Market Segmentation, Liquidity Spillover, and Closed-End Country Fund Discounts

Chan, Justin S. P.; Jain, Ravi; Xia, Yihong

doi:10.2139/ssrn.853664

Cited by 13 publications

(30 citation statements)

References 64 publications

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“…In their model, foreign investors are aware that they are generally less informed than local investors, so they set a lower foreign share price to compensate for the information disadvantage. 2 However, the source of variation of information asymmetry between foreign and local investors is not specified in K. Chan et al's (2008) model. We identify the cross-sectional variation of local firms' earnings quality as one explicit source for the information disadvantage faced by foreign investors relative to local investors, allowing U.S. investors to be subject to different levels of information disadvantage as compared with local investors.…”

Section: Earnings Opacity Information Costs and Closed-end Country mentioning

confidence: 99%

“…Consistent with J. S. P. Chan, Jain, and Xia (2008) and Hwang (2011), we test H1 by estimating the following fund discount model:…”

Section: Empirical Modelsmentioning

confidence: 99%

“…They show analytically and empirically that foreign share prices are discounted from the prices of domestic shares and the discounts are positively correlated with the extent of the information disadvantage faced by foreign investors. Extending K. Chan et al's (2008) analytical reasoning to the setting of closed-end country funds, we hypothesize that the opaqueness of underlying firms' earnings causes a greater information disadvantage for U.S. investors, which in turn leads to a larger fund price discount to the fund NAV for a closed-end country fund. Therefore, in our primary hypothesis, we posit that higher earnings opacity of the individual firms in the funds' holdings leads to larger fund discounts.…”

Section: Introductionmentioning

confidence: 99%

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Earnings Opacity and Closed-End Country Fund Discounts

Chen

Hope

et al. 2016

Journal of Accounting, Auditing & Finance

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Closed-end country funds are interesting in that they have two sets of prices for the same underlying assets-the net asset value (NAV) of the fund holdings as measured using the underlying firms' stock prices in their home markets and the fund price at which the fund trades on a U.S. stock exchange. Utilizing the theoretical framework of information asymmetry in two separate markets for an identical asset, we find that the difference between the fund's NAV and its trading price (i.e., the fund discount) is positively associated with the earnings opacity of the underlying companies. Such a positive association is consistent with the notion that U.S. investors face higher information acquisition and processing costs when compared with local investors, and therefore earnings opacity exacerbates the information disadvantage of U.S. investors, leading to a larger fund discount. We further show that the positive relation varies predictably with U.S. investors' information acquisition and processing costs and with the extent to which host stock markets are segmented from the U.S. market. Specifically, we find that the positive relation between earnings opacity and fund discounts is weaker for those funds with more U.S. cross-listings in fund holdings, with underlying companies following financial reporting standards similar to U.S. standards, and with less segmented local markets.

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Section: Earnings Opacity Information Costs and Closed-end Country mentioning

confidence: 99%

“…Consistent with J. S. P. Chan, Jain, and Xia (2008) and Hwang (2011), we test H1 by estimating the following fund discount model:…”

Section: Empirical Modelsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Earnings Opacity and Closed-End Country Fund Discounts

Chen

Hope

et al. 2016

Journal of Accounting, Auditing & Finance

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“…Brickley et al, 1991; investor sentiment (see De Long et al, 1990;Lee et al, 1991, but cf. Chen et al, 1993Chopra et al, 1993;Elton et al, 1998;Dimson and Minio-Kozerski, 1999;Chan et al, 2005); agency costs (see Barclay et al, 1993); investments in restricted or foreign assets (see Malkiel, 1977;Bonser-Neal et al, 1990;Chan et al, 2005, but cf. Kumar and Noronha, 1992); asymmetric information (see Oh and Ross, 1994;Arora et al, 2003); and liquidity (see Cherkes et al, 2009).…”

Section: Introductionmentioning

confidence: 99%

The closed-end fund puzzle: Management fees and private information

Lenkey¹

2015

Journal of Financial Intermediation

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“…Chen and Poon (2007) report that stock market downturn Granger causes illiquidity while illiquidity does not Granger causes market downturn. Furthermore, Chan et al (2005) investigate closed end country fund and show that illiquidity in one market can easily spillover to another and affect both the funds share price and its assets. Tang and Yan (2006) analyse liquidity spillovers to Credit Default Swap (CDS) markets.…”

Section: Introductionmentioning

confidence: 99%

Liquidity volatility and spillover effects: evidence from the UK-USA and East Asian countries

Lim

Giouvris

2015

IJFERM

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Most studies in the area of spillovers concentrate on return volatility and how this transmits between different markets. Liquidity volatility and potential spillovers on the other hand have attracted very little attention which is disproportional to the importance of liquidity. This empirical study makes an attempt to fill this gap in the literature and investigates liquidity volatility spillovers between the UK and East Asian stock markets (Japan, China, Hong Kong and Korea) and between the UK and the USA from 2006 to 2010. We use GARCH-M models and Granger causality tests. Liquidity is captured by absolute and proportional spread. Liquidity volatility for all countries in the sample is high and persistent. We also confirm the existence of significant liquidity volatility spillover effects using both methods mentioned above for UK-USA, UK-China, UK-Hong Kong and UK-Korea. Results for UK-Japan indicate that there is a weak spillover effect between the two countries if any at all.

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Market Segmentation, Liquidity Spillover, and Closed-End Country Fund Discounts

Cited by 13 publications

References 64 publications

Earnings Opacity and Closed-End Country Fund Discounts

Earnings Opacity and Closed-End Country Fund Discounts

The closed-end fund puzzle: Management fees and private information

Liquidity volatility and spillover effects: evidence from the UK-USA and East Asian countries

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