bluuebunny/crossref_metadata_2025 huggingface dataset:
CONSISTENT ESTIMATION OF RESIDUAL VARIANCE IN REGULATORY EVENT STUDIES
Authors: Ingram Marcus A. , Ingram Virginia C.
Published: August 2014

This study presents new evidence on alternative methods used to test for abnormal returns in regulatory event studies where cross‐sectional correlation in residuals is significant. Results contradict earlier studies that find no advantages to using joint generalized least squares (JGLS) methods over ordinary least squares (OLS). We find that in an actual regulatory event study cross‐correlation is significant, and that failing to correct for this correlation results in substantially higher calculated F‐statistics. In Monte Carlo simulations we find that OLS test statistics are not well specified when residuals exhibit cross‐sectional correlation at levels that are reasonable to expect in daily return data, while JGLS test statistics are well specified. The study includes tests of the effective power of the OLS and JGLS statistics.
A NOTE ON THE VALUE LINE STOCK HIGHLIGHT EFFECT
Authors: Chandy P. R. , Reichenstein William
Published: August 2014

Each week Value Line highlights one or two timeliness rank 1 stocks. We find a significant 2.65 percent three‐day return around this event. However, this effect is temporary and largely reverses over the next several weeks. We also find that the market response to a highlighted stock is stronger when the stock has a lower price/earnings ratio, is smaller, and has fewer institutional owners. We cannot find evidence against the semistrong form of the efficient market hypothesis. Finally, we present a hypothesis examining whether a favorable Value Line report permanently or temporarily affects stock price.
TRADE SIZES AND THEORIES OF THE BID‐ASK SPREAD
Authors: Laux Paul A.
Published: August 2014

Relations between trade‐size characteristics and the bid‐ask spread are developed to distinguish among major theories of the spread. These trade‐size characteristics are determinants of the spread for NASDAQ/NMS stocks. They explain much of the cross‐sectional variation in the spread commonly associated with volume, volatility, and share price. Evidence shows that order‐processing costs are dominant relative to inventory effects for low‐price, small‐capitalization, and low‐volume stocks, but that the opposite is true for high‐price, large‐capitalization, and high‐volume stocks. Inventory effects are more important relative to asymmetric information costs when stock price or capitalization is lower.
TAX‐LOSS SELLING, INSTITUTIONAL INVESTORS, AND THE JANUARY EFFECT: A NOTE
Authors: Eakins Stan , Sewell Susan
Published: August 2014

In this note we test the hypothesis that trading by tax‐motivated individual investors is responsible for the January effect. We examine the ownership structure of a large sample of firms over a four‐year period and find that the small firms that usually exhibit high January returns have low institutional ownership. After controlling for firm size, we still find that institutional ownership is significantly related to January abnormal returns. These results suggest that one reason the January effect may concentrate in small firms is because these firms are held by tax‐motivated individual investors.
AN INVESTIGATION INTO THE CAUSALITY AMONG FIRMS' DIVIDEND, INVESTMENT, AND FINANCING DECISIONS
Authors: Mougoué Mbodja , Mukherjee Tarun K.
Published: August 2014

In this paper we posit that information asymmetries and the resultant signaling implications make a firm's investment decision dependent on its dividend and financing decisions. By applying the vector autoregressive modeling technique to 100 firms randomly selected from ten four‐digit SIC industries, we find evidence of interdependencies among the three decisions. The success of the model in predicting each of the three decision variables also suggests that these decisions should be analyzed in a simultaneous equation framework.
IS THE REAL INTEREST RATE REALLY UNSTABLE?
Authors: Choi Seungmook
Published: August 2014

If nominal interest rates have a unit root, but inflation and inflation forecast errors do not, ex‐ante real interest rates are argued to have a unit root and are therefore nonstationary. I show that empirical tests for nonstationarity of real interest rates using such a deductive method can be misleading when the stationary inflation forecast errors are large relative to the variation of nominal interest rates.
OVERREACTION AND REVERSE ANTICIPATION: TWO RELATED PUZZLES?
Authors: Liang Youguo , Mullineaux Donald J.
Published: August 2014

In this article we investigate stock price behavior before and after surprise events. We form four base portfolios and sixteen control portfolios, taking into consideration the event direction, the magnitude of event‐day surprises, the potentially confounding effects due to calendar regularities in stock returns, and the ex‐post outlier month of October 1987. Using capital market data from 1964 to 1989, we find a pre‐event stock price behavior pattern that we call the reverse anticipation puzzle. We also confirm the existence of the overreaction pattern. The pre‐ and post‐event stock price behavior patterns are found to be similar.
INVESTOR TAX‐TRADING OPPORTUNITIES AND DISCOUNTS ON CLOSED‐END MUTUAL FUNDS
Authors: Kim Chang‐Soo
Published: August 2014

