short selling and the price discovery process we show that stock prices are more accurate when short sellers are more active first in a large panel of nyse listed stocks intraday informational efficiency of prices improves with greater shorting flow second at monthly and annual horizons more shorting flow accelerates the incorporation of public information into prices third greater shorting flow reduces post earnings announcement drift for negative earnings surprises fourth short sellers change their trading around extreme return events in a way that aids price discovery and reduces divergence from fundamental values these results are robust to various econometric specifications and their magnitude is economically meaningful the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

put call parity violations and return predictability evidence from the 2008 short sale ban abstract we investigate the link between stock and options markets during the 2008 u s short sale ban first we find definitive evidence that the ban indeed caused stock overvaluation second we show that the short sale ban caused a significant increase in put call parity violations only in the direction of the short sale constraints and it significantly enhanced the stock return predictability of put call parity violations third the overvaluation is really large a portfolio formed on the trading signal that the put call parity violation is in the top quintile underperforms the lowest quintile portfolio by a statistically and economically significant abnormal daily return of 5 6 during the short sale ban period we employ a novel and rigorous method of using taq intraday data to ensure that our high low violation arbitrage portfolio as well as the five fama french factors used to estimate the abnormal returns are implementable by a hypothetical investor exempt from the shorting ban

short sales are almost instantaneously bad news evidence from the australian stock exchange this paper investigates the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution we find a mean reassessment of stock value following short sales of up to 0 20 percent with adverse information impounded within fifteen minutes or twenty trades short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction trades near information events precipitate larger price reactions the evidence is generally weaker for short sales executed using limit orders relative to market orders this article analyzes the intraday price behavior surrounding short sales executed using market and limit orders within a transparent setting a number of recent studies have focused on daily or monthly stock price behavior surrounding short selling activity in u s markets e g senchack and starks 1993 figlewski and webb 1993 conrad 1994 hanley and seyhun 1994 asquith and meulbroek 1996 and dechow et al 1997 this research has been motivated by the continued interest of market regulators i n short selling activity and the controversy surrounding the desirability restrictions and disclosure requirements related to short selling see janvey 1992 and ramsay 1993 in particular several studies such as that by figlewski and webb 1993 have examined the relationship between short positions and subsequent abnormal returns without finding a strong relationship asquith and meulbroek 1996 in contrast focus on firms with large short positions and find a strong and consistent relationship dechow et al 1997 find a correlation between short selling strategies and strategies based on fundamental analysis these results are consistent with short sellers being able to identify

costly arbitrage evidence from closed end funds arbitrage costs lead to large deviations of prices from fundamentals using a sample of closed end funds i find that the market value of a fund is more likely to deviate from the value of its assets 1 for funds with portfolios that are difficult to replicate 2 for funds that pay out smaller dividends 3 for funds with lower market values and 4 when interest rates are high these factors are related to the magnitude of the deviation as opposed to the direction i e whether discount or premium and explain a quarter of cross sectional mispricing variation these findings are consistent with noise trader models of asset pricing

asset growth anomaly in europe do profits and losses matter abstract this paper investigates whether the well documented asset growth effect on stock returns exists across both profit and loss firms in european capital markets we find that the asset growth anomaly is more pronounced across loss firms and is significantly dampened by the inclusion of profit firms in the sample the raw and abnormal returns earned from a hedge strategy on balance sheet growth for loss firms are almost two times higher than the respective returns for profit firms our evidence casts doubt on a risk based explanation thereby lending credence to the suggestion that the asset growth effect is attributable to mispricing

creative destruction and firm specific performance heterogeneity traditional u s industries with higher firm specific stock return and fundamentals performance heterogeneity use information technology it more intensively and post faster productivity growth in the late 20 th century we argue that this mechanically reflects a wave of schumpeter s 1912 creative destruction disrupting a wide swath of industries with successful it adopters unpredictably undermining established firms this validates endogenous growth theory models of creative destruction e g aghion and howitt 1992 and suggests intensified creative destruction as explaining findings associating greater firm specific performance variation with higher per capita gdps economy growth rates accounting standards financial system development and property right protection

beyond taxation discourse around energy policy in japan energy policy literature tends to emphasise the impact of taxation on energy preference however the present case concerning extremely low acceptance of diesel cars in japan could not be explained by taxation as a possible factor the paper sheds light upon discourse around the energy policy the policy aimed to characterise diesel technology as emitting particulate matter and nitrogen oxide nox the paper contributes to extending the existing understanding of the role of public policy by embracing the linguistic interactions complemented by visualisation

short sale constraints divergence of opinion and asset values evidence from the laboratory the overvaluation hypothesis miller 1977 predicts that a stocks are overvalued when there are short selling restrictions and that b the overvaluation is increasing in the degree of divergence of opinion we design an experiment that allows us to test these predictions in the laboratory our results support the hypothesis that prices are higher in the presence of short selling constraints the overvaluation does not depend on the degree of divergence of opinion

large market shocks and abnormal closed end fund price behaviour abstract this paper investigates the short term price behaviour of closed end funds following eight large market wide shocks the findings from a sample of 63 funds continuously traded on the london stock exchange indicate that prices overreact relative to equilibrium given by net asset values the speed of reversion in discounts following market wide shocks is slower than that following fund specific shocks of a similar magnitude the post shock persistence in discounts is related more to the ease of arbitrage rather than to liquidity as proxied by fund size or to the speed of recovery in the broader market the discount decays more slowly for those funds that are difficult to arbitrage

