Common Divisors, Payout Persistence, and Return Predictability
John Powell(Massey University)
Jing Shi(Australian National University, Canberra, Australia and Jiangxi University of Finance and Economics)
Tom Smith(Australian National University)
Robert Whaley(Vanderbilt University)

In the finance and accounting literature, the use of a common divisor in the dependent and independent variables of ordinary least-squares regressions is commonplace. What goes less recognized, however, is that their use induces spurious correlation between the regression variables and invalidates standard testing procedures. This paper analyses the common divisor problem by outlining analytical results concerning the expected R2 and providing a simulation procedure that generates test statistics from which critical values can be drawn. To illustrate the procedure, we re-investigate payout yield return predictability findings that have appeared in the literature and show that the results are spurious.

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Corporate Diversification and Firm Value: Evidence from Post-1997 Data*
Xi He(School of Finance and Applied Statistics, College of Business and Economics, Australian National University）

In 1997, SFAS 131 established a new segment-reporting standard for US public companies. Using measures of diversification based on the diversity in segment-industry characteristics and controlling for endogeneity of the diversification decision, we document a diversification premium in our post-1997 period. We find significant positive effects of cash flow diversity, leverage diversity and profitability diversity on excess value, consistent with the efficient internal capital market hypothesis. We also find that the size of the diversification premium in the post-1997 data is negatively correlated with the degree of diversification and positively correlated with firm size. In contrast, we find that the pre-1998 data typically generates a diversification discount, but the effect is statistically less significant when endogeneity is controlled for. Thus, the diversification discount documented in earlier studies can be an artifact of the pre-1998 data or a failure to control for endogeneity.

*The author thanks Sudipto Dasgupta, Doug Foster, Bruce Grundy, Shi Jing, Arie Melnik, Phong Ngo, John Powell, Tom Smith, Garry Twite, Ralph Walkling, Emma Welch, and seminar participants at 2006 Asian FA/FMA Conference, 2006 Financial Integrity Research Network (FIRN) PhD Finance Research Workshop and 2006 FIRN Doctoral Tutorial for helpful comments.

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Switching Between the Banking and Metals and Mining Sectors of Australia*
Tariq Haque(Department of Finance, The University of Adelaide)

Using the Australian banking and metals and mining industries as the categories in the Barberis and Shleifer model, this study demonstrates switching in the Australian stock market. Switching occurs when investors move into an industry by selling off stocks of an alternate industry, thus causing negative lagged cross-correlation between those industries. Our results, based on daily returns, suggest that category-level investor sentiment may drive observed switching patterns in the Australian stock market and not fundamental risk factors. Our results also show that switching does not necessarily only occur between value and growth stocks or large-cap and small-cap stocks.

*I am grateful to Paul Kofman and Kim Sawyer for their numerous comments and suggestions. I also thank seminar participants at the 2008 AFAANZ conference and 2008 QUT Seminar Series and participants at the 2005 FIRN Doctoral Colloquium, 2006 Melbourne-Monash PhD symposium and 2007 AFAANZ Doctoral Colloquium.

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Market Price of Risk: A Comparison among the United States, United Kingdom, Australia and Japan*
Kent Wang(University of Queensland and The Wang Yanan Institute for Studies in Economics, Xiamen University)

This study examines and compares the market price of risk of the S&P 500, FTSE 100, All Ordinaries, and Nikkei 225 markets from 1984 to 2009 in the framework of Intertemporal Capital Asset Pricing Model (ICAPM). We follow the Vector Autoregressive instrumental variable approach in identifying the risk and hedge components of market returns and argue that in the context of market integration, covariance with a world market portfolio is a better measure of market risk than conditional market variance. Evidence is documented in support of using covariance as a risk measure in explaining market risk premiums in the Australian and Japanese markets. CAY, the consumption wealth ratio from the US market is found to be a robust state variable that helps to explain both conditional variance and covariance processes in the four markets. The market prices of risk, after controlling for the hedging demands, are positive and significant with the United States having the highest price of risk. The results are confirmed using a series of robustness tests that include varying the sampling interval.

*I want to thank Tom Smith, Tim Brailsford, Guo Hui, Michael Lemmon (editor), Hong Yongmiao, Jiang Yan-Fei, Sam Richie, two anonymous referees and participants of 2009 Asian Finance Association annual conference (Brisbane) for helpful comments. The usual disclaimer applies.

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