Vol-7, Special Issue-Number4-June, 2016, pp759-768 http://www.bipublication.com
Research Article
Investigating the effect among size, growth opportunity and cumulative
abnormal returns of the companies
Khalil bevali behbahani1 and Karim rezvani* 1Department of accounting, Persian Gulf International Branch,
Islamic Azad University, Khorramshahr, IRAN khalilbavali@gmail.com *Department of accounting, Persian Gulf International Branch, Islamic Azad University, Khorramshahr, IRAN karim.Rezvani@yahoo.com*
ABSTRACT
The stockholders and investors require identifying main variables that explain stock return. Being aware of variables and achieving an appropriate model can lead to improve their investment and considering that each wise and economic person’s goal is obtain high and more returns, the current research is sought to investigate the effect of company’s characteristics and the ratio of investment on company’s cumulative abnormal returns. Statistical sample which has been used in current research includes 256 listed companies in Tehran Stock Exchange during 2002 to 2013. Dependent variable of current research is cumulative abnormal return. The independent variables whose effects are investigated on cumulative abnormal return include company’s size, growth opportunity. The data are collected and were inserted in Excel file as information database. Testing hypotheses also has been done from multi-variable regression models based on combined data technique using econometric software Eviews. The findings of the research show that there is a positive and significant relationship between company’s size and company’s cumulative abnormal return. There is also a negative and significant relationship between growth opportunities and company’s cumulative abnormal return.
Key words: company’s size, cumulative abnormal return, growth opportunity, the ratio of investment and combined data
INTRODUCTION
Stock market plays a very important role in development and economic growth of a country. Based on the findings of Cherimbef (2010), in case of predicating stock return ability, there will be important economic consequences. About analyzing time series in economy, he says that in stock market the price moves irregularly and in another word on a determined day, stock price might be descending while on a similar day it was ascending. Such this irregular behavioral pattern for stock price has made many financial economists worried. Therefore such irregular movement in stock price has created a hypothesis which is called irregular movement. Hence
predicting stock rice 100% correctly is impossible. Irregular movement hypothesis can be compared with the hypothesis of efficient markets. Based on efficient markets hypothesis in stock market, a stock is priced fairly or the price of stock available in market is shown for everybody widely and accessing to the information is equal for everybody. In this market no one can have better performance than others or hurt the market (Li et al, 2010; quoted by Kashi et al, 2013).
important point is selecting appropriate stock for purchasing and selling and selecting the best method for assuring the most return. Lack of appropriate knowledge about ideal methods in stock market is the main concern among investors in stock market that due to this subject using proved scientific techniques help two main goals in stock exchange, first; using these techniques causes increasing the rate of productivity and profitability of the investors and second; this subject will be effective on improving the performance of capital market and leading market toward efficacy.
Companies’ efficacy is derived from the rate of their optimum investments. Due to their financial policies, the companies increase liquidity level and cash flows and in specific time interval use investment opportunities(Loughran and Ritter (2000), concluded in their research that through increasing the level of cash flows, the rate of investment considering financial limitations also will increase with a special ratio. Financial limitation can be such as moderating variables which has been effective on the rate of companies’ investments and is derived from factors such as dividend, firm size, and degree of adjustment (Boehme and Sorescu, 2002; Vazinvash et al, 2009). Effective cash flows are derived from optimum efficacy of companies and has effective relationship on investment volatilities (Jagadeesh and Karceski, 2004; quoted by Bolo et al, 2014). Growth rate of investments indicates increasing the capital of companies with increasing sensitive decisions of managers and achieving optimum performance (Amihud, 2002). Kothari and Warner (2007) have mentioned this subject that related to volatility of stock abnormal return and company performance there are two two-way relationships that ultimately lead to positive relationship between these two variables. Stock abnormal return of companies is more derived from abnormal development of economy and is rooted in fundamental developments of companies (Moeller et al, 2004).
Volatility over the average investment can have long-term effects on companies’ abnormal return (Jagadeesh, 2000). Related to their stockholders, stock markets should share dividend or purchase the stock with minimum cost and their attitude should be from taxation and due to reducing the costs, they should operate based on achieving high efficacy of stock market (Harford, 2005). Within this, another subject which is somehow related to optimum performance of companies is the independency of board of directors in decisions related to investment (Yang et al, 2009; quoted by Dastgir and Yousefi Gourti, 2014).