the role of lockups in initial public offerings in a sample of 2 794 initial public offerings ipos we test three potential explanations for the existence of ipo lockups lockups serve as i a signal of firm quality ii a commitment device to alleviate moral hazard problems or iii a mechanism for underwriters to extract additional compensation from the issuing firm our results support the commitment hypothesis insiders of firms that are associated with greater potential for moral hazard lockup their shares for a longer period of time insiders of firms that have experienced larger excess returns are backed by venture capitalists or go public with high quality underwriters are more likely to be released from the lockup restrictions an initial public offering ipo often represents the first opportunity that a firm s founders and initial investors have to begin the process of realizing the value for their ownership stake in the firm 1 we explore one particular aspect that regulates this cashing out by insiders namely the structure of the price reaction to and the compliance with investment banker lockups which restrict the ability of the firm s management and prepublic investors from selling their stock in the aftermarket for a period of time after the ipo our article provides three contributions on going public and financial markets first we explore why prepublic insiders agree to long holding periods after the ipo we test three potential explanations i lockups as a signal of quality ii as a commitment device to alleviate moral hazard problems and iii as a means for investment banks to extract additional compensation from issuing firms our analysis supports the commitment hypothesis specifically investment banks impose longer lockups when the moral hazard in the aftermarket is higher we conduct several tests of the signaling hypothesis and find no support for the idea that insiders signal their quality by locking

how smooth is price discovery evidence from cross listed stock trading abstract the adjustment to parity can be nonlinear for a cross listed pair convergence may be quicker when the price deviation is sufficiently profitable we propose a threshold error correction model ecm to gauge the market respective information shares of canadian listings traded on the toronto stock exchange tsx and the new york stock exchange nyse since dynamics may alternatively be gradual we further generalize the threshold framework to a smooth transition ecm the empirical implications are as follows first the tsx and the nyse appear to have integrated over time second parity convergence accelerates upon discounts on the cross listings on the nyse third we find a larger feedback from the nyse if the price gap exceeds the threshold required arbitrage return fourth informed traders tend to cluster on the nyse upon discounts on the cross listings fifth information share and threshold are affected by the relative degree of private information market friction and liquidity measures firm level characteristics and aggregate risks

market frictions and consumption based asset pricing a fundamental equilibrium condition underlying most utility based asset pricing models is the equilibration of intertemporal marginal rates of substitution imrs previous empirical research however has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition in this paper we examine whether market frictions can explain previous findings our results suggest that a combination of short sale borrowing solvency and trading cost frictions can drive a large enough wedge between imrs so that the apparent violations may not be inconsistent with market equilibrium

does short selling amplify price declines or align stocks with their fundamental values critics of short selling argue that short sellers amplify price declines by targeting firms with falling prices in an unwarranted manner contrary to this viewpoint we find that increases in short interest for firms following a price decline are associated with measures of overpricing based on financial statement analysis our results extend to short selling activity following marketwide declines we also find evidence consistent with the profitability of short selling following price declines being driven by valuation based positions overall our findings suggest short sellers primarily undertake valuation based strategies following price declines and have implications for regulators limiting short selling following price declines is likely to impede efficient price discovery this paper was accepted by mary barth accounting

religious beliefs gambling attitudes and financial market outcomes this study investigates whether geographic variation in religion induced gambling norms affects aggregate market outcomes we conjecture that gambling propensity would be stronger in regions with higher concentrations of catholics relative to protestants consistent with our conjecture we show that in regions with higher catholic protestant ratios investors exhibit a stronger propensity to hold lottery type stocks broad based employee stock option plans are more popular the initial day return following an initial public offering is higher and the magnitude of the negative lottery stock premium is larger collectively these results indicate that religion induced gambling attitudes impact investors portfolio choices corporate decisions and stock returns

what do revolving door laws do abstracton the basis of evidence from state public utility commissions we find that revolving door laws laws that restrict the post government employment opportunities of public sector workers including public utility regulators do not do much at least with respect to electricity prices in this paper we take advantage of a quasi experiment afforded by the fact that revolving door laws were introduced in different states at different times to investigate their effects on electricity prices our findings suggest that while revolving door laws temporarily dampen industrial electricity prices they have no effect on commercial or residential prices there is also some evidence that these regulations affect the characteristics of state public utility commissioners commissioners from states with revolving door regulations serve shorter terms and are less likely to be subsequently employed in the private sector compared with their counterparts from states without revolving door laws

short interest and stock price crash risk abstract using a large sample of u s public firms we find robust evidence that short interest is positively related to one year ahead stock price crash risk the evidence is consistent with the view that short sellers are able to detect bad news hoarding by managers additional findings show that the positive relation between short interest and future crash risk is more salient for firms with weak governance mechanisms excessive risk taking behavior and high information asymmetry between managers and shareholders empirical support is provided showing that the relation between short interest and crash risk is driven by bad news hoarding

insider trading in supervised industries abstractwe investigate the impact of government agency oversight such as by the federal reserve on insider trading at the firm level regulatory supervision potentially limits trading based on material nonpublic information as it provides another layer of corporate governance to mitigate outflows of private information yet regulators themselves may serve as a source of information leakage thereby facilitating insider trading activity we find first that in comparison to nonsupervised firms supervised firms exhibit substantially greater trading based on inside information prior to earnings announcements second in the first few days after firms provide private information to regulators or when regulators possess private information inaccessible to corporate insiders these firms exhibit greater symptoms of insider trading finally within a given supervised industry insider trading symptoms appear more pronounced when regulators exhibit greater leniency or operate in states with more political c

