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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|16097||2005||19 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Pacific-Basin Finance Journal, Volume 13, Issue 4, September 2005, Pages 367–385
We investigate what drives highly volatile stock return variations in an emerging country stock market. By applying Vuolteenaho's [What drives firm-level stock returns? Journal of Finance 57 (2002), 233–264] log book-to-market model to the Korean stock market, we find that at the individual stock level, cash-flow news contributes to stock return variation more than expected-return news does. However, at the aggregate market level, expected-return news dominates stock return variation. This is because the expected-return news has a substantial common element, whereas cash-flow news is largely firm-specific and thus diversifiable. Our finding suggests that the conventional wisdom that cash-flow news is firm-specific and expected-return news is market-wide is valid for emerging countries with volatile stock returns.
Stock price is often represented as the present discounted value of expected future cash flows. This implies that movements of stock returns are driven by two components: (i) changes in expected future cash flows and (ii) changes in expected returns (i.e., discount rates). However, the extent to which each of the two components contributes to stock return movements seems not well understood. The conventional approach by Campbell and Shiller was based on the dividend discount model of stock price, treating dividend payouts as cash flows relevant to shareholders (e.g., Campbell and Shiller, 1988a, Campbell and Shiller, 1988b and Campbell, 1991). Applying the Vector Autoregression (VAR) technique, they decomposed stock return variations into the cash flows related component, the expected return related component and the covariance of the two components. However, researchers have expressed some reservations about the Campbell–Shiller approach based on the dividend discount model for the following reasons. First, one can raise a question as to whether dividends are most relevant to the value of a stock. In a theoretical no-friction world such as the one assumed in the Modigliani–Miller model, changes in dividends will not affect the value of a stock. Second, one can point out that dividends may be an incomplete measure of cash flows to the shareholders. Dividends represent only a fraction of cash flows distributed to shareholders, given that there are several other forms of distributions (e.g., share repurchases). And it is worth noting that firms have gradually substituted share repurchases for dividend payouts in Corporate America (see, for example, Grullon and Michaely, 2002). The purpose of this paper is to examine what drives volatile stock return variation in an emerging country stock market such as the Korean stock market. The volatility of stock returns tends to be high in emerging country stock markets, relative to that of stock returns in developed country stock markets. Fig. 1 compares return volatilities of the aggregate U.S. and Korean stock indices. The graph shows that the return volatility of the Korean stock market is greater than that of the U.S. stock market over most of the 21 year period between 1981 and 2001. This observation is consistent with the belief of high volatility of emerging country stock markets. In this paper, we investigate sources of this high return volatility in an emerging country stock market. Specifically, we evaluate the relative importance of the expected-return-related component and the cash-flow-related component by decomposing stock return variation for the Korean stock market. Full-size image (64 K) Fig. 1. Stock return volatilities in U.S. and Korea stock markets. The figure compares the return volatilities of the U.S. aggregate market index (the NYSE composite index) and the Korean aggregate market index (the KOSPI) over the sample period of 1980–2001. Return volatilities of each market are defined as the standard deviations of daily returns over 20 trading days. We estimate the standard deviation of 20-day daily returns successively, starting from the beginning of 1980. The dotted line represents the return volatilities of the U.S. market index and the solid line represents the return volatilities of the Korean market index. Figure options In examining the drivers of stock return variations in an emerging country stock market, some characteristics of emerging country stock markets make the use of the Campbell–Shiller approach more problematic beyond the aforementioned criticisms. First, dividends paid out by some emerging country firms are very small. This is pointed out by La Porta et al. (1998), who argue that firms in countries with poor investor protection tend to provide relatively small dividend payouts to shareholders, compared with firms in countries with better investor protection. Thus, the dividend discount model is likely to substantially underestimate true cash flows to shareholders in some emerging country stock markets. Another issue facing researchers is the relatively short length of time series data. Emerging country stock markets are young and typically have at most about 20 years of trading history. The long time-series of the U.S. stock market data allows researchers to perform statistically reliable research. In contrast, with only about 20 years of history in emerging country stock markets, researchers are not able to obtain sufficient data points for the Campbell–Shiller approach.1 We adopt a methodology that enables us to get around the criticisms raised on the dividend based model as well as the sample data issue when studying emerging country stock markets. First, our methodology treats net income as cash flows, which allows us to escape criticism on the use of dividends as cash flows. Another important feature of the methodology is the use of firm year variables. Rather than looking directly into the drivers of stock return variation at the aggregate market level, we look into the drivers of stock return variation at the individual stock level using firm year variables. Afterwards, we attempt to infer the drivers of stock return variation at the aggregate market level by conducting a supplementary analysis. The use of firm year variables is clearly advantageous when one tries to study emerging country stock markets with a relatively short trading history. It allows us to obtain a sufficiently large number of data points for a reliable statistical analysis. The methodology of this study has been developed by Vuolteenaho (2002). He performs a variance decomposition on U.S. stock market returns and reports that at the individual stock level (i.e., firm-level), cash-flow news variance is several times greater than expected-return news variance, implying that changes in cash flows are the main driver of stock return variation at the individual stock level. At the aggregate market level, however, he infers that expected-return news is the major driver of stock return variation. This inference is based on the observation that cash-flow news is diversified more easily than expected return news so that at the aggregate market level, expected-return news variance is a few times greater than cash-flow news variance. This observation of low diversifiability of expected-return news relative to cash-flow news is consistent with the conventional wisdom that expected return news tends to be economy-wide, while cash flow news is firm-specific. To shed new light on the major driving factor