The Role of Stock Price Synchronicity on Portfolio Optimization

Document Type : Research Paper

Authors

1 Assistant Professor - School of Management and Accounting - Allameh Tabatabaei University

2 Payame noor university

Abstract

  In this paper, we investigate the effects of financial statement comparability on the corporate cash holdings of Tehran Stock Exchange firms. Required data for the study were collected from the financial statements of 110 firms in the 1390-1395 years. To examine the hypotheses, we used multivariate regression with panel data. For calculation of comparability of the model variable, we referred to Di Franco et al. (2011). The results revealed that there is negative and significant relationship between financial statement comparability and corporate cash holding. In addition, among the moderating variables in this research, financial reporting quality has a moderating role in influencing the Financial statement comparability with cash holdings.The negative relationship between the ability to compare financial statements and remuneration through the theory of representation is justifiable. Representative theory states that opportunistic managers spend on investing in projects with a net negative net worth

1- Introduction
In this paper, we investigate the effects of financial statement comparability on the corporate cash holdings of Tehran Stock Exchange firms. We further examine whether financing constraints, financial reporting quality, and firm-level corporate governance mediate this association. Financial statement comparability describes the degree of similarity in accounting choices among two or more firms and reflects “the relationship between two or more pieces of information” (Financial Accounting Standards Board (FASB) [1980]). It also reflects the quality of the information that enables users to identify similarities and differences in the financial performance of two firms (Francis et al., 2014).
 2- Research Hypotheses
In order to achieve the objectives of this research, the following hypotheses are developed: 
H1: Financial statement comparability has an effect on corporate cash holdings.
H2: Financing constraints mediate the effect of financial statement comparability on corporate cash holdings.
H3: Financial reporting quality mediates the effect of financial statement comparability on corporate cash holdings.
H4: Corporate governance, as proxies by institutional ownership, mediates the effect of financial statement comparability on corporate cash holdings.
 3- Methods 
Required data for the study were collected from the financial statements of 110 firms in the 1390-1395 years. To examine the hypotheses, we used multivariate regression with panel data. For calculation of comparability of the model variable we referred to Di Franco et al. (2011). For assessment of the cash holdings, we used the model by Ozkan and Ozkan (2002).
 4- Results
The results revealed that there is a negative and significant relationship between financial statement comparability and corporate cash holding. In addition, among the moderating variables in this research, financial reporting quality has a moderating role in influencing the Financial statement comparability with cash holdings.
 5- Discussion 
The negative relationship between the ability to compare financial statements and remuneration through the theory of representation is justifiable. Representative theory states that opportunistic managers spend on investing in projects with a net negative net worth.
 


 

