Journal articles: 'Stock market mispricing'

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Haque, Muhammad Emdadul. "Asset Growth and Future Stock Returns: Insight from International Equity Markets." International Business Research 14, no. 11 (October 7, 2021): 1. http://dx.doi.org/10.5539/ibr.v14n11p1.

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The main purpose of this research is to examine the cross-sectional connection between asset growth and stock returns in the international equity market during 2016-2020. Firms in international equity markets, subsequently experience lower stock returns with higher asset growth rates, consistent with the United States evidence. If capital markets are well-developed stocks efficiently priced then the negative AG effect on returns is likely to be stronger, but different to country characteristics representing accounting quality, investor protection, and limits to arbitrage. The research is to examine the cross-sectional connection between the asset growth and stock return in the international equity market is likely due to optimal investment effect than due to market timing, overinvestment, or other forms of mispricing. The evidence suggests that the cross-sectional association between the AG effect and stock return is more likely due to an optimal investment effect than due to overinvestment, mispricing or market timing. The findings of the research support Copper et al (2008) however, the weakening of the accounting quality decreases the AG effect magnitude which contradicts the mispricing-based arguments.

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Mian, G. Mujtaba, and Srinivasan Sankaraguruswamy. "Investor Sentiment and Stock Market Response to Earnings News." Accounting Review 87, no. 4 (March 1, 2012): 1357–84. http://dx.doi.org/10.2308/accr-50158.

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ABSTRACT We examine whether market-wide investor sentiment influences the stock price sensitivity to firm-specific earnings news. Using the recently developed measure of investor sentiment by Baker and Wurgler (2006), we find that the stock price sensitivity to good earnings news is higher during high sentiment periods than during periods of low sentiment, whereas the stock price sensitivity to bad earnings news is higher during periods of low sentiment than during periods of high sentiment. This influence of sentiment is especially pronounced for the earnings news of small stocks, young stocks, high volatility stocks, non-dividend-paying stocks, and stocks with extremely high and low market-to-book ratios. Further analysis suggests that the sentiment-driven mispricing of earnings contributes to the general mispricing of stocks due to investor sentiment. JEL Classifications: D14; D21; G24.

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Chen, Carl R., Peter P. Lung, and F. Albert Wang. "Stock Market Mispricing: Money Illusion or Resale Option?" Journal of Financial and Quantitative Analysis 44, no. 5 (October 2009): 1125–47. http://dx.doi.org/10.1017/s0022109009990238.

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AbstractWe examine two hypotheses to explain stock mispricing: i) the money illusion hypothesis (Modigliani and Cohn (1979)) and ii) the resale option hypothesis (Scheinkman and Xiong (2003)). We find that the money illusion hypothesis may explain the level, but not the volatility, of mispricing in the U.S. market. In contrast, the stock resale option hypothesis, which stems from heterogeneous beliefs about future dividend growth rates and short-sale constraints, can explain both the level and the volatility of mispricing. The evidence suggests that while the two hypotheses complement each other in explaining the level of mispricing, the resale option hypothesis provides a more coherent explanation for asset price bubbles, in which extraordinarily high price levels are often accompanied by excessive volatility and frenzied trading.

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Li, Larry, Adela McMurray, and Bo Liu. "The Functionality of Book-to-Market Ratio in Chinese Markets." International Research in Economics and Finance 2, no. 2 (August 8, 2018): 50. http://dx.doi.org/10.20849/iref.v2i2.514.

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We investigate the question whether the book to market ratio acts as a “risk-based” or “mispricing-based” proxy for share price formation in Chinese markets. We find that a strong relationship is observed between the firms’ book to market ratio and stock returns both in current and following years, while we cannot find a steady relationship between market leverage ratio and stock returns. In addition, the findings support the notion that a mispricing-based explanation is more plausible in China due to the speculative features of the Chinese markets.

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Chuhdary, Meriam, and Aisha Ismail. "Analyzing the Arbitrage Opportunities and their Determinants in Deliverable Future Contracts: Evidence from Pakistan." Journal of Finance and Accounting Research 1, no. 2 (August 30, 2019): 94–121. http://dx.doi.org/10.32350/jfar/0102/05.

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This study explores the arbitrage opportunities in Deliverable Future Contracts (DFC) due to mispricing and the factors affecting it. We use the cost of carry model to calculate the fair prices of futures. We use mispricing as a direct measure of arbitrage opportunities. With one-year daily data collected from the data portal of Pakistan Stock Exchange, we calculate mispricing for twenty-two stock futures. Summary statistics of mispricing confirm the presence of arbitrage opportunities in this market. We also examine the relationship of mispricing with the time to contract expiry, stock return volatility, the trading volume of ready and future market, and open interest. Tobit regression results indicate that apart from open interest, all other factors possess significant explanatory power for mispricing.

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Doukas, John A., Chansog (Francis) Kim, and Christos Pantzalis. "Arbitrage Risk and Stock Mispricing." Journal of Financial and Quantitative Analysis 45, no. 4 (August 2010): 907–34. http://dx.doi.org/10.1017/s0022109010000293.

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AbstractIn this paper we examine the relation between equity mispricing and arbitrage risk and find that stocks with high arbitrage risk have higher estimated mispricing than stocks with low arbitrage risk. These results are not limited to high book-to-market or small capitalization stocks, and they are not sensitive to transaction and short-selling costs. In addition, they remain robust to alternative multifactor return generating specification models and mispricing measures. Overall, our empirical results are consistent with the conjecture that mispricing is a manifestation of the inability of arbitrageurs to hedge idiosyncratic risk, a major deterrent to arbitrage activity.

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Muhammad, Usman, Sana Saleem, Anwar ul Haq Muhammad, and Faiq Mahmood. "Stock mispricing and investment decisions: evidence from Pakistan." Journal of Financial Reporting and Accounting 16, no. 4 (December 3, 2018): 725–41. http://dx.doi.org/10.1108/jfra-04-2017-0026.