Discounts on closed‐end mutual funds are a puzzle to financial economists, because arbitrage activities should eliminate discounts in a perfect capital market. In this paper I develop a model that explains discounts, using Merton's option pricing theorem. By holding shares of a closed‐end mutual fund, investors lose valuable tax‐trading opportunities associated with the constituent securities of the closed‐end mutual fund's portfolio. However, investors can take advantage of all tax‐trading opportunities by directly holding the closed‐end mutual fund's portfolio. I also show that both variances of individual securities and correlations among securities in the portfolio are important factors in determining the magnitude of discounts.
AN ANALYSIS OF THE WALL STREET JOURNAL'S COVERAGE OF CORPORATE NEWS AND THE RESEARCH DESIGN OF EVENT STUDIES
Authors: Yau Jot , Ferri Michael G. , Sugrue Timothy F.
Published: August 2014

The typical event study of corporate news restricts its sample of announcements to events reported in the Wall Street Journal (WSJ) and listed in the WSJ Index. In this paper we examine whether such samples are representative of the events omitted from the WSJ. Focusing on convertible calls in the 1980s, we analyze possible differences between a sample based only on the WSJ Index and a larger but similarly constructed sample of calls reported in the Dow Jones News Service but not in the WSJ Index. Numerous parametric and nonparametric tests reveal no significant cross‐sample divergences in key attributes of the calling firms and called bonds, or in the distributions of risk‐adjusted returns around announcements. This evidence suggests that WSJ‐based samples for other corporate news items can be representative of cases not covered by the WSJ. Further, the evidence indicates that the results of event studies using WSJ‐based samples may support inferences about events not reported in the newspaper.
A RE‐EXAMINATION OF THE EFFECT OF 12B–1 PLANS ON MUTUAL FUND EXPENSE RATIOS
Authors: McLeod Robert W. , Malhotra D. K.
Published: August 2014

In this paper we re‐examine the effect of 12b–1 payments on mutual fund expense ratios by analyzing data from 1988 through 1991. The findings are consistent with previous studies that find charges are a dead‐weight cost borne by shareholders. However, we show that this cost increases over time.
CAUSALITY TESTS OF THE REAL STOCK RETURN‐REAL ACTIVITY HYPOTHESIS
Authors: Gallinger George W.
Published: August 2014

Recent studies of the relation between real stock returns and real activity do not examine cause and effect. In this study I use Granger causality tests to examine such a relation. Results support three possibilities. First, changes in stock returns are synonymous with changes in wealth, which influence future demand for consumption and investment goods. Second, an increase in current real activity increases demands on existing capital stock, which ultimately induces future increased capital investment. The stock market anticipates these events. Third, stock returns Granger‐cause a leading economic indicator, the interest rate spread between commercial paper and Treasury bills.
THE DIFFERENTIAL EFFECTS OF DEREGULATION ON SAVINGS AND LOAN ASSOCIATIONS AND BANKS
Authors: Graddy Duane B. , Kyle Reuben , Strickland Thomas H.
Published: August 2014

The passage of the Garn‐St Germain Depository Institutions Act of 1982 was a legislative response to the plight of the thrift industry. The Act broadened the asset/liability powers of thrifts and granted regulators emergency authority to aid failing institutions. In this paper we analyze the effect of the Act on the market returns of large S&Ls and banks using a two‐factor estimating procedure. Single‐factor models of depository institutions' returns produce biased estimates and confound the Act's interpretation. Explicit treatment of the event/risk interaction is necessary to avoid ambiguities in the interpretation of the Act's effect on the returns of depository institutions. It is difficult to use capital market data to pinpoint the effect of information flows on complex regulatory changes.
COMPENSATION CONTRACTS OF CHIEF EXECUTIVE OFFICERS: DETERMINANTS OF PAY‐PERFORMANCE SENSITIVITY
Authors: Lippert Robert L. , Moore William T.
Published: August 2014

Compensation contracts of chief executive officers of large firms typically provide for a low linkage between compensation and stock performance. We test predictions of various theoretical models of managerial behavior using pay‐performance sensitivity measures. We find that even though the sensitivity measures are low on average, they vary cross‐sectionally, in a manner broadly consistent with predictions from the literature on efficient contracting.
EXCESS RETURNS OF INDEX REPLACEMENT STOCKS: EVIDENCE OF LIQUIDITY AND SUBSTITUTABILITY
Authors: Edmister Robert O. , Graham A. Steven , Pirie Wendy L.
Published: August 2014