Keywords

References

 Ahmadi, F., Nasiriani, Kh. and Abazari, P. (2008). Delphi technique: A tool in the research. Iranian Journal of  Medical Education, Volume 8, Issue 1, Page 164-174. (in Persian)
Ahmadpour A. & Peikarnegar S. (2012). The relationship between components of accruals quality and price synchronicity in tehran stock exchange companies. Journal of Security Exchange, 4 (16), 137-151. (in Persian)
Andreou, P. C., Ehrlich D. & Louca C. (2013). Managerial ability and firm performance: Evidence from the global financial crisis. Available online at: http://www.efmaefm.org.
Ang, J., Cole, R. & Lin J. (2000). Agency costs and ownership structure. The Journal of Finance, 55 (1), 81-106.
Azar, A., Ramooz, N. and Atefatdoost, A. (2018). The application of  non-inferior set estimation (nise) method in optimum portfolio selection (case study: Tehran Security Exchange). Financial Research Journal, 14 (2), 1-14. (in Persian)
Bali, T. G., & Cakici, N. (2008). Idiosyncratic volatility and the cross section of expected returns. Journal of Financial and Quantitative Analysis, 43, 29-58.
Bartholdy, J., Pear, P., (2005). Estimation of expected CAPM vs. Fama and French. International Review of Financial Analysis, 14, 407-427.
Bertsimas, D., Shioda, R. (2009). Algoritm for cardinality-costrained quadratic optimization. Computational Optimization and Application, 43, 65-80.
Bettman J., Sault, S., Schultz, E. (2009). Fundamental and technical analysis: substitutes or compliments? Accounting & Finance, 49(1), 21-33.
Boehme, R. D., Danielsen, B. R., Kumar, P. and Sorescuet S. (2009). Idiosyncratic risk and the cross-section of stock returns: Merton (1987) meets miller (1977). Journal of Financial Markets, 12, 438-468.
Bulgurcu, B. (2012). Application of TOPSIS technique for financial performance evaluation of technology firms in Istanbul stock exchange market. Procedia-Social and Behavioral Sciences, 62, 1033-1041.
Bushman, R., Piotroski, J., Smith, A. (2004). What determine corporate transparency? Journal of Accounting Research, 42 (2), 207-221.
Campbell, J., Martin, L., Malkiel, B., Xu, Y. (2001). Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk. Journal of Finance 56, 1-43.
Chan, K., Hameed, A., Kang, W. (2013). Stock return synchronicity and liquidity. Journal of Financial Markets, 16, 414–438.
Chen, M., Cheng, S. and Hwang Y. (2005). An empirical investigation of the relationship between intellectual capital and firms market value and financial performance. Journal of Intellectual Capital. 6(2), 59-78.
Cheng, L. T. W., Leung, T. Y. & Yu, W. (2014). Information arrival, changes in R-square and pricing asymmetry of corporate new. International Review of Economic & Finance, 33, 67-81.
Cheong C., & Zurbruegg R. (2016). Analyst forcasts and stock price informativeness: Some international evidence, Journal of Contemporary Accounting & Economics, 12, 257-269.
Dasgupta, S., Gan, J. & Gao, N. (2010). Transparency, price informative, stock return synchronicity: Theory and evidence. Journal of Financial and Quantitative Analysis, 45 (5), 1189-1201.
Davallou, M. & Emami A. (2015). Stock price synchronicity and liquidity. Journal of Security Exchange, 8 (29), 3-22. (in Persian)
Demerjian, P., Lewis, M., and McVay, S. (2012). Managerial ability and earnings management. Available online: www.Online.wustl.edu.
Demerjian, P. Lev, B., and McVay, S. (2012). Quantifying managerial ability: A new measure and validity tests. Management Science, 58 (7), 1229-1242.
Durnev, A., Morck, R., Yeung, B., Zarowin, P. (2003). Does greater firm-specific return variation mean more or less informed stock pricing? Journal of Accounting Research, 41, 797-836.
Durnev, A., Li, K., Morck, R., Yeung, B. (2004). Capital markets and capital allocation: Implication for economies in transition. Economics of Transition, 12 (4), 593-634.
Eslami Bidgoli, Gh. and Talangi, A. (1999). Optimal provincial budget allocation: A goal programing approach. Financial Research Journal, 4 (1), 50-71. (in Persian)
Foroghi D. & Ghasemzad P. (2016). The Effect of financial statements comparability on stock price synchronicity. Financial Accounting researches, 8(1), 39-54. (in Persian)
