discussion by campbell r. harvey duke university and nber

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Stock Price Synchronicity and Analyst Stock Price Synchronicity and Analyst Coverage in Emerging MarketsCoverage in Emerging Marketsand and RR22 Around the World: New Theory Around the World: New Theory and Testsand Tests

Discussion by Campbell R. HarveyDiscussion by Campbell R. HarveyDuke University and NBERDuke University and NBER

4th Annual Conference onEmerging Markets FinanceMarch 9-11, 2005University of Virginia

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The Common ThemeThe Common Theme

Both papers study how stocks in Both papers study how stocks in international markets move together international markets move together (synchronicity)(synchronicity)

Both use RBoth use R22 (stock return regressed on (stock return regressed on market return) as measure of synchronicitymarket return) as measure of synchronicity

(market-wide info)(market-wide info)RR2 2 ~ -------------------------------------------------~ ------------------------------------------------- (market-wide info + firm-specific info)(market-wide info + firm-specific info)

4th Annual Conference onEmerging Markets Finance

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Roll (1988)Roll (1988)– U.S. stocks have low RU.S. stocks have low R22

Campbell, Lettau, Malkiel, Xu (2001)Campbell, Lettau, Malkiel, Xu (2001)– RR22 decreasing over time for U.S. stocks decreasing over time for U.S. stocks

Morck, Yeung, Yu (2000)Morck, Yeung, Yu (2000)– Higher RHigher R22 in emerging markets than developed markets in emerging markets than developed markets

Piotroski, Roulstone (2004)Piotroski, Roulstone (2004)– Different market participants’ info generating activities Different market participants’ info generating activities

and their effect on Rand their effect on R22. Security analysts do not have an . Security analysts do not have an advantage over insiders or institutional investorsadvantage over insiders or institutional investors

The Research SettingThe Research Setting


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Jin, Myers (JM)Jin, Myers (JM)– Explain differences in RExplain differences in R22 across countries across countries

Chan, Hameed (CH)Chan, Hameed (CH)– Explain differences in RExplain differences in R22 across firms across firms

The DifferencesThe Differences


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Both study role of information in Both study role of information in explaining differences in Rexplaining differences in R22

JM: link RJM: link R22 with opaqueness with opaqueness

CH: link RCH: link R22 with analyst activity with analyst activity * * ** * *

The DifferencesThe Differences


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Model first predicts RModel first predicts R22 increases with increases with opaquenessopaqueness

Why? Why? – Insiders know more firm-specific info than Insiders know more firm-specific info than

outsiders (info asymmetry)outsiders (info asymmetry)– Insiders bear part of firm-specific risk on behalf Insiders bear part of firm-specific risk on behalf

of outsidersof outsiders– Outsiders face relatively more market-wide riskOutsiders face relatively more market-wide risk

Jin-Myers ModelJin-Myers Model


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Model second predicts that crash Model second predicts that crash frequency increases with opaquenessfrequency increases with opaqueness

Why?Why?– Insiders can only absorb so much firm-Insiders can only absorb so much firm-

specific bad newsspecific bad news

Jin-Myers ModelJin-Myers Model


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JM proxy opaqueness byJM proxy opaqueness by– Disclosure (Transparency International)Disclosure (Transparency International)– Number of auditors per 100,000Number of auditors per 100,000– Diversity (dispersion of analysts forecasts)Diversity (dispersion of analysts forecasts)

In emerging markets, driven byIn emerging markets, driven by– Weak disclosure regulationWeak disclosure regulation– Little voluntary disclosureLittle voluntary disclosure– Financial developmentFinancial development– Interconnecting companiesInterconnecting companies

OpaquenessOpaqueness


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CH asks:CH asks:– Do analysts generate market-wide info or firm-Do analysts generate market-wide info or firm-

specific info?specific info? Prediction for RPrediction for R22::

– If analysts generate relatively more market-wide If analysts generate relatively more market-wide info => Rinfo => R22 increases with analyst coverage increases with analyst coverage

– If analysts generate relatively more firm-specific If analysts generate relatively more firm-specific info => Rinfo => R22 decreases with analyst coverage decreases with analyst coverage

Chan-Hameed ModelChan-Hameed Model


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Findings support predictions:Findings support predictions:– RR22 increases with opaqueness increases with opaqueness– Crash frequency increases with opaqueness Crash frequency increases with opaqueness

