Hostname: page-component-cd9895bd7-p9bg8 Total loading time: 0 Render date: 2025-01-05T13:36:00.323Z Has data issue: false hasContentIssue false
  • English
  • Français

Market Development, Information Diffusion, and the Global Anomaly Puzzle

Published online by Cambridge University Press:  11 July 2022

Charlie X. Cai Open the ORCID record for Charlie X. Cai [Opens in a new window] ,
Kevin Keasey ,
Peng Li  and
Qi Zhang
Charlie X. Cai*
Affiliation:
University of Liverpool Management School
Kevin Keasey
Affiliation:
University of Leeds Leeds University Business School [email protected]
Peng Li
Affiliation:
University of Leeds Leeds University Business School [email protected]
Qi Zhang
Affiliation:
Durham University Business School [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Previous literature finds anomalies are at least as prevalent in developed markets as in emerging markets; namely, the global anomaly puzzle. We show that while market development and information diffusion are linearly related, information diffusion has a nonlinear impact on anomalies. This is consistent with theoretical developments concerning the process of information diffusion. In extremely low-efficiency regimes, without newswatchers sowing the seeds of price discovery and ensuring the long-run convergence of price to fundamentals, initial mispricing and subsequent correction will not occur. The concentration of emerging countries in low-efficiency regimes provides an explanation to the puzzle.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 104 - 147
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful for the constructive comments from Söhnke M. Bartram, Jennifer Conrad (the editor), John Griffin, Heiko Jacobs, Lei Jiang, Ron Kaniel, Patrick Kelly, Dong Lou, Christian Lundblad, Sebastian Müller (the referee), Jiaren Pang, Neil Pearson, Tao Shen, Zhishu Yang, and the participants of the 2018 INQUIRE UK Business School Seminar, the 2016 Research in Behavioral Finance Conference, the 2019 SYSBS Finance International Conference Joint with Geneva Finance Research Institute, and seminars in Tsinghua University, the University of Leeds, and the University of Liverpool. Errors are ours.