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Purpose This study aims to examine the impact of stock mispricing on corporate investment decisions by taking the sample of non-financial firms listed on the Pakistan Stock Exchange during the period of 2008-2014. Design/methodology/approach To measure the mispricing, this study decomposes the market-to-book ratio into mispricing and growth components and measures corporate investment by capital expenditures. Fixed and random effect panel regression models are used to estimate the results. Findings Results of the study show that firms issue overvalued equity to finance the capital expenditures. Consistent with other studies, the relationship between stock mispricing and investment is more prominent in the financially constrained firms. In addition, cash flow investment sensitivity is higher in financially unconstrained firms. Practical implications Nonetheless, the results give important implications to the Pakistan Stock Market on how the mispricing enhances the welfare by relaxing the financial constraints and allowing the managers to make investment in profitable projects that otherwise go non-funded. These findings have interesting implications for further research in the literature of finance and also help in economic policy-making. Originality/value This study finds the impact of stock mispricing on corporate investment decisions by considering the role of market timing in the context of Pakistan.

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Mogbolu, Favoured. "Domestic Retail Investors’ Participation and Stock Price Efficiency in Nigeria." Tanzanian Economic Review 12, no. 1 (June 30, 2022): 129–45. http://dx.doi.org/10.56279/ter.v12i1.103.

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This study tests whether retail behaviour affects the stock price and pricing efficiency of stocks on the Nigerian Stock Exchange (NSE) using data on equity from retail investors' market transactions. The Delong, et al. (1990) model is used to measure retail mispricing and stock price efficiency, whereas the Least Squares (LS) and Generalised Least Square (GLS) techniques are used to estimate the static and probability distributed lag (PDL) models. The study finds that in the short run, temporary retail mispricing impacts stock prices and positively affects stock price efficiency. Hence, retail investors’ pricing behaviour benefits the equity market in the short-run, but not in the long run. Thus, for sustaining the efficiency of prices in the NSE, retail investors should participate in the equity market and investor literacy programs to enhance their trading skills, which would reduce their losses and enhance their survival in the market over the long term. JEL Classification: D53, G12.

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Chan, Konan, David Ikenberry, and Inmoo Lee. "Economic Sources of Gain in Stock Repurchases." Journal of Financial and Quantitative Analysis 39, no. 3 (September 2004): 461–79. http://dx.doi.org/10.1017/s0022109000003987.

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AbstractPrevious studies offer a mixed understanding of the economic role of stock repurchases. This paper investigates three key economic motivations—mispricing, disgorging free cash flow, and increasing leverage—by evaluating cross-sectional differences in both the initial market reaction and long-run performance. The initial reaction provides some support for the mispricing story. However, subsequent earnings-related information shocks suggest that the initial market reaction is incomplete and that long-run performance may be informative. The long-horizon return evidence is most consistent with the mispricing hypothesis and, to some degree, the free cash flow hypothesis. We find little support for the leverage hypothesis.

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Alber, Nader, and Ehab Ezzat. "The Impact of Herding Behavior on Stock Mispricing: The Case of Listed Companies at the Egyptian Exchange." European Journal of Business and Management Research 6, no. 4 (July 2, 2021): 7–10. http://dx.doi.org/10.24018/ejbmr.2021.6.4.917.

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This paper aims at examining the impact of herding behavior on stock mispricing. Herding behavior is measured by Cross Sectional of Standard Deviation (CSSD), while stock mispricing is measured by the difference between the market value and intrinsic value of stock. This has been conducted using a sample of 24 companies are listed at the Egyptian exchange during the period from 2002 to 2018. Results indicate there is a significant effect of herd behavior on stock mispricing in a bivariate context, while the effect remains significant, even after controlling for inflation rate and discount rate. Besides, the discount rates don’t seem to have any significant effects on stock mispricing.

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Silva, Diogo, and António Cerqueira. "Does Investors’ Divergence of Opinion Affect Stock Mispricing?" ACRN Journal of Finance and Risk Perspectives 10, no. 1 (2021): 1–24. http://dx.doi.org/10.35944/jofrp.2021.10.1.001.

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The main purpose of this study is to address the association between investors’ divergence of opinion (DIVOP) and stock mispricing for UK firms listed in the London Stock Exchange Market. Previous research on this topic has provided mixed results. Some studies provide evidence consistent with the overpricing hypothesis, which indicates that DIVOP leads to overpricing because the market overweighs the most optimistic valuations, since optimistic investors can always buy a stock but pessimistic investors can only sell a stock if they already own it or need rely on short-selling, which has costs. Other studies support the underpricing hypothesis, which proposes that DIVOP works as a price risk factor that generates underpricing. We develop an empirical analysis that do not depend on the interpretation of abnormal future stock returns to assess contemporaneous mispricing. We use five explicit measures of mispricing. Also, to safeguard the development of a comprehensive study, we use three kinds of proxies of DIVOP, based on idiosyncratic volatility, dispersion in analysts’ forecasts and unexpected trading volume. The results show a positive significant association between DIVOP and stock mispricing on a yearly basis. This association is stronger for underpriced stocks, which is consistent with the underpricing hypothesis, and indicates that DIVOP signals risk. An implication of this study is that firms have incentives to provide high-quality and explicit information to limit DIVOP and avoid being underpriced.

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Usman, Muhammad, Sana Saleem, Faiq Mahmood, and Humera Imran. "DOES STOCK MISPRICING AFFECT THE CORPORATE INVESTMENT DECISIONS? EVIDENCE FROM CATERING EFFECT." Journal on Innovation and Sustainability. RISUS ISSN 2179-3565 9, no. 1 (March 1, 2018): 43. http://dx.doi.org/10.24212/2179-3565.2018v9i1p43-54.

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Current study finds out the effect of stock mispricing, through catering effect, on corporate investment decisions by taking the sample of firms listed on Pakistan Stock Exchange during the period of 2007-2014. This study uses the methodology of Rhodes-Kropf et al (2005) to measure the stock mispricing who used market to book decomposition methodology to find out different components of mispricing and relate it to corporate investment activity that is measured by capital expenditures. Stockholder investment horizon is measured by share turnover ratio. Panel regression methodology is used to determine the relationship between stock mispricing and corporate investment decisions. Results of the study show that Firms with short horizon investors have significantly higher mispricing sensitivity than the firms with long horizon shareholder. Both sides of mispricing affect the investment but the impact of overvaluation is more than undervaluation because the firms issue shareholder equity more than stock repurchase.

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Vipul. "Temporal Variation in Futures Mispricing." Vikalpa: The Journal for Decision Makers 30, no. 4 (October 2005): 25–38. http://dx.doi.org/10.1177/0256090920050403.

