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Abstract:
This study jointly evaluates the informativeness of insider trades and analyst recommendations. We show that the two activities often generate contradictory signals. Insiders in aggregate buy more shares when their firm's stock is unfavorably recommended or downgraded by analysts than when it is favorably recommended or upgraded. This result is robust to various controls such as varying degrees of analyst coverage, firm size, book-to-market ratios, and stock price momentum. We find that analyst recommendations affect insider trading decisions, but not vice versa. Our further analysis shows that insider trading is informative when signaling positive information, and analyst recommendations are informative when conveying negative information. The overall results imply that corporate insiders and financial analysts do not substitute each other's informational role in the financial market.

Analyst recommendations, Insider trades

Abstract:
This paper develops a methodology to identify asset price response to news in the framework of Campbell-Shiller log-linear present-value equation. We show that slow price adjustment not only induces high serial auto correlation in real estate excess returns, but also dampens their volatility and correlation with other asset returns. Using Hong Kong real estate and stock market data, we find that the quarterly real estate price assimilates only about half the effect of market news, whereas the quarterly stock price incorporates the news fully. Our analysis identifies a cumulative price adjustment that recovers lost information in real estate returns due to market inefficiency and thereby restores real estate return volatility and correlation with the stock market.

Abstract:
This study analyzes the detailed equity holdings of over 20,000 mutual funds from 26 developed and developing countries. Of particular interest is that we examine how this huge number of funds allocates their investment between domestic and foreign equity markets and what factors determine the distribution of their asset allocations worldwide. We find robust evidence that mutual funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock-market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors over-weighting their local markets) and the foreign bias (foreign investors under- or over-weighting the overseas markets). When a country is more developed, or is closer to the rest of the world in terms of physical distance or common language, foreign investors are attracted to that country (less foreign bias) and, in turn, proportionately fewer domestic investors are found to hold local equities (less domestic bias). Furthermore, we find that variables such as economic development, capital control, and withholding taxes also have significant, but smaller, effects on the investment decisions of foreign investors and not of domestic investors.

Abstract:
Using a new and unique dataset on mutual fund stockholdings, we identify several interesting similarities and differences in the stock preferences of domestic and foreign fund managers from 11 developed countries. Our results show that both groups of fund managers consider basic stock characteristics important in their investment decisions. However, foreign managers, while not domestic managers, tend to be biased towards globally visible stocks, even after controlling for investment styles. The demand for such stocks is strong when the objective of their funds is to diversify globally or across regions, but weakens when their stock holdings are concentrated mainly in the same local market as domestic managers. The latter implies that the geographic location of managers might matter. Finally, the results also show that managers from three different regional markets exhibit similar stock preferences.

home bias, fund managers, institutional trading, foreign, domestic, stock characteristics

Abstract:
The paper finds evidence that corporate governance mechanisms matter for mutual funds, especially funds with better governance standards. Using new and unexplored mutual fund governance data, we show that corporate governance mechanisms play a role in both the investment decisions and the monitoring efforts of mutual funds. Mutual funds, in general, tend to tilt their portfolios toward firms with strong corporate governance, and this is more evident in funds with good governance practices. We further find that corporate governance also affects fund proxy voting decisions. Such voting decisions are indicative of the funds' efforts aimed at monitoring corporate activities supporting mutual fund activism. Funds with better governance tend to vote against management's, but consistent with Institutional Shareholder Services' negative recommendations on management-sponsored proposals relating to antitakeover, board quality, and director election. Overall, our evidence suggests that well-governed, while not poorly-governed, mutual funds do perform their fiduciary duties and act in the interests of their shareholders.

