It is well known that the basic characteristics of emerging markets include a high degree of ownership concentration and illiquid capital markets, and good corporate governance practices are not widespread among companies. This special symposium section is dedicated to further deepen our knowledge of how firms and investors in emerging economies behave in the face of changes in economic and institutional environment. This issue becomes even more relevant because institutional investors in emerging markets now are very important players. For instance, they trade around 70% of the daily market capitalization in Latin American emerging markets, so it is important to better understand the reactions of listed companies and investors due to external changes. Policy makers and regulators are also interested to see the potential reaction and consequences of changes already in place, such as the Latin American Integrated Market (MILA), in order to evaluate the effects of integration on economic activity,
This special symposium section includes 10 papers selected based on a thorough review process. In the first paper, Rapp and Udoieva focus on the impact of ownership structures and shareholder’s rights protection on research and development (R&D) outlays. In their cross-country study that includes firms from 24 emerging countries, they find that a more dilute ownership and a greater presence of institutional investor positively affect R&D intensity. This positive effect is enhanced in countries with greater investor protection.
An interesting question in the development of Latin American emerging economies is what drives mergers and acquisitions (M&A) in these markets. Cortés, Durán, Gaitán, and Vasco examine this issue and conclude that in emerging markets with available capital, transnational M&A activities do not prosper because companies, operating in Latin America, usually expand their operations through international takeovers. However, industry productivity and high standards of corporate governance in Latin American companies attract transnational M&A activity from companies based on Organization for Economic Cooperation and Development (OECD) countries into the Latin American region.
The Latin American Integrated Market (or MILA for its Spanish acronym) started its operations in 2011 and currently includes four markets: Colombia, Chile, Mexico, and Peru. A current issue in the MILA is the harmonization of tax rates for capital gains and dividends, because tax rates are an important determinant of the market value of companies. In the third paper, Vélez-Pareja finds that personal taxes on dividend gains in fact destroy more value than we used to think, based on Miller’s (1977) approach. Hence, it is extremely important to consider the full harmonization of tax rates in the MILA.
The fourth paper of the special symposium section, by Feng, Lin, and Wan, discusses the impact of foreign direct investment (FDI) and short-term capital investment on stock and real estate prices in China. A positive shock on net capital inflows positively and contemporaneously affects both housing and stock prices, while an increase in FDI does not have an impact on stock prices but contributes to home price appreciation with some delay.
In the fifth paper, Mora-Valencia, Perote, and Tobar Arias analyze the performance of the cubic model (four-moment CAPM) in a sample of 16 emerging markets. They find little evidence in favor of the cubic model, since variables like co-skewness and co-kurtosis did not attain statistical significance explaining stock returns. Overall, the authors find evidence favoring the traditional CAPM in their sample comprising national stock indices.
In the next paper, Abuzayed and Al-Fayoumi study the impact of stock market upgrades announcements on stock returns and volatility. Upgrade decisions for Qatar, Dubai, and Abu Dhabi stock markets initially lead to a positive reaction by investors. Nevertheless, volatility tends to increase due to the speculative activities of retail and active investors that become net sellers (while passive fund investors become net buyers) in the days preceding the upgrade announcement.
The seventh paper, by Huang and Wang, analyzes herding behavior in the Taiwanese stock market. They find that herding tends to increase only after positive changes in the VIX index, which is the volatility index of Chicago Board Options Exchange (CBOE) and commonly referred to as the fear or uncertainty index in markets. The authors find no evidence of herding after large negative changes in the VIX. In addition, when fear increases, they show that investors react more swiftly to bad news. On the other hand, when fear abates, investors react more quickly to good news.
In the eight paper, Espinosa-Méndez, Gorigoitía, and Vieito analyze the benefits of market integration in Latin America to the national stock markets involved. The authors find that the creation of the MILA has indeed been beneficial since integration has increased dynamic conditional correlations among the four national markets that take part in MILA. The integration process has been beneficial for its participants, especially for Peru, the least developed market among MILA countries. Nevertheless, integration benefits are expected to dwindle in the long term, as national markets tend to become more integrated.
In the following paper, Santillán-Salgado, Roldán, and Miranda conduct an exploratory analysis on linear and non-linear causality among the four national stock markets comprising the MILA. They find that cross-country linear correlations and their linear causal relationships have increased, pointing to a greater level of integration. Nevertheless, the absence of long run linkages and the weakening of non-linear causality suggest that the integration process still offers diversification opportunities for investors.
In the last paper, Hill, Kelly, Preve, and Sarria-Allende investigate the link between financial and trade credits using a sample of firms from 66 countries. They find that firms with lower access to financial credit make a more intensive use of trade credit in. Companies with low access to bank or bond financing tend to be small, illiquid, and volatile firms. The more intensive use of trade credit in lieu of financial credit manifests more strongly in emerging markets.
We would like to acknowledge the able contribution of the authors and anonymous referees. We would also like to thank Ali M. Kutan (editor-in-chief of the journal) for his help and guidance in the review and production process of this special symposium section.