Farooq O. & Aktaruzzaman K. (2016). Does stock price synchronicity effect information content of reported earnings? Risk Governance & control, 6(3), 41-47.
Goyal, A. & Santa-Clara, P. (2003). Idiosyncratic risk matters! Journal of Finance, 58(3), 34-55.
Gul, F., Kim, B., Qiu, A. (2010). Ownership concentration, foreign shareholding, audit quality and firm specific return variation, Journal of Financial Economics, 95 (3), 425.
Hajiani, P., Jalali, R. and Khosravani P. (2010). The ranking of insurance companies in Iran based on the Balanced Scorecard approach and using the MADM techniques. Management Research in Iran, 9, 1-12. (in Persian)
Hamidyan M., Vaghfi S. M. & Soleymani H. (2018). A survey on the relationship between price concurrency and distribution of stock return volatility. Journal of Economic Development Policy, 5 (3), 91-108. (in Persian)
Hasan, I., Song L. & Wachtel P. (2014). Institutional development and stock price synchronicity: Evidence from China. Journal of Comparative Economic, 42(1), 92-108.
Hu, Y., Zhao T., Zhang L. (2018). Does low price synchronicity mean more informativeness in stock prices? Empirical evidence on information integration speed in the chinese stock market, Emerging Markets Finance and Trade, 55 (5), 1014-1033.
Jafari, N. & Montazer, Gh. (2008). Application of fuzzy delphi method in designing tax policy in Iran. Economic Research, 8 (1), 91-114. (in Persian)
Jang, B., Lee, H., Park, S. (2015). Entrepreneurial business plan undiversifiable idiosyncratic risk. Accounting Horizon, 15, 49-61.
Jiang, X., and Lee B. (2006). The dynamic relation between returns and idiosyncratic volatility. Financial Management, 35 (2), 43-65.
Jin, L., and S. Myers. (2006). R2 around the world: New theory and new tests. Journal of Financial economics, 79 (2), 257-292.
Jing, Z. (2007). Earning Quality, Analyst, Institutional Investor and Stock Price Synchronicity. PhD Thesis, Hong Kong Polytechnic University.
Johnston, J. A., (2009). Accruals Quality and Price Synchronicity. Working Paper, Louisiana State University and Agricultural and Mechanical College.
Kamyabi Y. & Parhizgar B. (2016). The study of the relationship between institutional investors and stock price synchronicity in listed companies in Tehran Stock Exchange. Journal of Investment Knowledge, Vol. 5(17), 165-186. (in Persian).
Khandaker S. (2012). An empirical analysis of stock price synchronicity in emerging economies. A. T. Business Management Review, 8 (3), 108-133.
Kim, J., B. & Shi H. (2007). Voluntary IFRS adoption and stock price synchronicity: Do analyst following and instituonal infrastructure matter? Available at http://dx.doi.org/10.2139/ssrn
Kuo, Y. F., Chen, P. C. (2008). Constructing performance appraisal indicators for mobility of the service industries using fuzzy Delphi method. Expert Systems with Application, 35, 1930-1943.
Lee, B., & Mauck, N. (2016). Dividend initiations, increases and idiosyncratic volatility. Journal of Corporate Finance, 40, 47-67.
Lee, D. W. & Liu, M. H. (2011). Does more information in stock price lead to greater or smaller idiosyncratic volatility. Journal of Banking and Finance, 35(6), 1563-1580.
Levine, R. & Zervos, S. (1998). Stock Markets, Banks, and Economic growth. American Economic Review. 88 (3), 537-558.
Liang, M. (2015). Stock price information content, idiosyncratic volatility and expected return. Journal of Mathemetical Finance, 5, 401-411.
Lin, K. J., Khondkar K., Clairmont C. (2014). Stock price informativeness and idiosyncratic return volatility in emerging markets: evidence from China. Review of Pacific Basin Financial Markets and Policies, 17(4), 1-48.
Lyimo, GD., Pradesh, U. (2014). Accrual quality and stock price informativeness: Evidence from India. Research Journal of Financial and Accounting, 5 (12), 88-95.
Mahdavi, G. & Maharlooi, M.(2012). Composition of the board of directors and agency fees. Accounting Research, 10, 84-103. (in Persian)
Mahdavi, G. &  Ghorbani A. (2012). A comparative study of the role of modern and traditional liquidity indexes in apprising financial performance of the companies listed in Tehran Stock Exchange. Financial Accounting Researches, 4(1), 67-88. (in persian)
Malkiel, B. & Y. Xu. (2012). Idiosyncratic risk and security returns. Working Paper, University of  Texas at Dallas.
