The Relationship Between Financial Patterns and Exogenous Variables: Empirical Evidence from Symmetric and Asymmetric ARDL

International Journal of Business Society, Vol. 6, Issue 5
Asrat ArayaDr. Jauhari Dahalan2Dr. Barudin Muhammad
Unit Root TestsCo-integration TestsAutoregressive Dickey-Fuller Lag (ARDL) ModelCumulative Abnormal ReturnsUnexpected EarningsInterest RatesLiquidity Risk
PDFRegular IssueDOI: 10.30566/ijo-bs/2022.06.90
6Volume
5Issue

Abstract

Purpose:This study investigated the impact of unexpected earnings, interest rates, and liquidity risk on cumulative abnormal returns to explain the underreaction phenomenon. Our sample consists of firms that belong to the information transmission and technology industry stocks from 2010 through 2020. Design/Method/Approach:We first used unit root and cointegration tests to demonstrate the tests’ levels and differences. We then used the ARDL and error correction models to develop underreaction measures. Findings:Our empirical results showed a positive but insignificant influence of unexpected earnings and interest rates on cumulative abnormal returns. However, the result showed a negative and significant relationship between liquidity risk and cumulative abnormal returns. Our research result also showed that the ARDL and error correction model explained 43.20% and 44.12% of the variation in the percentage of cumulative abnormal returns, respectively. The models were robust. Research Limitations:Our study of the underreaction phenomenon was just restricted to the relationships between cumulative abnormal returns and three explanatory variables. Thus, using more than three explanatory variables to explain the underreaction might result in more robustness of the ARDL model. Practical Implication:our study presents several significant findings and their implications for scholars as well as policymakers which helps the latter make the appropriate decision.

References

[1]

Abbas, F., Iqbal, S., & Aziz, B. (2019). The impact of bank capital, bank liquidity and credit risk on profitability in postcrisis period: A comparative study of US and Asia. Cogent Economics & Finance, 7(1), 1605683.

[2]

Adelopo, I., Vichou, N., & Cheung, K. Y. (2022). Capital, liquidity, and profitability in European banks. Journal of Corporate Accounting & Finance, 33(1), 23-35.

[3]

Agboola, P. O., Hossain, M., Gyamfi, B. A., & Bekun, F. V. (2022). Environmental consequences of foreign direct investment influx and conventional energy consumption: evidence from dynamic ARDL simulation for Turkey. Environmental Science and Pollution Research, 1-14.

[4]

Akhtar, F., & Das, N. (2018). Predictors of investment intention in Indian stock markets: Extending the theory of planned behaviour. International Journal of Bank Marketing.

[5]

Al-dhamari, R., & Ku Ismail, K. N. I. (2013). Surplus free cash flow and the effect of corporate governance on the informativeness of earnings. International Business Management, 7(3), 214-228.

[6]

Al-Homaidi, E. A.; Tabash, M. I.; Farhan, N. H.; Almaqtari, F. A. (2018). Bank-specific and macro-economic determinants of profitability of Indian commercial banks: A panel data approach. Cogent Economics & Finance, 6(1), 1548072.

[7]

Al-Qudah, A. A., & Houcine, A. (2021). Stock markets' reaction to COVID-19: evidence from the six WHO regions. Journal of Economic Studies, 49(2), 274-289.

[8]

Anolick, N., Batten, J. A., Kinateder, H., & Wagner, N. (2021). Time for gift giving: Abnormal share repurchase returns and uncertainty. Journal of Corporate Finance, 66, 101787.

[9]

Antônio, R. M.; Junior, T. P.; Magnani, V. M.; Gatsios, R. C. (2022). Announcements of debenture issues and the impact on stock returns in Brazil (1989-2020): A bootstrap-based study. Contaduría y administración, 67(2), 8.

[10]

Audrino, F., Sigrist, F., & Ballinari, D. (2020). The impact of sentiment and attention measures on stock market volatility. International Journal of Forecasting, 36(2), 334-357.

[11]

Ball, R. & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 159-178.

[12]

Baltagi, B. H. (2021). Unbalanced Panel Data Models. In Econometric Analysis of Panel Data (pp. 229-257). Springer, Cham.

[13]

Barber, B. M., & Odean, T. (2001). Boys will be boys: Gender, overconfidence, and common stock investment. The Quarterly Journal of Economics, 116(1), 261-292.

[14]

Barberis, N., Greenwood, R., Jin, L., & Shleifer, A. (2018). Extrapolation and bubbles. Journal of Financial Economics, 129(2), 203-227.

[15]

Basu, S. (1977). Investment performance of common stocks in relation to their price-earnings ratios: A test of the efficient market hypothesis. The Journal of Finance, 32(3), 663-682.