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This paper explores the variation of pricing inefficiency of the stock and index futures with time. The theoretical ‘no arbitrage’⁄‘cost of carry’ price of futures contracts is compared with their actual prices for the period January 1, 2002 to November 24, 2004. The comparison has been made only for the near month futures to ensure good liquidity. In an efficient market, these two prices cannot differ because such a difference provides a risk-less arbitrage opportunity to market players. However, many instances of the difference between the two prices (mispricing) exceeding the transaction cost in the NIFTY index and stock futures are found for operators like financial institutions and members of derivatives exchange. This provides a clear arbitrage opportunity to these players. On an average, NSE members could have made arbitrage profits of 0.34 per cent after accounting for transaction costs on more than 37 per cent of trading days. Financial institutions could have made average arbitrage profits of 0.38 per cent on more than 12 per cent of trading days. The NIFTY index futures are persistently underpriced plausibly due to restrictions on short selling and the hedging activity of investors and fund managers. Most of the high-volume stock futures, on the other hand, are generally overpriced. The overpricing of stock futures points towards the speculative activity in the cash market in these scrips. These findings are generally in line with those in the other markets of the world where such inefficiencies and underpricing in stock index futures are also observed. However, the findings on stock futures are unique to this study because stock futures, being more recent entrants to the global derivatives market, have not been adequately researched. Non-parametric tests including the Kruskal-Wallis test (for more than two samples) and the Mann-Whitney test (for two samples) are used in this study due to non-normality conditions in the mispricing series. Conclusions about the time pattern of mispricing are drawn based on these tests. There is no discernible improvement or deterioration in the efficiency of pricing of futures over the last three years since the introduction of stock futures to the Indian market. The last week prior to expiry shows a significant reduction in mispricing for both the NIFTY and stock futures due to unwinding of trading positions. But, there is no significant difference in the mispricing pattern between individual days of the last week. This shows that the unwinding activity is uniformly spread over the week. Also, there is no discernible difference in the mispricing pattern between different days of the week across the period of study. These results have obvious implications for the arbitrageurs in the Indian futures market which are as follows: There are many sizeable arbitrage opportunities available to the traders who are willing to take a counterparty position opposite to the market demand. Such opportunities and their magnitude keep changing over time. An arbitrage opportunity is likely to go down in the last week before expiry. One cannot expect more such opportunities on a particular day of the week.

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Kim, Jungmu, Youngkyung Ok, and Yuen Jung Park. "Institutional Investors’ Trading Response to Stock Market Anomalies: Evidence from Korea." Sustainability 12, no. 4 (February 14, 2020): 1420. http://dx.doi.org/10.3390/su12041420.

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This study examines whether institutions are sophisticated investors that exploit stock characteristics known to predict future returns in Korea, using data from 2000 to 2018. We analyze the institutional demand, measured as a change in institutional ownership, for stocks with eight well-known anomalies as well as the future abnormal returns of institutional trading. We find that, generally, institutions do not trade consistently with stock anomaly predictions because they are reluctant to hold both highly overvalued and highly undervalued stocks. Although they use a few anomalies, they use these characteristics passively to avoid stocks known to underperform rather than to pick stocks known to outperform. Furthermore, the positive returns on long-legs are concentrated on stocks sold by institutions, while the negative returns on short-legs are concentrated on stocks bought by them. Our finding casts doubt on the widely-accepted notion that institutions are skilled investors and that institutional arbitrage trading corrects any mispricing in the market. To the contrary, institutions’ loss-averse trading behaviors cause or magnify mispricing.

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Zhu, Zhaohui, and Wensheng Huang. "Bounded Rationality, Stock Mispricing, and Corporate Investment." Journal of Advanced Computational Intelligence and Intelligent Informatics 21, no. 6 (October 20, 2017): 1056–64. http://dx.doi.org/10.20965/jaciii.2017.p1056.

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Although the effects of agents’ bounded rationality and stock mispricing on corporate investment is becoming a frontier research field in corporate finance, little research has been devoted to different channels of managers catering to agents’ bounded rationality and stock mispricing. With a sample of 2003–2010 Chinese listed companies, we investigate how firms cater to stock mispricing in their investment decision-making. The empirical study results support the view that managers do cater to investors’ perceived bias for investment in intangible assets and/or fixed assets and that firms’ financial constraints, market characteristics, and the myopia of investors are important factors in catering for such investment. Moreover, fixed asset investment may be a more important channel than intangible asset investment for managers when catering to stock mispricing.

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Setyawan, I. Roni, and Sudarto ,. "DETEKSI PERBANDINGAN EKSES VOLATILITAS HARGA SERTA REAKSI EARNING TERHADAP RETURN & HARGA SAHAM SEKTOR LQ45." Media Riset Bisnis & Manajemen 6, no. 3 (December 16, 2006): 269–84. http://dx.doi.org/10.25105/mrbm.v6i3.1047.

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This paper examines the validity of Efficient Market Hypothesis (EMH) valuation model through stock price volatility and earning volatility excesses. Our research also analyzes stock price reaction to earning. Based on existence of stock price mispricing; there is no investor who will obtain abnormal return if we follow EMH. We find JS is not efficient. Over the observation periods; investors have more concerned with stock market volatility than earning quality. Specifically they have remained to concern about earning quality from LQ 45 companies. Our study provides stock price prediction model that used by investors for decision to buy and to sell. The base for decision of investors is earning. When earning is positive; investors should hold that stock. Otherwise they should release if their earning of stock are negative.Keywords: stock price and earning volatility excesses; mispricing; efficient market,. abnormal return.

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Qizam, Ibnu, Misnen Ardiansyah, and Razali Haron. "Shariah Issue of Warrant Contract: Empirical Evidence from Warrant Mispricing in Malaysia Market." Global Review of Islamic Economics and Business 1, no. 1 (May 4, 2015): 041. http://dx.doi.org/10.14421/grieb.2013.011-04.

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The objective of this paper is to analyze the gharar issue of warrant by presenting the empirical evidence of warrant mispricing in Malaysia's market (moneyness and mispricing) and its determinant. The Black Scholes Option Pricing Model (BSOPM) will be used to detect mispricing in a warrant's contract. In addition panel regression will be performed to analyze the determinant if said warrant is mispriced. The result shows that in majority, mispricing happens in warrant, either by Out the Money, or In the Money. Panel regression analysis finds that Stock price, klibor, and maturity are positive and are significant variables to the mispricing of a warrant. Finally, with the use of a warrant mispricing model, this research concludes that there is gharar issue in warrant contract.

