Market Power in Capital Market (PDF)

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See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/330830705 MARKET POWER OF STOCKS AND ITS IMPACT ON MARKET PERFORMANCE: EVIDENCE FROM BUDAPEST STOCKS EXCHANGE Conference Paper · February 2019 CITATIONS READS 0 1,223 3 authors: Musaab Mousa Judit Sági International Business School - Budapest Budapest Business School 11 PUBLICATIONS 83 CITATIONS 65 PUBLICATIONS 890 CITATIONS SEE PROFILE SEE PROFILE Zeman Zoltan John von Neumann University Kecskemét Hungary 141 PUBLICATIONS 1,180 CITATIONS SEE PROFILE All content following this page was uploaded by Musaab Mousa on 02 February 2019. The user has requested enhancement of the downloaded file.  MARKET POWER OF STOCKS AND ITS IMPACT ON MARKET PERFORMANCE: EVIDENCE FROM BUDAPEST STOCKS EXCHANGE Musaab Mousa1, Judit Sagi 2, Zoltan Zeman 3 1 Szent István University,Godollo Hungary 2 Budapest Business school, Budapest Hungary 3 Szent István University,Godollo Hungary E-mail address: < [email protected] > Abstract: The stocks exchange is similar to the production market in many economic characteristics, especially the levels of competition for listed securities. The purpose of this paper is to analyze the economic structure of the Budapest Stocks exchange in order to identify the market power degree of the most-traded shares, the Prime equity market was divided into two portfolios, the first includes the most four companies in terms of trade value, while the second includes the remaining listed shares in prime market. In addition to investigate the impact of market power measured by concentration rates on market performance measured by return and liquidity for a period of eight years (2010-2017), the findings show that the significant impact of trade value concentration of two most traded shares on the liquidity for the entire market portfolio, concentrated portfolio and non-concentrated portfolio, Also the concentration of the most traded share has impact only on the liquidity for the entire market portfolio and concentrated portfolio, while the return does not affect by any of the four concentrations levels except the impact concentration of two most traded shares on return on concentrated portfolio. Keywords: Budapest stocks Exchange, liquidity, market power, return JEL codes: G12, G14, D4 1. Introduction The capital market is a market where securities are issued and traded (Jakob.et al, 2009, p65). In other words, it is a context where the suppliers and demanders of securities interact financially regardless of the spatial space (Gitman-Joehnk, 2008), accordingly these markets play a crucial role in modern economy as an important part of financial system, they provide good opportunities for individuals looking to increase income, at the same time provide funds to firms operations. Without capital market, it will be difficult to meet borrowers (saving surpluses) and lenders (investment opportunities), subsequently, through these functions, financial markets contribute to the efficiency of capital allocation, production and consumption. So the well-established markets lead to the welfare of all society, In contrast, the crises and shocks in the markets lead to serious and disastrous economic effects (Mishkin, 2004,p.24-25) Moreover, the capital market has the same economic roots of the product market, and differ in some properties such as information and nature of products(Filatotchev et al, 2016) as included in table 1 TABLE 1: DISTINCTIVE CHARACTERISTICS OF PRODUCT AND CAPITAL MARKET Criteria Product Market Capital Market Informational Production Concentrated Dispersed environment  Types of good traded Consumption good Investment good Until the point of Beyond the point of sell Buyer and seller linkage sell Information collection At a single point of Collection and dissemination is continual intensity time Transportation and Costs of transaction, taxes and regulation Information friction storage and agency Source of arbitrage Arbitrage in space Arbitrage in time Source: (Filatotchev et al, 2016) In general, the classical theory of capital markets depend on microeconomic assumptions to subject the issue of market trend as well as performance of financial assets prices proceeding from that stock exchange is fully competitive markets where there is a huge number of demander and supplier Market efficiency theory MET and random walk behavior of securities' prices (fama, 1965) used economic market equilibrium in the stocks exchange, that suppose there is no marginal profit as well as the stock’s price equal to true value, so the present price reflects all information which is known and forecasted, as a result, price always trends to fundamental (equilibrium) value (Ausloos et al, 2016). Substantially, market efficiency theory assumes that the investors are rational and make decisions according to expected utility and choose the most beneficial alternative, in case the investor can achieve extraordinary returns, this is due either to luck or as compensation for the high risks incurred. namely, the market has no memory, and investors cannot beat the market (Gavriilidis, 2013) Although MET provided a scientific framework to explain the value determinations within the market, however, it has