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Review of Quantitative Finance and Accounting

Erschienen in:

01.08.2011 | Original Research

Financial disclosure, investor protection and stock market behavior: an international comparison

verfasst von: Benjamas Jirasakuldech, Donna M. Dudney, Thomas S. Zorn, John M. Geppert

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 2/2011

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Abstract

The main purpose of this study is to examine the relationship between financial opacity, investor protection and stock market behavior for sixteen countries. We use the 1995 CIFAR corporate disclosure ratings and the 2006 World Bank investor protection index to measure a country’s relative level of financial transparency and legal protection for investors. The return behavior of each country is examined using numerous time series tests such as serial correlation, Markov chain, runs, duration dependence and variance ratio tests. We found that the results show no significant differences between high and low disclosure countries. However, high disclosure countries appear to be associated with a lower level of stock market volatility. Cox proportional hazard test results indicate that extreme returns (positive and negative) are more likely in low disclosure countries.

Vorheriger Artikel The 52-week high, momentum, and predicting mutual fund returns

Nächster Artikel Firm value and investment policy around stock for stock mergers

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Further information on the investor protection index can be obtained from the World Bank Doing Business Data website at www.doingbusiness.org.

The CIFAR index was last published in 1995, so we were not able to obtain an updated CIFAR index ranking for 2006.

Refer to Bushman et al. (2004) for a detailed description and evaluation of the CIFAR index.

Frost and Ramin (1997) examine the accounting disclosure for five countries and find that their ranking corresponds to the CIFAR ranking. Hope (2003) also find that CIFAR disclosure rankings corroborate with Botosan’s (1997) disclosure rankings.

1995 CIFAR disclosure ranking provides the ranking for forty countries. We exclude Zimbabwe and Nigeria from our study due to the unavailability of the stock price data from MSCI.

MSCI Indices are constructed on a uniform basis across countries. The indices are constructed so as not to include stocks with multiple-listings on foreign stock exchanges. This eliminates the problem of double counting stocks. In addition, the MSCI indices do not include the stock of companies that are non-domiciled and that have high cross-ownership. Firms that have high reciprocal ownership provide a continuous flow of information among firms, making access to inside information easier and publicly available information less useful. Further details on the construction of MSCI indicies can be obtained from http://www.msci.com.

In their paper examining the predictability of crashes in emerging market currency markets, Kumar and Moorthy (2003) define a currency market crash as a monthly decrease of 10% or more. Similarly, Bordo and Wheelock (2007) define stock market booms as any 3-year or longer period where the average annual rate of increase in the real stock index is at least 10%.

The Mann–Whitney Rank test is more robust than a t-test because it does not require normality. The test statistic is calculated as: n _a n _b + ((n _a(n _a + 1))/2)) − T _a, where T _a is the observed sum of ranks for the high disclosure group and n _a and n _b are the number of countries in the high and low disclosure group, respectively. No ties occur in our data.

Under the null hypothesis of no serial correlation, the Ljung-Box portmanteau test statistics is defined as \( Q_{LB} = T(T + 2)\sum\limits_{J = 1}^{K} {{\frac{{r_{j}^{2} }}{T - j}}.} \) It has an asymptotic chi-square distribution with j degrees of freedom where r _j is the jth order autocorrelation coefficient estimate. The Q-statistic at lag j is a test statistic for the null hypothesis that there is no autocorrelation in the return series up to order j.

The runs test has been previously used in several studies of market efficiency hypothesis (see for example, Lo and MacKinlay (1988), Long et al. (1999), and Karemera et al. (1999).

A detailed description of the mechanics of the runs test is given in the “Technical appendix”.

The details of the duration dependence test are given in the “Technical appendix”.

The Third Order Markov chain test is described in the “Technical appendix”.

For a more detailed explanation of the Cox Proportional Hazard Test, see Allison (1995) or Cox and Oakes (1984).

See original paper of McQueen and Thorley (1994) for full detail of the derivation of this equation. This condition, however, does not hold for runs of negative returns because rational expectations bubbles cannot be negative.

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Titel: Financial disclosure, investor protection and stock market behavior: an international comparison
verfasst von: Benjamas Jirasakuldech
Donna M. Dudney
Thomas S. Zorn
John M. Geppert
Publikationsdatum: 01.08.2011
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 2/2011
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-010-0200-5

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