This study extends the stock market liberalisation literature by conducting a firm-level analysis on the emerging economy of Malaysia. Using a finer measure of foreign ownership, we explore the association between liberalisation and cost of equity for public listed firms on Bursa Malaysia over the sample period of 2002-2009. We find strong support for our hypothesis that total foreign ownership is negatively and significantly associated with cost of equity. Further disaggregate analysis suggests foreign institutions that trade through direct accounts are driving the lower cost of equity. When the model is extended to include interaction term, we find that an effective board of directors further strengthens the negative relationship between foreign institutions and cost of equity. Our empirical results consistently support the corporate governance channel in which foreign institutions play an active monitoring role.
Foreign ownership; Cost of equity; Investor heterogeneity; Corporate governance; Malaysia
This paper examines the relationship between foreign shareholding and stock price efficiency for Malaysian public listed firms over the 2002–2009 sample period. We use stock price delay as an inverse measure of price efficiency, and consider the speed of adjustment to local and global common factor information. The results show that foreign investors accelerate the incorporation of both types of common information into the prices of Malaysian stocks, mainly due to their superior skills in processing systematic market-wide factors. However, we find evidence of optimality in foreign shareholding, suggesting that the efficiency benefit disappears after foreign ownership exceeds a certain threshold level. Further analyses shed lights on the channels and moderating variables driving this non-monotonic relationship. Our disaggregate analysis on foreign investor heterogeneity shows that foreign investors who trade through nominee accounts are elite processors of public market-wide and firm-specific news in the Malaysian stock market.
Financial liberalisation; Foreign investors; Price efficiency; Thresholds; Investor heterogeneity
This study constructs two liquidity indicators, “Closing Percent Quoted Spread” and “Closing Percent Quoted Spread Impact”, for all publicly listed firms on Bursa Malaysia over the 2000-2014 sample period. The raw firm-level daily liquidity values are averaged across months and then aggregated using equal- and value-weighted schemes to provide two Malaysian monthly aggregate liquidity indicators. Tracking the level of market liquidity over the last 15 years, all indicators consistently show that there is an obvious dry-up in liquidity in year 2008 when the bankruptcy of Lehman Brothers shattered confidence in the financial markets. Unlike the U.S. stock exchanges, there is no conclusive evidence to suggest that liquidity in the Malaysian market has improved over the sample period. However, in the short-term, there is evidence of seasonality in which the market is less liquid at year end as compared to the beginning of the year. Further structural break analysis indicates that the sharp liquidity changes in the Malaysian stock market are mainly driven by reactions to international events. When comparing with other commonly used liquidity proxies, the correlation analysis provides evidence in the Malaysian context that the turnover ratio is a poor indicator of liquidity.
Aggregate liquidity; Malaysian stock market; Seasonality; Structural Break; Trend
This paper re-examines the persistence and source of non-linear predictability in the stock markets of G7 countries. Applying the Brock–Dechert–Scheinkman (BDS) test on autoregression (AR)-filtered returns in rolling estimation windows, we find evidence of local non-linear predictability in all the sampled stock markets. To identify the source, we apply the BDS test on AR-generalized autoregressive conditional heteroskedasticity (GARCH)-filtered returns in rolling windows. After accounting for conditional heteroskedasticity, we still find brief time periods with non-linear predictability in all markets, contradicting the weak-form efficient markets hypothesis.
Nonlinear predictability; BDS test; Efficient markets hypothesis; Adaptive markets hypothesis; G7 stock market
This study addresses the question of whether a more integrated stock market is associated with a higher degree of informational efficiency. We employ the adjusted pricing error from an equilibrium international asset pricing model as a proxy for market integration. The aggregate country-level price delay serves as an inverse measure of informational efficiency, as it captures the relative speed with which each aggregate stock market reacts to global common information. Using data from 49 countries, we find robust evidence supporting the hypothesis that markets more integrated with the world are also more efficient, and this positive association is only significant in the sub-sample of emerging stock markets. The results provide additional insight on the factors facilitating the transmission of global information and yield important policy implications.
Informational efficiency; Market integration; Financial liberalization; Price delay; Pricing error
This article re-examines the evidence of return predictability for three major US stock indices using two recently developed data-driven tests, namely the automatic portmanteau Box–Pierce test and the wild bootstrapped automatic variance ratio test. In tracking the time variation of return predictability via rolling estimation window, we find that those periods with significant return autocorrelations can largely be associated with major exogenous events. Theoretically, the documented time varying nature of predictable patterns is consistent with the adaptive markets hypothesis.
Autocorrelation test; Variance ratio test; Adaptive markets hypothesis; Evolving return predictability; US stock market
Market efficiency; Return predictability; Martingale difference sequence; Asian stock markets
This paper examines the empirical link between trade openness and the informational efficiency of stock markets in 23 developing countries. Our fixed effects panel regression results document a significant negative relation between trade openness and stock return autocorrelations only when the de facto measure is used. On this basis, we argue that a greater level of de facto trade openness is associated with a higher degree of informational efficiency in these emerging stock markets because the former signals higher future firm profitability, and investors tend to react faster to information when there is less uncertainty about a firm’s future earnings or cash flows. Further analyses find no significant association between the extent of financial openness and the degree of informational efficiency.
Trade openness; Financial openness; Informational efficiency; Return autocorrelations; Emerging stock markets
This paper provides a systematic review of the weak-form market efficiency literature that examines return predictability from past price changes, with an exclusive focus on the stock markets. Our survey shows that the bulk of the empirical studies examine whether the stock market under study is or is not weak-form efficient in the absolute sense, assuming that the level of market efficiency remains unchanged throughout the estimation period. However, the possibility of time-varying weak-form market efficiency has received increasing attention in recent years. We categorize these emerging studies based on the research framework adopted, namely non-overlapping sub-period analysis, time-varying parameter model and rolling estimation window. An encouraging development is that the documented empirical evidence of evolving stock return predictability can be rationalized within the framework of the adaptive markets hypothesis.
Adaptive markets hypothesis (AMH); Efficient markets hypothesis (EMH); Evolving return predictability; Stock markets; Weak-form EMH
This paper provides strong evidence of time-varying return predictability of the Dow Jones Industrial Average index from 1900 to 2009. Return predictability is found to be driven by changing market conditions, consistent with the implication of the adaptive markets hypothesis. During market crashes, no statistically significant return predictability is observed, but return predictability is associated with a high degree of uncertainty. In times of economic or political crises, stock returns have been highly predictable with a moderate degree of uncertainty in predictability. We find that return predictability has been smaller during economic bubbles than in normal times. We also find evidence that return predictability is associated with stock market volatility and economic fundamentals.
Economic bubbles; Economic crises; Adaptive markets hypothesis; Market efficiency; U.S. stock market