Faculty Research

Propensity to pay dividends and catering incentives in Thailand

posted Jul 13, 2013, 1:01 AM by Nopphon Tangjitprom

This is summarized from the paper published in "Studies in Economics and Finance" by Nopphon Tangjitprom in 2012. 

Dividends is a reward to investors holding shares of a company. It is a fraction of a firm's profit that is paid to shareholders proportionally to the shares they own. However, after dividends are paid, retained earnings will be lower. This may affect a firm's ability to reinvest and restrict the future growth of the firm. Consequently, potential capital gain is reduced by dividends income. Additionally, income from dividends is immediately taxed in most countries while capital gain taxation can be delayed. This tax difference between dividends and capital gains will vary from jurisdiction to jurisdiction, but in general capital gains have a clear tax advantage. In Thailand, dividend incomes are subject to tax but the capital gains are exempted. As dividends have tax disadvantages, it is also interesting to explain why Thai firms pay dividends. 

This creates a doubt why firms should pay dividends. Many theories try to explain this phenomenon. Agency theory explains that dividend payment can reduce agency problem in a firm. One of the recent theory proposed during the last decade is the catering theory of dividends by Baker and Wurgler (2004). In this theory, firms pay dividends in order to cater investors' demand for dividends. This demand can be gauged by dividend premium, which is the different between market-to-book ratio of dividend paying firms and non-paying firms. 

The finding from this paper show that investors in Thailand prefer dividends and pay relatively higher price for the stocks of firms paying dividends, which can be seen by positive dividend premiums. The evidences in this paper have shown that more number of firms will pay dividends if there are catering incentives from positive dividend premiums. Moreover, dividend premiums play the important role to discourage managers to cut dividend payment; especially they are far from omitting dividends when dividend premiums are high.

You can read the full article from here

Market Timing with GEYR in Emerging Stock Market: The Evidence from Stock Exchange of Thailand

posted Jul 12, 2013, 6:28 AM by Nopphon Tangjitprom   [ updated Jul 12, 2013, 10:26 PM ]

This is summarized from the paper published in Journal of Finance and Investment Analysis by Nopphon Tangjitprom in 2012.

Marketing timing is one of active investment strategies where investors try to adapt their investment positions in order to take advantages of different stock performance in different time. One of important factor to do it successfully is the signal. There are many indicators used as the signal that investors should change their investment positions to take advantages of market condition. One of popular indicator is GEYR or gilt-equity yield ratio. This is the ratio between government bond yield (gilt yield as popular use in United Kingdom) and equity dividend yield. If GEYR is high, it is the signal that the stock market is overvalued compared to bond market and investor should switch to hold bonds. If GEYR is low, it is the signal that the stock market is undervalued and investor should switch to hold stocks. However, in order to use GEYR as the signal indicator, we need the model to predict future trend correctly. 

From the paper, three trading rules are developed. The first trading rule use the lag data of GEYR to predit the equity return in the future. Therefore, investors will switch to hold the stocks if the predicted equity return is higher than government bond yield. The second trading rule use GEYR and other economics variables like term premium and dividend yields to predict future equity excess return, which is the difference between equity return and government bond yield. If the predicted excess equity return is positive, investors should switch to hold the stocks. The third trading rule use Markov Switching model to predict the future GEYR based on the assumption that there are two regimes, high GEYR and low GEYR. If the marginal probability of regime switching is more likely that the GEYR will switch from high-GEYR to low-GEYR regime, investors should switch to hold the stocks. 

The results have revealed that all trading rules can outperform a simple buy-and-hold equity-only portfolio. However, switching strategy requires higher transaction costs because investors need to trade frequently. After including transaction costs the performance from switching strategy is still higher than buy-and-hold strategy. The performance is compared based on mean-variance framework and Sharpe's ratio. 

Moreover, in order to examine the applicability of the trading rules in investment management industries (mutual funds), a set of restriction needs to be considered. For example, Equity fund (equity only mutual fund) needs to hold equity securities at least 65% of total portfolio at anytime. If the signal from trading rule shows that equity should be invested, equity fund can invest all of portfolio in equity securities. However, if signal from trading rule suggests that bond should be invested, equity fund can invest only 35% of portfolio in government securities and still needs to hold 65% in equity securities. This restriction can reduce the performance of switching strategy significantly. However, the result from the paper shows that the switching portfolio still outperforms a simply buy-and-hold portfolio. 

You can read the full article from here

Macroeconomic Factors of Emerging Stock Market: The Evidence from Thailand

posted Jul 12, 2013, 6:26 AM by Nopphon Tangjitprom   [ updated Jul 12, 2013, 10:25 PM ]

This is summarized from the paper published in International Journal of Financial Research by Nopphon Tangjitprom in 2012

Macroeconomics condition is believed to be an important factor to explain the stock market performance. There are also many studies showing that the stock market performance can be explained by macroeconomics variables. In this study, the researcher uses the evidences on Thailand data. The macroeconomic variables are unemployment rate, interest rate, inflation rate, and exchange rate. The results show that only interest rate and exchange rate has the impact to stock market performance whereas unemployment rate and inflation rate have no impact. However, after using some lag information instead of contemporaneous, it shows that two-month lag of unemployment and inflation have an impact to stock market. Moreover, the use of either short-term interest rate or long-term interest rate does not alter the impact. 

Furthermore, the examination of lead-lag relationship reveals that stock market performance can predict the macroeconomics performance rather than macroeconomics variables can predict stock market performance. This result is consistent with the fact that the Bank of Thailand also use stock market index as a leading economics indicator. 

You can read the full article from here.

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