Discussion by Campbell R. Harvey Duke University and NBER

1. 4th Annual Conference on Emerging Markets Finance March 9-11, 2005 University of Virginia Stock Price Synchronicity and Analyst Coverage in Emerging Marketsand R2 Around the World: New Theory and Tests Discussion by Campbell R. Harvey Duke University and NBER

2. 4th Annual Conference on Emerging Markets Finance The Common Theme • Both papers study how stocks in international markets move together (synchronicity) • Both use R2 (stock return regressed on market return) as measure of synchronicity (market-wide info) R2 ~ ------------------------------------------------- (market-wide info + firm-specific info)

3. 4th Annual Conference on Emerging Markets Finance The Research Setting • Roll (1988) • U.S. stocks have low R2 • Campbell, Lettau, Malkiel, Xu (2001) • R2 decreasing over time for U.S. stocks • Morck, Yeung, Yu (2000) • Higher R2 in emerging markets than developed markets • Piotroski, Roulstone (2004) • Different market participants’ info generating activities and their effect on R2. Security analysts do not have an advantage over insiders or institutional investors

4. 4th Annual Conference on Emerging Markets Finance The Differences • Jin, Myers (JM) • Explain differences in R2 across countries • Chan, Hameed (CH) • Explain differences in R2 across firms

5. 4th Annual Conference on Emerging Markets Finance The Differences • Both study role of information in explaining differences in R2 • JM: link R2 with opaqueness • CH: link R2 with analyst activity * * *

6. 4th Annual Conference on Emerging Markets Finance Jin-Myers Model • Model first predicts R2 increases with opaqueness • Why? • Insiders know more firm-specific info than outsiders (info asymmetry) • Insiders bear part of firm-specific risk on behalf of outsiders • Outsiders face relatively more market-wide risk

7. 4th Annual Conference on Emerging Markets Finance Jin-Myers Model • Model second predicts that crash frequency increases with opaqueness • Why? • Insiders can only absorb so much firm-specific bad news

8. 4th Annual Conference on Emerging Markets Finance Opaqueness • JM proxy opaqueness by • Disclosure (Transparency International) • Number of auditors per 100,000 • Diversity (dispersion of analysts forecasts) • In emerging markets, driven by • Weak disclosure regulation • Little voluntary disclosure • Financial development • Interconnecting companies

9. 4th Annual Conference on Emerging Markets Finance Chan-Hameed Model • CH asks: • Do analysts generate market-wide info or firm-specific info? • Prediction for R2: • If analysts generate relatively more market-wide info => R2 increases with analyst coverage • If analysts generate relatively more firm-specific info => R2 decreases with analyst coverage

10. 4th Annual Conference on Emerging Markets Finance Jin-Myers Results • Findings support predictions: • R2 increases with opaqueness • Crash frequency increases with opaqueness (insiders exercise abandonment option if conditions get really bad)

11. 4th Annual Conference on Emerging Markets Finance Jin-Myers Contribution • Provides alternative interpretation to Morck, Yeung, Yu (2000) • MMY argue property rights protection explains differences in R2 across countries (weak property rights discourage informed trading and therefore prevent firm-specific information from getting into prices) • JM: Opaqueness measures has more explanatory power than property rights measures • JM study effect of opaqueness on higher moments of stock markets • Find positive effect of kurtosis on R2 – invite explanations

12. 4th Annual Conference on Emerging Markets Finance Chan-Hameed Results • Findings: • More analyst coverage increases R2 • Supports hypothesis that analysts generate relatively more market-wide info

13. 4th Annual Conference on Emerging Markets Finance Chan-Hameed Contribution • Study interaction between analyst coverage and R2 in emerging markets • Shows that Piostroski, Roulstone (2004) results for U.S. hold in emerging markets • Tests show that analysts generate market-wide info in emerging markets

