Current Issue

Capital Markets Review Vol. 28, No. 2, pp. 1-18 (2020)

Performance of ProShares Triple-Leveraged Equity ETFs

Ramesh Adhikari1, Humnath Panta1 & M. Kabir Hussan3
1School of Business, Humboldt State University, USA.
2Department of Economics and Finance, University of New Orleans, USA.

Abstract: Research Question: How well do triple leveraged exchange-traded funds (ETFs) issued by ProShares perform and track their underlying indices?  Motivation: Prior research on the relative performance and tracking ability of leveraged and inverse ETFs (LETFs) is not conclusive. We re-examine and extend the findings of prior research (Charupat and Miu, 2011; Loviscek et al., 2014). We have a unique set of LETFs, more recent and historical price data over a longer sample period, and a unifying methodological framework. Our findings help many investors understand the implications of including LETFs in their portfolios for up to six months. Idea: We examine how well LETFs achieve their objectives using mean deviations and tracking errors of cumulative and holding period returns over various non-overlapping holding periods. Our holding period ranges from one day to six months. We also study how much LETFs deviate from their benchmark indices during high volatile markets. Data: We use daily prices of LETFs and values of their underlying indices from the inception date of each LETF to May 29, 2020. We have data for 2,749 trading days. We retrieve all data from Method/Tools: We use three sets of statistical tools to examine the return deviations. They include univariate tests, pooled regression-based alphas, betas, and tracking errors and bootstrapping. Findings: Although tracking errors increase with the number of holding periods, LETFs do well up to six months, and the magnitude of deviations are different for bull and bear ETFs. But, LETFs fail to deliver promised returns during high volatile markets. Our findings complement some prior research and contrast with others and bring some new insights on the performance of LETFs. Contributions: We provide new evidence that LETFs provide premiums or discounts beyond one month up to six months, but they fail to track their indices during high volatile markets.


Updated on 1 September 2020

Capital Markets Review Vol. 28, No. 2, pp. 19-27 (2020)

Max-Effect in the Indonesian Market

Leo Julianto1 & Irwan Adi Ekaputra1
1Faculty of Economics and Business, Universitas Indonesia, Indonesia.

Research Question: Following the well-documented MAX-effect anomaly in different markets, we inquire whether the MAX-effect occurs in the Indonesian market. Motivation: The MAX-effect is the following month negative return when investors long the highest decile portfolio and short the lowest decile portfolio. The decile portfolios are sorted and created based on the stocks highest previous month daily return (Alkan and Guner, 2018; Bali, et al., 2011; Seif et al., 2018). The anomaly has been documented in different countries and regions, such as Australia (Zhong and Gray, 2016), Turkey (Alkan and Guner, 2018), and European countries (Walkshäusl, 2014). We conduct this study because the Indonesian market has different features from other markets, namely the relatively low proportion of the retail investors in comparison to the whole population and the limit to short-sell stocks. Idea: Based on the extant literature, if the MAX-effect is robust, we deduce that the MAX-effect will exist in the Indonesian market. Data: We create ten portfolios sorted on the maximum previous month’s daily return (MAX) using the Indonesian market data from July 2013 till June 2018. Method/Tools: Our study utilizes descriptive statistics, Fama French Three-Factor Model, and Fama-Macbeth regressions. Findings: Our portfolio analysis suggests that a combination of long (short) position in high(low) MAX decile stocks will generate a raw return and a risk-adjusted (Fama-French Three-Factor) return of -1.6% per month. Also, our stock level analysis shows that MAX and market capitalization (SIZE) are negatively associated with the subsequent monthly stock return. In contrast, stock market beta (BETA) and book-to-market ratio (BM) do not significantly influence the subsequent monthly return. Contributions: Although the Indonesian market has different features, our study corroborates the existence of MAX-effects in different markets. We also find that the previous month MAX positively affects the current month MAX, indicating some investors’ preference for lottery-type stocks


Updated on 7 November 2020


Capital Markets Review Vol. 28, No. 2, pp. 29-41 (2020)

Predicting SMEs Failure: Logistic Regression vs Artificial Neural Network Models

Juraini Zainol Abidin1, Nur Adiana Hiau Abdullah1 & Karren Lee-Hwei Khaw2
1College of Business, Universiti Utara Malaysia, Malaysia.
2Faculty of Business and Accountancy, University of Malaya, Malaysia.