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

the asset growth effect insights from international equity markets abstract firms with higher asset growth rates subsequently experience lower stock returns in international equity markets consistent with the u s evidence this negative effect of asset growth on returns is stronger in more developed capital markets and markets where stocks are more efficiently priced but is unrelated to country characteristics representing limits to arbitrage investor protection and accounting quality the evidence suggests that the cross sectional relation between asset growth and stock return is more likely due to an optimal investment effect than due to overinvestment market timing or other forms of mispricing

financial innovation and arbitrage pricing in frictional economies abstract frictional economies are fundamentally different from their frictionless counterparts for example in frictional economies the price function is sublinear and thus there will be incentives to innovate when decomposing existing securities and opening new markets innovators serve important economic functions such as allowing investors to obtain consumption at lower costs enabling investors to achieve better risk sharing and making the fundamental value of more payoffs observable in particular innovators serve these functions even when they introduce redundant securities that are not yet issued furthermore in frictional economies the replication based arbitrage valuation approach tends to overprice certain securities while underpricing others journal of economic literature classification numbers c61 g10 g12 g20

redistribution by insurance market regulation analyzing a ban on gender based retirement annuities we illustrate how equilibrium screening models can be used to evaluate the economic consequences of insurance market regulation we calibrate and solve a model of the united kingdom s compulsory annuity market and examine the impact of gender based pricing restrictions we find that the endogenous adjustment of annuity contract menus in response to such restrictions can undo up to half of the redistribution from men to women that would occur with exogenous social security like annuity contracts our findings indicate the importance of endogenous contract responses and illustrate the feasibility of employing theoretical insurance market equilibrium models for quantitative policy analysis

zombie board board tenure and firm performance we show that board tenure exhibits an inverted u shaped relation with firm value and accounting performance the quality of corporate decisions such as m a financial reporting quality and ceo compensation also has a quadratic relation with board tenure our results are consistent with the interpretation that directors on the job learning improves firm value up to a threshold at which point entrenchment dominates and firm performance suffers to address endogeneity concerns we use a sample of firms in which an outside director suffered a sudden death and find that sudden deaths that move board tenure away from toward the empirically observed optimum level in the cross section are associated with negative positive announcement returns the quality of corporate decisions also follows an inverted u shaped pattern in a sample of firms affected by the death of a director

the informativeness of earnings and management s issuance of earnings forecasts abstract theory suggests that managers issue earnings forecasts to reduce information asymmetry an earnings forecast is more effective in reducing information asymmetry if it contains earnings news that is relatively more informative about the firm s value we hypothesize that a manager is more likely to issue an earnings forecast if investors perceive that earnings are more informative we measure earnings informativeness by estimating the firm s earnings response coefficient erc in quarters prior to the forecast issuance decision consistent with our hypothesis we find that the firm s historic erc is positively associated with management s issuance of earnings forecasts

liquidity risk and exchange traded fund returns variances and tracking errors abstract we investigate the effect of exchange traded fund etf liquidity on etf tracking errors returns and volatility in the us we find that illiquid etfs have large tracking errors the effect is more pronounced when underlying assets are less liquid returns and liquidity of illiquid etfs are more sensitive to underlying index returns or etf market liquidity or both thus a positive liquidity premium exists in us etf markets the etf variance could be larger than its net asst value variance owing to infrequent trading in summary illiquid etfs are more likely to deviate from their underlying indexes and could be riskier than underlying portfolios

worldwide reach of short selling regulations abstract we characterize legality and incidence of short selling in a worldwide multimarket framework home country short selling restrictions curtail home market stock borrowing by 45 and reduce short selling of the country s american depository receipts adrs by 68 due to regulatory reach also the 2008 us ban on short selling of financial firms reduced borrowing in foreign locations these findings are robust to controls for option availability enforcement returns firm size trading volume dividends adr level volatility days to cover and industry sector further we show that investor conduct resulting from adherence to professional standards is a more powerful mechanism of regulatory reach than intergovernment cooperation

insiders incentives for asymmetric disclosure and firm specific information flows abstract recent research suggests that insiders incentives for capturing cash flows affect price formation process in which insiders are inclined to withhold good news and to accelerate the release of bad news jin and myers 2006 we investigate whether insiders incentives for private control benefit proxied by control ownership wedge affect firm specific return characteristics we find that control ownership wedge is negatively related to the likelihood of positive return jumps and positively related to the extent of asymmetric market reaction to good news rather than to bad news overall our results support the notion that corporate insiders increase opaqueness and withhold good news in order to capture unexpected cash flow

individualism and stock price crash risk employing a sample of 26 473 firms across 42 countries from 1990 to 2013 we find that firms located in countries with higher individualism have higher stock price crash risk furthermore individualism can be transmitted by foreign investors from overseas markets to influence local firms crash risk and can exacerbate the impact of firm risk taking and earnings management on crash risk moreover the positive relation between individualism and crash risk is amplified during the global financial crisis and attenuated by enhanced country level financial information transparency and the adoption of international financial reporting standards

ownership structure limits to arbitrage and stock returns evidence from equity lending markets we examine how institutional ownership structure gives rise to limits to arbitrage through its impact on short sale constraints stocks with lower more concentrated short term and less passive ownership exhibit lower lending supply higher costs of shorting and higher arbitrage risk these constraints limit the ability of arbitrageurs to take short positions and delay the correction of mispricing stocks with more concentrated ownership exhibit smaller announcement day reactions larger post earnings announcement drift and an additional negative abnormal return of 0 47 in the week following a positive shorting demand shock received june 16 2014 accepted june 8 2016 by editor laura starks

bringing the future forward the effect of disclosure on the returns earnings relation this paper studies how firm disclosure activity affects the relation between current annual stock returns contemporaneous annual earnings and future earnings our results show that firms with relatively more informative disclosures bring the future forward so that current returns reflect more future earnings news we also find that changes in disclosure activity are positively related to changes in the importance of future earnings news for current returns these results suggest that a firm s disclosure activity reveals credible relevant information not in current earnings and that this information is incorporated into the current stock price

