Do Stock Prices in Turkey Reflect Fundamental Information? A Firm-Level Analysis

Abstract

This paper investigates the correspondence between stock prices and firm fundamentals in Turkey. In pursuing our objective, we explore the relationship between firm-specific variation in stock returns and fundamentals in the context of a simple present value framework. We overcome the typical insufficiency of the spans of time-series accounting data in emerging market research, and the consequent loss of statistical testing power, by adopting a firm-level micro panel data approach. After properly accounting for unobserved heterogeneity, potential endogeneity bias and volatility persistence, we find that firm-specific variation of stock returns in Turkey is only weakly correlated with alternative proxies of firm-specific variation in firm fundamentals and that the relationship is not robust to the influence of control variables such as the firm size. Our findings are, therefore, consistent with the usual perception that stock prices in emerging markets contain little firm-specific information.

Idiosyncratic Risk and Corporate Governance: Evidence from Jordan

“…Bekaert and Harvey (1995) find that volatility in emerging markets decreases with higher trade openness as measured by the ratio of trade to GDP. Rahman et al (2012) point out that, in contrast to the findings of Li et al (2004), other studies document either a negative relationship or no relationship. Rahman et al (2012) point out that, in contrast to the findings of Li et al (2004), other studies document either a negative relationship or no relationship.…”

“…Although Li et al (2004) confirm the positive relationship between stock return movements (r-squared) and openness in the market for consumer goods, they find a positive relation between idiosyncratic risk and institutional development, and between idiosyncratic risk and capital market openness. In fact, Rahman et al (2012) find no significant relationship between stock idiosyncratic volatility in the Turkish financial market and variables that capture information contained in stock prices. In fact, Rahman et al (2012) find no significant relationship between stock idiosyncratic volatility in the Turkish financial market and variables that capture information contained in stock prices.…”

“…A number of observations are worth highlighting. The average individual stock's idiosyncratic risk in the ASE (Table 2) is around 40 percent of the average idiosyncratic risk reported by Rahman et al (2012) for the ISE and about 32 percent of the average idiosyncratic risk reported by Ferreira and Laux (2007) for the U.S. stock markets. The idiosyncratic risk trend shown in the figure is unlike what has been documented in Turkey; Rahman et al (2012) show that firm-specific volatility at the Istanbul Stock Exchange (ISE) has been stable during the early twenty-first century.…”

“…Li et al (2004) show that idiosyncratic risk in emerging markets has increased significantly. However, Rahman et al (2012) find that firm-specific volatility cannot be robustly explained by firm fundamentals in the Turkish financial market and conclude that emerging markets do not incorporate firm-specific news into stock prices.…”

“…majority of idiosyncratic volatility is explained by competitiveness. Rahman et al (2012) report that firm size negatively relates to idiosyncratic risk. Bali et al (2008) criticize idiosyncratic risk measures in Campbell et al (2001), arguing that it is "asset-pricing model" dependent.…”