[16]

Bauer, M. D., & Rudebusch, G. D. (2020). Interest rates under falling stars. American Economic Review, 110(5), 1316-54.

[17]

Beckmann, J., & Czudaj, R. L. (2022). Exchange rate expectation, abnormal returns, and the COVID-19 pandemic. Journal of Economic Behavior & Organization, 196, 1-25.

[18]

Bernard, V. L., & Thomas, J. K. (1989). Post-earnings-announcement drift: delayed price response or risk premium?. Journal of Accounting Research, 27, 1-36.

[19]

Bouteska, A., & Regaieg, B. (2018). Loss aversion, overconfidence of investors and their impact on market performance evidence from the US stock markets. Journal of Economics, Finance and Administrative Science.

[20]

Al-Homaidi, E. A.; Tabash, M. I.; Farhan, N. H.; Almaqtari, F. A. (2018). Bank-specific and macro-economic determinants of profitability of Indian commercial banks: A panel data approach. Cogent Economics & Finance, 6(1), 1548072.

[21]

Al-Qudah, A. A., & Houcine, A. (2021). Stock markets' reaction to COVID-19: evidence from the six WHO regions. Journal of Economic Studies, 49(2), 274-289.

[22]

Anolick, N., Batten, J. A., Kinateder, H., & Wagner, N. (2021). Time for gift giving: Abnormal share repurchase returns and uncertainty. Journal of Corporate Finance, 66, 101787.

[23]

Antônio, R. M.; Junior, T. P.; Magnani, V. M.; Gatsios, R. C. (2022). Announcements of debenture issues and the impact on stock returns in Brazil (1989-2020): A boots trap-based study. Contaduría y administración, 67(2), 8.

[24]

Audrino, F., Sigrist, F., & Ballinari, D. (2020). The impact of sentiment and attention measures on stock market volatility. International Journal of Forecasting, 36(2), 334-357.

[25]

Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 159-178.

[26]

Baltagi, B. H. (2021). Unbalanced Panel Data Models. In Econometric Analysis of Panel Data (pp. 229-257). Springer, Cham.

[27]

Barber, B. M., & Odean, T. (2001). Boys will be boys: Gender, overconfidence, and common stock investment. The Quarterly Journal of Economics, 116(1), 261-292.

[28]

Barberis, N., Greenwood, R., Jin, L., & Shleifer, A. (2018). Extrapolation and bubbles. Journal of Financial Economics, 129(2), 203-227.

[29]

Basu, S. (1977). Investment performance of common stocks in relation to their price-earnings ratios: A test of the efficient market hypothesis. The Journal of Finance, 32(3), 663-682.

[30]

Bauer, M. D., & Rudebusch, G. D. (2020). Interest rates under falling stars. American Economic Review, 110(5), 1316-54.

[31]

Beckmann, J., & Czudaj, R. L. (2022). Exchange rate expectation, abnormal returns, and the COVID-19 pandemic. Journal of Economic Behavior & Organization, 196, 1-25.

[32]

Bernard, V. L., & Thomas, J. K. (1989). Post-earnings-announcement drift: delayed price response or risk premium?. Journal of Accounting Research, 27, 1-36.

[33]

Bouteska, A., & Regaieg, B. (2018). Loss aversion, overconfidence of investors and their impact on market performance evidence from the US stock markets. Journal of Economics, Finance and Administrative Science.

[34]

Al-Homaidi, E. A.; Tabash, M. I.; Farhan, N. H.; Almaqtari, F. A. (2018). Bank-specific and macro-economic determinants of profitability of Indian commercial banks: A panel data approach. Cogent Economics & Finance, 6(1), 1548072.

[35]

Al-Qudah, A. A., & Houcine, A. (2021). Stock markets' reaction to COVID-19: evidence from the six WHO regions. Journal of Economic Studies, 49(2), 274-289.

[36]

Anolick, N., Batten, J. A., Kinateder, H., & Wagner, N. (2021). Time for gift giving: Abnormal share repurchase returns and uncertainty. Journal of Corporate Finance, 66, 101787.

[37]

Antônio, R. M.; Junior, T. P.; Magnani, V. M.; Gatsios, R. C. (2022). Announcements of debenture issues and the impact on stock returns in Brazil (1989-2020): A bootstrap-based study. Contaduría y administración, 67(2), 8.

[38]

Audrino, F., Sigrist, F., & Ballinari, D. (2020). The impact of sentiment and attention measures on stock market volatility. International Journal of Forecasting, 36(2), 334-357.

[39]

Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 159-178.

[40]

Goh, S. K., Sam, C. Y., & McNown, R. (2017). Re-examining foreign direct investment, exports, and economic growth in Asian economies using a bootstrap ARDL test for cointegration. Journal of Asian Economics, 51, 12-22.