dividend distributions and closed end fund discounts abstract empirical support for the hypothesis that closed end fund discounts are related to overhanging tax liabilities has been mixed we introduce a new approach to testing this hypothesis by examining changes in discount levels following distributions of dividends and capital gains since distributions reduce future shareholder tax liabilities the tax liability hypothesis implies that closed end fund discounts should decline following distributions focusing on changes in discounts isolates this tax effect by eliminating the impact of other fund specific factors on discount levels our results support the tax liability hypothesis showing that short run fluctuations in discounts are directly affected by taxable distributions

political incentives to suppress negative information evidence from chinese listed firms this paper tests the proposition that politicians and their affiliated firms i e firms operating in their province temporarily suppress negative information in response to political incentives we examine the stock price behavior of chinese listed firms around two visible political events meetings of the national congress of the chinese communist party and promotions of high level provincial politicians that are expected to asymmetrically increase the costs of releasing bad news the costs create an incentive for local politicians and their affiliated firms to temporarily restrict the flow of negative information about the companies the result will be fewer stock price crashes for the affiliated firms during these event windows followed by an increase in crashes after the event consistent with these predictions we find that the affiliated firms experience a reduction an increase in negative stock return skewness before after the event these effects are strongest in the three month period directly preceding the event among firms that are more politically connected and when the province is dominated by faction politics and cronyism additional tests document a significant reduction in published newspaper articles about affected firms in advance of these political events suggestive of a link between our observed stock price behavior and temporary shifts in the listed firms information environment

short sale constraints information acquisition and asset prices abstract during financial crises financial market regulators often restrict short selling to support prices and curb volatility however evidence suggests that short selling bans during the turmoil in financial markets in 2007 2009 failed to achieve regulators goals we analyze a model of costly private information acquisition and asset pricing under short sale constraints to examine a possible cause of this failure we show that the constraints increase return volatility by adversely affecting the production of private information when investors are highly risk averse or are holding highly correlated risky assets the distortion in private information production arising from imposing short sale constraints leads to undervaluation implying that imposing short selling bans during economic crises not only fails to curb volatility but also may fail to support prices

on the use of instrumental variables in accounting research abstract instrumental variable iv methods are commonly used in accounting research e g earnings management corporate governance executive compensation and disclosure research when the regressor variables are endogenous while iv estimation is the standard textbook solution to mitigating endogeneity problems the appropriateness of iv methods in typical accounting research settings is not obvious drawing on recent advances in statistics and econometrics we identify conditions under which iv methods are preferred to ols estimates and propose a series of tests for research studies employing iv methods we illustrate these ideas by examining the relation between corporate disclosure and the cost of capital

zero r 2hedge funds and market neutrality factor models yield an r 2 insignificantly different from 0 for one third of hedge funds in a broad sample these funds illustrate the concept of market neutrality and feature lower volatilities higher sharpe ratios and higher alphas than other funds indicating that they provide a successful alternative investment however large portfolios of zero r 2 funds contain fully half the volatility of portfolios of other funds suggesting that they feature substantial systematic risk furthermore these funds display an increased probability of failure even after controlling for idiosyncratic volatility these results indicate the presence of an omitted factor that exposes investors to significant downside risk

property rights protection corporate transparency and growth in countries with secure property rights corporate transparency improves investment efficiency and increases growth by alleviating information asymmetry however in countries with insecure property rights greater transparency can increase the risk of government expropriation therefore some firms that would benefit most from transparency cannot take full advantage of it as they set sub optimal transparency levels using data from 59 industries in 69 countries we find that in countries with weak property rights protection industries that would benefit the most from transparency exhibit worse investment efficiency and grow more slowly than industries that can efficiently operate at minimal levels of transparency

differences in trading and pricing between stock and index options we find that the demand for stock options that increases exposure to the underlying is positively related to the individual investor sentiments and past market returns whereas the demand for index options is invariant to these factors these differences in trading patterns are also reflected in the differences in the composition of traders with different types of options options on stocks are actively traded by individual investors whereas trades in index options are more often motivated by the hedging demand of sophisticated investors consistent with a demand based view of option pricing the individual investor sentiments and past market returns are related to time series variations in the slope of the implied volatility smile of stock options but they have little impact on the prices of index options the pricing impact is more pronounced in options with a higher concentration of unsophisticated investors and those with higher delta hedging costs our results provide evidence that factors not related to fundamentals also impact security prices this paper was accepted by brad barber finance

short selling constraints as cause for price distortions an experimental study in this paper we explore the influence of the possibility to short stocks and or borrow money in laboratory markets a key innovation of our study is that subjects can simultaneously trade two risky assets on two double auction markets allowing us to differentiate between assets with relatively high versus low capitalization divergence of opinions is created by providing each trader with noisy information on the intrinsic values of both assets we find that when borrowing money or shorting stocks is restricted prices are systematically distorted specifically stocks with high low capitalization are traded at lower higher prices than their fundamental value lifting the restrictions leads to more efficient prices and more liquidity thereby also lowering volatility and bid ask spreads

the idiosyncratic volatility puzzle time trend or speculative episodes campbell lettau malkiel and xu 2001 document a positive trend in idiosyncratic volatility during the 1962 1997 period we show that by 2003 volatility falls back to pre 1990s levels furthermore we show that the increase and subsequent reversal is concentrated among firms with low stock prices and high retail ownership this evidence suggests that the increase in idiosyncratic volatility through the 1990s was not a time trend but rather an episodic phenomenon at least partially associated with retail investors results from cross sectional regressions conditional trend estimation stock split events and attention grabbing events are consistent with a retail trading effect the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