References

Andrei, D., and Cujean, J.. “Information Percolation, Momentum and Reversal.” Journal of Financial Economics, 123 (2017), 617–645.CrossRefGoogle Scholar
Bali, T. G.; Cakici, N.; and Whitelaw, R. F.. “Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns.” Journal of Financial Economics, 99 (2011), 427–446.CrossRefGoogle Scholar
Barberis, N.; Greenwood, R.; Jin, L.; and Shleifer, A.. “Extrapolation and Bubbles.” Journal of Financial Economics, 129 (2018), 203–227.CrossRefGoogle Scholar
Barberis, N.; Shleifer, A.; and Vishny, R.. “A Model of Investor Sentiment.” Journal of Financial Economics, 49 (1998), 307–343.CrossRefGoogle Scholar
Barberis, N., and Thaler, R.. 2003. “A Survey of Behavioral Finance.” Handbook of the Economics of Finance, 1 (2003), 1053–1128.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C. R.. “Research in Emerging Markets Finance: Looking to the Future.” Emerging Markets Review, 3 (2002), 429–448.CrossRefGoogle Scholar
Bhattacharya, U.; Daouk, H.; Jorgenson, B.; and Kehr, C.. “When an Event is Not an Event: the Curious Case of an Emerging Market.” Journal of Financial Economics, 55 (2000), 69–101.CrossRefGoogle Scholar
Bhattacharya, U.; Kuo, W.; Lin, T.; and Zhao, J.. “Do Superstitious Traders Lose Money.” Management Science, 64 (2018), 3772–3791.CrossRefGoogle Scholar
Bonner, S. E., and Walker, P. L.. “The Effects of Instruction and Experience on the Acquisition of Auditing Knowledge.” Accounting Review, 69 (1994), 157–178.Google Scholar
Bonner, S. E.; Walther, B. R.; and Young, S. M.. “Sophistication-Related Differences in Investors’ Models of the Relative Accuracy of Analysts’ Forecast Revisions.” Accounting Review, 78 (2003), 679–706.CrossRefGoogle Scholar
Brennan, M. J.; Chordia, T.; and Subrahmanyam, A.. “Alternative Factor Specifications, Security Characteristics, and the Cross-Section of Expected Stock Returns.” Journal of Financial Economics, 49 (1998), 345–373.CrossRefGoogle Scholar
Bris, A.; Goetzmann, W. N.; and Zhu, N.. “Efficiency and the Bear: Short Sales and Markets around the World.” Journal of Finance, 62 (2007), 1029–1079.CrossRefGoogle Scholar
Butler, K. C., and Malaikah, S. J.. “Efficiency and Inefficiency in Thinly Traded Stock Markets: Kuwait and Saudi Arabia.” Journal of Banking and Finance, 16 (1992), 197–210.CrossRefGoogle Scholar
Callen, J. L.; Hope, O.; and Segal, D.. “Domestic and Foreign Earnings, Stock Return Variability, and the Impact of Investor Sophistication.” Journal of Accounting Research, 43 (2005), 377–412.CrossRefGoogle Scholar
Calluzzo, P.; Moneta, F.; and Topaloglu, S.. “When Anomalies are Publicized Broadly, Do Institutions Trade Accordingly.” Management Science, 65 (2019), 4555–4574.CrossRefGoogle Scholar
Cao, C.; Liang, B.; Lo, A. W.; and Petrasek, L.. “Hedge Fund Holdings and Stock Market Efficiency.” Review of Asset Pricing Studies, 8 (2018), 77–116.CrossRefGoogle Scholar
Chang, C.; Hsieh, P.; and Wang, Y.. “Sophistication, Sentiment, and Misreaction.” Journal of Financial and Quantitative Analysis, 50 (2015), 903–928.CrossRefGoogle Scholar
Chordia, T.; Subrahmanyam, A.; and Tong, Q.. “Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity.” Journal of Accounting Economics, 58 (2014), 41–58.CrossRefGoogle Scholar
Chu, Y.; Hirshleifer, D.; and Ma, L.. “The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies.” Journal of Finance, 75 (2020), 2631–2672.CrossRefGoogle Scholar
Collins, D. W.; Gong, G.; and Hribar, P.. “Investor Sophistication and the Mispricing of Accruals.” Review of Accounting Studies, 8 (2003), 251–276.CrossRefGoogle Scholar
Cooper, M. J.; Gulen, H.; and Schill, M. J.. “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 1609–1651.CrossRefGoogle Scholar
Dang, T. L.; Moshirian, F.; and Zhang, B.. “Commonality in News Around the World.” Journal of Financial Economics, 116 (2015), 82–110.CrossRefGoogle Scholar
Daniel, K.; Hirshleifer, D.; and Subrahmanyam, A.. “Investor Psychology and Security Market Under- and Overreactions.” Journal of Finance, 53 (1998), 1839–1885.CrossRefGoogle Scholar