been criticized for some reasons, first the "anomalies" which refer to some patterns of prices behavior that could not explain by market efficiency or asset pricing models. Second, the evident irrational results during a crisis like the crash of 1987, the internet bubble ( Burton,2003). Third, the empirical proofs showed that the majority of markets are weak-form efficient as well as most of the largest financial markets are semi- strong –form, (Michael,2002). Whatever, research efforts are still trying to solve the mystery of price behavior in the stocks market with the theories development of competition, market power and monopoly in microeconomics which leads to many questions about the economic structure of stocks exchange as well as the reasons for the difference in prices between listed shares in the market, meaning that is there full competition between stocks or there are some stocks that behave in a monopolistic manner such as blue chips. From this point the paper tries to explain the market power of stocks in Budapest stocks exchange. In addition to the relation between the market power stocks and the performance of the whole market measured by return and liquidity. The remainder of the paper is structured as follows. The literature review of the economic market structure and capital market to present the research questions in Section 1. The methodology and results discussion in Section 2, section 3 presents a conclusion and recommendation as well as the recommended future research. 1. Literature review 1.1 market structure and market power Microeconomics literature and theories emphasized the market structure through a firm environment as well as the competition degree resulting therefrom. four main features are taken in account to determine market structure: (1) the number and size of the firm in the market,(2 product nature and distinctiveness degree,(3) barriers to entry and exit from the market and (4) market information. (Hushke,2010,p.217), therefore markets are categorized from full competition to full monopoly with four categories perfect competition, monopolistic competition, oligopoly, and monopoly. (Pindyck & Rubinfeld,2015) Market power (MP) related to market structure and is proportional associated with monopoly degree, meaning that it arises when a specific company be able to change the market price either by reducing its products quantity or increasing its price (Borenstein,2000), sequentially, the firm of MP enjoys a profit margin that exceeds competitors' margins, it is detrimental to the economy and negatively affects the allocation of resources (OECD, 2002), originally the pioneers literature of market power belong to industrial organization field principally through antitrust policy which aims to monitor and control the exercise of market power to keep it within the legal limits, that in turn is in the interest of the economy (White, 2013). Accordingly, MP has earned a lot of attention from researchers in many industries. Wood (1998) from a marketing point of view, found that brand plays a significant role in MP increasing in international beer markets. Igami (2015) analysis the market structure of coffee bean and its price behavior in international commodity market showed that the large price drop during the coffee crisis in 1989 was mainly due to the high degree of market power of the exporting countries, not to mention studies of market power in the highly concentrated (monopoly) of electrical power market (Piotr, 2017), while in the banking sector, (Boateng et al, 2018) illustrated the role of information asymmetry in market power boosting in sample of African banks belong to 42 countries, in like manner, the lowering in credit supply was accompanied by an increase in the market power of banks during the global financial crisis. Moreover, market power generates higher revenues specifically which are created by non- traditional activities (Nguyen et al, 2016), from risk perspective, banks tend to invest at lower risk when they have higher market power (Tabak et al, 2015), also Müller and Noth (2018) pointed out that banks with market power have owned a greater safety margin against credit risk in the mortgage market. Regarding financial products, Ruddell et al (2018) explained the price premium of forwarding is due to investors' preference for forwarding contracts associated with high market power producers. Concerning to capital market, Jorya and Ngo (2017) documented that the portfolio of shares related to product market power performs superior to other shares presented by buy-and-hold abnormal returns (BHARs). Although the research steam of market power is still ongoing, as well as still adhering to the product market in the real economy where the difficulty of full competition was recognized, something that has not materialized in the capital market. Therefore, this search attempts to test the following hypothesis: Do some of the listed stocks have a market power and preferred to other by the traders? 