opaque financial reports r2 and crash risk abstract we investigate the relation between the transparency of financial statements and the distribution of stock returns using earnings management as a measure of opacity we find that opacity is associated with higher r2s indicating less revelation of firm specific information moreover opaque firms are more prone to stock price crashes consistent with the prediction of the jin and myers 2006 r2 around the world new theory and new tests journal of financial economics 79 257 292 model however these relations seem to have dissipated since the passage of the sarbanes oxley act suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment

overreaction delayed reaction and contrarian profits this paper presents a decomposition of short horizon contrarian profits into various sources based on an analysis os stock price reactions to common factors an firm specific information in sharp contrast with the conclusions in the extant literature we find that the lead lag structure in stock prices contributes less than 5 of the observed contrarian profits with most of the profits being attributable to stock price overreaction

the effects of sfas 131 geographic segment disclosures by us multinational companies on the valuation of foreign earnings foreign operations are becoming increasingly important for us companies we investigate whether the market s valuation of foreign earnings is a function of the firm s geographic segment disclosures specifically we examine the effects of an increase in the number of geographic segments disclosed and the inclusion of earnings measures in geographic segment disclosures following the adoption of sfas 131 we find strong evidence that our proxies for increased disclosure are positively associated with the valuation of foreign earnings our results are robust to a number of sensitivity analyses taken together our results suggest that the pricing of foreign earnings is associated with important aspects of the firm s information environment

short sales constraints and price discovery evidence from the hong kong market short sales practices in the hong kong stock market are unique in that only stocks on a list of designated securities can be sold short by analyzing the price effects following the addition of individual stocks to the list we find that short sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists these findings are consistent with miller s 1977 intuition and other optimism models we also document higher volatility and less positive skewness of individual stock returns when short sales are allowed the question of how short sales impact capital markets is highly controversial with short sale regulations varying widely across countries and capital markets 1 although short selling has been carried out for years in major financial markets around the world its effects on market efficiency especially on pricing efficiency remain of interest to financial researchers miller 1977 theorizes that in the presence of short sales constraints security prices tend to reflect a more optimistic valuation than the average opinion of potential investors and thus tend to be upward biased this overvaluation argument is based on two conditions 1 a security s short sales are either prohibited or costly and 2 investors have heterogeneous beliefs or information about the security s value the underlying intuition is quite straightforward pessimistic investors are forced to sit out of the market when short sales are not available and thus some negative information is not reflected in prices enabling enthusiastic buyers to bid prices above the level that average investors perceive as fair this argument has significant implications for market efficiency theories since one of the major functions of capital markets is price discovery indeed an efficient market should be a market in which prices always

eu and russian discourse on energy relations the paper explores the dominant interpretations of the eu russian energy relations by identifying three dominant concepts around which these interpretations revolve 1 integration 2 liberalization and 3 diversification building on a detailed discourse analysis of 97 textual units produced by eu leaders and institutions and 104 documents and speeches by russian policy makers the paper argues that these three discourses differ widely in their assessment of the two partners mutual ties both in terms of the relationship s symmetry and the perceived benefits for each partner the paper comes up with two basic arguments first in spite of the shared usage of the three basic notions by both sides the interpretations of each of the discourses are widely different in the eu and in russia which causes continuous frictions and misunderstandings second and surprisingly the discourse of integration is dominant both in the eu and russia which shows that the claims about the alleged securitization of eu russian energy relations are clearly exaggerated

idiosyncratic return volatility cash flows and product market competition over the past 40 years the volatility of the average stock return has drastically outpaced total market volatility thus idiosyncratic return volatility has dramatically increased we estimate this increase to be 6 per year consistent with an efficient market this result is mirrored by an increase in the idiosyncratic volatility of fundamental cash flows we argue that these findings are attributable to the more intense economy wide competition various cross sectional and time series tests support this idea economic competitiveness facilitates reinterpretation of the results from the cross country r2 literature as well as the us idiosyncratic risk literature jel g12 g14

regulation asymmetric information and auditing this article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator by auditing at a cost however the regulator is assumed to be able to observe the realized cost of the firm if the regulator finds that the firm had misrepresented its costs at the time at which prices were set he can order a refund to consumers in the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated given the original report a separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision the auditing decision however depends on the price that was initially set the optimal auditing strategy is characterized and the nature of the welfare gains are identified the methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable

market madness the case of mad money we use the popular television show mad money hosted by jim cramer to test theories of attention and limits to arbitrage stock recommendations on mad money constitute attention shocks to a large audience of individual traders we find that stock recommendations lead to large overnight returns that subsequently reverse over the next few months the spike reversal pattern is strongest among small illiquid stocks that are hard to arbitrage using daily nielsen ratings as a direct measure of attention we find that the overnight return is strongest when high income viewership is high we also find weak price effects among sell recommendations taken together the evidence supports the retail attention hypothesis of barber and odean barber b t odean 2008 all that glitters the effect of attention and news on the buying behavior of individual and institutional investors rev financial stud 21 2 785 818 and illustrates the potential role of media in generating mispricing this paper was accepted by brad barber teck ho and terrance odean special issue editors

when r2 meets the short sales constraints we examine the short selling in the hong kong stock market and find that after the lift of short sales constraint the r2 increases contradicting the traditional wisdom that r2 is a proxy of price inefficiency moreover the change of r2 is from the decrease in idiosyncratic volatility

the need for improved financial reporting of a developing country energy utility abstract some consideration has been given to regulatory and institutional reforms to facilitate sustainable development in electricity usage in papua new guinea but little attention has been paid to bringing about full compliance of financial reporting expectations of the country s main energy utility examining documentary evidence of the audit reports of the auditor general s office of papua new guinea this study considers the financial reporting compliance of png power for the period 2007 2013 and the means by which compliant reporting may be improved the results of the study reveal that the financial statements of png power are late and receive disclaimers of opinion from the auditor general s office which suggest that png power s stakeholders are not receiving accurate and reliable financial information to make informed decisions about sustainable development of electricity usage and planning in papua new guinea the study reveals that it would take little resources to improve png power s reporting which in turn could enhance national energy policy decision making and energy utility accountability