Daniel, K., and Titman, S.. “Market Reactions to Tangible and Intangible Information.” Journal of Finance, 61 (2006), 1605–1643.CrossRefGoogle Scholar
De Bondt, W. F. M., and Thaler, R.. “Does the Stock Market Overreact?” Journal of Finance, 40 (1985), 793–805.CrossRefGoogle Scholar
De Long, B.; Shleifer, A.; Summers, L.; and Waldmann, R.. “Positive Feedback Investment Strategies and Destabilizing Rational Speculation.” Journal of Finance, 45 (1990), 379–395.CrossRefGoogle Scholar
Dichev, I. D. “Is the Risk of Bankruptcy a Systematic Risk?” Journal of Finance, 53 (1998), 1131–1147.CrossRefGoogle Scholar
Djankov, S.; McLiesh, C.; and Shleifer, A.. “Private Credit in 129 Countries.” Journal of Financial Economics, 84 (2007), 299–329.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 1–22.CrossRefGoogle Scholar
Feng, L., and Seasholes, M. S.. “Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets.” Review of Finance, 9 (2005), 305–351.CrossRefGoogle Scholar
Gao, P.; Parsons, C. A.; and Shen, J.. “Global Relation between Financial Distress and Equity Returns.” Review of Financial Studies, 31 (2018), 239–277.CrossRefGoogle Scholar
Green, J.; Hand, J. R.; and Zhang, F.. “The Characteristics that Provide Independent Information about Average US Monthly Stock Returns.” Review of Financial Studies, 30 (2017), 4389–4436.CrossRefGoogle Scholar
Griffin, J. M.; Hirschey, N. H.; and Kelly, P. J.. “How Important is the Financial Media in Global Markets?” Review of Financial Studies, 24 (2011), 3941–3992.CrossRefGoogle Scholar
Griffin, J. M.; Kelly, P. J.; and Nardari, F.. “Do Market Efficiency Measures Yield Correct Inferences? A Comparison of Developed and Emerging Markets.” Review of Financial Studies, 23 (2010), 3225–3277.CrossRefGoogle Scholar
Harvey, C. R.; Liu, Y.; and Zhu, H.. “… and the Cross-Section of Expected Returns.” Review of Financial Studies, 29 (2016), 5–68.CrossRefGoogle Scholar
Hirshleifer, D.; Hou, K.; Teoh, S. H.; and Zhang, Y.. “Do Investors Overvalue Firms with Bloated Balance Sheets?” Journal of Accounting and Economics, 38 (2004), 297–331.CrossRefGoogle Scholar
Hong, H.; Lim, T.; and Stein, J. C.. “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies.” Journal of Finance, 55 (2000), 265–295.CrossRefGoogle Scholar
Hong, H., and Sraer, D. A.. “Speculative Betas.” Journal of Finance, 71 (2016), 2095–2144.CrossRefGoogle Scholar
Hong, H., and Stein, J. C.. “A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets.” Journal of Finance, 54 (1999), 2143–2184.CrossRefGoogle Scholar
Hong, H., and Stein, J. C.. “Disagreement and Stock Market.” Journal of Economic Perspectives, 21 (2007), 109–128.CrossRefGoogle Scholar
Hou, K.; Xue, C.; and Zhang, L.. “Digesting Anomalies: an Investment Approach.” Review of Financial Studies, 28 (2015), 650–705.CrossRefGoogle Scholar
Hou, K.; Xue, C.; and Zhang, L.. “Replicating Anomalies.” Review of Financial Studies, 33 (2020), 2019–2133.CrossRefGoogle Scholar
Jacobs, H. “Market Maturity and Mispricing.” Journal of Financial Economics, 122 (2016), 270–287.CrossRefGoogle Scholar
Jacobs, H., and Müller, S.. “Anomalies Across the Globe: Once Public, No Longer Existent?” Journal of Financial Economics, 135 (2020), 213–230.CrossRefGoogle Scholar
Jegadeesh, N. “Evidence of Predictable Behavior of Security Returns.” Journal of Finance, 45 (1990), 881–898.CrossRefGoogle Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 65–91.CrossRefGoogle Scholar
Jin, L., and Myers, S. C.. “R 2 Around the World: New Theory and New Tests.” Journal of Financial Economics, 79 (2006), 257–292.CrossRefGoogle Scholar
Kaniel, R.; Ozoguz, A.; and Starks, L.. “The High Volume Return Premium: Cross-Country Evidence.” Journal of Financial Economics, 103 (2012), 255–279.CrossRefGoogle Scholar
Kurtzman, J.; Yago, G.; and Phumiwasana, T.. “The Global Cost of Opacity.” MIT Sloan Management Review, 46 (2004), 38–54.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Agency Problems and Dividend Policies Around the World.” Journal of Finance, 55 (2000), 1–33.CrossRefGoogle Scholar
Lam, F. Y. E. C., and Wei, K. C. J.. “Limits-to-Arbitrage, Investment Frictions, and the Asset Growth Anomaly.” Journal of Financial Economics, 102 (2011), 127–149.CrossRefGoogle Scholar