(insiders exercise abandonment option if (insiders exercise abandonment option if conditions get really bad)conditions get really bad)

Jin-Myers ResultsJin-Myers Results


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Provides alternative interpretation to Morck, Yeung, Yu Provides alternative interpretation to Morck, Yeung, Yu (2000)(2000)– MMY argue property rights protection explains differences in RMMY argue property rights protection explains differences in R22

across countries (weak property rights discourage informed across countries (weak property rights discourage informed trading and therefore prevent firm-specific information from trading and therefore prevent firm-specific information from getting into prices)getting into prices)

JM: Opaqueness measures has more explanatory power JM: Opaqueness measures has more explanatory power than property rights measuresthan property rights measures

JM study effect of opaqueness on higher moments of stock JM study effect of opaqueness on higher moments of stock marketsmarkets

Find positive effect of kurtosis on RFind positive effect of kurtosis on R22 – invite explanations – invite explanations

Jin-Myers ContributionJin-Myers Contribution


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Findings:Findings:– More analyst coverage increases RMore analyst coverage increases R22

– Supports hypothesis that analysts generate Supports hypothesis that analysts generate relatively more market-wide inforelatively more market-wide info

Chan-Hameed ResultsChan-Hameed Results


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Study interaction between analyst Study interaction between analyst coverage and Rcoverage and R22 in emerging markets in emerging markets

Shows that Piostroski, Roulstone (2004) Shows that Piostroski, Roulstone (2004) results for U.S. hold in emerging marketsresults for U.S. hold in emerging markets

Tests show that analysts generate market-Tests show that analysts generate market-wide info in emerging marketswide info in emerging markets

Chan-Hameed ContributionChan-Hameed Contribution


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Does more analyst coverage lead to more Does more analyst coverage lead to more informative firm-specific news or reduce firm-informative firm-specific news or reduce firm-specific noise? specific noise? – Link firm-specific info with future fundamental news Link firm-specific info with future fundamental news

e.g. accounting variables (Durnev, Morck, Yeung, e.g. accounting variables (Durnev, Morck, Yeung, Zarowin (2001))Zarowin (2001))

– Are market model residuals correlated with future Are market model residuals correlated with future accounting variables? If higher correlation with high accounting variables? If higher correlation with high analysts stocks, then more firm-specific informationanalysts stocks, then more firm-specific information

Chan-Hameed ThoughtsChan-Hameed Thoughts


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Study interaction between opaqueness and Study interaction between opaqueness and analyst activityanalyst activity– Do analysts generate relatively more market-wide Do analysts generate relatively more market-wide

info for more opaque firms?info for more opaque firms?– Regress RRegress R22 on both opaqueness measure, analyst on both opaqueness measure, analyst

coverage and interaction term between opaqueness coverage and interaction term between opaqueness and analyst coverageand analyst coverage

Chan-Hameed ThoughtsChan-Hameed Thoughts


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How to reconcile JM and CH findings?How to reconcile JM and CH findings?– JM: higher earnings dispersion => increased JM: higher earnings dispersion => increased

opaqueness => increased Ropaqueness => increased R22

– CH: higher earnings dispersion => more CH: higher earnings dispersion => more disagreement on market-wide news => reduce disagreement on market-wide news => reduce positive impact of analyst coverage on Rpositive impact of analyst coverage on R22 => => decreased Rdecreased R22

Reconciling the ResearchReconciling the Research


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JM measure is country-levelJM measure is country-level CH measure is firm-levelCH measure is firm-level Forecast dispersion depends on both Forecast dispersion depends on both

opaqueness and disagreementopaqueness and disagreement Possible explanation:Possible explanation:

– At country-level, opaqueness component At country-level, opaqueness component dominates => Rdominates => R22 increases increases

– At firm-level, disagreement component At firm-level, disagreement component dominates => Rdominates => R22 decreases decreases

Reconciling the ResearchReconciling the Research


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Accounting measuresAccounting measures– Earnings aggressiveness, earnings smoothing, loss Earnings aggressiveness, earnings smoothing, loss

avoidance (Bhattacharya, Daouk, Welker (2002))avoidance (Bhattacharya, Daouk, Welker (2002)) Corporate governance measuresCorporate governance measures

– Business group membership (Bae, Bailey, Mao Business group membership (Bae, Bailey, Mao (2005))(2005))

– ICRG subcomponentsICRG subcomponents

??