short sales and speed of price adjustment evidence from the hong kong stock market abstract we present empirical evidence that short sales contribute to market efficiency by increasing the speed of price adjustment to not only private public firm specific information but also market wide information shortable stocks are characterized by weaker trade continuity and stronger quote reversals they adjust faster to new information than non shortable counterparts these findings remain robust even in an up market condition in which short sales are not binding the amount of information incorporated in each trade is also significantly higher for shortable than non shortable stocks in both up and down market conditions after controlling for firm size trading volume liquidity price and option trading short sales stand out as one of the significant factors that speed up the price adjustment

efficiency and the bear short sales and markets around the world we analyze cross sectional and time series information from 46 equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices we find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced a common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic we find strong evidence that in markets where short selling is either prohibited or not practiced market returns display significantly less negative skewness

aggregate short interest and market valuations we examine some basic data on the evolution of aggregate short interest both during the dot com era and at other times in history total short interest moves in a countercyclical fashion for example short interest in nasdaq stocks actually declines as the nasdaq index approaches its peak moreover this decline does not seem to reflect a substitution away from outright short selling and towards put options as the ratio of put to call volume displays the same countercyclical tendency the evidence suggests that i arbitrageurs are reluctant to bet against aggregate mispricings and ii short selling does not play a particularly helpful role in stabilizing the overall stock market this abstract was borrowed from another version of this item

arbitrage risk and post earnings announcement drift this study examines whether the magnitude of post earnings announcement drift is related to the risk faced by arbitrageurs who may view the anomaly as a trading opportunity consistent with this hypothesis the magnitude of the drift is strongly related to the arbitrage risk measure developed by wurgler and zhuravskaya 2002 the effect of arbitrage risk is statistically and economically significant in a range of specifications the results support the view of post earnings announcement drift as an underreaction to earnings information

inconsistent regulators evidence from banking we find that regulators can implement identical rules inconsistently due to differences in their institutional design and incentives and this behavior may adversely impact the effectiveness with which regulation is implemented we study supervisory decisions of u s banking regulators and exploit a legally determined rotation policy that assigns federal and state supervisors to the same bank at exogenously set time intervals comparing federal and state regulator supervisory ratings within the same bank we find that federal regulators are systematically tougher downgrading supervisory ratings almost twice as frequently as do state supervisors state regulators counteract these downgrades to some degree by upgrading more frequently under federal regulators banks report worse asset quality higher regulatory capital ratios and lower return on assets leniency of state regulators relative to their federal counterparts is related to costly outcomes such as higher failure rates and lower repayment rates of government assistance funds the discrepancy in regulator behavior is related to different weights given by regulators to local economic conditions and to some extent differences in regulatory resources we find no support for regulator self interest which includes revolving doors

the information content of bank exam ratings and subordinated debt prices do supervisory examinations of large commercial banking firms produce useful information not already reflected in market prices to investigate this question we apply a new research methodology to data on bank exam ratings and the subordinated debt risk spreads of their parent holding companies we find that government exams do produce new value relevant information that debenture prices do not immediately reflect this information and that the market prices the likely regulatory actions implied by this information these results have implications for market versus regulatory discipline at large banking firms and for proposals to make subordinated debt mandatory for these firms

options short sale constraints and market efficiency a new perspective this paper undertakes a new investigation of the potential for options to mitigate short sale constraints i find that option introduction alleviates 79 of the price adjustment efficiency disparity between short sale constrained and unconstrained stocks in relation to negative news no significant improvement in adjustment efficiency is found in response to positive information these results are robust to controls for endogeneity biases associated with the option introduction selection process further i find evidence that post option improvement in efficiency is similar in relation to private and public information this suggests that short sale constraint effects stem at least in part from an irrational optimism bias or another behavioral source as suggested theoretically by miller 1977 collectively these results suggest that options act as an effective substitute to short sales significantly contributing to the informational efficiency of the market

large foreign ownership and stock price informativeness around the world abstract this study investigates the relation between large foreign ownership lfo and the informativeness of stock prices in 40 markets we show that lfo is positively related to price informativeness measured by probability of informed trading pin and price non synchronicity nonsync which reflects firm specific variations in stock returns we also find a stronger association between stock returns and future earnings innovations for firms with higher lfo further analysis reveals that the effect of lfo on price informativeness is stronger in developed economies and markets with strong investor protection and a transparent information environment

a transaction level analysis of spatial arbitrage the role of habit attention and electronic trading despite the central role of arbitrage in finance and economic theory there is limited evidence of the factors that create and eliminate arbitrage opportunities how often arbitrage occurs and how profitable it is we address these gaps via a transaction level analysis of spatial arbitrage in the wholesale automotive market we investigate why arbitrage opportunities are created by analyzing how sellers choose where to sell vehicles we find that the attention sellers pay to the distribution of a vehicle is negatively related to the probability that it is arbitraged arbitrage occurs in approximately 1 of transactions although electronic trading is making arbitrage less prevalent by improving buyer seller matching across locations arbitrage yields a 5 6 return on average although arbitrageurs take a loss 14 of the time our results contribute to the literature on arbitrage the effect of attention allocation on market outcomes and the effect of information technology on market efficiency this paper was accepted by brad barber teck ho and terrance odean special issue editors