Leuz, C.; Nanda, D.; and Wysocki, P. D.. “Earnings Management and Investor Protection: An International Comparison.” Journal of Financial Economics, 69 (2003), 505–527.CrossRefGoogle Scholar
Li, D., and Zhang, L.. “Does Q-Theory with Investment Frictions Explain Anomalies in the Cross Section of Returns?” Journal of Financial Economics, 98 (2010), 297–314.CrossRefGoogle Scholar
Lipson, M. L.; Mortal, S.; and Schill, M. J.. “On the Scope and Drivers of the Asset Growth Effect.” Journal of Quantitative and Financial Analysis, 46 (2011), 1651–1682.CrossRefGoogle Scholar
Lochstoer, L., and Tetlock, P.. “What Drives Anomaly Returns?” Journal of Finance, 75 (2020), 1417–1455.CrossRefGoogle Scholar
Lu, X.; Stambaugh, R.; and Yuan, Y.. “Anomalies Abroad: Beyond Data Mining.” SSRN Working Paper (2020).Google Scholar
McLean, R. D., and Pontiff, J.. “Does Academic Research Destroy Stock Return Predictability?” Journal of Finance, 71 (2015), 5–32.CrossRefGoogle Scholar
McLean, R. D.; Pontiff, J.; and Watanabe, A.. “Share Issuance and Cross-Sectional Returns: International Evidence.” Journal of Financial Economics, 94 (2009), 1–17.CrossRefGoogle Scholar
Morck, R.; Yeung, B.; and Yu, W.. “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements.” Journal of Financial Economics, 58 (2000), 215–260.CrossRefGoogle Scholar
Novy-Marx, R. “The Other Side of Value: The Gross Profitability Premium.” Journal of Financial Economics, 108 (2013), 1–28.CrossRefGoogle Scholar
Ohlson, J. A. “Financial Ratios and the Probabilistic Prediction of Bankruptcy.” Journal of Accounting Research, 18 (1980), 109–131.CrossRefGoogle Scholar
Richardson, S. A.; Sloan, R. G.; Soliman, M. T.; and Tuna, I.. “Accrual Reliability, Earnings Persistence and Stock Prices.” Journal of Accounting and Economics, 39 (2005), 437–485.Google Scholar
Richardson, S.; Tuna, I.; and Wysock, P.. “Accounting Anomalies and Fundamental Analysis: a Review of Recent Research Advances.” Journal of Accounting and Economics, 50 (2010), 410–454.CrossRefGoogle Scholar
Rosenberg, B.; Reid, K.; and Lanstein, R.. “Persuasive Evidence of Market Inefficiency.” Journal of Portfolio Management, 11 (1985), 9–16.CrossRefGoogle Scholar
Sloan, R. G. “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?” Accounting Review, 71 (1996), 289–315.Google Scholar
Stambaugh, R. F.; Yu, J.; and Yuan, Y.. “Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle.” Journal of Finance, 70 (2015), 1903–1948.CrossRefGoogle Scholar
Subrahmanyam, A. “The Cross-Section of Expected Stock Returns: What Have We Learned in the Past Twenty Five Years of Research.” European Financial Management, 16 (2010), 27–42.CrossRefGoogle Scholar
Titman, S.; Wei, K. C. J.; and Xie, F.. “Market Development and the Asset Growth Effect: International Evidence.” Journal of Financial and Quantitative Analysis, 48 (2013), 1405–1432.CrossRefGoogle Scholar
Van Der Hart, J.; Slagter, E. and Dijk, D.V.. “Stock Selection Strategies in Emerging Markets.” Journal of Empirical Finance, 10 (2003), 105–132.CrossRefGoogle Scholar
Watanabe, A.; Xu, Y.; Yao, T.; and Yu, T.. “The Asset Growth Effect: Insights from International Equity Markets.” Journal of Financial Economics, 108 (2013), 529–563.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and A Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.Google Scholar
Xing, Y. “Interpreting the Value Effect Through the Q-Theory: an Empirical Investigation.” Review of Financial Studies, 21 (2008), 1767–1795.CrossRefGoogle Scholar
You, H., and Zhang, X.. “Financial Reporting Complexity and Investor Underreaction to 10-K Information.” Review of Accounting Studies, 14 (2009), 559–586.CrossRefGoogle Scholar
Zhang, X. F. “Information Uncertainty and Stock Returns.” Journal of Finance, 61 (2006a), 105–136.CrossRefGoogle Scholar
Zhang, X. F. “Information Uncertainty and Analyst Forecast Behavior.” Contemporary Accounting Research, 23 (2006b), 565–590.CrossRefGoogle Scholar
Supplementary material: PDF

Cai et al. supplementary material

Online Appendix

Download Cai et al. supplementary material(PDF)
PDF 338.5 KB