Literature review and hypotheses regarding the domination of individual investors and the effect of the English language

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The trading activity in GCC markets

It is said that the average daily amount of traded shares and the number of traded shares can provide an idea of the market liquidity and visibility (Elayan et al., 2003; James and Edmister, 1983). In table (2) below, we present the market capitalisation, trading volume and the daily average value of the traded shares of each of the stock markets in the GCC area. By looking at the average amount traded per day and the number of shares traded, we can assume that liquidity in Bahrain Bourse (BHB) is relatively low compared to the other GCC markets, suggesting a probable existence of liquidity premium in this market. Whereas the contrary case is presented in Tadawul All Share Index (TASI), Dubai Financial Market (DFM), Kuwait Stock Exchange (KSE), Abu Dhabi Stock Exchange (ADX), and Qatar Stock Exchange (QE) with high trading activity, suggesting higher liquidity in these markets. Muscat Stock Market (MSM) is placed in between.

Overview of the “domination” of individual investors in GCC countries

One of the main characteristics of the GCC markets is the large proportion of individual investors in the stock market, which differentiates them from the other mature and non-mature markets either in developed or developing countries. As far to our knowledge, there is not yet any study that has been dedicated to countries and markets where the proportion of individual investors is as high as it is in GCC markets, except maybe for the Chinese market when the proportion of retail investors was about 90% regarding the traded volume, in 2003 (Jadwa Investment, 2014).
Until recently, the GCC markets have not been in favour of institutional investors due to several reasons, for example, the restrictions of entering the market for foreign investments, a shortage of available data, a lack of corporate transparency, lax in information disclosure and reporting requirements, lack of market makers as well as the underwriters, the prohibition of short-selling, etc. (Al-Hoymany, 2013; IMF, 2005; Onour, 2010; Rahman et al., 2015; Ulussever and Demirer, 2017). Therefore, it may justify why retail investors dominate the daily transactions. With respect to the foreign ownership in the market, it is argued that the existence of foreign investors in a stock market affects the efficiency, which encourages to reduce the information asymmetry, by demanding better information disclosure, accounting, and auditing (Choi et al., 2010, 2013; Li Jiang and Jeong-Bon Kim, 2004).
The stock market in Saudi Arabia is dominated by local individuals as reported by Samba bank, who reports that around 88% of the daily transactions were performed by the individual investors in November 2009, whereas, usually 90% of transactions are addressed by institutional investors in the large OECD bourses (Samba Group, 2009). At late of 2013, 2% of the traded volumes in the US market were placed by individuals, around 35% in India and approximately 60% in China, while in the Saudi market around 90% of the traded volumes were accounted for individual investors (figure 1) (Jadwa Investment, 2014).

Accurate theories about the role of credit rating agencies in GCC countries and markets

