Foreign portfolio capital flows and stock returns: a study of Brazilian listed firms

Loncan, Tiago Rodrigues; Caldeira, João Frois

doi:10.1590/0101-416145456tlj

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Article • Estud. Econ. 45 (4) • Oct-Dec 2015 • https://doi.org/10.1590/0101-416145456tlj copy

Foreign portfolio capital flows and stock returns: a study of Brazilian listed firms ^♦ ♦ João Caldeira wishes to thank CNPq (process 485561/2013-1) for financial support.

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

This study analyzed the effect of foreign portfolio capital flows on stock returns of Brazilian listed firms through a 6-factors APT model, in which an additional risk factor for foreign portfolio capital flows was included. First, an aggregate analysis was conducted. The partial effect of foreign portfolio capital flows on the IBOVESPA index’s returns was statistically significant and positive. Next, a disaggregate analysis was also implemented, in which portfolios of stocks were sorted by sector of economic activity, level of risk and level of corporate governance. Foreign portfolio capitals caused increases in returns especially for sectors related to commodities, industry and cyclical consumption. For the portfolios sorted by risk (in which the stocks’ betas were used as a risk parameter for sorting), foreign capitals increased the returns of mid-high and high beta portfolios, but decreased the returns of low and low-mid beta portfolios. For corporate governance portfolios, the firms listed on the Novo Mercado segment (according to BMF&Bovespa criteria) experienced a statistically significant revaluation effect. Overall, the results of the study provide support to the revaluation effect hypothesis.

Keywords
Foreign portfolio capital flows; Stock returns; Arbitrage pricing theory

Variable	Legend	Operationalization	Interpretation	Source
Ibovespa Returns	Rm	Monthly returns of the index	Equity premium for the Brazilian market	NEFIN USP
Swap pre-DI	Rf	Monthly spread on the interbank deposit rate	Proxy for Brazilian risk-free rate	NEFIN USP
Excess Ibovespa Returns	Rm-Rf	Monthly difference between market returns and risk free rate	Excess return on the Brazilian stock market	NEFIN USP
Excess S&P 500 Composite returns	Rwf	Monthly returns of the índex minus U.S risk fre rate (3-months T-bill returns)	Proxy for global returns	Datastream
Net Foreign Portfolio Capital flows	Fk	Monthly net foreign portfolio capital flows (inflows minus outflows) as a percentage of total stock market traded volume	Measure of foreign portfolio investor's activity on the stock market	Central Bank of Brazil
Excess Returns for portfolio i	Rit	Monthly difference between the returns to portfolio i and risk free rate	Monthly Returns for portfolio i in time t	Datastream
Beta	βi	Covariance between the returns of a given portfolio and the market returns divided by the variance of market returns (the measure is net of the partial effect of foreign capitals on returns)	Proxy for firms' (portfolios') risk	-
Small minus Big	Smb	Excess returns earned by a portfolio of small stocks over a portfolio of big stocks	Smb risk factor in APT models	NEFIN USP
High minus Low	Hml	Excess returns earned by a portfolio of growth stocks over a portfolio of value stocks	Hml risk factor in APT models	NEFIN USP
Winners minus Losers	Wml	Excess returns earned by a portfolio of winning stocks over a portfolio of losing stocks	Wml risk factor in APT models	NEFIN USP
Illiquid minus Liquid	Iml	Excess returns earned by a portfolio of illiquid stocks over a portfolio of liquid stocks	Iml risk factor in APT models	NEFIN USP
Dividend Yield	Dy	Dividends paid divided by stock prices (averaged across IBOVESPA constituents)	Proxy for the cost of equity capital	Datastream

	Mean	Std dev	Min	Max	n
Rm-rf	0,60%	6,20%	-24,30%	18,90%	156
SMB	0,30%	4,80%	-17,10%	18,50%	156
HML	0,70%	4,70%	-13,40%	14,20%	156
WML	1,00%	5,70%	-23,90%	17,20%	156
IML	0,40%	4,57%	-14,70%	14,50%	156
Rf	1,10%	0,40%	0,40%	3,60%	156
Fk	2,40%	5,00%	-11,50%	21,70%	156
Dy	3,90%	1,00%	2,00%	7,00%	156
Rw	0,20%	4,50%	-18,50%	10,20%	156