High return of stock has an important role in enabling managers for future investments of the company (Fu et al, 2012). The stock return volatility of companies and developments derived from over investment may cause increasing the efficacy and productivity (Ang et al, 2006; quoted by Vadiei and Hosseini, 2012).
The obtained results from empirical studies show that the threats derived from companies’ debts or in other word the way of budgeting their capital structure may affect the rate of financial flexibility of companies and cause creating abnormal return (Lyandres et al, 2008; quoted by Sinaei and Rashidizad, 2010).
One of the most important tools of managers relating to achieving the most optimum point of profitability of companies is achieving appropriate market related to purchasing and selling the stock (Loughran and Ritter (2000). The investors are always looking for investing on projects that the added value of their manufacturing output is more than other par projects and groups, therefore internal rate of return of contracts will be have higher added value that its predicting of expected return is in point higher than other contracts and projects (Carlson et al, 2006; Tehrani et al, 2010). The importance of investigating the profitability of contracts can be considered as moving slowly toward threats that will bring the lost to competitors in the market in case the lack of an appropriate and correct policy related to new contracts(Chapter et al, 2009). If there isn’t a criterion for determining the profitability of projects in companies and the rate of internal return of projects with more risk is priced like projects with low risk internal return rate, the realized return of investors won’t be commensurate with the level of risk taking (Nicholas, 2007). Meanwhile in the conditions of contracts’ internal return rate, the factor of abnormal return of investments is very important and ignoring it causes reducing the profitability of contracts and ultimately reducing the profitability of acquired projects (Moeller et al, 2004). If there isn’t a criterion for determining the profitability of projects in companies and the rate of internal return of projects with more risk is priced like projects with low risk internal return rate, the realized return of investors won’t be commensurate with the level of risk taking (Sohaila et al, 2007). Meanwhile in the conditions of estimating contracts’ internal return rate, the
factor of abnormal return of investments is very important and ignoring it causes reducing the profitability of contracts and ultimately reducing the profitability of projects (Yang et al, 2009; quoted by Dastgir and Yousefi Gourti, 2014). Attracting the investors in our country’s capital market considering the fledgling capital market compared to developed countries is very important in managers’ point of view and due to achieve this goal, identifying the factors such as company’s size. Growth opportunity, special volatilities of stock return and the ratio of company’s investment and its effectiveness on cumulative abnormal return can be the main solution in achieving the ultimate goal of companies.
The goal of this research is completing the existing gap in the literature by investigating the response to this question that if the characteristics of the company, special volatilities of stock and the ratio of investment on cumulative abnormal return in listed companies in Tehran Stock Exchange are effective or not.
Through identifying and investigating the effect of company’s characteristics and the ratio of investment on cumulative abnormal return of companies, the current research will provide applied principles for the actors of capital market including potential and actual investors. It is obvious that following each research, it is tried that obtained results to be used by the enthusiasts to be effective in making efficient decisions so this research isn’t also exceptional. On the other hand the results of the research will be noticeable for the managers of companies as well to have more positive consequences.
This paper is looking for responding these questions that if there is a significant relationship between the size of company and cumulative abnormal return of companies and if there is a significant relationship between companies’ cumulative abnormal return and growth opportunities.
abnormal return of companies and also there is a significant relationship between companies’ cumulative abnormal return and growth opportunities.