Mehrani K, Tahriri A. (2012). Ranking of firms by means of financial variables and examination of its relation with stock returns in Tehran Stock Exchange. Business Strategies, volume 9(50), 51-70. (in Persian)
McKnight, P. J. & C. Weir. (2009). Agency costs, corporate governance mechanisms and ownership structure in large UK publicly quoted companies. Quarterly Review of Economics and Finance, 49(2), 139-158.
Miraskari S., Mahfoozi G., Shabani M. (2018). Investigating the Relationship between stock price synchronicity and return distribution. Asset Management & Financing, 6(3), 51-66. (in Persian)
Morck, R., Yeung, B., Yu, W. (2000). The information content of stock market: why do emerging markets have synchronous stock price? Journal of Financial Economics, 58 (1), 215-260.
Namazi M. & Ghaffari, M. (2015). The importance and role of managerial ability information and financial ratios as a criterion for the optimal stock portfolio selection in Tehran Stock Exchange (Via data envelope analysis). Quarterly Financial Accounting Journal, 7 (26), 1-30. (in Persian)
Najafi A. M. (2017). Synchoronization of the stock price and the role of institutional investors in Tehran Stock Exchange. Journal of Investment Knowledge, 6(23), 71-84. (in persian)
Piotroski, J., Roulstone, D. (2004). The influence of analysts, institutional traders, and insiders on the incorporation of market, industry, and firm-specific information into stock prices. The Accounting Review, 79 (4), 1119-1151.
Qodsi, S., Tehrani, R. & Bashiri, M. (2015).Portfolio optimization with simulated annealing algorithm. Financial Accounting Researches, Volume 17, page 141-158. (in Persian)
Rahmani, A. & Bashirimanesh, N. (2011). Analysis of the effect of income smoothing on informative of stock prices. Financial Accounting Researches, 3, 39-54. (in Persian)
Rajgopal, S. & Venkatachalam, M. (2011). Financial reporting quality and idiosyncratic return volatility. Journal of Accounting and Economics, 51 (1), 1-20.
Roll, R. (1988). R2. The Journal of Financial, 43, 541-566.
Ross, S., Westerfield, R. & Bradford J. (2012). Fundamental of Corporate Finance. New York: Mc Graw-Hill.
Sharp, William F. (1994). The sharp ratio. Journal of Portfolio Management, 21(1), 49-58.
Shin, Hyejeong (2019). The effects of industry characteristics on stock price synchronicity around IFRS adoption. Investment Management and Financial Innovations. 16 (1), 89-99.
Shiu, H. (2006). The application of the value added intellectual coefficient to measure corporate performance. Journal of Management, 23(2), 356-379.
Skeife, A., H., Gassen, J. & Lafond, R. (2005). Does Stock Price Synchronicity Represent Firm-Specific Information? The International Evidence. MIT Sloan Paper no. 4551-05: Available at, SSRN: http://ssrn.com.
Sonnier, B. M., Carson, D. C. & P. P. Carson. (2007). Accounting for intellectual capital: The relationship between profitability and disclosure. Journal of Applied Management, 12(2), 3-19.
Vinh Vo, X. (2017). Do foreign investors improve stock price informativeness in emerging equity markets? Evidence from Vietnam. Research in International Business and Finance, 42, 986-991.
Wang, G. Y. (2010). The impacts of free cash flows and agency costs on firm performance. Journal of Service Science & Management, 3, 408-435.
Watanabe, O., Trulaske, R. (2012). Did the EU Transparency Directive Improve Financial Reporting Transparency? University of Missouri.
Wurgler, J. (2000). Financial markets and the allocation of capital. Journal of Financial Economics 58, 87-214.
Xing X. & Anderson R. (2010). Stock price synchronicity and public firm-specific information. Journal of Financial Markets, 14, 259-276.
Zare Bahnamiri M. J. & Kashiri L. (2018). Stock price synchronicity and herd behavior of shareholders (Real and legal): Emphasizing the role of liquidity mediator. Quarterly Financial Accounting, 10(38), 22-45. (in Persian)
Zhang W., Li X., Shen D. & Teglio A. (2016). R2 and idiosyncratic volatility: which captures the firm specific return variation? Economic Modeling 55, 298

Files

History

  • Receive Date: 03 February 2019
  • Revise Date: 13 September 2019
  • Accept Date: 14 September 2019

Share

How to cite

Statistics