14. 4th Annual Conference on Emerging Markets Finance Chan-Hameed Thoughts • Does more analyst coverage lead to more informative firm-specific news or reduce firm-specific noise? • Link firm-specific info with future fundamental news e.g. accounting variables (Durnev, Morck, Yeung, Zarowin (2001)) • Are market model residuals correlated with future accounting variables? If higher correlation with high analysts stocks, then more firm-specific information

15. 4th Annual Conference on Emerging Markets Finance Chan-Hameed Thoughts • Study interaction between opaqueness and analyst activity • Do analysts generate relatively more market-wide info for more opaque firms? • Regress R2 on both opaqueness measure, analyst coverage and interaction term between opaqueness and analyst coverage

16. 4th Annual Conference on Emerging Markets Finance Reconciling the Research • How to reconcile JM and CH findings? • JM: higher earnings dispersion => increased opaqueness => increased R2 • CH: higher earnings dispersion => more disagreement on market-wide news => reduce positive impact of analyst coverage on R2 => decreased R2

17. 4th Annual Conference on Emerging Markets Finance Reconciling the Research • JM measure is country-level • CH measure is firm-level • Forecast dispersion depends on both opaqueness and disagreement • Possible explanation: • At country-level, opaqueness component dominates => R2 increases • At firm-level, disagreement component dominates => R2 decreases

18. 4th Annual Conference on Emerging Markets Finance Alternative Opaqueness • Accounting measures • Earnings aggressiveness, earnings smoothing, loss avoidance (Bhattacharya, Daouk, Welker (2002)) • Corporate governance measures • Business group membership (Bae, Bailey, Mao (2005)) • ICRG subcomponents ?

19. 4th Annual Conference on Emerging Markets Finance Alternative Opaqueness • Analyst activity • Average number of analysts in market • Analysts’ advantage= average error from naïve earnings prediction model - average analysts forecast error. • Are country-level results be consistent with firm-level?

20. 4th Annual Conference on Emerging Markets Finance Financial Liberalization • What is the effect of liberalization on the interaction among R2, opaqueness and analyst activity? • Bae, Bailey, Mao (2005) • Study effect of liberalization on info environment • Interesting questions: • Does liberalization affect R2 through decreased opaqueness or increased analyst coverage? • Would increased foreign investor participation through liberalization increase R2 because foreign investors rely more on market-wide info?

21. 4th Annual Conference on Emerging Markets Finance Financial Liberalization • Possible measures of liberalization: • Investibility at country-level (Bekaert,1995) [country effects will not pick this up because it changes through time] • Investibility at firm-level (Bae, Chan, Ng (2003)) used in CH not JM

22. 4th Annual Conference on Emerging Markets Finance Synchronicity • Cross-sectional volatility (Bekaert, Harvey (1997)) • Higher cross-section volatility => less market-wide info • Advantage: measure is available at higher frequency than R2 • Stock return dispersion • (Solnik, Roulet (2000), De Silva, Sapra, Thorley (2001), Statman, Scheid (2004)) • Difference between average individual stock volatility and volatility of market portfolio

23. 4th Annual Conference on Emerging Markets Finance Other Issues • Results sensitive to sample (old version of paper used data back to 1989) • Critically important to use Scholes-Williams market model estimation in emerging market weekly data – also world factor is omitted in CH • Suspicious of regressions with standardized variables on LHS and level variables on RHS • Not convinced of the correction for endogeneity problem • Volume is the noisiest measure in EMDB and is not a good measure of liquidity

24. 4th Annual Conference on Emerging Markets Finance Liquidity • Considerable evidence that liquidity is a priced factor • Evidence in emerging markets that local liquidity is important • Stocks with high analysts following are likely more liquid. This explains why the high analysts sort leads the low analysts sort.

25. 4th Annual Conference on Emerging Markets Finance Liquidity • Interesting exercise • Let the BHL liquidity measures compete with opaqueness and property rights in the JM cross-country regression • Let the BHL liquidity measures compete with the analysts measures in the firm level regression in CH