Referring to the agency theory, signal theory, and the information content hypothesis; credit rating agencies can be pictured as an intermediary mandated by an issuer to convey useful and valuable information (either private or public) to investors in order to reduce the information asymmetry, and then, to allow the efficiency level on the financial markets to be improved. The signal hypothesis and the information content hypothesis suggest that there is additional information that is conveyed to the market about the firms’ value by a rating change, which might be treated as a signal indicative for the upcoming earnings and cash flows of the firm (Sehgal and Mathur, 2013; Zaima and McCarthy, 1988). May (2010) examined the information content of bond rating changes that assigned by the three credit rating agencies and found evidence of some new information conveyed by the credit rating changes, moreover, he found the reaction of lower-rated firms are stronger than higher-rated firms. Issuers usually use credit rating agencies to signal the credit quality of their debt instruments (Hsueh and Kidwell, 1988). The signal that is addressed to the investors mostly concern the creditors, as they are the holders of the debt securities that are rated. However, the information of a firm should usually be incorporated into its securities, either in the bond market or in the stock market, as it is said by Pinches and Singleton (1978) that “Capital market efficiency also implies that the markets for different securities of the same firm are not segmented; thus, information about the future prospects of the firm should flow freely between the bond market and the stock market”. Most of the time, authors consider that in case the rating event conveys valuable information, the reaction on the stock market should be identical in its direction than the one occurring on the bond market, and be aligned with that of the rating event (i.e., negative abnormal returns for a downgrade, and vice-versa for an upgrade). Some authors link the impact of the information content of a rating change over the securities value to the reason behind this rating. Holthausen and Leftwich (1986) assumed that when a rating is assigned, ceteris paribus, the bond and stock prices of the rated firm should move in the same direction if the probability of default arises from a change in the firm’s value, whereas if the probability of default is related to the firm’s bond, then the effect on stock price can be ambiguous. It is also suggested that the cause of the downgrade must be taken into consideration; because the stock reaction can be negative if the bonds are downgraded due to a change in the firm’s value, while it is not the same if the downgrade is due to an increase in leverage (Goh and Ederington, 1993). Thus, the signal theory and information content hypothesis are helpful in explaining the stock market reaction when positive (negative) news affect the market positively (negatively), symmetrically or asymmetrically, showing that this news contains an informational value to the market.
On the other hand, the wealth redistribution hypothesis (WRH) intends to describe a conflict of interest that might appear between the stockholders and bondholders. Some corporate decisions might maximise the wealth of stockholders; meanwhile, it can be at the expense of bondholders, and vice-versa (Galai and Masulis, 1976; Zaima and McCarthy, 1988). Stockholders may opt to increase the level of risk by going through investments with a higher risk in order to increase the expected returns; however, this action may cause an augmentation in the outstanding bonds’ default risk as a reflection of an alteration in the value of the firm or a modification in the variance of the cash flow. Hence, the increase in default risk is likely to lead to a decrease in the value of the outstanding bonds. This reduction in the value can be taken from bondholders for the sake of stockholders. Abad-Romero and Robles-Fernández (2007) and Zaima and McCarthy (1988) refer their findings of negative stock reaction to bond upgrades to the wealth redistribution hypothesis. Authors justify a possible wealth transfer effects (e.g. the asymmetric change of debt and equity value) by a change in the variance of cash flow or leverage. Holthausen and Leftwich (1986) said that, with all else being equal, if the probability of default that is provided by a rating decision to a firm arises from a change in its variance of cash flow, the value of debts and equity of this firm should change asymmetrically (prices move in opposite directions), as suggested by the option pricing theory. Goh and Ederington (1993) assumed that if a CRA assigned a downgrade to a firm because the leverage of this firm was increased, the stock prices of this firm is expected to increase while the bond prices is expected to decrease, as it should be good news to stockholders due to the shift in wealth from bondholders. And vice-versa, the wealth might also be transferred from stockholders to bondholders if the default risk is lowered by decreasing the leverage (May, 2010).


The mimicry behaviour as a possible explanation of the growing demand for the CRAs’ services in GCC markets

As illustrated above, the Neo-institutionalism theory could explain part of the firms’ behaviour, and it might be helpful to justify one of the reasons behind the overgrowing demand for CRAs services in GCC countries, although the debts markets are still narrow compared to more mature markets. This theory may also justify the attitude of firms that ask for CRAs services even in the case they have not yet issued a debt security.
Granovetter (1985) and White (1981) suggest that the market should be seen as a network of social relationships besides being a system of exchange. Hence, firms’ behaviour, regarding some actions, might be explained by the assumption of imitation that firms in such an environment may follow their competitors’ steps and observe their strategy of managing the firm. Therefore, we could assume that in a specific market, industry or environment, whenever a company asks for CRAs services, it is likely to encourage or to lead other firms (competitors) within the same sector activity or the same business field to act alike in the next future. This imitation process may be explained by either:
– The wish of following the competitor’s management decisions, by a transfer of practices and ideas coming from professional networks (e.g. managers’ relationships or turn-over).
– Directly by the expected outcomes coming from the rating assign, which might be the signal effect for instance, as these outcomes might raise the competitive level amongst the rivals in the market causing the others to lose their relative position in the market.
Thereby, in GCC financial markets, we suggest that assessing a rating to an issuer may occur simply because another issuer “competitors” asked for it “a rival situation”, or looking to signal their strength in order to obtain the best interest rates, and does not always indicate their willingness to issue debt instruments and having them rated. This is in line also with Lieberman and Asaba (2006) who suggest that the imitations between firms emerge either from the fear of falling behind in respect to the competitors or from the point that the competitors’ action might convey information to the market.
In addition to the previous theories that may influence the firms to ask to be rated in GCC markets. In the next section, we aim to investigate the variables that may influence the firms’ choice to be rated by the international credit rating agencies in the GCC countries.

