Review of Pacific Basin Financial Markets and Policies

In this paper, I examine the ability of equity market illiquidity to predict Australian macroeconomic variables, between 1976 and 2010. In contrast to existing, U.S.-based, studies, I find that stock market illiquidity does not, on average, have much predictive power over economic growth. Consistent with the weak in-sample predictive power, economic growth forecasts from models that exclude stock illiquidity from the set of explanatory financial variables are statistically no worse than forecasts from models that include illiquidity. However, I find strong evidence that the predictive power of equity market illiquidity is state-contingent, with much higher predictability in states associated with economic and financial stress. The difference between the single-state and regime-switching models' results reflects the fact that, as the nonstressed states have been much more prevalent, parameter estimates from a single-state model averages over both stressed and non-stressed states thus lowering the statistical and economic significance of the estimates.

The purpose of this paper is to investigate whether a CEOs stock-based compensation incentive, that is one of the main corporate governance dimensions, has different impacts on accruals-based earnings management (AEM) and real activities earnings management (REM) which have different economic costs. Empirical results show that CEOs stock-based compensation incentive has a positive impact on AEM but a negative impact on REM, implying stock-based compensation incentive leads executives to use more AEM but less REM. Given that the SOX places additional compensation risk on executives, the stock-based compensation is an incentive to significantly encourage managers for using more AEM during the pre-SOX period and less REM during the post-SOX period. The evidence implies that managers change their risk perceptions for AEM and REM after the enactment of SOX, and then their earnings management behaviors indeed change for avoiding wealth-destroying pitfalls. These results bring a new insight into the ability to prevent managers from increasing personal wealth at shareholders' expense.

In this paper, we examine the evidence of herding behavior on the Chinese stock market. Our main findings are as follows. First, we find strong evidence of herding behavior on both the Shanghai and Shenzhen stock exchanges. Second, we document evidence of asymmetric herding behavior with greater magnitude of herding behavior on up markets than on down markets. Third, our findings suggest that herding behavior is sector-specific and predominant in the industrial and properties sectors. Finally, we unravel strong evidence suggesting that herding behavior is time-varying and in some sectors time-varying herding behavior is more prevalent than in other sectors.

This paper investigates the characteristics of implied risk-neutral distributions separately derived from Taiwan stock index call and put options prices. Differences in risk-neutral skewness and kurtosis between call and put options indicate deviations from put-call parity. We find that the sentiment effect is significantly related to differences between call and put option prices. Our results suggest the differential impact of investor sentiment and consumer sentiment on call and put option traders' expectations about underlying asset prices. Moreover, rational and irrational sentiment components have different influences on call and put option traders' beliefs.

The value of stock options increases in both stock prices and volatility. It suggests that options might engender incentives for managers to increase both stock prices and volatility. Recent studies have documented a negative association between earnings quality and idiosyncratic volatility: Hence, the lower the earnings quality, the greater the idiosyncratic volatility, and the higher the value of stock options. This study investigates whether there is a link between CEO equity compensation and earnings quality. Using a simultaneous system of equations, we find negative correlations between the two, suggesting that managers have incentives to reduce earnings quality.

The flow of orders from buyers and sellers, relative to past returns and stock characteristics, was examined in the Chinese stock market. Order imbalance (the gap between buyer- and seller-initiated trades) was found to be negatively related to long term returns. Turn of the calendar year trading provided strong indications of tax-motivated trading as well as support for the flight-to-quality hypothesis, which suggests selling in response to perceived increases in market risk.

In a private placement, the identity of the block purchaser has attracted much attention, while the characteristics of the issuing firm are sparsely noted. We hypothesize that the market concerns about the coupling between the issuing firm and the new block investor. Our empirical findings from a sample of 213 private equity placements in Taiwan indicate that the announcement effect of good-governance firms is significantly higher than that of bad-governance firms. Moreover, the induction of outside block investor further punctuates the coupling effect: the coupling between good-governance (poor-governance) firms and outside block investors yields even higher (lower) returns. Finally, the coupling effect remains significant in explaining the long-run performance of private-equity-placement firms.