financial asset demand is elastic evidence from new issues of federal home loan bank debt abstract we estimate the slope of the demand curve for newly auctioned fhlb discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity our unique dataset of roughly 2900 observations of two price quantity pairs the first from a pre auction dealer survey the second from actual auction results provides the quantity shift necessary to identify demand in contrast to previous findings of downward sloping demand curves for equities we show that demand for newly issued fhlb notes is nearly perfectly elastic during normal market conditions we find however that frictions like arbitrage risk and to a lesser extent heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50 drop in elasticity observed during the recent financial crisis

the short selling skill of institutions and individuals abstract using market wide data from the brazilian stock lending market at the deal level we find strong evidence of short selling skill for institutions and individuals skilled short sellers present out of sample performance persistence exploring the granularity of our dataset we find that skilled short sellers do not display the disposition effect are more likely to pick value liquid high volatility and losing stocks and to initiate a short position before earnings announcements and around sell recommendations

the divergence of liquidity commonality in the cross section of stocks abstract this paper demonstrates that the cross sectional variation of liquidity commonality has increased over the period 1963 2005 the divergence of systematic liquidity can be explained by patterns in institutional ownership over the sample period we document that our findings are associated with similar patterns in systematic risk our analysis also indicates that the ability to diversify systematic risk and aggregate liquidity shocks by holding large cap stocks has declined the evidence suggests that the fragility of the us equity market to unanticipated events has increased over the past few decades

price reaction of ethically screened stocks a study of the dow jones islamic market world index this paper investigates the short term effects on the price of the ethically screened stocks of the dow jones islamic market world index djimwi quarterly revisions using a sample of 8 250 stocks from may 1999 through june 2012 we find a significant price reaction of the ethically screened stocks following additions and deletions the results show that additions deletions from emerging stock markets tend to experience a greater and significantly positive negative price response than additions deletions from the developed markets further tests reveal that the price reactions following djimwi revisions are likely to be driven by shifts in investor sentiment rather than changes in firm fundamentals

tax loss selling and the january effect evidence from municipal bond closed end funds this paper provides direct evidence supporting the tax loss selling hypothesis as an explanation of the january effect examining turn of the year return and volume patterns for municipal bond closed end funds which are held mostly by tax sensitive individual investors we document a january effect for these funds but not for their underlying assets we provide evidence that this effect can be largely explained by tax loss selling activities at the previous year end moreover we find that funds associated with brokerage firms display more tax loss selling behavior suggesting that tax counseling plays a role among the numerous stock return anomalies probably none has generated more interest than that of the turn of the year or january effect the phenomenon in which small capitalization stocks realize unusually high returns in early january 1 the literature offers a number of hypotheses to explain this phenomenon including the tax loss selling hypothesis the window dressing hypothesis the insider trading information release hypothesis and the seasonality of the risk return relation hypothesis given existing evidence in some support for the first two hypotheses the debate continues with respect to which of these the tax loss selling of individual investors or the window dressing of

the effects of market segmentation and investor recognition on asset prices evidence from foreign stocks listing in the united states non u s firms cross listing shares on u s exchanges as american depositary receipts earn cumulative abnormal returns of 19 percent during the year before listing and an additional 1 20 percent during the listing week but incur a loss of 14 percent during the year following listing we show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing our tests provide support for the market segmentation hypothesis and merton s 1987 investor recognition hypothesis the globalization of u s capital markets has accelerated dramatically in the past decade increasing numbers of companies from overseas have chosen to either raise capital through global equity issues or prepare for future capital raising by way of cross listings on u s exchanges as of 1997 about 1 300 non u s companies have listed their shares for trading on the new york stock exchange nyse the american exchange amex the national association of securities dealers automation quotation nasdaq system or

do etfs increase volatility due to their low trading costs exchange traded funds etfs are a potential catalyst for short horizon liquidity traders the liquidity shocks can propagate to the underlying securities through the arbitrage channel and etfs may increase the nonfundamental volatility of the securities in their baskets we exploit exogenous changes in index membership and find that stocks with higher etf ownership display significantly higher volatility etf ownership increases the negative autocorrelation in stock prices the increase in volatility appears to introduce undiversifiable risk in prices because stocks with high etf ownership earn a significant risk premium of up to 56 basis points monthly

efficient trading strategies in the presence of market frictions we provide a price characterization of efficient contingent claims that is chosen by at least a rational agent in multiperiod economies with market frictions frictions include market incompleteness transaction costs short selling and borrowing costs we characterize the inefficiency cost of a trading strategy its required investment minus the largest amount necessary to obtain the same utility level and we propose a measure of portfolio performance we show that arbitrage bounds cannot be tightened based on efficiency without restricting preferences or endowments we observe common investment strategies becoming inefficient with market frictions and others rationalized by them in this article we characterize efficient contingent claims to future consumption consumption bundles in multiperiod economies with uncertainty taking a wide range of market frictions into account 1 such as dynamic market

exploring the impact of internal corporate governance on the relation between disclosure quality and earnings management in the uk listed companies this study investigates the impact of internal corporate governance on the relation between disclosure quality and earnings management in the uk listed companies in particular whether governance mechanisms have deterrent effect on earnings management similar to firms disclosure quality unlike prior literature we measure a number of board and audit committee related governance instruments three disclosure quality proxies i e investor relation magazine award forward looking disclosure and analyst forecast accuracy and the modified jones model to test the hypotheses of the study on a matched pair sample data of investor relation magazine award winning and non winning firms our findings in the ols and sensitivity analyses using heckman procedure and 2sls regressions consistently report a significant negative association between earnings management and disclosure quality for all proxies in restraining earnings management in contrast corporate governance variables are mostly insignificantly related to earnings management this provides an emerging trend of the outperformance of disclosure quality over internal governance mechanisms in lessening earnings management these findings warrant due attention of the policy makers investors corporate firms and other stakeholders in shaping a high quality disclosure and governance regime in corporate settings to mitigate managerial manipulations of earnings across the countries in the world