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Eickelberg, Peter. "Stock Market Mispricing: Money Illusion or Resale Option?" CFA Digest 40, no. 2 (May 2010): 59–61. http://dx.doi.org/10.2469/dig.v40.n2.2.

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Liu, Dehong, Hongmei Gu, and Peter Lung. "The equity mispricing: Evidence from China's stock market." Pacific-Basin Finance Journal 39 (September 2016): 211–23. http://dx.doi.org/10.1016/j.pacfin.2016.06.007.

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Rana Shahid Imdad Akash, Iqbal Mahmood, and Muhammad Mudasar Ghafoor. "Anomalous Behaviour and Volatility in Stock Returns are still Live - Efficient Markets Hypothesis? : Perspective from Pakistan Stock Exchange (PSX)." Journal of Accounting and Finance in Emerging Economies 6, no. 2 (June 14, 2020): 381–89. http://dx.doi.org/10.26710/jafee.v6i2.1182.

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Purpose: This empirical study investigates the anomalous behaviour and volatility in stock return of PSX-100 index of Pakistan Stock Exchange (PSX). Design/Methodology/Approach: The data is taken from January, 2006 to December, 2018 to detect variability and predictability of stock returns. ARCH and GARCH models are applied to check the volatility in stock returns using dummy variable. Findings: It is found that there exists positive and significant September effect in Pakistani equity market. The returns are high in the month of September than other months. The constant returns do not exist during the whole year so the efficient market hypothesis contradicts. Implications/Originality/Value: The Efficient Market Hypothesis is question mark due to volatility for mispricing the securities. The mispricing may have implications for undervalue or overvalue the securities and overall economic activity of equity – stock returns.

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Haque, Abdul, and Kashif Naeem. "Mispricing, Corporate Investment and Stock Returns: Evidence from Pakistani Stock Market." Research Journal of Applied Sciences, Engineering and Technology 12, no. 10 (May 15, 2016): 988–93. http://dx.doi.org/10.19026/rjaset.12.2817.

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Fu, Jiajia. "Sophistication of Chinese Mutual Funds and the Mispricing of Accruals." Journal of International Accounting Research 18, no. 1 (September 1, 2018): 97–120. http://dx.doi.org/10.2308/jiar-52257.

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ABSTRACT This study examines the role of mutual funds in the pricing of accruals in China's stock market to evaluate the sophistication of Chinese mutual funds. Using a sample of A-share stocks in China from 2003 to 2011, I find that the mispricing of accruals is concentrated in firms with large mutual fund holdings. This result differs from a number of U.S. studies documenting a positive relation between institutional holdings and stock price efficiency. In an effort to explain this result, I provide evidence that mutual funds in China fixate on earnings and fail to understand the one-year-ahead earnings implication of accruals. Specifically, I find that the persistence of accruals is overpriced in stocks with a high level of mutual fund ownership. The mispricing of accruals in these stocks is largely driven by discretionary accruals and is related to their high stock price responsiveness to earnings. JEL Classifications: M41; G12.

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Cremers, Martijn, and David Weinbaum. "Deviations from Put-Call Parity and Stock Return Predictability." Journal of Financial and Quantitative Analysis 45, no. 2 (February 19, 2010): 335–67. http://dx.doi.org/10.1017/s002210901000013x.

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AbstractDeviations from put-call parity contain information about future stock returns. Using the difference in implied volatility between pairs of call and put options to measure these deviations, we find that stocks with relatively expensive calls outperform stocks with relatively expensive puts by 50 basis points per week. We find both positive abnormal performance in stocks with relatively expensive calls and negative abnormal performance in stocks with relatively expensive puts, which cannot be explained by short sale constraints. Rebate rates from the stock lending market directly confirm that our findings are not driven by stocks that are hard to borrow. The degree of predictability is larger when option liquidity is high and stock liquidity low, while there is little predictability when the opposite is true. Controlling for size, option prices are more likely to deviate from strict put-call parity when underlying stocks face more information risk. The degree of predictability decreases over the sample period. Our results are consistent with mispricing during the earlier years of the study, with a gradual reduction of the mispricing over time.

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Sakti, Muhammad Rizky Prima, and Abdul Qoyum. "Testing The Warrants Mispricing and Their Determinants: The Panel Data Models." Global Review of Islamic Economics and Business 5, no. 2 (December 7, 2017): 118. http://dx.doi.org/10.14421/grieb.2017.052-05.

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This paper empirically studied the impact of several variables such as moneyness, stock return, maturity, and volatility on the warrant mispricing. We selected 4 companies listed in Bursa Malaysia such as MHC Plantations Bhd, MKH Bhd, YFG Bhd, and UNISEM to investigate the mispricing of warrants. Subsequently, panel time series data employed with daily basis from 30 June 2010 until 30 June 2013. The Black-Scholes Option Pricing Model (BSOPM) used to determine the mispricing of warrant. Several panel data techniques employed in this study such as pooled-OLS, fixed effect model (FEM), and random effect model (REM). In turn, we found that FEM is well explained the determinants of warrant mispricing. Thus, empirical results suggest that moneyness, maturity, and volatility are positively and significantly explained the mispricing of warrant, while stock return does not give an impact toward the warrant mispricing. The BSOPM is consistently mispricing the warrant either in-the-money (ITM) or out-the money (OTM) warrants. The market is not efficient on the warrants traded for four companies observed

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Ekawati, Erni. "The Link of Abnormal Accrual Mispricing and Value- Glamour Stock Anomaly: Evidence from the Indonesian Capital Market." Gadjah Mada International Journal of Business 14, no. 1 (January 1, 2012): 77. http://dx.doi.org/10.22146/gamaijb.5438.

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The purpose of this study is to investigate whether abnormal accrual mispricing acknowledged in accounting literature is a manifestation of documented value-glamour anomaly in finance literature. This study proposes the traditional value-glamour proxies (sales growth, book-to-market, earningprice, cash flows-price, and size) and CFO/P ratio (ratio of operating cash flows and stock price) to explain the mispricing of abnormal accruals. Using a sample of 540 firm-year observations of companies listed on the Jakarta Stock Exchange (JSE) from the period of 1993 to 2003, the study finds that individually, only either the E/P or CFO/P ratio can pick up the mispricing attributed to abnormal accruals. These results can be interpreted as follows: (1) as captured by E/P ratio, abnormal accrual mispricing is due to the market’s inability to understand managers’ attempts to manage reported earnings; (2) as captured by the CFO/P, the market is unable to assess the persistence of cash flows. From a practical standpoint, this study has simplified the research agenda related to asset pricing. The result suggests that a researcher can control for the abnormal accrual mispricing and the value-glamour anomaly parsimoniously via just one variable, E/P ratio.Keywords: business performance; entrepreneurial orientation; environmental uncertainty

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Mahmood, Faiq, Amir Inam Bhutta, and Muhammad Usman. "Effect of Executive Ownership on the Relationship between Agency Cost and Equity Mispricing." Global Social Sciences Review IV, no. IV (October 30, 2019): 171–79. http://dx.doi.org/10.31703/gssr.2019(iv-iv).23.