	Rm-rf	SMB	HML	WML	IML	Rf	Fk	Dy	Rw
Rm-rf	1
SMB	0.18^ Significant at 0.05 level;	1
HML	-0,02	0,06	1
WML	-0.29^* ***** Significant at 0.01 level;	-0.32^* ***** Significant at 0.01 level;	-0,045	1
IML	-0,09	0.71^* ***** Significant at 0.01 level;	0.17^ Significant at 0.05 level;	-0,04	1
Rf	0,06	0,11	0.18^ Significant at 0.05 level;	-0.01	0,05	1
Fk	0.28^* ***** Significant at 0.01 level;	0.23^* ***** Significant at 0.01 level;	0,09	-0.08	0,10	0,04	1
Dy	-0.15^* ***** Significant at 0.01 level;	0,03	0,00	-0.02	0,03	0.51^* ***** Significant at 0.01 level;	-0,12	1
Rw	0.67^* ***** Significant at 0.01 level;	0,10	-0,09	-0.37^* ***** Significant at 0.01 level;	-0.16^ Significant at 0.05 level;	-0,11	0.26^* ***** Significant at 0.01 level;	-0.17^ Significant at 0.05 level;	1

	Mean	Std dev	Min	Max	Corr (Ri,Fk)	#stocks
Economic Sectors
Cyclical consumption (Cyc)	0,10%	8,30%	-26,10%	23,60%	0.28***	33
Industrial goods (IG)	0,40%	8,24%	-27,00%	20,60%	0.26***	16
Basic materials (BM)	0,40%	8,13%	-32,70%	19,40%	0.31***	27
Real estate (RE)	0,40%	4,57%	-14,70%	14,50%	0.24***	30
Public Utilities (PU)	0,30%	9,80%	-43,30%	36,60%	0.27***	27
Telecom (TC)	-0,70%	6,70%	-18,50%	19,10%	-0.013	4
Construction and Transport (CT)	0,40%	8,70%	-34,50%	24,40%	0.14*	19
Oil and Gas (OG)	-0,40%	9,70%	-39,80%	20,80%	0.26***	4
Non-cyclical consumption (N_cyc)	0,60%	5,90%	-20,10%	18,30%	0.06	29
Risk
Beta 1 (low)	0,70%	5,20%	-14,10%	17,80%	0.13	47
Beta 2 (low-mid)	0,20%	5,80%	-17,80%	15,70%	0.26***	46
Beta 3 (mid-high)	0,00%	7,30%	-33,50%	18,10%	0.28***	50
Beta 4 (high)	0,15%	10,30%	-38,90%	22,70%	0.31***	48
Corporate Governance
Novo Mercado (NM)	0,20%	7,40%	-28,30%	20,30%	0.28***	105
N1	0,00%	6,90%	-26,20%	15,90%	0.29***	21
N2	0,80%	7,40%	-33,20%	19,60%	0.21***	10
Tradicional Bovespa (TB)	0,00%	6,80%	-30,90%	16,40%	0.26***	55

	gamma	alpha	beta	S	H	W	L	Hj fk	Hj b
*Aggregate Returns (Rm-rf)*
*6-factors APT*	.079^* ***** Significant at 0.01 level;	-.012^* ***** Significant at 0.01 level;	.855^* ***** Significant at 0.01 level;	.219^* ***** Significant at 0.01 level;	.014	.022	-.209^* ***** Significant at 0.01 level;	0.83	0.70
	(.016)	(.002)	(.024)	( .086)	(.021)	(.046)	(.066)
*Global CAPM*	.080^* ***** Significant at 0.01 level;	-.013^* ***** Significant at 0.01 level;	.891^* ***** Significant at 0.01 level;	.	.	.	.	0.60	0.79
	( .023)	(.001)	(.026)