[41]

Jacobs, B. W., Singhal, V. R., & Subramanian, R. (2010). An empirical investigation of environmental performance and the market value of the firm. Journal of Operations Management, 28(5), 430-441.

[42]

Jacobs, H. (2016). Market maturity and mispricing. Journal of Financial Economics, 122(2), 270-287.

[43]

Jones, E. A., Kyiu, A. K., & Li, H. (2021). Earnings informativeness and trading frequency: Evidence from African markets. International Journal of Finance & Economics, 26(1), 1064-1086.

[44]

Jordan, S., & Philips, A. Q. (2018). Cointegration testing and dynamic simulations of autoregressive distributed lag models. The Stata Journal, 18(4), 902-923.

[45]

Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1-44.

[46]

Kesraoui, A., Lachaab, M., & Omri, A. (2022). The impact of credit risk and liquidity risk on bank margins during economic fluctuations: evidence from MENA countries with a dual banking system. Applied Economics, 54(35), 4113-4130.

[47]

Kormendi, R., & Lipe, R. (1987). Earnings innovations, earnings persistence, and stock returns. Journal of Business, 323-345.

[48]

Kovács, T., Ko, A., & Asemi, A. (2021). Exploration of the investment patterns of potential retail banking customers using two-stage cluster analysis. Journal of Big Data, 8(1), 1-25.

[49]

Kripfganz, S., & Schneider, D. C. (2016, July). ardl: Stata module to estimate autoregressive distributed lag models. In Stata Conference, Chicago.

[50]

Kuang, W. (2022). Real earnings smoothing and crash risk: Evidence from Japan. Journal of International Financial Management & Accounting, 33(1), 154-187.

[51]

Lausegger, M. (2021). Stock markets in turmoil: political institutions and the impact of elections. Economics & Politics, 33(1), 172-204.

[52]

Leung, T., & Nguyen, H. (2019). Constructing cointegrated cryptocurrency portfolios for statistical arbitrage. Studies in Economics and Finance.

[53]

Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.

[54]

Liu, E., Mian, A., & Sufi, A. (2022). Low interest rates, market power, and productivity growth. Econometrica, 90(1), 193-221.

[55]

López-Penabad, M. C., Iglesias-Casal, A., & Neto, J. F. S. (2022). Effects of a negative interest rate policy in bank profitability and risk taking: Evidence from European banks. Research in International Business and Finance, 60, 10-1597.

[56]

Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of Economic Perspectives, 17(1), 59-82.

[57]

Martins, O. S., & de Campos Barros, L. A. B. (2021). Firm informativeness, information environment, and accounting quality in emerging countries. The International Journal of Accounting, 56(01), 2150004.

[58]

Matzana, V., Oikonomou, A., & Polemis, M. (2022). Tourism Activity as an Engine of Growth: Lessons Learned from the European Union. Journal of Risk and Financial Management, 15(4), 177.

[59]

Memdani, L., & Shenoy, G. (2019). Impact of terrorism on stock markets across the world and stock returns: An event study of Taj attack in India. Journal of Financial Crime.

[60]

Memdani, L., & Shenoy, G. (2020). A Guide to Econometric Methods for the Energy- Growth Nexus. Academic Press.

[61]

Mukhtarov, S., Schoute, M., & Wielhouwer, J. L. (2022). The information content of the Solvency II ratio relative to earnings. Journal of Risk and Insurance, 89(1), 237-266.

[62]

Narayan, P. K., & Sharma, S. S. (2014). Firm return volatility and economic gains: the role of oil prices. Economic Modelling, 38, 142-151.

[63]

Nguyen, J., Li, W. X., & Chen, C. C. S. (2022). Mean Reversions in Major Developed Stock Markets: Recent Evidence from Unit Root, Spectral and Abnormal Return Studies. Journal of Risk and Financial Management, 15(4), 162.

[64]

Nguyen, L. D. (2021). Liquidity management and stock price reactions in an economic crisis. In International Econometric Conference of Vietnam (pp. 197-208). Springer, Cham.

[65]

Nkoro, E., & Uko, A. K. (2016). Autoregressive Distributed Lag (ARDL) cointegration technique: application and interpretation. Journal of Statistical and Econometric Methods, 5(4), 63-91.

[66]

Odean, T. (1999). Do investors trade too much?. American Economic Review, 89(5), 1279-1298.

[67]

Olbrys, J. (2021). Do Changes in Interest Rates Affect Asset Returns? Event Study Results within the COVID-19 Pandemic in Poland. Event Study Results within the COVID-19 Pandemic in Poland (November 16, 2021).

[68]

Olsen, R. A. (1998). Behavioral finance and its implications for stock-price volatility. Financial Analysts Journal, 54(2), 10-18.