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The purpose of the current work is to investigate the influence of agency cost on equity mispricing for the firms listed on Pakistan Stock Exchange during the period from 2008 to 2016. Agency cost is estimated by asset utilization ratio, mispricing is computed by book- to -market ratio and some firms characteristic such as size, profitability and leverage are taken as control variables. Balanced panel method is used to estimate the results. The sample is divided into two parts on the basis of stock mispricing; undervalued and overvalued firms. The influence of agency costs is then separately examined on both sub-samples. Moreover, the effect of managerial ownership on the relationship between agency cost and mispricing is investigated. Results show that agency cost is positively linked with equity mispricing. Moreover, findings demonstrate that for undervalued firms, effect of agency costs is stronger but for overvalued firm, it is weaker and negative. Results are consistent with previous studies.

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Park, Chul W., and Andrew Chunwon Yi. "Mispricing of US Shocks in the Korean Stock Market*." Asia-Pacific Journal of Financial Studies 40, no. 3 (June 2011): 347–76. http://dx.doi.org/10.1111/j.2041-6156.2011.01042.x.

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Lee, Jaeram, Hyunglae Jeon, Jangkoo Kang, and Changjun Lee. "Do actively managed mutual funds exploit stock market mispricing?" North American Journal of Economics and Finance 53 (July 2020): 101189. http://dx.doi.org/10.1016/j.najef.2020.101189.

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WESTERHOFF, FRANK H. "TECHNICAL ANALYSIS BASED ON PRICE-VOLUME SIGNALS AND THE POWER OF TRADING BREAKS." International Journal of Theoretical and Applied Finance 09, no. 02 (March 2006): 227–44. http://dx.doi.org/10.1142/s0219024906003512.

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We propose a novel stock market model and investigate the effectiveness of trading breaks. Our nonlinear model consists of two types of traders: while fundamentalists expect prices to return towards their intrinsic values, chartists extrapolate past price movements into the future. Moreover, chartists condition their orders on past trading volume. The model is able to replicate several stylized facts of stock markets such as fat tails and volatility clustering. Using the model as an artificial stock market laboratory we find that trading breaks have the power to reduce volatility and — if fundamentals do not move too strongly — also mispricing.

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Henderson, B. Charlene, Kevin Kobelsky, Vernon J. Richardson, and Rodney E. Smith. "The Relevance of Information Technology Expenditures." Journal of Information Systems 24, no. 2 (September 1, 2010): 39–77. http://dx.doi.org/10.2308/jis.2010.24.2.39.

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ABSTRACT: Although information technology (hereafter, IT) expenditures represent an increasingly large investment for most corporations, firms are not required to disclose them separately in their financial statements. We hypothesize and find evidence that information about a firm’s IT expenditures helps explain its future performance as reflected in both accounting measures (residual income, earnings volatility) and market measures (stock price and long-run abnormal returns). In particular, we provide evidence of market mispricing and suggest the lack of firm-level annual IT expenditure disclosure as one potential reason for such mispricing. Altogether, the evidence presents a persuasive case that information about a firm’s IT expenditures is useful to stock market participants. The evidence we report is useful to managers and accounting policy makers contemplating the public disclosure of firm-level information about IT investments.

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Hertzel, Michael G., and Zhi Li. "Behavioral and Rational Explanations of Stock Price Performance around SEOs: Evidence from a Decomposition of Market-to-Book Ratios." Journal of Financial and Quantitative Analysis 45, no. 4 (June 8, 2010): 935–58. http://dx.doi.org/10.1017/s002210901000030x.

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AbstractWe examine the extent to which investment opportunities and/or mispricing motivate equity issuance and contribute to post-issue stock underperformance. We decompose market-to-book ratios into misvaluation and growth option components and find that issuing firms are both overvalued and have greater growth opportunities relative to nonissuers. Firms with greater growth opportunities invest more in capital expenditures and research and development (R&D) after issuance but do not experience lower post-issue stock returns. In contrast, issuing firms with greater mispricing tend to decrease long-term debt and/or increase cash holdings and do earn lower returns. Our findings are consistent with behavioral explanations for post-issue stock price underperformance.

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Tee, Lain-Tze, Si-Roei Kew, and Soo-Wah Low. "Do momentum strategies perform better for Islamic stocks than for conventional stocks across market states?" Ekonomski anali 64, no. 221 (2019): 107–29. http://dx.doi.org/10.2298/eka1921107t.

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This study compares the momentum profitability of Islamic and conventional stocks in Malaysia and examines whether the presence of momentum profits is market-state dependent. Winner portfolios are shown to outperform loser portfolios, suggesting that a momentum effect exists in the equity market. Islamic stocks exhibit stronger momentum than conventional stocks. Interestingly, although pursuing profit is not the primary goal of Islamic stock investors, the findings indicate that momentum profits for all Islamic stock trading strategies are higher than those for conventional stocks. The profits from momentum strategies for both stocks are market-state dependent. In all trading strategies, while there are significant positive momentum profits following market upturns, there is no evidence of profits subsequent to market downturns. Overall, Islamic stocks yield higher momentum profits than conventional stocks across market states. These findings are robust to using various measures of the state of the market. While the presence of momentum profits is also robust to the inclusion of Fama-French?s (1993) risk factors, the risk factors are unable to explain momentum profits, suggesting that the risk-adjusted momentum profits are not due to risk compensation. Rather, the profitability is evidence of stock mispricing.

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Rostagno, Luciano Martin, Gilberto De Oliveira Kloeckner, and João Luiz Becker. "Previsibilidade de Retorno das Ações na Bovespa: Um Teste Envolvendo o Modelo de Fator de Retorno Esperado." Brazilian Review of Finance 2, no. 2 (January 1, 2004): 183. http://dx.doi.org/10.12660/rbfin.v2n2.2004.1141.