1.2 Capital market performance market value creation has presented the most important measure of performance, meaning that "maximizing shareholder value" is the authentic goal of listed company, the higher the value of investors, the more successful the company will be (Sacui and Dumitru,2014), due to securities prices are the most noticeable of all measures that can be used to evaluate the performance of a listed company. Dissimilar to profit or revenues that are issued at one time every quarter or every year, the market prices are modified permanently to reflect the investors' response to every action that the company takes, so investors attach utmost importance to price changes and subsequent indicators that measure these changes such as return on stock (Damodaran, 2014) more than that the liquidity refers to buying and selling facilitating and capability to convert the financial assets to cash (Leirvik et al,2017,p.1), Investors decisions are deeply associated with market liquidity, when they can execute immediate and large volume of transactions without a significant change in the price, that leads in turn to boost confidence in the market. addition to liquidity is one of securities markets integration motivations through moving their investments toward markets that have higher returns, Sklavos et al (2013) found that the liquidity of the stock measured bt stock turnover directly affects future price behavior after one day for most traded companies and two for that are less traded, also the extraordinary returns are mainly due to low levels of liquidity and imbalances in supply and demand (Acharya and Pederson, 2004). In general stocks return and liquidity are considered from the most important indicators of performance in the market and a cornerstone in many models that tried to frame the trends of the stocks exchange, so the research aims to study the role of market power of stocks in performance represented by these two indicators through the second research question: What is the impact of the stocks market power on returns and liquidity in the Budapest stocks Exchange? 2. Empirical study 2.1 Research methodology 2.1.1 Budapest Stocks Exchange BSE Hungary has long experience in financial markets, since establishment in 1864, Budapest stocks exchange had witnessed many milestones and was considered one of the most important European markets until the period of World Wars I and II, then the market was dissolved within the nationalization in 1948. After 42 years of downtime, the new birth of the market was in1990 within the free market economy system. The Hungarian National Bank MNB has owned 68.8% of BSE since 20 November 2015. Various and technical activities are carried out through ten specializedOrganizational units. The wide variety of products are available in BSE through cash market, derivatives market, commodities market and BETA market (foreign equities), several securities within each one of these four markets. The equities within cash market, in turn, consists of three types that are equity prime for companies that have high criteria, equity T for SMEs that do not make public transaction and standard market for SMEs that consider executing a public transaction at their initial listing, there are 60 issuers and 66 securities traded in the cash market in 2017 as in table 2: TABLE 2: CASH MARKET IN BSE Equity Other securities equity Standard equity Corporate Investment Mortgage Investment prim market T bonds funds bonds certificate 14 18 7 12 6 4 2 Government Treasury Compensation bond bills note 1 1 1 Source: www.bse.com BSE issued its official index BUX in January 1991 with a base value equal to 1000 points, beside that BSE is covered by central European Blue Chips index CETOP.  TABLE 3: LIQUIDITY AND BUX INDEX IN BSE 2011 2012 2013 2014 2015 2016 Average BSE 93% 56% 56% 54% 44% 36% 55% World 156% 109% 102% 112% 163% 102% 128% BUX 21,407 16,980 18,255 18,592 16,634 23,920 Source www.bse.com, www.worldbank.org The liquidity of BSE is notably low comparing to international average, while the index value fluctuated during the period and reached its peak in 2016. 2.1.2 Data collection and variables To answer the questions of research, the sample was chosen from equity prim and involves all companies which were continuously traded between 2010 and 2017, then the sample was divided into two portfolios, the first concentrated portfolio includes the most four companies in terms of trade value, while the second includes the remaining listed shares in prime market. This research depends on secondary data from the annual reports and the prices update published on the Web site of BSE for the period under study. Likewise, the liquidity ratio was accounted for concentrated portfolio Lc, non-concentrated portfolio Inc and for the market as whole La, the same thing with respect to the return, Rc, Rnc and Ra as in table 3: TABLE 4: VARIABLES OF RESEARCH Variable Description amusements The concentration of Percentage of the four biggest companies trade C4 the four biggest value to all trade value companies The concentration of Percentage of the three biggest companies trade C3 the Three biggest value to all trade value companies The concentration of Percentage of tow biggest companies trade C2 the two biggest value to all trade value companies The concentration of Percentage of the biggest company trade value C1 the biggest company to all trade value Liquidity Lc-Lnc-La for three portfolios trade value / capitalization Current year Clos price- last year Clos price)+ Return Rc- Rnc - Ra for three portfolios