Abstract: Research Question: This study compares the power of logit and artificial neural network (ANN) models in predicting the failure of SMEs in the hospitality industry and identifies the predictors that are significant in determining business failure. Motivation: SMEs are an important segment of the Malaysian economy and contribute significantly to the country’s economic growth. However, SMEs are riskier and associated with a high failure rate. In Malaysia, around 3.5% of the SMEs in the hospitality industry fail within the first two years and 54% of them cease operations within four. Idea: The use of ANN to model business failure, particularly in the hospitality industry, is relatively unexplored in the emerging markets. Based on the literature, this study hypothesizes that ANN models outperform logit models because of less stringent model assumptions. Data: Excluding missing information, a matched sample of 41 failed and 41 non-failed SMEs in the hospitality industry was identified from the year 2000 to 2016. The accounting ratios, firm-specific characteristics and governance variables are selected as potential predictors of SMEs failure in the hospitality industry. Method/Tools: Stepwise logit regression and multilayer perceptron ANN models were used to determine significant predictors to predict business failure. Each model’s predictive power was compared. Findings: The ANN model was found to consistently outperform the logit model in classifying the failed and non-failed SMEs in the hospitality industry. Furthermore, the ANN model ranked liquidity as the most important predictor, followed by profitability and leverage, in determining business failure. Board size was also found to be a significant predictor in addition to the financial variables. The stepwise logit model also suggests a significant relationship between board size and the failure of SMEs. Therefore, in addition to financial predictors, a firm’s governance is also key to business survival. Contributions: The findings of this study contribute to the limited literature on SMEs in the hospitality industry by providing empirical evidence from an emerging market perspective. The failure prediction model can be utilized to warn of potential business failure so that strategic measures can be taken to mitigate the risk of failure.


Updated on 13 November 2020


Capital Markets Review Vol. 28, No. 1, pp. 1-23 (2020)

Corporate Governance in Australia: Share Repurchases under an Imputation Tax System

Hussein Abedi Shamsabadi1, Byung S. Min1 , Imen Tebourbi2 & Mohammad Nourani3
1Department of Business Strategy and Innovation, Griffith University, Australia.
2Faculty of Management, Canadian University Dubai, United Arab Emirates. 
3School of Management, Universiti Sains Malaysia, Malaysia.

Abstract: Research Question: Whether the mitigating effect of corporate governance on investor perceptions of corporate agency problems affects corporate financial dividend decisions is a question, especially under an imputation tax system. Motivation: Since 2003 Australian firms must comply with the Principle of Good Corporate Governance and Best Practice Recommendations by the Australian Securities Exchange. Moreover, since the imputation tax system in Australia substantially differs from other countries, a study investigating the effect of corporate governance on share repurchases in Australia is warranted. Idea: Hence, this paper examines the association between corporate governance and share repurchases in Australia given its unique taxation system for corporate dividend payments. More specifically, we examine the association between corporate governance and the choice of dividend strategies under Australia’s imputation tax regime. We developed and tested three hypotheses: 1) better corporate governance is associated with greater ratio of share repurchase; 2) the ratio of share repurchase is positively associated with the payout ratio of cash dividends for firms that adopt a franked dividend regime; and 3) any positive association between the ratio of share repurchase with the payout ratio of cash dividends for firms that adopt a franked-dividend regime is evident only for firms with strong corporate governance. Data: We have a final sample of 1858 firm-year observations of which 250 (i.e., 13.5%) involve share repurchases for the 2004-2013 period. The sample companies are obtained from the constituents of the ASX 300, which contains the top 300 firms listed on the stock exchange in Australia (ASX). Method/Tools: We use Tobit regression method to estimate the models. Findings: Consistent with the literature, we find a positive association of share repurchases with better corporate governance, but contrary to the literature for the U.S. and Sweden, we find a positive association between share repurchases and cash distributions, which weakens with poorer corporate governance. Contributions: Our robust findings highlight the importance of country-specific institutional arrangements such as tax regimes when understanding corporate dividend strategies. Overall, we show that the mitigating effect of corporate governance on investor perceptions of corporateagency problems affects corporate financial dividend decisions.


Capital Markets Review Vol. 28, No. 1, pp. 25-47 (2020)

Do Heterogeneous Boards Promote Firm Innovation? Evidence from Malaysia

Sa’adiah Munir1 , Gary John Rangel2 , Ravichandran K. Subramaniam1  & Mohd. Zulkhairi bin Mustapha3
1School of Business, Monash University Malaysia, Malaysia.
2School of Management, Universiti Sains Malaysia, Malaysia.

3Faculty of Business and Accountancy, University of Malaya, Malaysia.