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This paper examines the hypothesis of asst return predictability in the Brazilian Stock Market (Bovespa). Evidence suggests that seven factors explain most of the monthly differential returns of the stocks included in the sample. Within the factors that present statistically significant mean, two are liquidity factors (market capitalization and trading volume trend), three refer to price level of stocks (dividend to price, dividend to price trend, and cash flow to price), and two relate to price history of stocks (3 and 12 months excess return). Contradicting theoretical assumptions, risk factors present no explanatory power on cross-sectional returns. Using an expected return factor model, it is contended that stock returns are quite predictable. An investment simulation shows that the model is able to assemble portfolios with statistically significant higher returns. Additional tests indicate that the winner portfolios are not fundamentally riskier suggesting mispricing of assets in the Brazilian stock Market.

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Xie, Hong. "The Mispricing of Abnormal Accruals." Accounting Review 76, no. 3 (July 1, 2001): 357–73. http://dx.doi.org/10.2308/accr.2001.76.3.357.

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This paper examines the market pricing of Jones (1991) modelestimated abnormal accruals (often termed “discretionary accruals” in the prior literature) to test whether stock prices rationally reflect the one-year-ahead earnings implications of these accruals. Using the Mishkin (1983) and hedge-portfolio test methods Sloan (1996) employs, I find that the market overestimates the persistence, or one-year-ahead earnings implications, of abnormal accruals, and consequently overprices these accruals. These results extend Subramanyam (1996) by demonstrating that the market not only prices, but also overprices abnormal accruals. They also suggest that the overpricing of total accruals that Sloan (1996) documents is due largely to abnormal accruals. The results are robust to five alternative measures of abnormal accruals, and still hold when I estimate abnormal accruals after controlling for major unusual but largely nondiscretionary accruals. The latter finding is consistent with the notion that the market overprices the portion of abnormal accruals stemming from managerial discretion.

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BATTEN, JONATHAN, and XUAN VINH VO. "LIQUIDITY AND FIRM VALUE IN AN EMERGING MARKET." Singapore Economic Review 64, no. 02 (March 2019): 365–76. http://dx.doi.org/10.1142/s0217590817470063.

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This paper investigates the link between stock market liquidity and firm value in an important emerging market, Vietnam. Specially, we examine this relationship using a sample of firms listed on the Ho Chi Minh City stock exchange for the period 2006–2014. We show that there is a negative relation between liquidity and firm value. This outcome is contrary to previous results for many developed countries. Further, we demonstrate that this result may be explained by differences in leverage effects and pricing-based theories, where stock liquidity influences firm performance via an illiquidity premium or mispricing.

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Biebuyck, Anton, and Johan H. Van Rooyen. "Valuing put options on single stock futures: Does the put-call parity relationship hold in the South African derivatives market?" Risk Governance and Control: Financial Markets and Institutions 4, no. 4 (2014): 107–19. http://dx.doi.org/10.22495/rgcv4i4c1art5.

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This study attempts to determine whether mispricing of options on single stock futures is present in the South African derivatives market. The valuation of options on single stock futures is considered through the put-call parity relationship. The theoretical fair values obtained, are compared to the actual market values over a period of three years, that is, from 2009 to 2011. Only put options are considered in this research.The results show that arbitrage put option opportunities do present themselves for the chosen shares. The actual put options were found to be underpriced in 5 out of 6 (83%) of the cases considered over the evaluation periods chosen. The mispricing was significant for both the BHP Billiton options with 100% and in the case of Sasol options (66%) of the time. Whether profitable arbitrage opportunities is possible, will depend on the magnitude of the mispricing and the transaction fees payable. Further, more extensive research may help identify tendencies which may be of use for the formulation of arbitrage strategies.

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Chang, Xin, Lewis H. K. Tam, Tek Jun Tan, and George Wong. "The real impact of stock market mispricing — Evidence from Australia." Pacific-Basin Finance Journal 15, no. 4 (September 2007): 388–408. http://dx.doi.org/10.1016/j.pacfin.2006.06.003.

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Yan, Honglei, Suigen Yang, and shengmin zhao. "Research on convertible bond pricing efficiency based on nonparametric fixed effect panel data model." China Finance Review International 6, no. 1 (February 15, 2016): 32–55. http://dx.doi.org/10.1108/cfri-04-2015-0030.

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Purpose – The purpose of this paper is to study the pricing efficiency of convertible bonds and arbitrage opportunities between the convertible bonds and the underlying stocks thus improve market efficiency. Design/methodology/approach – Using nonparametric fixed effect panel data model, the authors build pricing model of convertible bonds and obtain fitted value for them. Then the authors constructs simultaneous confidence band for the smooth function to identify mispricing and study the pricing efficiency and arbitrage opportunities of convertible bonds. Findings – Result shows, convertible bonds’ prices largely depend on stock prices. Pricing efficiency does not improve during the past few years as there are quite a few trading opportunities. Arbitrage opportunities increase as the stock prices approach it maxima, and selling opportunities for convertible bonds surpass buying opportunities which indicates that investors use market neutral strategies to arbitrage. Pricing efficiencies varies a lot and it is affected by the features of the stocks and convertible bonds. Index stocks eligible for margin trading with high liquidity enjoy higher pricing efficiency. Research limitations/implications – The study does not take into account trading cost and risk management measures. Practical/implications – Arbitrage between the underlying and the convertible bonds is profitable and contributes to pricing efficiency therefore should be encouraged. The regulator should pay attention to the extreme mispricing of the underlying and convertible bonds which cannot be corrected by the market as there might be manipulation. Originality/value – Since traditional pricing methods are based on the framework of non-arbitrage equilibrium with the assumption of balanced and perfect market, there are many restrictions in the pricing process and the practical utility is somewhat limited, and the impractical assumptions lead to model risk. This study uses nonparametric regression to study the pricing of convertible bonds thus circumvents the problem of model risk. Simultaneous confidence band for smooth function identifies mispricing and explicitly reflects the variation of pricing efficiency as well as signalizes trading opportunities. Application of nonparametric regression and simultaneous confidence band in derivative pricing is advantageous in accuracy and simplicity.

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Kumar, Umesh Kumar. "Are Indian ADR Premiums Mispriced?" International Journal of Finance 8, no. 1 (February 10, 2023): 1–18. http://dx.doi.org/10.47941/ijf.1192.

