International Asset Allocation, Complexity and the Effects of Excessive Outstanding-Shares : Generating Alternative Risk Premia

Having excessive numbers of shares outstanding is either common or prevalent among listed companies in emerging markets and especially in Central/Eastern European, African and Asian stock markets (i.e. where such companies usually have between two-times and twelve-times the average numbers of outstanding shares of listed companies in developed countries like the US, UK and Japan, on an undiluted basis) – and this condition causes behavioral anomalies and sometimes contravenes established finance theories. During the last twenty years, there has been increasing allocation of active and passive investment capital to such countries that have excessive numbers of outstanding shares – the main issue is that such markets are structurally and behaviorally different from “normal” markets, a fact that is often omitted by active and passive managers. Also, there has been increasing use of Artificial Intelligence (AI) in portfolio management (both active and passive), and for modeling of agents, preferences and statistical relationships in market microstructure analysis, yet such studies often omit behavioral and structural issues that render such models ineffective. The article contributes to the literature by explaining the following, many of which have not been addressed at all or in detail in the literature: i) there may be a symbiotic relationship between institutionalized earnings management and corporate governance deficiencies on one hand, and the excessive outstanding shares phenomenon; ii) the number of issuers' outstanding shares can have significant impact on investor behavior, and a broad range of corporate governance metrics, managerial behavior, incentive-effects and systemic risk – thus having excessive numbers of outstanding shares can distort Artificial Intelligence (AI) based trading or market microstructure models; iii) the incentive effects of employee incentives and managerial behavior can change as a result of excessive numbers of outstanding shares, and the relationship is symbiotic; iv) the Law-of-Large-Numbers is not correct in all circumstances, and is precluded when there is an excessive number of outstanding shares