	gamma	alpha	beta	Hj fk	Hj b
Cost of equity capital
Dividend Yield	-.024^ ***** Significant at 0.01 level;*	.015^ ***** Significant at 0.01 level;*	.784^ ***** Significant at 0.01 level;*	0.61	0.30
Dividend Yield	(.001)	(.003)	(.061)

	gamma i	alpha i	beta i	S i	H i	W i	L i	Hj fk	Hj b
*Economic Sectors*
*Cyclical consumption (Cyc)*	.116^* ***** Significant at 0.01 level;	-.054^* ***** Significant at 0.01 level;	.817^* ***** Significant at 0.01 level;	.403^* ***** Significant at 0.01 level;	-.080	-.094^* ***** Significant at 0.01 level;	.135	0,79	0.62
	(.018)	(.004)	(.030)	(.080)	(.051)	(.026)	( .109)
*Industrial goods (IG)*	.128^* ***** Significant at 0.01 level;	-.025^* ***** Significant at 0.01 level;	.514^* ***** Significant at 0.01 level;	.511^* ***** Significant at 0.01 level;	-.108	-.020	-.133	0.71	0.51
	(.045)	(.003)	(.038)	(.089)	(.067)	(.025)	(.117)
*Basic materials (BM)*	.082^ Significant at 0.05 level;	-.005^ Significant at 0.05 level;	.995^* ***** Significant at 0.01 level;	.376^* ***** Significant at 0.01 level;	-.108^ Significant at 0.05 level;	.147	-.239^* ***** Significant at 0.01 level;	0.81	0.64
	(.037)	(.002)	(.031)	(.040)	(.054)	(.113)	(.074)
*Real estate (RE)*	-.037	.003^* * Significant at 0.1 level	.668^* ***** Significant at 0.01 level;	1.09^* ***** Significant at 0.01 level;	-.024	-.010	-.620^* ***** Significant at 0.01 level;	0.75	0.60
	(.037)	(.002)	( .040)	( .053)	( .036)	( .051)	(.057)
*Public utilities (PU)*	.068^ Significant at 0.05 level;	-.025^* ***** Significant at 0.01 level;	.70^* ***** Significant at 0.01 level;	.046	.295^* ***** Significant at 0.01 level;	-.083^ Significant at 0.05 level;	.162^* * Significant at 0.1 level	0.70	0.49
	(.029)	(.001)	(.030)	(.076)	(.043)	(.038)	(.090)
*Telecom (TC)*	-.258^ Significant at 0.05 level;	-.021^* ***** Significant at 0.01 level;	.676^* ***** Significant at 0.01 level;	-.036	.185^ Significant at 0.05 level;	-.093^* * Significant at 0.1 level	.120^* * Significant at 0.1 level	0.69	0.66
	(.023)	(.004)	( .049)	(.066)	(.092)	(.054)	(.065)
*Construction and transport (CT)*	-.115	-.028^* ***** Significant at 0.01 level;	.714^* ***** Significant at 0.01 level;	.651^* ***** Significant at 0.01 level;	-.068	.082^* * Significant at 0.1 level	-.189^ Significant at 0.05 level;	0.65	0.44
	(.077)	(.004)	(.043)	(.101)	( .101)	(.042)	(.076)
*Oil and gas (OG)*	.077^* ***** Significant at 0.01 level;	.009^* * Significant at 0.1 level	1.14^* ***** Significant at 0.01 level;	.009	-.060	-.002	-.161^* * Significant at 0.1 level	0.71	0.86
	( .026)	( .005)	(.031)	(.091)	(.040)	(.034)	(.097)
*Non-cyclical consumption (N_cyc)*	-.206^* ***** Significant at 0.01 level;	.011^* ***** Significant at 0.01 level;	.578^* ***** Significant at 0.01 level;	.330^* ***** Significant at 0.01 level;	-.105^* ***** Significant at 0.01 level;	-.027	-.150^* ***** Significant at 0.01 level;	0.68	0.65
	(.034)	(.002)	(.019)	(.046)	( .025)	(.028)	(.052)
*Risk*