Our hypotheses: The expected effects of Imams’ announcements on stock markets

In the Saudi Stock Exchange, the volume of shares traded in sectors with a lower number of Sharia-compliant firms is less than the sectors with a higher number of Sharia-compliant firms (Ibnrubbian, 2012, pp.63). This finding can demonstrate the importance of the Sharia concept amongst investors, and as mentioned before, the majority of these investors are individuals. In this part, we aim to examine the reaction of the firms’ stocks that were “upgraded” to Sharia-compliant firms and that for those being “downgraded” to non-Sharia compliant firms. This examination is going to illustrate the influence of Sharia (Islamic instructions) on listed firms, which might lead us to enhance the determinants of CRAs decisions in this type of markets. More precisely, to suggest them adding the religion factor to the determinants elements of issuers’ risk assessment.
To clarify this point, let us precise that if the stock price of a company (A) in Saudi Arabia drops significantly after an Imam’s downgrade announcement, this is likely to affect the investors’ wish to keep holding the bond/Sukuk of this firm, as well as the firm stock, with a subsequent possible effect on prices, earnings, and also other financial indicators. Moreover, in case this company (A) is a bank, we expect this effect being larger, as some of its clients (e.g. high religious individuals, Islamic corporations, Islamic organisations, etc.) might move their wealth from bank (A) to any other Sharia-compliant bank.

Table of contents :

Chapter 1: introduction
1- An overview of the economy of GCC countries
2- The trading activity in GCC markets
3- Overview of the “domination” of individual investors in GCC countries
4- A snapshot of Credit Rating Agencies (CRAs)
5- The structure of our research
Chapter 2: Literature review and hypotheses regarding the credit rating agencies’ role and impact in GCC equity markets
1- Accurate theories about the role of credit rating agencies in GCC countries and markets
1.1 The level of transparency in the market
1.2 Neo-institutionalism theory
2- The impact of CRAs decisions on financial markets
2.1 Rating changes & credit watches
2.2 Previous studies on narrow and non-mature markets
3- Our hypotheses: The expected reaction of GCC stock markets to the CRAs’ decisions
Hypothesis 1
Hypothesis 2
Chapter 3: Literature review and hypotheses regarding the domination of individual investors and the effect of the English language
1. The individuals’ behaviour
2. The expected behaviour of individual investors in GCC markets
3. The possible effect of English as a Business language
3.1 Previous studies concerning the effect of the language of publication
3.2 The possible impact of the English language on the GCC equity markets
3.3 Reconsidering the role of CRAs in light of the GCC investors’ environment
4. Our hypotheses: The expected effect of the English language and individuals’ domination on GCC markets
Hypothesis 4
Chapter 4: Literature review and hypotheses regarding the influence of religion and Imams’ announcements
1. The influence of religion on stock markets and investors’ attitude towards risk
2. How religion may affect the market response to CRAs
3. Imams’ announcements In Saudi Arabia
4. Our hypotheses: The expected effects of Imams’ announcements on stock markets
Hypothesis 5
Hypothesis 6
Chapter 5: Data and Methodology
1. The questionnaire methodology
A. Distribution process
B. The sample
C. Methods to analyse the questionnaire
2. The event-study methodology
A. An overview of the event study methodology
B. Excess return measurement
C. Estimation procedures
D. Estimation and event windows
E. The calculation of CARs, CAARs
F. Data
Chapter 6: Questionnaire – Results and discussion
1. Comparison test
1.1 English speakers vs. non-English speakers
1.2 High religious investors vs. less religious investors
1.3 Key results of the comparison test
2. Logistic regression
 Key results of the logistic regression regarding the effect of English language
Chapter 7: Event study – Results and discussions of the impact of CRAs’ announcements on stock prices
1. Case study: Saudi Arabia
1.1 The stock market reaction to upgrades and positive rating events
1.2 The stock market reaction to downgrades and negative rating events
1.3 Conclusion of the case study: Saudi Arabia
2. Case study: All the six GCC countries combined (Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Bahrain, Oman)
2.1 Positive rating events (upgrades merged with positive credit watches)
2.2 Negative rating events (downgrades merged with negative credit watches)
3. Key learning from previous studies regarding the reaction time to CRAs’ announcements and language effect
 Assessing the reaction time reported in previous literature to support our hypotheses: a methodological approach
4. Conclusion of chapter (7): CRAs’ announcements and Event-Study
Chapter 8: Event study – Results and discussion of the impact of Imams’ announcements on stock prices
1. The event study over the Imams’ announcements
1.1 Study period, methods and data
1.2 Downgrade announcements
1.3 Upgrade announcements
1.4 Conclusion of the event-study implemented on the Saudi Imams’ announcements
2. Is there an effect of Imams’ announcements over the firms’ financial health?
2.1 Our assumptions behind a possible impact of the religion factor over the firms’ financial health
2.2 Data and filtration
2.3 Methodology
2.4 Conclusion of the possible effect of Imams’ announcements over the firms’ financial health
Chapter 9: Final conclusion
1. The stock market reaction towards CRAs’ announcements
2. The stock market reaction towards Imams’ announcements
 Suggestions for further research
Synthèse de la thèse en Français


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