Small firms have, on average, lower return on assets and higher leverage than do large firms. Small firms tend to do well in good economic conditions but to perform poorly in the worst economic conditions. We investigate the hypothesis that the small firm effect is manifest in the expansion phase of the economic cycle but not in the contraction phase. The empirical results of our study confirm the hypothesis for 1976-95. We use the alpha, residual, and regression methods in testing the hypothesis. Southern Finance Association and the Southwestern Finance Association.
This study examines the frequency of extreme trading days and investment behaviour in Sweden. We show that the frequency, as well as the magnitude of extreme trading days has increased over time. We also show that the frequency of extreme trading days in a year is positively correlated to the frequency the preceding year. Furthermore, we show that aggregate cash flows into equity and bond funds are unrelated to risk measured by standard deviation of return. Our findings show that investors, individuals as well as corporations, use simple passive investment strategies and hence, do not believe in market timing or wish to risk capital on capturing far tail or black swan type returns.
JEL classification: G11; G14; G32
The performance of 87 stock markets around the world is examined over the period December 1995 through June 2016. Market responses to democracy or dictatorship and several economic freedom measures are estimated. The democracy/dictatorship measures are based on the Cheibub, Gandhi, and Vreeland data system. Measures of economic freedom, property rights, and corruption are taken from the Heritage Foundation indices since inception. Data are used as first differences to capture any response to new information. Democracy/dictatorship has a significant impact on returns; that is, added risk commands a higher return. The stock markets react positively to the release of economic freedom index data. The adjusted change in economic freedom scoring and corruption has a positive impact on market returns, but no effect was found for property rights. These results are consistent with increases in “perceived risk” impacting returns. Lower corruption (a higher freedom from corruption score) should lead to better returns as cash off flow should diminish and either be paid out to the investor or reinvested in the firm. Key conclusions are as follows: Required investment compensation is lower in a democracy than a dictatorship, a reduction in corruption is associated with improving returns, the region of the world where the stock market index is located matters, and positive changes in economic freedom are associated with a positive market return change.
Using a unique dataset of ownership structure for all stocks listed on the Stockholm Stock Exchange in Sweden, we examine different degrees of institutional holdings in Swedish firms during the bear market of 2000 to 2002. We find that examination by institutional investor domicile reveals that both Swedish and foreign institutions increase their equity holdings, although the increase by foreign institutions is proportionately higher, (individuals reduce their equity holdings). We find evidence that foreign and domestic institutional investors exhibit different preferences for excess returns and standard deviations in excess returns when we control for firm size; excess return is associated with changes in foreign institutional holdings while higher standard deviation in excess return is associated with the change in domestic institutional holdings. Both types of institutions are sensitive to liquidity and trading factors, causing portfolio realignment.
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