*Beta 1 (low)*	-.035^* * Significant at 0.1 level	.004^ Significant at 0.05 level;	.385^* ***** Significant at 0.01 level;	.133	.113^* ***** Significant at 0.01 level;	.030	-.00	0.70	0.53
	(.019)	(.001)	(.014)	(.097)	(.024)	( .034)	(.096)
*Beta 2 (low-mid)*	-.058^ Significant at 0.05 level;	.013^* ***** Significant at 0.01 level;	782^* ***** Significant at 0.01 level;	.249^* ***** Significant at 0.01 level;	-.157^* ***** Significant at 0.01 level;	.133^* ***** Significant at 0.01 level;	-.071^* ***** Significant at 0.01 level;	0.70	0.66
	(.029)	(.002)	(.014)	(.022)	(.020)	(.017)	(.025)
*Beta 3 (mid-high)*	.057^* ***** Significant at 0.01 level;	-.003	1.00^* ***** Significant at 0.01 level;	-.044	.037	-.047^* ***** Significant at 0.01 level;	.009	0.67	0.75
	(.017)	(.002)	(.009)	(.031)	(.023)	(.015)	(.033)
*Beta 4 (high)*	.081^* ***** Significant at 0.01 level;	-.053^* ***** Significant at 0.01 level;	1.25^* ***** Significant at 0.01 level;	578^* ***** Significant at 0.01 level;	.061^* ***** Significant at 0.01 level;	-.113^* * Significant at 0.1 level	-.231^* * Significant at 0.1 level	0.79	0.63
	(.023)	(.004)	(.046)	(.104)	(.020)	(.060)	(.138)
*Corporate Governance*
*Novo Mercado (NM)*	.036^* * Significant at 0.1 level	-.013^* ***** Significant at 0.01 level;	.802^* ***** Significant at 0.01 level;	.446^* ***** Significant at 0.01 level;	-.036	-.078^* * Significant at 0.1 level	-.066	0.72	0.52
	(.018)	(.002)	(.024)	(.046)	(.029)	(.040)	( .058)
N1	-.004	-.001	.921^* ***** Significant at 0.01 level;	313^* ***** Significant at 0.01 level;	.065^* ***** Significant at 0.01 level;	.127^* ***** Significant at 0.01 level;	-.195^* ***** Significant at 0.01 level;	0.64	0.79
	(.025)	(.002)	(.014)	(.027)	(.022)	(.030)	(.035)
N2	-.032	.034^* ***** Significant at 0.01 level;	.661^* ***** Significant at 0.01 level;	177^* ***** Significant at 0.01 level;	.012	.082^ Significant at 0.05 level;	-.177^* ***** Significant at 0.01 level;	0.75	0.57
	(.024)	(.002)	(.022)	(.062)	(.021)	(.036)	(.057)
*Tradicional Bovespa (TB)*	-.002	.020	.947^* ***** Significant at 0.01 level;	-.025	-.101^* ***** Significant at 0.01 level;	-.029^* * Significant at 0.1 level	.024	0.67	0.80
	( .002)	(.020)	(.008)	(.035)	(.024)	(.015)	(.039)

	sigma1	sigma2	sigma3	sigma4
*Variance equation*
Fk	-.017***	-.008	-.012*	-.034***
	(.002)	(.005)	(.007)	(.005)

Departamento de Economia; Faculdade de Economia, Administração, Contabilidade e Atuária da Universidade de São Paulo (FEA-USP) Av. Prof. Luciano Gualberto, 908 - FEA 01 - Cid. Universitária, CEP: 05508-010, Tel.: (55 11) 3091-5803/5947 - São Paulo - SP - Brazil
E-mail: estudoseconomicos@usp.br

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Foreign portfolio capital flows and stock returns: a study of Brazilian listed firms ♦ ♦ João Caldeira wishes to thank CNPq (process 485561/2013-1) for financial support.

Abstract

Foreign portfolio capital flows and stock returns: a study of Brazilian listed firms ^♦ ♦ João Caldeira wishes to thank CNPq (process 485561/2013-1) for financial support.