of volatile emerging market returns, we study variance decomposition in the Korean stock market. Stock returns reflect new information at both the market-level and the firm-level. As Roll (1988) points out, the extent to which stocks move together depends on the relative amounts of firm-level and market-level information capitalized into stock prices. Considering several aspects of emerging country stock markets, it is uncertain whether emerging markets will exhibit the same pattern as in the U.S. stock market. First, as Morck et al. (2000) report, stock prices in emerging country stock markets tend to move more synchronously than stock prices in developed country stock markets. They postulate that synchronous movements of stock prices in emerging country stock markets are associated with the lack of firm-specific information in those stock markets, which implies that it is costly to obtain firm-specific information for investors to differentiate between stocks. If cash-flow news is mostly firm-specific and is costly to obtain in emerging country stock markets, we can predict that stock return variation in those markets is more likely to be driven by the common economy-wide expected-return-related component. Second, emerging countries are typically characterized as small, open economies with relatively less diversified industries. Stock returns in a small, open economy are expected to move more synchronously than those in a large economy with diversified industry sectors, because a small, open economy is susceptible to external or macroeconomic shocks that drive the whole economy up or down. One may be able to argue that for a small, open economy, firm-level cash-flow news has a substantial amount of the common economy-wide component.2 For a small, open economy, when an economy-wide (positive or negative) common external or macroeconomic shock occurs, it is likely to affect firm-level cash flows in the same direction as expected returns. That is, in a stock market of an emerging country with a small, open economy, firm-level cash flow news is very likely to be highly correlated and an economy-wide event too. In sum, it is not clear a priori which of the two main sources for stock return variation—cash flows and expected returns–will be more important in driving stock returns in emerging country stock markets. This is an empirical question to be answered by examining the data carefully. To address the question, we examine stock returns of 122 firms over the 21 year period between 1981 and 2001 in the Korean stock market. We find that at the individual stock level, cash-flow news variance is greater than expected-return news variance, suggesting that cash flow news is the main driver of stock return variation at the individual stock level. On the other hand, at the aggregate market level, expected-return news contributes more to stock return variation than cash-flow news does. The contrasting observations at the individual stock level and at the aggregate market level are obtained because cash-flow news is not so closely correlated across firms and thus diversified away at the aggregate market level, whereas expected-return news is highly correlated across firms and thus seems to have a large common component. These results from the Korean stock market are similar to those from the U.S. stock market, as mentioned above. Our evidence suggests that the same forces at work in developed country stock markets may govern stock return variation in emerging country stock markets as well. Our evidence also suggests that the source of high volatilities in the market level returns in emerging country stock markets is expected-return news, which is supposedly determined by macroeconomic events. This paper is organized as follows. The next section introduces the methodology we use to decompose the stock return variation. Section 3 explains the data and variables. Section 4 conducts the analysis and describes the results. Section 5 concludes the paper.
نتیجه گیری انگلیسی
In this study, we have conducted variance decomposition to investigate the relative importance of expected-return news and cash-flow news in driving stock returns in a volatile emerging country stock market. As far as we know, ours is the first study done in this research vein on an emerging country stock market. The analysis has been made possible by the use of a firm year variable to circumvent the issue of lack of sufficient aggregate-level data points typical in emerging country stock markets. The motivation of this study has been to examine whether an emerging stock market characterized by high return volatilities will exhibit the same pattern of variance decomposition as in a developed country stock market. Interestingly, our findings are similar to those on the U.S. stock market. Our findings suggest that the dynamics of stock returns in volatile emerging stock markets may be governed by the same forces as in developed stock markets. First, at the individual stock level, cash-flow news continues to be important in driving stock returns in the Korean stock market as in the U.S. stock market. This is contrary to a conjecture that individual stock returns in an emerging stock market will be driven more by expected-return news because of a lack of firm-specific information. Especially, the findings using the market-adjusted returns suggest that what makes an individual stock underperform or outperform its peers is cash-flow news rather than expected-return news. Second, at the aggregate market level, expected-return news is a dominant factor in driving stock returns in the Korean stock market as in the U.S. stock market. We find that expected-return news seems to have a large common component, while cash-flow news is not closely related across firms. This observation is consistent with the conventional wisdom that expected-return news is an economy-wide event and cash flow news is a firm-specific event. Our evidence implies that the source for high return volatilities at the aggregate market level in emerging country stock markets is expected-return news supposedly associated with macroeconomic events. These findings may need to be interpreted with caution. To be precise, the stock return variation we examine is by means of E[(rt−Et−1(rt))2], rather than by the usual measure of E[(rt−r¯)2]. Given that researchers do not have precise knowledge about the expectations model used by investors in the stock market, alternative specifications for Et−1(rt) are possible. This study employs the same VAR models used in the previous study on the U.S. stock market, mainly for the purpose of facilitating comparison of the results from the two stock markets. However, one can always raise the possibility that stock returns in emerging stock markets might follow different dynamics from those in developed stock markets. If so, we will have to modify the state vector of the VAR system by adding or deleting variables, and we might have a different result as to the relative importance of expected-return news and cash-flow news in driving stock returns. Finally, for future research, it will be worth investigating the drivers of stock returns in other emerging stock markets as well. It will be interesting to examine whether the following observations from this study can be generalized to other emerging stock markets: (i) cash flow news is relatively important in driving stock returns at the individual stock level, while expected return news is more important at the aggregate market level, and (ii) cash-flow news is firm-specific, while expected-return news is economy-wide.