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Purpose: Indian ADRs have been observed to trade at premiums to the price of the underlying shares flouting the law of one price theorem. Therefore, it becomes imperative to investigate whether the observed premiums are mispricing or investor demand. This paper examines the Indian ADRs trading at a significant premium for an extended period. Methodology: The paper studies all ten Indian ADRs traded from 2001 to 2006. It uses NYSE Trade and Quote Database to compute order imbalance for analysis of the mispricing. It employs multivariate regression models to examine the premiums. Findings: The results suggest that Indian ADR returns are closely associated with the underlying market returns. Premiums are negatively related to the underlying stock returns. The ADR prices only adjust partially to the prices of the underlying stock. The ADR and underlying stock have a separate process for price formation in their respective markets. Using order imbalance of small and total trades of ADRs, this study shows that Indian ADR premiums are significantly and positively related to the buy demand of investors. Overall, the results support the idea that investor demand drives the Indian ADR premiums and is not mispriced. Unique Contribution to Theory, Policy, and Practice: The study provides valuable information on the same security traded in different trading locations and market segmentations. It offers insight into an emerging market stock listed in the most developed financial markets. It expands the literature on order imbalanced and dual-listed securities, particularly for ADRs. The order imbalance can be decomposed into short- and long-run components, showing how both parts influence ADR returns and premiums/discounts.

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Kim, Myungsun, Robert Kim, Onook Oh, and H. Raghav Rao. "The role of online freelance stock analysts in correcting overly pessimistic market sentiment." Managerial Finance 44, no. 8 (August 13, 2018): 954–71. http://dx.doi.org/10.1108/mf-12-2016-0333.

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Purpose The purpose of this paper is to examine the role of online freelance stock analysts in correcting mispricing of hard-to-value firms during sentiment-driven market periods. Design/methodology/approach The sample covers 23,758 Seeking Alpha articles obtained for the period between January 2005 and September 2011. The authors use OLS regressions to test the stock market reaction around Seeking Alpha analysts’ reports. The information in online analysts’ reports is measured by the tone of stock articles posted in SeekingAlpha.com (SA). Findings The analysis reveals that the degree of negative tone of their stock articles is related to three-day stock returns around the article posting dates. It further reveals that the relation between these returns and prevailing market sentiment depends on firm-specific susceptibility to the market sentiment. The three-day stock returns are higher during low market sentiment periods for firms that are more susceptible to the market sentiment, hence, harder to value. The tone of the stock articles during low sentiment periods also predicts the news in the forthcoming earnings. Practical implications The findings help stock investors identify value-relevant information provided by online freelance stock analysts, particularly for hard-to-value stocks and during the low market sentiment period. Originality/value This study utilizes a unique dataset obtained from SA. This is the first paper to examine whether online analysts help investors correct potential undervaluation of hard-to-value firms during the low market sentiment period.

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Szyszka, Adam. "Factors Influencing IPO Decisions. Do Corporate Managers Use Market and Corporate Timing? A Survey." International Journal of Management and Economics 42, no. 1 (November 20, 2014): 30–39. http://dx.doi.org/10.2478/ijme-2014-0041.

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Abstract This paper explores the motives for Initial Public Offerings (IPOs); that is, whether market mispricing or the behavioral inclinations of investors and analysts impact corporate decisions about rising equity, with a particular focus on market and corporate timing practices of managers going public. To do so, an anonymous survey was conducted of 166 managers of firms that recently went public at the Warsaw Stock Exchange in Poland (being the second most active IPO market in Europe, after London). The resulting data reveals that managers attempt to time bullish markets and good historical corporate financial results.

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Ali, Ashiq, Lee-Seok Hwang, and Mark A. Trombley. "Residual-Income-Based Valuation Predicts Future Stock Returns: Evidence on Mispricing vs. Risk Explanations." Accounting Review 78, no. 2 (April 1, 2003): 377–96. http://dx.doi.org/10.2308/accr.2003.78.2.377.

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Frankel and Lee (1998) show that the value-to-price ratio (Vf/P) predicts future abnormal returns for up to three years, where Vf is an estimate of fundamental value based on a residual income valuation framework operationalized using analyst earnings forecasts. In this study, we examine whether the Vf/P effect is due to market mispricing or omitted risk factors. We find that the Vf/P effect is partially concentrated around the future earnings announcements, consistent with the mispricing explanation. On using an extensive set of risk proxies, suggested by Gebhardt et al. (2001) and Gode and Mohanram (2001), we also find that Vf/P is significantly related to some risk proxies. However, after controlling for these risk factors, Vf/P continues to exhibit a significant positive association with future returns suggesting that these risk factors are not responsible for the Vf/P effect. Overall, the results seem consistent with the mispricing explanation for the Vf/P effect.

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Lyandres, Evgeny, Egor Matveyev, and Alexei Zhdanov. "Does the Market Correctly Value Investment Options?*." Review of Finance 24, no. 6 (January 16, 2020): 1159–201. http://dx.doi.org/10.1093/rof/rfaa002.

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Abstract This paper shows that the stock market misprices firms’ investment options. We build a real options model of optimal investment under uncertainty to estimate the value of firms’ investment options. We show that firms with valuable investment options have a higher likelihood of being mispriced. Importantly, this mispricing is not one-sided, as such firms are equally likely to be undervalued or overvalued. Our paper adds to the debate on whether public equity markets are myopic and systematically undervalue innovative firms. We show that this is not necessarily the case.

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Iqbal, Muhammad, and Buddi Wibowo. "Analysis of Asset Growth Anomaly on Cross-Section Stock Returns: Evidence from Indonesia Stock Exchange." Journal of Economics, Business & Accountancy Ventura 20, no. 1 (July 27, 2017): 47. http://dx.doi.org/10.14414/jebav.v20i1.1036.

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Assorted types of market anomalies occur when stock prices deviate from the prediction of classical asset pricing theories. This study aims to examine asset growth anomaly where stocks with high asset growth will be followed by low returns in the subsequent periods. This study, using Indonesia Stock Exchanges data, finds that an equally-weighted low-growth portfolio outperforms high-growth portfolio by average 0.75% per month (9% per annum), confirming existence of asset growth anomaly. The analysis is extended at individual stock-level using fixed-effect panel regression in which asset growth effect remains significant even with controlling other variables of stock return determinants. This study also explores further whether asset growth can be included as risk factor. Employing two-stage cross-section regression in Fama and Macbeth (1973), the result aligns with some prior studies that asset growth is not a new risk factor; instead the anomaly is driven by mispricing due to investors’ overreaction and psychological bias. This result imply that asset growth anomaly is general phenomenon that can be found at mostly all stock market but in Indonesia market asset growth anomaly rise from investors’ overreaction, instead of playing as a factor of risk.

