Managerial Finance

Michael E. Drew; Madhu Veeraraghavan; Min Ye

2007 Managerial Finance

doi: 10.1108/03074350710779223

Purpose – The purpose of this paper is to investigate the profitability of momentum investment strategy and the predictive power of trading volume for equities listed in the Australian Stock Exchange. Design/methodology/approach – Following the Lee and Swaminathan's approach, portfolios on past returns and past trading volume is constructed. In this approach, all stocks are ranked independently on the basis of past returns and past trading volume. The stocks are then assigned to one of five portfolios based on past returns and one of three portfolios based on trading volume over the same period. Findings – A strong momentum effect for the Australian market during the period 1988 through 2002 is observed. Further, momentum plays an important role in providing information about stocks. Past trading volume appears to predict both the magnitude and persistence of price momentum. Research limitations/implications – Substantial momentum observed in monthly stock returns has investment implications. Abnormal returns vary from 0.3 to 7 per cent per month in the intermediate horizon. Originality/value – This study provides an out of sample evidence by examining the relationship between “trading volume” (measured by the turnover ratio) and “momentum” strategies in an Australian setting.

Kaylene Zaretzky; J. Kenton Zumwalt

2007 Managerial Finance

doi: 10.1108/03074350710779232

Purpose – Earlier research found that firms with the highest distress risk have low book‐to‐market (B/M) ratios and low returns. This paper aims to examine the robustness of those's results and provide further evidence that high distress‐risk firms do not enjoy the same high returns earned by high B/M firms and that distress risk is unlikely to explain the Fama and French high‐minus‐low (HML) B/M factor. Design/methodology/approach – A distress‐risk measure, distressed‐minus‐solvent (DMS), is calculated and a range of zero investment distress‐risk trading strategies is investigated. Value‐ and equal‐weighted portfolios are examined both with negative book‐equity firms and without. These most distressed firms have low or negative B/M values and would either not be included in the Fama and French sample or included in the low B/M portfolio. Findings – The paper finds that the DMS factor is negative and significant, and none of the zero investment strategies earns significantly positive returns. Research limitations/implications – The findings suggest that exposure to distress risk does not earns investors a positive risk premium. It appears that over the period examined, market inefficiencies drive the market value and returns of high distress‐risk firms. Originality/value – The distress‐risk premium is shown to be negative and, therefore, cannot be driven by bankruptcy risk alone. The negative premium is not consistent with a financial distress explanation for the Fama and French HML factor.

Suren Peter

2007 Managerial Finance

doi: 10.1108/03074350710779241

Purpose – The purpose of this paper is to investigate returns of initial public offerings (IPOs) in an emerging market and differences in the returns of privatized and non‐privatized offerings. Design/methodology/approach – Market‐adjusted return is computed as daily cumulative excess returns for six‐ and 12‐month periods. Long‐run performance is measured by calculating market‐adjusted buy and hold return assuming that shareholders pursue strategies of 1, 2 and 3 years. Findings – The paper finds that underpricing exists even in emerging markets and at a higher level than in developed countries. Average returns are over 55 per cent and is comparable with that of Malaysia, Mexico, Poland and Thailand. POs generally outperform the market, with the privatized IPOs offering superior excess returns than the non‐privatized IPOs. Excess returns diminish by the end of three years. The pattern of the returns seen in this case is different to similar studies elsewhere, where excess returns are observed over four to five years after the initial listing. Research limitations/implications – The number of IPOs investigated here is comparatively small. However, because the sample consists of a mix of privatized vs non‐privatized companies, the results provide useful insights on factors that may drive the unusual returns. While underpricing is common in most IPOs, the state when privatizing enterprises seem to be offering investors excessive returns. Originality/value – This paper provides researchers and policymakers some insights into the workings of capital markets in emerging economies.

Hafiz Al Asad Bin Hoque

2007 Managerial Finance

doi: 10.1108/03074350710779250

Purpose – The purpose of this paper is to explore dynamics of stock price movements of an emerging market, Bangladesh with that of USA, Japan and India. Design/methodology/approach – The long‐term relationships among the markets are analyzed using the Johansen and Juselius multivariate cointegration approach. Short‐run dynamics are captured through vector error correction models. Further investigation on short‐run dynamics is carried out through impulse response analysis. Findings – There is evidence of cointegration among the markets demonstrating that stock prices in the countries studied here share a common stochastic trend. Impulse response analysis shows that shocks to the US market do have an impact on the Bangladesh market. The evidence of Bangladesh stock market responding to shocks in the Indian market is weak. Shocks to the Japanese market do not generate a response in the Bangladesh market. Research limitations/implications – As these markets share a common stochastic trend no diversification benefit is possible from cross‐border investments. Investors could further enhance their understanding of market behaviour by comparing the observations here with those of studies that adopt technical analysis, fundamental analysis and consider financial anomalies. Originality/value – The evidence of cointegration and the short run dynamic relationship help investors in making efficient investment decisions in the Bangladesh stock market.

Don U.A. Galagedera

2007 Managerial Finance

doi: 10.1108/03074350710779269

Purpose – The main aspect of security analysis is its valuation through a relationship between the security return and the associated risk. The purpose of this paper is to review the traditional capital asset pricing model (CAPM) and its variants adopted in empirical investigations of asset pricing. Design/methodology/approach – Pricing models are discussed under five categories: the single‐factor model, multifactor models, CAPM with higher order systematic co‐moments, CAPM conditional on market movements and time‐varying volatility models. Findings – The paper finds that the last half‐century has witnessed the proliferation of empirical studies testing on the validity of the CAPM. A growing number of studies find that the cross‐asset variation in expected returns cannot be explained by the systematic risk alone. Therefore a variety of models have been developed to predict asset returns. Research limitations/implications – There is no consensus in the literature as to what a suitable measure of risk is, and consequently, as to what is a suitable measure for evaluating risk‐adjusted performance. So the quest for robust asset pricing models continues. Originality/value – From its beginning to its possible demise the paper reviews the history of the CAPM assuring that we are all up to speed with what has been done.