dividends / last year Clos price 2.1.3 Results and discussion To test the market power in Budapest Stocks Exchange, the concentration of the best four trade value shares collected in table 4 TABLE 5: TRADE VALUE CONCENTRATED 2011 2012 2013 2014 2015 2016 2017 C4 99% 99% 99% 98% 99% 99% 99% C3 92% 91% 91% 92% 94% 94% 93%  C2 86% 82% 76% 78% 75% 75% 75% C1 64% 66% 58% 59% 56% 52% 52% The trading value percentage is very close to 100% in the largest four companies, although the concentration percentage decreases for C3, C2 and C1, it remains more than 50% of the total value for the largest company, which means that there is a high degree of concentration in the values of trading, and four companies (OTP, MOL, MTELEKOM, RICHTER) monopolize approximately all trades in equity prim market. Expressly a limited number of listed companies monopolize most trades and have a high market power degree, and as a result, markets characterized as oligopolistic. The linear regression method was used to examine the relationship between the market power and the performance mustered by liquidity and return based on the Statistical Package for Social Sciences (SPSS) version 21. Table 5 involves the regression results: TABLE 6: THE REGISTRATION RESULTS Lc Inc La Rc Rnc Ra C4 X X X X X X C3 X X X X X X R=.881 R=.914 R=.916a R=.780 C2.697 0.686.696 0.81 X X.147 0.552.153 -.314- Sig=.001 Sig=.004 Sig=.002 Sig=.002 R=.881 R=.882 C1 0.471 X.470 X X X 0.213.220 Sig=.004 Sig=.004 Source: SPSS outputs The results show that the concentrated trade value of two biggest companies C2 affect the liquidity of concentrated portfolio Lc, where the significant level is.001 which less than 5% which refers to the linear relationship between two variables. Also, C2 affect the liquidity level of non-concentrated portfolio Inc in terms of Sig =.004, in the same way, there is a significant relationship between C2 and the liquidity level of the whole prim market where sig =.002. In other words, in every unit increase in concentrated trade value of two biggest companies, the liquidity increases by 0.147 units for concentrated portfolio, 0.552 units for non- concentrated portfolio and by 0.153 units for the whole prim market. From another side, the concentrated trade value of the biggest company C1 affects significantly in the liquidity level of concentrated portfolio Lc (sig=.004) as well as the liquidity level of the whole prim market (sig=0.004). Respecting the impact of concentrated trade value on returns, only the concentrated trade value of two biggest companies C2 affect negatively the return on concentrated portfolio Rc, where Sig =.002, in every unit increase in concentrated trade value of two biggest companies, the return decreases by 0.314 units for a concentrated portfolio Based on the above, the two biggest trade value listed companies dominate the level of liquidity in the prime market, where their trading value influence directly on market trend in regard to the level of shares demand and supply. While the impact of trading value concentration is on returns is limited to the negative relationship between the concentration of the biggest two companies and return on the concentrated portfolio, generally, that refers to a weak form of efficiency in Budapest Stocks Exchange. 3. Counclousion & Recommendations the main purpose of this research is an examination of the economic structure of Budapest Stocks Exchange, by study the market power of biggest traded shares using concentration ratio for the first four companies regarding the trading value. In addition to analysis the relationship between concentration level from one hand and liquidity level and returns on second. The empirical results point out that BSE characterized as-as oligopolistic from a microeconomic point of view due to domination of the four largest companies in 99% of trading value during the period under study, based that OTP bank the largest traded value share demonize more than half of the trading value for the same period. Further, the concentrated trading value of the biggest two companies affects the liquidity level of the whole market, concentrated portfolio, and non-concentrated portfolio, meaning that the liquidity level depends totally on the trading of two listed stocks. The research shed light on the dialectic of market efficiency in capital market and perfect competition in the product market, that can contribute to a deeper understanding of the market value and price puzzle by adding a new dimension to the theoretical and practical framework. Frome technical view the decision makers in BSE should develop the current policies from encouraging the trading of other listed shares side as well as increase the number of listed companies to increase the market debt. For future research, we recommend deeper analysis by using other variables to measure the market power and other measurements of performance in the market, additionally, apply this methodology on other markets or compare the results between different markets in the region or in international markets. References 1. Acharya, V. and Pederson, L. (2004): Asset Pricing with Liquidity Risk, Journal of Financial Economics. 77, pp.375-410. 2. Ausloos, M., Franck, J. and Schinckus,C. 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