[69]

Omay, T., & Baleanu, D. (2021). Fractional unit-root tests allowing for a fractional frequency flexible Fourier form trend: predictability of Covid-19. Advances in Difference Equations, 2021(1), 1-33.

[70]

Park, J. S., & Shi, Y. (2017). Hedging and speculative pressures and the transition of the spot-futures relationship in energy and metal markets. International Review of Financial Analysis, 54, 176-191.

[71]

Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61(S1), 653-670.

[72]

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.

[73]

Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621-634.

[74]

Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.

[75]

Plastun, A., Sibande, X., Gupta, R., & Wohar, M. E. (2021). Evolution of price effects after one-day abnormal returns in the US stock market. North American Journal of Economics and Finance, 57, 101405.

[76]

Pynnonen, S. (2022). Non-Parametric Statistic for Testing Cumulative Abnormal Stock Returns. Journal of Risk and Financial Management, 15(4), 149.

[77]

Rai, V. K., & Pandey, D. K. (2021). Does privatization of public sector banks affect stock prices? An event study approach on the Indian banking sector stocks. Asian Journal of Accounting Research.

[78]

Reddy, K., Qamar, M. A. J., Mirza, N., & Shi, F. (2020). Overreaction effect: evidence from an emerging market (Shanghai stock market). International Journal of Managerial Finance.

[79]

Rehman, A., Ma, H., Ozturk, I., & Radulescu, M. (2022). Revealing the dynamic effects of fossil fuel energy, nuclear energy, renewable energy, and carbon emissions on Pakistan’s economic growth. Environmental Science and Pollution Research, 1-11.

[80]

Saleh, I., & Abu Afifa, M. (2020). The effect of credit risk, liquidity risk and bank capital on bank profitability: Evidence from an emerging market. Cogent Economics & Finance, 8(1), 1814509.

[81]

Shrestha, M. B., & Bhatta, G. R. (2018). Selecting appropriate methodological framework for time series data analysis. The Journal of Finance and Data Science, 4(2), 71-89.

[82]

Song, S. I., Janang, J. T., Yazi, E., & Morni, F. (2022). The Effects of Market Strength, Information Asymmetry, and Industrial Characteristics on Malaysian Firms’ CAR During COVID-19 Pandemic. MARKETS, 1.

[83]

Summerfield, C., & Parpart, P. (2021). Normative principles for decision-making in natural environments.

[84]

Traverso, F. R. (2022). Factores de la valoración de mercado de los bancos. In IX Jornada Internacional AECA sobre Valoración, Financiación y Gestión de Riesgos: Actas IX Jornada Internacional -Cuenca 2022 (p. 27). AECA.

[85]

Tsai, Y. S., Tzang, S. W., & Chang, C. P. (2020). Information Asymmetry, Market Liquidity and Abnormal Returns. In International Conference on Innovative Mobile and Internet Services in Ubiquitous Computing (pp. 510-518). Springer, Cham.

[86]

Uddin, S., Gul, F., & Mubarik, F. (2021). Anchoring and stock market reactions: Evidence from pakistani stock exchange. Journal of Business & Economics, 13(1), 148-168.

[87]

Ullah, I., Ullah, A., Ali, S., Poulova, P., Akbar, A., Shah, M. H., ... & Afridi, F. E. A. (2021). Public health expenditures and health outcomes in Pakistan: evidence from quantile autoregressive distributed lag model. Risk Management and Healthcare Policy, 14, 3893.

[88]

Yang, Y., & Rehm, M. (2021). Housing prices and speculation dynamics: a study of Auckland housing market. Journal of Property Research, 38(4), 286-304.

[89]

Ye, Z. J., & Schuller, B. W. (2021). Capturing dynamics of post-earnings-announcement drift using a genetic algorithm-optimized XGBoost. Expert Systems with Applications, 177, 114892.

[90]

YILMAZ, Y. (n.d.). The Relationship Between BIST100 Index Return and the Central Bank of the Republic of Turkey Interest Rate Decisions. Anemon Muş Alparslan Üniversitesi Sosyal Bilimler Dergisi, 10(1), 289-297.

[91]

Zhang, D., Xie, J., & Sikveland, M. (2021). Tourism seasonality and hotel firms’ financial performance: Evidence from Norway. Current Issues in Tourism, 24(21), 3021-3039.

Article Information

Article Details
Volume & IssueVol. 6, Iss. 5
Publication DateJun 30, 2022
Authors
Asrat Araya
Dr. Jauhari Dahalan2
Dr. Barudin Muhammad
DOI
10.30566/ijo-bs/2022.06.90
PDF Download
The Relationship Between Financial Patterns and Exogenous Variables: Empirical Evidence from Symmetric and Asymmetric ARDL | International Journal of Business Society