proxy voting, Morningstar stewardship grade, mutual funds, governance mechanisms

Abstract:
This study investigates whether the widely documented daily correlated trading volume of stocks is driven by individual investor trading, institutional trading, or both. We find that at least 95 percent of NYSE and AMEX stocks exhibit statistically significant, positive serial correlation. Volume autocorrelation decreases with the level of institutional ownership of a stock. We also show that the rate of arrivals of new information to the market contributes to the clustering of the trades. When there is high information flow to the market, institutional trading generates a more pronounces effect on volume autocorrelation than individual investor trading. Our results are broadly consistent with the predictions of trading volume patterns suggested by most theoretical models of stock trading and by empirical research on investor trading.

institutions, autocorrelation, information flow

Abstract:
This study investigates whether the widely documented daily correlated trading volume of stocks is driven by individual investor trading, institutional trading, or both. We find that at least 95 percent of NYSE and AMEX stocks exhibit statistically significant, positive serial correlation. Volume autocorrelation decreases with the level of institutional ownership of a stock. We also show that the rate of arrivals of new information to the market contributes to the clustering of the trades. When there is high information flow to the market, institutional trading generates a more pronounces effect on volume autocorrelation than individual investor trading. Our results are broadly consistent with the predictions of trading volume patterns suggested by most theoretical models of stock trading and by empirical research on investor trading.

institutions, autocorrelation, information flow

Abstract:
This paper investigates whether different types of institutions have discernible trading motives in response to portfolio disclosures. Results show that banks, life insurance companies, mutual funds, and investment advisors who act as external managers generally have similar trading strategies. They sell more poorly performing stocks during the fourth quarter than the first three quarters of the year, and such trading behavior is more pronounced for institutions whose stocks on average have underperformed the market. In contrast, property and liability insurance companies, internally-managed pension funds, colleges, universities, and foundations, who mainly provide their own asset management services, show less inclination to window dress their portfolios.

Institutional investors, trading patterns, window dressing

Abstract:
This paper investigates whether different types of institutions
have discernible trading motives in response to portfolio
disclosures. Results show that banks, life insurance companies,
mutual funds, and investment advisors who act as external managers generally have similar trading strategies. They sell more poorly performing stocks during the fourth quarter than the first three quarters of the year, and such trading behavior is more pronounced for institutions whose stocks on average have underperformed the market. In contrast, property and liability insurance companies, internally-managed pension funds, colleges, universities, and foundations, who mainly provide their own asset management services, show less inclination to window dress their portfolios.

Institutional investors, trading patterns, window dressing

Abstract:
This study provides evidence that links institutional trading
behavior directly to anomalous turn-of-the-year (TOY) return
patterns of small stocks. We find that TOY trading patterns of
institutions reflect strategies that are generally consistent with window-dressing and risk-shifting behaviors. Institutions sell more loser small stocks in the last quarter of the year, but buy more small stocks, both winners and losers, in the first quarter. Institutional buying (selling) of loser stocks at year-end weakens (strengthens) the TOY effect. In addition, buying of winner stocks after year-end causes a statistically-significant, though weaker, effect.

Institutions, Window-Dressing, Risk-Shifting, Turn-of-the-Year Effect

Abstract:
This study provides evidence that links institutional trading
behavior directly to anomalous turn-of-the-year (TOY) return
patterns of small stocks. We find that TOY trading patterns of
institutions reflect strategies that are generally consistent with window-dressing and risk-shifting behaviors. Institutions sell more loser small stocks in the last quarter of the year, but buy more small stocks, both winners and losers, in the first quarter. Institutional buying (selling) of loser stocks at year-end weakens (strengthens) the TOY effect. In addition, buying of winner stocks after year-end causes a statistically-significant, though weaker, effect.

Institutions, Window-Dressing, Risk-Shifting, Turn-of-the-Year Effect

Abstract:
This paper employs a unique data set to analyze the trading behavior of 4.74 million individual and institutional investors across Mainland China. Results show that groups of individual investors with varying trade values (as proxies for wealth levels) engage in different trading strategies. Chinese institutions are momentum investors, while less wealthy Chinese individual investors at large are contrarian investors. The results also indicate that a small group of wealthiest Chinese individuals tend to behave like institutions when they buy stocks, and behave like less wealthy individuals when they sell. Furthermore, only the trading activities of institutions and of wealthiest individuals can affect future stock volatility, but those of Chinese individual investors at large have no predictive power for future stock returns.