Alternative OpaquenessAlternative Opaqueness


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Analyst activityAnalyst activity– Average number of analysts in marketAverage number of analysts in market– Analysts’ advantage= average error from naïve Analysts’ advantage= average error from naïve

earnings prediction model - average analysts forecast earnings prediction model - average analysts forecast error.error.

– Are country-level results be consistent with firm-Are country-level results be consistent with firm-level?level?

Alternative OpaquenessAlternative Opaqueness


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What is the effect of liberalization on the interaction What is the effect of liberalization on the interaction among Ramong R22, opaqueness and analyst activity?, opaqueness and analyst activity?

Bae, Bailey, Mao (2005) Bae, Bailey, Mao (2005) – Study effect of liberalization on info environmentStudy effect of liberalization on info environment

Interesting questions:Interesting questions:– Does liberalization affect RDoes liberalization affect R22 through decreased through decreased

opaqueness or increased analyst coverage? opaqueness or increased analyst coverage? – Would increased foreign investor participation through Would increased foreign investor participation through

liberalization increase Rliberalization increase R22 because foreign investors rely because foreign investors rely more on market-wide info?more on market-wide info?

Financial LiberalizationFinancial Liberalization


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Possible measures of liberalization:Possible measures of liberalization:– Investibility at country-level (Bekaert,1995) Investibility at country-level (Bekaert,1995)

[country effects will not pick this up because [country effects will not pick this up because it changes through time]it changes through time]

– Investibility at firm-level (Bae, Chan, Ng Investibility at firm-level (Bae, Chan, Ng (2003)) used in CH not JM(2003)) used in CH not JM

Financial LiberalizationFinancial Liberalization


2222

Cross-sectional volatility (Bekaert, Harvey (1997))Cross-sectional volatility (Bekaert, Harvey (1997))– Higher cross-section volatility => less market-wide infoHigher cross-section volatility => less market-wide info– Advantage: measure is available at higher frequency Advantage: measure is available at higher frequency

than Rthan R22

Stock return dispersion Stock return dispersion – (Solnik, Roulet (2000), De Silva, Sapra, Thorley (Solnik, Roulet (2000), De Silva, Sapra, Thorley

(2001), Statman, Scheid (2004))(2001), Statman, Scheid (2004))– Difference between average individual stock volatility Difference between average individual stock volatility

and volatility of market portfolioand volatility of market portfolio

SynchronicitySynchronicity


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Results sensitive to sample (old version of paper used Results sensitive to sample (old version of paper used data back to 1989)data back to 1989)

Critically important to use Scholes-Williams market Critically important to use Scholes-Williams market model estimation in emerging market weekly data – model estimation in emerging market weekly data – also world factor is omitted in CHalso world factor is omitted in CH

Suspicious of regressions with standardized variables Suspicious of regressions with standardized variables on LHS and level variables on RHSon LHS and level variables on RHS

Not convinced of the correction for endogeneity Not convinced of the correction for endogeneity problemproblem

Volume is the noisiest measure in EMDB and is not a Volume is the noisiest measure in EMDB and is not a good measure of liquiditygood measure of liquidity

Other IssuesOther Issues


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Considerable evidence that liquidity is a priced Considerable evidence that liquidity is a priced factorfactor

Evidence in emerging markets that local Evidence in emerging markets that local liquidity is importantliquidity is important

Stocks with high analysts following are likely Stocks with high analysts following are likely more liquid. This explains why the high analysts more liquid. This explains why the high analysts sort leads the low analysts sort.sort leads the low analysts sort.

LiquidityLiquidity


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Interesting exerciseInteresting exercise– Let the BHL liquidity measures compete with Let the BHL liquidity measures compete with

opaqueness and property rights in the JM opaqueness and property rights in the JM cross-country regressioncross-country regression

– Let the BHL liquidity measures compete with Let the BHL liquidity measures compete with the analysts measures in the firm level the analysts measures in the firm level regression in CHregression in CH

LiquidityLiquidity


discussion by campbell r. harvey duke university and nber

Documents

higher r2

link r2

international markets

emerging marketsand

firmspecific information

firmspecific risk

market return

myers jmexplain differences