Cumulative abnormal return
There is powerful and continuous flow of overload information to the market every day. For example, the information related to public conditions of economy, international crises, companies investments, lack of raw material and the same information that all of them affect the return of securities. If the market is efficient; as soon as receiving this information, the price of securities should react and be moderated. The reaction cannot usually be immediate but the distance between receiving the information and reaction of prices should be in accordance with for receiving and processing informationby available methods and techniques. Some of capital markets aren’t efficient enough. In these markets firstly the information do not spread widely and quickly in the market secondly the price of securities is neutral toward new information or maybe the reaction of securities price toward new information is more than expected. Sometimes market may show less reaction to one or several events. In these kinds of markets, there aren’t strong analysts to receive information and evaluate them correctly and make decisions. Therefore the price isn’t determined correctly therefore no one feels secure because he doesn’t trust if he pays or receives the price for securitiesis fair or not. The goal of investors from investing is obtaining the profit and ultimately maximizing their wealth. In order to realize this, the investors invest on assets that have high return and less risk. If return rate of an investment is more than their expected return rate, the value of that asset is higher and the wealth of the investor will increase. The thing here is important is calculating stock abnormal return that relies on an active, efficient market more than anything else. A market where the stock exchanges of companies are done ongoing and it are sensitive to the information and react to them. The used model in
this research is market model and it is using a set of monthly information of companies for finding more accurate alpha and beta for sample companies and forming expected return model of each company for each single one of sample companies. With this very model, expected monthly return of each company will be calculated and then its difference with real return of company will be considered as abnormal return of company and from adding monthly abnormal returns of each company, annual abnormal return which is called cumulative abnormal return will be obtained for that company in a determined fiscal year (Higgins and Bechman, 2006).
The size of company
company’s general risk because bigger companies are more publicly safe because according to financial analysts they are more known (Moses, 1987). The size of the company determines the volume and wideness of company’s activity. Bigger companies have less trade risk because of more relationship with stakeholders and more control mechanisms. The study, which was accomplished by Leldakis (2004), shows that, there is a reverse relationship between the size of the company and stock return in smaller companies with big debt ratios. Considering the high inflation in Iran, the digits related to sale propose more relevant information and as result bigger companies are expected to have less return volatility.
Growth opportunities
At the time of deciding for investment, the investors consider different factors but according to many financial management scholars, risk and return are two very important factors that affect the decision of the investor. Therefore recognizing the factors which affect stock return and risk can be very important (Pino, 1994). Of components of investment process are accessing to informational system in this field through specialized newspapers, financial websites and so on. Identifying the structure of securities market is another section of investment process. The investors should know how these securities are traded and how the method of trading and creating investment process is. The last step in the process of investment is selecting a set of securities that has acceptable return and risk according to the investor. In this research, by investment we mean investing on financial assets (Hart, 1995).
The investment problem is one of the most important duties of company’s managers. If managers can recognize the valuable opportunities of investment correctly in market (positive pure current valuable plans) and invest on each one of them appropriately, this will ultimately cause the growth of the company and the wealth of stockholders will increase. The rate of company’s cash flows because of less capital cost than
providing external finance and also more control of managers on that has more effect on the rate of company’s investments. The done researches show that the sensitivity of investment- cash flows in addition to company’s characteristics and market conditions is affected by managers’ personality features as well. In recent years, there have been many studies in this field that show managers haven’t acted sensibly all the time and under the influence of more self-confidence and extreme optimisms, they may make insensible decisions that has important effect on company’s financial activities especially investment subject (Baker et al, 2007). Thorough recognizing effective factors on investment and using them in achieving optimum level of investment,the managers of the companies can create the maximum return either not to lose investment profitable opportunities or satisfy the stockholders (Fazzari et al, 1998). The participation of senior management in proposing investment opportunities will usually limit to strategic actions such as expanding company’s activity through financial policies and entering new markets, considering that investment opportunities cause allocating financial resources of the company in order to earning income or reducing costs, so regular and principled financial policies may be executed for investment opportunities by company (Hart, 1995).
Research history
Moghaddam et al (2012) investigated the relationship between the quality of financial reporting and spreading abnormal return on listed companies in Tehran Stock Exchange during 2007 to 2009. The results showed that earning smoothing using total accruals and discretionary accruals by stock markets was perceived and caused increasing the variance of companies’ stock abnormal return.
company. The results showed the significance of all variables except financial leverage.
Mehrani and Behbahaninia (2014) investigated the way of valorizing accruals considering the type of ownership and the size of the company. The size of the company is also obtained from logarithm of total sales. The results showed that the investors of bigger companies pay more attention to the difference between cash and accruals but institutional investors didn’t consider this difference and attention to more accurate accruals pricing mechanism in their decisions.
Shan et al (2012) investigated the relationship between non-accounting information and the volatilities of stock return. Considering the use of analysts from non-accounting information in predicting stock return, they proved that this information affect directly stock return.