Trading behavior, momentum and contrarian strategies, stock volatility

Abstract:
This paper employs a unique data set to analyze the trading behavior of 4.74 million individual and institutional investors across Mainland China. Results show that groups of individual investors with varying trade values (as proxies for wealth levels) engage in different trading strategies. Chinese institutions are momentum investors, while less wealthy Chinese individual investors at large are contrarian investors. The results also indicate that a small group of wealthiest Chinese individuals tend to behave like institutions when they buy stocks, and behave like less wealthy individuals when they sell. Furthermore, only the trading activities of institutions and of wealthiest individuals can affect future stock volatility, but those of Chinese individual investors at large have no predictive power for future stock returns.

Trading behavior, momentum and contrarian strategies, stock volatility

Abstract:
This study finds strong evidence that home bias affects firm valuation at both country and firm levels. Results show that, at the country level, domestic investors increasing weights in countries that they have over-weighted produces a negative impact on market valuation, while foreign investors increasing weights in countries that they have underweighted leads to enhanced market valuation. At the firm level, firm value increases as domestic and foreign investors weight local firms toward the firms' global market capitalization weights, but decreases as their weights deviate from global weights. Overall, the evidence is consistent with the optimal global risk-sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation.

Home Bias, Mutual Funds, Cost of Capital, Firm Value, Risk Sharing

Abstract:
We find that the geographic dispersion of a corporation affects its firm valuation. Firms with subsidiaries located in different regions of the United States experience a valuation discount of 6.2% after controlling for the impact of both global and industrial diversifications, and the valuation discount increases as firms expand their operations to different regions nationwide. Results show that firms with weak corporate governance tend to expand geographically, and these firms experience greater value discounts compared with their counterparts with good corporate governance. Overall, our results suggest that the geographic location of corporate activities is an essential component of corporate policies and has important market valuation implications.

Geographic Dispersion, Firm valuation, Corporate Governance

Abstract:
This study examines for evidence of peer effects, via word-of-mouth communication, in investor trading decisions. It exploits a unique setting in Mainland China in that groups of individual investors are in the same trading room at the time they place their stock orders. We find strong word-of-mouth effects in the trading decisions of these Chinese individual investors. The effect is stronger in investor buys than investor sells of locally-headquartered stocks, while it is stronger in investor sells than investor buys of non-locally headquartered stocks. The results are robust to several alternative interpretations associated with stock visibility and familiarity, within-branch bias, location, local bias, firm size, and calendar effects. In contrast to existing studies, we find the word-of-mouth influence be mainly dominated by the nearest neighbors from the same branch and not by those from different branches located even in the same city. Hence physical proximity that facilitates frequent personal interactions between individual investors does matter for peer effects in trading decisions.

Abstract:
This study offers new evidence on the preferences of individual investors for certain stock characteristics. Based on 64.2 million trades executed by about 6.8 million Chinese investors, results show that stock preferences of individual investors vary with wealth levels. Wealthier individuals prefer highly liquid and volatile stocks, and stocks with greater state-ownership, growth potential, and good past return performance. However, less wealthy individuals prefer stocks with high beta, high liquidity, poor past return performance, and especially stocks with low price, and small capitalization. The strong preference for small and low-priced stocks reflects in part the regulatory constraints less wealthy individual investors face: the Chinese securities regulation prohibits investors from short selling and margin trading. Our overall results do not suggest that the investment choices of individual investors necessarily indicate only behavioral biases as existing studies might have implied, but instead, the findings reveal to some extent the rational investing behavior of Chinese individual investors. Finally, like institutions in developed markets, Chinese institutions also prefer large firms and firms with high earnings per share and large volatility.

