The Spread of Financial Sophistication Through Emerging Markets Worldwide by Kensinger John W.;

Author:Kensinger, John W.;
Language: eng
Format: epub
Publisher: Emerald Group Publishing Limited
Published: 2016-07-12T16:00:00+00:00

where ri,t is daily fund share i returns, DVOLi,t is daily fund share i dollar trading volume, and Di,y is the number of days with available illiquidity ratio for fund i in a year y. The ratio is a measure of the price impact that describes the daily price response associated with one dollar of trading volume.5

Main Independent Variable

In our models of the percentage of shares held by non-institutional investors, and of fund-share illiquidity, we include a measure of the percentage of securities in the fund’s portfolio that are illiquid. This variable, %PORTFOLIOILLIQUID, is measured as the percentage of the fund’s assets valued using Level 2 or Level 3 valuation inputs, which we hand-collect from the fund’s annual report. In the United States, Accounting Standards Codification (ASC) 820 requires companies (including closed-end funds) to disclose the nature of valuation inputs used to calculate the fair value of assets, called Levels 1, 2, and 3 valuation inputs. Level 1 valuation inputs are directly observable inputs, which are market prices of actively traded securities. Level 2 inputs are indirectly observable valuation inputs. These Level 2 inputs are used when the security in question is not actively traded, but there are other market-determined criteria that can be used to estimate the value of the security, such as yield curves on bonds. Finally, Level 3 valuation inputs are unobservable (i.e., estimated by management), such as the amounts and variability of future cash flows and appropriate discount rates.

Level 1-valued assets are actively traded securities, and so are highly liquid. Level 2-valued assets may be traded, but not often enough to provide a clean market measure of the valuation at a certain point in time, indicating that Level 2 assets are less liquid than those valued using Level 1 inputs. Level 3 assets are the least liquid type of assets because there are no market measures available to assess their valuations, suggesting that the securities are rarely traded. Therefore, the percentage of Levels 2 and 3 valued securities (%PORTFOLIOILLIQUID) measures the percentage of illiquid securities held in the fund’s portfolio.6

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