Abstract: Research Question: What are the effects of board heterogeneity on a firm’s innovation in Malaysia? Motivation: Prior literature has presented differing views on the role of the board of directors and based on the resource dependency theory, board of directors is seen as a boundary spanner in the environment, securing resources for the organization and providing strategic advice that aids in firm survival and performance (Hillman & Dalziel, 2003; Pfeffer & Salancik, 1978; Hillman et al., 2000). This motivates us to explore the different dimensions of board characteristics and their influences on promoting innovation activities in the firms. Idea: In this study, we seek to understand the role of the board of directors in influencing innovation activities in firms by specifically investigating the effects of board heterogeneity on innovation in Malaysia. Data: Using a sample of 345 observations for the period 2010 to 2012, we examine eight different aspects of board heterogeneity. Financial data used as control variables are obtained from the Compustat database, while board heterogeneity data were hand collected from an individual company’s annual report downloaded from the Bursa Malaysia’s website. Method/Tools: Firm innovation is measured at two points in time. One is at the onset which entails R&D expenditure and the other at the end of the process which is the output of R&D, such as patents and patent citations. The final sample comprises 345 firm-year observations after excluding the missing data. Findings: Our results show that heterogeneous boards have both positive and negative effects on innovation. We find that gender, ethnic and tenure heterogeneity of directors encourage firms to innovate. In contrast, directors’ heterogeneity on type of experience and external engagement is found to be detrimental to the firm’s innovation. Contributions: Provides evidence that board heterogeneity can help to enhance firm innovation activities. The study also looks at innovation across a larger cross-section of firms across several industries and assist in formulating policies to promote appropriate board attributes that would promote innovation.


Capital Markets Review Vol. 28, No. 1, pp. 49-63 (2020)

We Bring You Capital and Job – Foreign Investment and Employment in Malaysia

Amy Dict-Weng Kwan1 & Tuck-Cheong Tang1
1Faculty of Economics and Administration, University of Malaya, Malaysia.

Abstract: Research Question: Do foreign investment inflows bring jobs for a small open economy, Malaysia? Motivation: Past studies have employed aggregate FDI and employment data, but their findings are subjected to aggregation bias. This ‘puzzle’ is resolved by employing disaggregated data. This study is built on the basis of Wong and Tang (2011), Hale and Xu (2016), and Jude and Silaghi (2016). This study explores the impact of foreign investment inflows on jobs creation for 19 industries. It offers a better understanding either foreign investment inflows create jobs or not in the host country. It is important because foreign investment has been strategized long ago by Malaysia for economic growth. The findings are relevant for policymakers. Idea: The core idea is that foreign investment inflows into different industries in Malaysia may have different impact on jobs creation. Data: Foreign investment inflows and employment data are obtained from Malaysian Investment Development Authority (MIDA) covering annual observations between 1980 and 2016. Other variables are human capital, population, and real Gross Domestic Product acting as control variables. Method/Tools: This study considers cross-sectional (ordinary least square, OLS) equation for its respective year between 1980 and 2016. And, time-series autoregressive-distributed lag (ARDL) approach for the 19 industries, respectively. Findings: Of the estimated cross-sectional equations, foreign investment has a positive effect on employment, in which the largest effect is in the year of 1995 (0.85). The ARDL results show that foreign investment inflows and employment are cointegrated for the 19 industries. Their long-run elasticity of foreign investment on employment are statistically significant, expect for Textiles & Textile Products (TTP), Paper, Printing & Publishing (PPP), and Petroleum Products (including Petrochemicals) (PetP) industries. They have a positive sign as expected (i.e. foreign investment creates jobs), except for Leather & Leather Products (LLP), and Non-Metallic Mineral Products (NMMP) industries. Contributions: This study adds fresh findings to the research literature on effect of foreign investment inflows on employment in Malaysia, in general, and her 19 industries. It sheds an insight for policy implication, especially for both financial market and labour market.


Capital Markets Review Vol. 28, No. 1, pp. 65-76 (2020)

Global and Local Commodity Prices: A Further Look at the Indonesian Agricultural Commodities

Pradita Nareswari1 & Sigit S. Wibowo1
1Faculty of Economics and Business, Universitas Indonesia, Indonesia.

Abstract: Research Question: This paper examines whether global commodity futures prices can be used to enrich the prediction of local commodity spot prices in the absence of local commodity futures prices information. Motivation: Our objective is to investigate whether global prices can be used as a reference if commodity futures prices are unavailable or limited. Indonesia as a producer for several major commodities only has a small number of trades in the commodity futures exchanges which is not sufficient yet to create market liquidity in the local futures market or price reference for local spot trading. Idea: This research proposes the use of global commodity prices to improve the prediction of local commodity prices where the local futures prices are limited or not available. Data: This research employs daily spot prices for CPO (crude palm oil), TSR (technically specified rubber), and cacao, which are obtained from Indonesia Commodity Futures Trading Regulatory Agency (BAPPEBTI) from 2005 to 2017. Global commodity price will use daily commodity futures prices for the same commodity obtained from Thomson Reuters Eikon database. Method/Tools: We conduct the cointegration and non-linear causality tests between Indonesia local commodity spot prices and global commodity futures prices using bi-variate VAR/VECM methodology. Findings: The results show that using Indonesian commodity prices, local commodity spot prices and global commodity futures prices are cointegrated and have bi-directional causality, which contains important information about commodity pricing. Therefore, global commodity futures prices could be used as a reference when local commodity futures prices information is less reliable. Our results also imply that the relationship between local and global commodity markets is efficient, which can be beneficial for market participants to lower the cost for information search. Contribution: This paper expands existing finance literature mainly in emerging economies, particularly for commodity markets where the price information is unavailable or limited.