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Li, Hui, Darren Henry, and Hsin-I. Chou. "Stock Market Mispricing, Executive Compensation and Corporate Investment: Evidence from Australia." Journal of Behavioral Finance 12, no. 3 (July 2011): 131–40. http://dx.doi.org/10.1080/15427560.2011.600842.

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Chen, Carl R., Peter P. Lung, and F. Albert Wang. "Where are the sources of stock market mispricing and excess volatility?" Review of Quantitative Finance and Accounting 41, no. 4 (November 10, 2012): 631–50. http://dx.doi.org/10.1007/s11156-012-0326-8.

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Nabosu, Simon Sokorte, and Esther Nkatha M’ithiria. "The Role of Accruals Anomaly on Stock Market Return of Non-Financial Firms Listed on the Nairobi Securities Exchange." Journal of Finance and Accounting 6, no. 3 (August 4, 2022): 82–96. http://dx.doi.org/10.53819/81018102t2082.

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The accrual anomaly arises due to the market mispricing of the total accruals and their components and the investors fail to incorporate the differential persistence of the cash flow components and accruals of firm earnings. This study sought to determine the effect of accruals anomaly on stock market return of non-financial firms listed on the Nairobi Securities Exchange. The study adopted positivism as data collection and hypothesis development and testing was achieved. The study used quantitative research design to correlate study variables using mathematical analysis methods. Correlation results indicate that accrual anomaly was negatively and significantly associated to stock market return of non-financial firms. Regression results for the static model indicate that accrual anomaly and stock market return of non-financial firms is negatively and significantly related. The results for the dynamic model indicate that accrual anomaly and stock market return is negatively and significantly related. The study concluded that accruals anomaly has a negative and significant effect on stock market return in non-financial firms on the Nairobi Securities Exchange. The analysis concluded that the accrual anomaly has implications because firms with high reported accruals exhibit lower stock market returns. High valuations of the investors are related to accruals because of the accounting distortions. The study recommends that having knowledge regarding accrual toward stock return in the future will help the investors to minimize the earning prediction error so that investors can make appropriate decision making. The study recommends for the investors to implement the investment strategy, which to short (sell) low accrual stocks and long (buy) high accrual stocks in Nairobi Securities Exchange with prediction that the stock gains higher return in the future based on the prevailing investor projections. Keywords: Accruals Anomaly, Stock Market Return & Non-Financial Firms Listed

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Trabelsi, Samir. "Are Transient Institutions Sophisticated Enough to Interpret Small Negative Earnings Surprises?" Journal of Accounting, Auditing & Finance 33, no. 1 (February 1, 2017): 34–39. http://dx.doi.org/10.1177/0148558x17692872.

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Institutional investors (active vs. passive) play various roles in the capital market and in assets prices, in particular. Institutional investors affect assets prices either because they play a monitoring role and mitigate the agency problem, or because they have information advantages, or finally, they can arbitrage away mispricing. This research note relates Hu, Ke, and Yu’s (forthcoming) article to both the traditional positive views that institutional investors are sophisticated and help correct stock mispricing and the complementary emerging literature that argues that institutions may contribute to stock return anomalies rather than eliminate them. My research note concludes that current research on the role of institutional investors has generated a number of useful insights. I identify many fundamental questions that remain unanswered, and changes in the economic environment that raise new questions for research.

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IQBAL, THONSE HAWALDAR, RAMONA BIRAU, CRISTI SPULBAR, BABITHA ROHIT, PRAKASH PINTO, THEKKEKUTT MATHUKUTTI RAJESHA, and FABRIZIO DI SCIORIO. "Further evidence on efficiency of Bahrain Bourse: A high challenge for other industries." Industria Textila 71, no. 05 (October 28, 2020): 458–66. http://dx.doi.org/10.35530/it.071.05.1732.

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The purpose of the present study is to provide further evidence of the weak form efficiency of the Bahrain Bourse. The research methodology is based on daily closing index values of the Bahrain Bourse from 2011 to 2015 in order to test the efficiency of the stock market while runs test, Autocorrelation Function, and advance tools such as ARCH and GARCH models and Hurst Index to provide further evidence of the weak form efficiency of the Bahrain stock market. For instance, a volatile and inefficient stock market has a negative impact on textile and apparel industry in the Kingdom of Bahrain, which is one of the most prosperous and attractive industries in the country. The empirical results revealed that Bahrain stock market does not follow normal distribution and the successive price changes are not independent. Further, ARCH effect is significant and indicative of a time-varying conditional volatility. There is an arbitrage opportunity and extreme mispricing in the Bahrain stock market as indicated by the GARCH (1,1) model. The results of the Hurst exponent also confirm the inefficiency of the market. The results of these tests are consistent indicating that the Bahrain stock market is inefficient

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Qun Wang, Qun Wang, and Po-Hsin Ho Qun Wang. "The long-run abnormal returns and the subsequent SEO characteristics of profit-exempted IPO firms in Taiwan." 企業管理學報 47, no. 4 (December 2022): 013–38. http://dx.doi.org/10.53106/102596272022120474002.

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<p>The deregulation of IPO requirements changes the industrial structure. Focusing on Taiwan’s unique profit-exempted IPO requirements, this study confirms that deregulation not only leads to IPO clustering, but also to a concentration in chemical and bio-pharmaceutical industry. The profit-exempted IPO issuers actively release optimistic information about future growth and take advantage of overvaluation to increase IPO revenue by misleading investors into mispricing the IPO. This results in poor long-run abnormal stock returns when stock price reverses after the IPO to correct the mispricing. In addition, some profit-exempted companies continue to use mispricing to raise equity capital and issue new shares after the IPO. For profit-exempted IPO companies, the characteristics of seasoned equity offerings within three years after IPO are significantly different from other companies. They are more likely to issue shares after IPO with shorter interval, larger size, and more frequent than non-profit exempted IPO firms. This study finds that the phenomenon of profit-exempted issuers raising capital is more consistent with the market timing theory.</p> <p> </p>

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Journal articles on the topic 'Stock market mispricing'

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