Individual investors, trading preferences, stock characteristics

Abstract:
This study offers new evidence on the preferences of individual investors for certain stock characteristics. Based on 64.2 million trades executed by about 6.8 million Chinese investors, results show that stock preferences of individual investors vary with wealth levels. Wealthier individuals prefer highly liquid and volatile stocks, and stocks with greater state-ownership, growth potential, and good past return performance. However, less wealthy individuals prefer stocks with high beta, high liquidity, poor past return performance, and especially stocks with low price, and small capitalization. The strong preference for small and low-priced stocks reflects in part the regulatory constraints less wealthy individual investors face: the Chinese securities regulation prohibits investors from short selling and margin trading. Our overall results do not suggest that the investment choices of individual investors necessarily indicate only behavioral biases as existing studies might have implied, but instead, the findings reveal to some extent the rational investing behavior of Chinese individual investors. Finally, like institutions in developed markets, Chinese institutions also prefer large firms and firms with high earnings per share and large volatility.

Individual investors, trading preferences, stock characteristics

Abstract:
We find that the geographic dispersion of a corporation affects its firm valuation. Firms with subsidiaries located in different regions of the United States experience a valuation discount of 6.2% after controlling for the impact of both global and industrial diversifications. The valuation discount increases as firms expand their operations to different regions nationwide. Results show that firms with more anti-takeover provisions are more likely to be geographically diverse, and that these firms experience greater value discounts compared with their counterparts with fewer such provisions. Our overall evidence suggests that the geographic location of corporate activities is an essential component of corporate policies and has important market valuation implications.

Geographic dispersion, Firm valuation, Corporate governance

Abstract:
We analyze the U.S. equity holdings of more than 3,000 non-U.S. based mutual funds from 22 countries and find robust evidence that fund managers strongly prefer to invest in stocks of U.S. firms that have presence in their home country. This "home bias" is independent of the degree of global involvement and visibility of these U.S. firms. While these firms have significantly greater exposure to local equity markets, their local presence offers little information advantage to local fund managers. Our findings suggest that the lack of international diversification is more serious than currently documented in the literature.

Foreign Investments, Mutual Funds, and Local Presence

Abstract:
This study analyzes the detailed equity holdings of over 20,000 mutual funds from 26 developed and developing countries. Of particular interest is that we examine how this huge number of funds allocates their money between domestic and foreign equity markets and what factors determine the distribution of their asset allocations worldwide. We find robust evidence that mutual funds, in aggregate, allocate disproportionately a larger fraction of wealth to domestic than foreign stocks. The results indicate that the stock-market development and familiarity variables exhibit significant, but asymmetric, effects on the domestic bias (domestic investors over-weighting the local markets) and foreign bias (foreign investors under- or over-weighting the overseas markets). When a market is more developed, or is closer in terms of physical distance or common language, this attracts foreign investors to the home country (less foreign bias) and, in turn, fewer domestic investors are found to hold local equities (less home bias). Furthermore, we find that variables such as economic development, capital controls, and withholding taxes also have significant, but smaller, effects on the investment decisions of foreign investors and not of domestic investors.

Home bias, mutual funds, institutional investors, diversification

Abstract:
We investigate whether size and book-to-market values of equity (BM) are proxying for macroeconomic risk found in Chen, Roll, and Ross's (CRR) multifactor model or are measures of stocks' risk exposure to relative distress. We find that the role of size subsumes stocks' risk exposures associated with the CRR factors and that the CRR multifactor model does not explain the BM effect. We also find that size and BM are related to relative distress and that relative distress can explain the size effect, but only partially the effect of BM, on average stock returns.