Yang and Kim (2014) investigated the relationship between abnormal return with the methods of financial supply, the size of the company and cash payments. The size of company is also obtained from logarithm of total assets. The results showed that among these criteria only cash payments with abnormal return has significant relationship. Methodology
Current research is applied one in terms of classifying based on goal and in terms of classifying based on method it is considered descriptive and among descriptive researches it is correlation one because it investigates the relationship between dependent and independent variables. Also considering lack of controlling all irrelevant variables and using historical information for testing hypotheses, this research can be considered in the field of quasiexperimental -after events research in terms of collecting data. In these kinds of plans the data are provided from an environment which has existed naturally or happened from an event without direct intervention of researcher.
Statistical sample is listed companies in Tehran Stock Exchange during 2002 to 2013. The quality and easy accessibility to information of Financial Statements and other required information of the
research were the reasons for selecting this statistical population.
For determining statistical sample through the systematic elimination method, the conditions below are applied:
1- First the companies whose end of the fiscal year isn’t 29 or 30 of Esfand (March) have been removed (105 companies, 1260 year-company)
2- Then banks and financial institutions and the financial investment companies (because of different nature of their activities from other trade units) are eliminated (26 companies, 338 year-company)
3- During the years of 2001 to 2013 constantly, the stock of company shouldn’t be more than 90 days without transaction (54 companies, 702 year-company)
4- At the end the outliers (The first percentile and the 99th percentile of all observations) and the companies that are transferred to informal unofficial board are eliminated (28 companies, 78 year-company)
Through applying the conditions above the number of 256 companies (equivalent for 2049 year-company) was selected in order to estimate models and test the hypotheses of the research. Collecting data and information have been done through two levels in this research. In the first level for developing theoretical foundations of research, library method (and referring to thesis1 and Persian2 and English3 articles through relevant websites) and in second level, for collecting required data, the proposed information in Information Site of Central Bank4 and proposed financial statements to Stock Exchange5 and other informational resources such as Tadbirpardaz and RahovardNovin informational bank have been used.
1
Www.IRANDOC.ir 2
Www.SID.ir 3
Www.SSRN.com, Www.Sciencedirect.com,
Www.Ebscohost.com, Www.Proquest.com
4
Http://tsd.cbi.ir/ 5
1. Dependent variable: cumulative abnormal return
BHARit: cumulative abnormal return of
company i in year t
Abnormal return is cumulative and equal with the amount of cumulate is difference between stock return and market return.
2. Independent variable: The size of the company
Sizeit: the size of company i in year t
The size of company is natural logarithm of the total book value of total assets.
The growth opportunities
BMit: the growth opportunities of company I
in year t
Growth opportunities of company are equal to the ratio of book value to stock market value.
Analyzing data Descriptive statistics
Descriptive statistics relevant to the research variables are proposed in the table. The mentioned statistics proposes a general view of research data distribution statues. The proposed results show that the mean (median) of cumulative abnormal
return variables 0.47 (0.19), the size of the company 13.08 (13.02), growth opportunities of the company 1.30 (0.39), expected return 0.19 (0.17) and the ratio of non-cash assets 3.83 (1.12). The results also show that maximum (minimum) of cumulative abnormal return variables 5.33 (-1.08), the size of the company 18.03 (9.84), growth opportunities of the company 15.88 (0.01), 2.93 (-1.13), expected return 0.94 (-0.44) and the ratio of non-cash assets is 50.82 (0.04).
Research descriptive statistics
Variabl es
Avera ge
Middl e
Maximu m
Minimu m
Standar d deviati
on
BHAR 0.47 0.19 5.33 -1.08 1.02
ΔSIZE 13.08 13.02 18.03 9.84 1.30
ΔBM 1.30 0.39 15.88 0.01 2.41
ΔINV 0.02 -0.01 2.93 -1.13 0.54
MOM 0.19 0.17 0.94 -0.44 0.15
ILIQ 3.83 1.12 50.82 0.04 7.29
The results of estimating research model The results of estimating research model have been proposed in the table using integrated pattern.