arbitrage short sales and financial innovation the authors describe a model of general equilibrium with incomplete markets in which firms can innovate by issuing arbitrary costly securities when short sales are prohibited firms behave competitively and equilibrium is efficient when short sales are allowed these classical properties may fail if unlimited short sales are allowed imperfect competition may persist even when the number of potential innovators is large if limited short sales are allowed perfect competition may obtain in the limit but equilibrium can be inefficient because of the presence of an externality the private benefits of innovation for firms differ from the social benefits copyright 1991 by the econometric society

options short sales and market completeness this paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales the significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling we also find significant effects on option prices related to the short interest in the underlying stock we then present evidence that options also increase information efficiency earlier work that is replicated and extended here has suggested that short sale constraints cause stock prices to underweight negative information options appear to reduce that effect

the business ethics of short selling and naked short selling the controversy over short selling has continued unabated from the introduction of modern equity trading in amsterdam in 1610 to the present day nevertheless the business ethics literature has not really addressed short selling short sellers not only profit from the misery of others they also create it through their selling activities however they also provide a socially useful service by making prices better reflect true values protecting other investors from purchasing overpriced securities short sellers can also help to provide liquidity in the markets recently there has been a hue and cry against so called naked short selling which involves not delivering the shares that have been sold this gives manipulators a tool for depressing stock prices and deprives purchasers of voting rights and potential stock lending revenue naked short selling creates ethical issues for short sellers buyers brokers market makers and regulators is it ethical to exploit a legal loophole that permits sellers to sell stock and delay delivering shares indefinitely

earnings announcements and competing information abstract we investigate whether competing information primarily analyst reports reduces the usefulness of earnings announcements inconsistent with the view that information in analyst reports substitutes for earnings announcements we find a positive relation between absolute abnormal returns to the two types of disclosures this positive relation also characterizes subsequent period analyst reports relative to current period earnings announcements we also find that aggregate absolute reactions to both types of disclosures increased over 1986 1995 as a whole these results provide little support for the view that the informativeness of earnings announcements is eroded by competing information in the form of analyst reports

corporate governance and conditional skewness in the world s stock markets we investigate why stock returns in emerging markets tend to be more positively skewed than those in developed markets we argue that differences in the quality of corporate governance matter to return skewness using return data from more than fourteen thousand individual stocks in 38 countries we find that positive skewness is most profound in stocks from markets that have poor corporate governance our results are robust to a variety of model specifications different measures of return asymmetries and alternative measures of corporate governance finally analogous results are also obtained from aggregate stock market returns

potential pilot problems treatment spillovers in financial regulatory experiments abstract the total effects of a regulatory change consist of direct effects and indirect effects spillovers but the standard difference in difference approach mostly ignores potential indirect effects during the 2007 full repeal of the uptick rule short sellers become much more aggressive across the board even in control stocks where the uptick rule is already suspended this finding is consistent with positive and significant indirect effects on control stocks likely driven by aggressive broad list based shorting in contract the indirect effect coefficients on shorting aggressiveness are negative for the 2005 partial uptick repeal possibly due to substitutions between control and treatment stocks

the shrinking merger arbitrage spread reasons and implications the merger arbitrage spread has declined by more than 400 bps since 2002 this decline which is both economically and statistically significant corresponds to the decline in aggregate returns of merger arbitrage hedge funds as well as increased inflows into merger arbitrage hedge funds part of the decline in the arbitrage spread may be explained by increased trading in the targets stocks following the merger announcement reduced transaction costs and changes in risk related to merger arbitrage these findings suggest that some of the decline is likely to be permanent therefore investors seeking to invest in merger arbitrage hedge funds should focus on returns since 2002

the framing of unconventional natural gas resources in the foreign energy policy discourse of the russian federation the advent of unconventional resources of natural gas has altered the order on global as well as continental gas markets with rising liquidity the position of established dominant suppliers is eroding we focus on the initial response of russia the leading supplier of natural gas to europe to the new situation building the research on unit level constructivism and discourse analysis we use frame analysis to reveal what image of unconventional resources was constructed in russian foreign energy policy discourse fepd in the period between 2009 and 2011 when the unconventional revolution did not yet have any sharp contours we conclude that in russian fepd the unconventionals are considered as a distinctive and inferior source of energy compared to conventional natural gas emphasis is put on their economic irrationality and environmental hazards the bottom line of the discourse is the idea that there is a choice between conventional and unconventional sources with this choice being framed as one between good and bad or right and wrong

self selection and the forecasting abilities of female equity analysts this paper investigates whether there are systematic differences between the forecasting style and abilities of female and male analysts and whether market participants recognize these differences my key conjecture is that only female analysts with superior forecasting abilities enter the profession due to a perception of discrimination in the analyst labor market consistent with this conjecture i find that female analysts issue bolder and more accurate forecasts and their accuracy is higher in market segments in which their concentration is lower further the stock market participants are aware of the male female skill

short selling margin trading and price efficiency evidence from the chinese market abstract china launched a pilot scheme in march 2010 to lift the ban on short selling and margin trading for stocks on a designated list we find that stocks experience negative returns when added to the list after the ban is lifted price efficiency increases while stock return volatility decreases panel data regressions reveal that intensified short selling activities are associated with improved price efficiency short sellers trade to eliminate overpricing by selling stocks with higher contemporaneous returns following a downward trend and their trades predict future returns in contrast we find intensified margin trading activities for stocks with lower contemporaneous returns and these trades have no return predictive power