Current Issues in Pricing Financial Assets in Emerging Capital Markets and Analysis of the Impact of Digital Transformation by Economic Sectors
On June 17th, the regular research seminar of the Corporate Finance Centre was held. The seminar was dedicated to discussing current issues of asset pricing in emerging capital markets and methods for assessing the impact of digital transformation across economic sectors on the sustainable development of companies.
The seminar featured two presentations. The first presentation, delivered by Egor Pashkov, a Research Intern at the Research Laboratory, addressed the question: Is digital transformation beneficial for sustainable development?
In the dynamic business environment, digital transformation serves as a key driver for both operational efficiency and the transition to sustainable development principles. However, its impact on ESG risks (Environmental, Social, and Governance) remains ambiguous and may vary depending on the industry context. Existing research presents a fragmented picture, with insufficient attention paid to U.S. companies and a comprehensive analysis of cross-industry differences.
The objective of this research is an empirical analysis of the influence of the level of digital transformation on the ESG ratings of U.S. public companies, taking into account industry specifics. The study is based on data from 1,962 companies listed on the NYSE and NASDAQ exchanges across 11 economic sectors, covering the period from 2019 to 2023 (Thomson Reuters database). To assess companies' digitalization levels, a method was developed and applied based on textual analysis of non-financial reports, utilizing the Word2Vec machine learning technology to create and verify a dictionary of key terms.
The study found that the level of digital transformation has a statistically significant impact on a company's ESG rating. However, the nature of this influence varies substantially depending on the economic sector. The impact of digital transformation on each component of the ESG rating was also identified and differentiated.
The research proposed and tested an improved methodology for measuring the level of digital transformation based on textual data using the Word2Vec model, which enhances the accuracy and validity of the constructed index.
The second presentation, delivered by Alexander Tomtosov, a Research Fellow at the Corporate Finance Centre, addressed asset pricing in emerging capital markets. Academic literature has proposed a large number of factors, the most popular being momentum, size, value, and low volatility (Harvey & Liu, 2020), which, based on historical data, can explain differences in observed returns of common stocks across various capital markets (with varying degrees of success). The multitude of proposed factors has even led to the term "factor zoo" (Cochrane, 2011).
The aim of the research is to justify the feasibility of constructing unique factor portfolios and to reveal the specifics of their characteristics (primarily risk-return and the dynamics of the alpha coefficient) in emerging capital markets.
The paper proposes an original methodology for constructing unique factor portfolios, which helps reduce the co-movement of factor portfolio returns. This allows for the mitigation of investment risk for actively managed funds and qualified retail investors.
The research was conducted using data on 13,836 common stocks from eleven emerging capital markets, including the BRICS countries. The data includes month-end closing prices, trading volume in local currency, and market capitalization for each instrument.
