnings Management And Mispricing Of Accruals: Evidence From China

This study examines the role of institutional investors in the pricing of normal accruals and discretionary accruals using the firms listed in the Chinese A-share Market. The results show that significant overpricing of discretionary accruals exists for individual investors and institutional investors, suggesting that they are both misled by the earnings management, while institutional investors are associated with significantly less overpricing. With respect to normal accruals, we find there is no evidence that institutional investors misprice normal accruals, while the individual investors overprice normal accruals. Our results suggest that institutional investors’ superiority in mitigating the mispricing of total accruals is mainly due to their accurate pricing of normal accruals, and the reason why institutional investors cannot fully eliminate mispricing of accruals is that they are partly misled by earnings management

The Equity Share in New Issues and Aggregate Stock Returns

The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities

The association between accruals and stock return following IFRS3

The purpose of this study is to investigate the correlation between accruals and stock return and further the quality of accounting accruals shown in financial statements for shareholders to predict their future returns. This study uses an inimitable location which is provided by FRS3 in the UK to highlight the well-documented accrual anomaly as important components of financial performance to help the users to understand the archived performance of a firm. Specifically, this paper focuses on the accrual anomaly phenomenon in the UK on the adoption of FRS No. 3 for a period from 2008 to 2017. Our result shows that stock returns can be predicted by accruals attributable to accounting misrepresentations. Generally, our findings support the information disclosure due to FRS No. 3. Also, the results are consistent with increased accounting disclosure to help investors protect themselves from inefficiencies and to encourage them to be aware of accurate stock prices in the market

Forecasting aggregate stock returns using the number of initial public offerings as a predictor

Large number of Initial Public Offerings (IPOs) reliably predicts subsequent low equally weighted aggregate stock returns and the return differential between small and big firms, both in-sample and out-of-sample. The forecasting patterns are consistent with a behavioral story featuring investor sentiment and limits to arbitrage.Initial Public Offerings

Behavioral Corporate Finance: An Updated Survey

Behavioral Corporate Finance: An Updated Surve

The Stock Market and Investment: Evidence from FDI Flows

Foreign direct investment offers a rich laboratory in which to study the broader economic effects of securities market mispricing. We outline and test two mispricing-based theories of FDI. The “cheap assets” or fire-sale theory views FDI inflows as the purchase of undervalued host country assets, while the “cheap capital” theory views FDI outflows as a natural use of the relatively lowcost capital available to overvalued firms in the source country. The empirical results support the cheap capital view: FDI flows are unrelated to host country stock market valuations, as measured by the aggregate market-to-book-value ratio, but are strongly positively related to source country valuations and negatively related to future source country stock returns. The latter effects are most pronounced in the presence of capital account restrictions, suggesting that such restrictions limit cross-country arbitrage and thereby increase the potential for mispricing-driven FDI

The Stock Market and Investment: Is the Market a Sideshow?

macroeconomics, stock market

Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly

We show that the agency theory of overvalued equity (see Jensen, 2005) rather than investors' fixation on accruals explains the accrual anomaly, i.e., abnormal returns to an accrual trading strategy (see Sloan, 1996).Under the agency theory of overvalued equity, managers of overvalued firms are likely to manage their firms' accruals upwards to prolong the overvaluation.Thus, high-accrual portfolios are likely to be over-represented with over-valued firms.Overvaluation, however, cannot be sustained indefinitely and we expect price reversals for high accrual firms.In contrast, undervalued firms do not face incentives to report low accruals, so undervalued firms are not concentrated in low accrual decile portfolios.Therefore, across the accrual decile portfolios, we predict and find an asymmetric relation between accruals and both prior and subsequent returns.In addition, consistent with the predictions of the agency theory of overvalued equity, we find high, but not low, accrual firms' investment-financing decisions and insider trading activity are distorted, and analyst forecast optimism is concentrated among the high-accrual decile portfolios.Overall, return behavior, analyst optimism, investment-financing decisions, and insider trading activity are all consistent with the agency theory of overvalued equity, but do not support investor fixation on accruals.accrual anomaly;earnings management;agency theory of overvalued equity