Abstract:
This paper uses multivariate statistical approaches to investigate the global sources of international real return variation. These approaches allow us to take into account the widely-documented evidence that stock market returns from different countries move in tandem with each other. In the spirit of Fama (1990), we examine two potential sources of international real return variation: changes in expected future cash flows and changes in discount rates. In this study, common global economic variables that relate to changes in the global economy or to international business conditions serve as proxies for the two sources of variation. Our results show that these two sources of variation capture a statistically significant fraction of stock price variability; their explanatory power, however, differs across holding period horizons. While proxies for changes in discount rates have an incremental impact on both monthly and quarterly real returns, proxies for changes in expected future cash flows have only an incremental impact on quarterly real returns. Our results are also generally robust to the different methodologies employed.

Abstract:
This paper uses a multivariate procedure to measure two sources of real return variation in the Pacific Basin equity markets: the expected return variables and shocks to expected future cash flows. While the global instrumental variables that proxy for these two sources of variation explain individual stock index real returns reasonably well, their explanatory power for portfolio real returns is much stronger. Our evidence thus suggests market rationality of stock price movements in the Pacific Basin countries. We further find that expected future cash flow shocks are better at explaining quarterly real returns than do expected-return variables. Results also show that U.S. future industrial growth rates have a significantly stronger impact on the Pacific Basin Stock return movements than do the Japanese.

Abstract:
This paper develops a test for causality in variance. The test is based on the residual cross-correlation function (CCF) and is robust to distributional assumptions. Asymptotic normal and asymptotic chi-square statistics are derived under the null hypothesis of no causality in variance. Monte Carlo results indicate that the proposed CCF test has good empirical size and power properties. Two empirical examples illustrate that the causality test yields useful information on the temporal dynamics and the interaction between two time series.

Abstract:
This paper presents a comprehensive empirical examination of the foreign exposure effect on Japanese corporations and sectors. We provide compelling evidence that, after controlling for marketwide movements, the exposure effect on Japanese corporations' stock returns is both statistically and economically significant. Based on a wide array of about 1200 Japanese firms and a group of 23 different Japanese industries in our sample, we find that Japanese stock returns on average are negatively correlated with contemporaneous exchange rate changes, but are virtually uncorrelated with lagged exchange rate fluctuations. The results are robust not only across exporting and non-exporting firms and industries, but also across sample periods. Exposure effects are also found to vary through time. We further show that both the market and currency risks are priced in the Japan stock market. Our results provide strong evidence that their conditional covariance risks are time-varying.

Abstract:
This paper presents a comprehensive empirical examination of the foreign exposure effect on Japanese corporations and sectors. We provide compelling evidence that, after controlling for marketwide movements, the exposure effect on Japanese corporations' stock returns is both statistically and economically significant. Based on a wide array of about 1200 Japanese firms and a group of 23 different Japanese industries in our sample, we find that Japanese stock returns on average are negatively correlated with contemporaneous exchange rate changes but are virtually uncorrelated with lagged exchange rate fluctuations. The results are robust not only across exporting and non-exporting firms and industries, but also across the sample period, indicating the presence of time variation in exposure effects. An exploratory investigation suggests that time-varying exposures are related to regime-switching exchange rate dynamics, and these effects are more pronounced in industries with high exports. We further show that both the market and currency risks are priced in the Japanese stock market and that their conditional components are time-varying. Overall, our results suggest that Japanese stock investors cannot diversify away the market risk, nor can they diversify away the currency risk.

Abstract:
Using the Johansen cointegration technique, we find empirical evidence of long run co-movements between five national stock market indexes and measures of aggregate real activity including the real oil price, real consumption, real money, and real output. Real returns on these indexes are typically related to transitory deviations from the long run relationship and to changes in the macroeconomic variables. Further, the constraints implied by the cointegration results yield some incremental information on stock return variation that is not already contained in dividend yields, interest rate spreads and future GNP growth rates.

Abstract:
This paper employs recently developed multivariate methods to study the predictability of international stock market returns. We find evidence of significant common predictable components within the Pacific, the European, and the North American stock markets using region-specific instrumental variables. The degree of predictability of these common movements, however, varies across regional markets and across subperiods. Results indicate that only North American instrumental variables have the ability to predict excess returns on the stock markets in the other two regions, but not vice versa.