Table: the results of estimating model and linearity test
Variable Coefficient Student's t statistic Significant VIF
y-intercept ***
-1.67 -16.18 0.00
---ΔSIZE ***
0.07 9.10 0.00 1.15
ΔBM ***
-0.04 -7.21 0.00 2.81
ΔINV *
-0.03 -1.90 0.06 1.02
ΔBETA ***
-0.18 -8.70 0.00 1.17
MOM 1.47*** 25.08 0.00 1.16
ILIQ -0.03 -1.21 0.23 2.88
Coefficient of determination 77.17% Fisher statistic (Significant) (0.00) 632.12*** Adjusted coefficient of
determination 77.05% Durbin-Watson statistic 1.83 *
** and * Significant at 1% and 10% respectively
Results show that Width of the origin (-1.67) and the coefficient of company’s size variables (0.07), the ratio of book value to market value (-0.04) and expected return (1.47) in level of 1% and the coefficient of investment ratio variable (-0.03) is significant in level of 10%. The value of variance inflation factor (VIF) also shows that independent variables don’t have severe linearity.6 The
6
W hen t he value of stat ist ic VIF is less than 5 (in some other functions 10 is also mentioned), there aren’t any
significance of Fisher statistic (632.12 in level of 1% shows the total significance of the model. Watson Durbin statistic (1.83) also shows that the rest of model doesn’t have series self-correlation problem. The coefficient of determination and the coefficient of moderated determination show that independent variables generally explain around 77 percent of cumulative abnormal return changes.
Positivity and significance of the size of company coefficient (0.07) show that in bigger companies, stock cumulative abnormal return is more. This subject indicates lack of rejecting the first hypothesis of the research. The negativity and significance of growth opportunities variable (-0.04) show that in companies that have more growth opportunities, stock cumulative abnormal return is less so the second hypothesis of the research isn’t also rejected.
CONCLUSION
The current research is sought to investigate the effect of the size of the company, growth opportunities on companies’ cumulative abnormal return. Statistical sample which has been used in current research includes 256 listed companies in Tehran Stock Exchange during 2002 to 2013.Dependent variable of current research is cumulative abnormal return. The independent variables whose effects are investigated on cumulative abnormal return include company’s size, growth opportunity, special volatilities of stock return and the ratio of investment. After measuring research variables, multi-variable linear regression analysis on technique of integrated data was used for testing research hypotheses.
First hypothesis of current research has investigated the relationship between the size of the company and companies’ cumulative abnormal return. The obtained result of testing this hypothesis shows that there is a positive significant relationship between the size of company and companies’ cumulative abnormal return.
Confirming the mentioned hypothesis showsin bigger companies’ stock cumulative abnormal return is more. The existence of abnormal return doesn’t mean market inefficiency because according to the mentioned subjects, there is abnormal return in an efficient market but the mean of abnormal return is tending to zero. This result is aligned with the findings of Khajavi et al (2013). Nicholas et al (2011) concluded that there is a positive significant relationship between capital structure and the size of company. Of
course Yang and Kim (2014) also showed that there isn’t significant relationship between the size of company and abnormal return.
In second hypothesis of the research the relationship between growth opportunities and companies’ cumulative abnormal return was tested. The result of test showed negative significant relationship between growth opportunities and companies’ cumulative abnormal return so this hypothesis is also confirmed.
The negativity of this variable’s coefficient shows a reverse relationship between growth opportunities and companies’ cumulative abnormal return. Therefore in companies where growth opportunity is high (that is capital market evaluates these companies’ performance and financial situation as the appropriate one) for avoiding investor’s withdrawing confidence and ruining their face, they don’t seek for abnormal return that isn’t usually available for them through legal ways. Karimi et al (2012) also showed that there is a negative and significant relationship between financial leverage and investment decisions.
Finding applied and appropriate solutions is one of this research’s goals. Some of these solutions include:
1. Active financial analysts in capital market and the investment consultants in stock exchange are better to have special analyses based on the situation of cumulative abnormal return and effective factors on it and the size of the company, growth opportunities, special volatilities of stock, the ratio of companies’ investment considering accounting standards besides their usual techniques and analyses. 2. Tehran Stock Exchange as well as auditing
profit because determining that section of fiscal information that is more capable of management and manipulation and an emphasis on the standards that are more exposed to this subject can help ultimate goal of capital market which is fair sharing resources by appropriate evaluation and reduce pricing stocks unreally and following that creating abnormal returns.
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