Excess returns of S&P index replacement stocks are attributed to price pressures and imperfect substitutes in previous research. However, parameter estimates are biased by the use of pre‐announcement returns; replacements are characterized by rising stock prices. Using a future estimation period to avoid this bias, we find excess returns do not reverse. Further, we find no relation between excess returns and the amount of stock closely held or the size of index funds. The evidence supports efficient market assumptions: the stock market is liquid and stocks are close substitutes.
RISK‐RETURN SEASONALITY AND MACROECONOMIC VARIABLES
Authors: Gangopadhyay Partha
Published: August 2014

In this paper I examine seasonality in the pricing of the Chen, Roll, and Ross (1986) macroeconomic variables. January seasonality is observed in the risk premia from 1932 to 1990. Examination of the 1932–57 period indicates nonstationary seasonals in the risk premia. The results cannot be attributed to the previously documented firm size effect. Residual risk is priced, and a strong January seasonality is observed in the residual risk premia. The market portfolio is not priced in the presence of the other variables. Trading volume is not priced in the individual months, but appears significant when all months are considered together.
STOCK PRICE BEHAVIOR OF PURE CAPITAL STRUCTURE ISSUANCE AND CANCELLATION ANNOUNCEMENTS
Authors: Hull Robert M.
Published: August 2014

I examine planned senior‐for‐junior and junior‐for‐senior transactions that are subsequently canceled. I find statistically significant stock returns for issuance and cancellation announcements that are positively related to the direction of the leverage change. The magnitude and direction of the returns differ from previous research. Discrepancies are attributed to different issuance purposes.
THE INDIVIDUAL INVESTOR
Authors: Brennan M. J.
Published: August 2014

In this paper I address several phenomena that arise from the limited information possessed by individual investors. This limitation focuses attention on the channels by which investors receive information about securities. I find this perspective to have implications for the marketing of financial products, the dissemination of information by brokers, the commissions of brokerages, the role of investment analysis in the pricing of securities, the pricing of the services provided by financial intermediaries, and the equilibrium of pricing of capital assets.
EQUITY VALUATION EFFECTS OF FORCED WARRANT EXERCISE
Authors: Fields L. Paige , Moore William T.
Published: August 2014

We examine stock price reactions to announced calls of in‐the‐money warrants and find a significant average devaluation in excess of 4 percent, consistent with the recent literature. We test theoretical predictions based on asymmetric information, agency costs, and corporate control in a cross‐sectional model of announcement‐period returns and find support for voting rights and ownership dilution as an explanation. We find evidence of some price recovery after the call announcement; however, further evidence of a liquidity‐based explanation is mixed.
LONG‐TERM AND SHORT‐TERM CAUSAL RELATIONS BETWEEN DIVIDENDS AND STOCK PRICES: A TEST OF LINTNER'S DIVIDEND MODEL AND THE PRESENT VALUE MODEL OF STOCK PRICES
Authors: Sung Hyun Mo , Urrutia Jorge L.
Published: August 2014

In this paper we test the joint implications for the intertemporal behavior of stock prices and dividends expressed in the Lintner dividend model and the present value model of stock prices. We use macro data corresponding to quarterly S&P 500 index prices and dividends for January 1930–December 1990. The methodology used is the error correction model (ECM), which allows testing for long‐term and short‐term relations between the two variables. Results from the ECM indicate that a long‐term equilibrium relation exists between dividends and stock prices, and that an error correction mechanism is at work when a disequilibrium exits between the two variables. Stock prices and dividends also influence each other in the short term. Finally, the results show that dividends and stock prices exhibit a contemporaneous causal relation.
ANATOMY OF SATELLITE TRADING IN THE NATIONAL MARKET SYSTEM FOR NYSE‐LISTED STOCKS
Authors: Hamilton James L.
Published: August 2014

A crucial element in the National Market System is the trading of NYSE‐listed stocks in several satellite marketplaces. An analytical description of this off‐board trading shows that the relative extent of trading in satellites varies considerably among stocks, among marketplaces, among trades of different sizes, and over time. A multivariate econometric model shows that cross‐sectional differences among stocks in off‐board trading correlates with certain descriptive characteristics of those stocks, but these differences mostly are endogenous with the competition between the satellites and the NYSE for trading volume.
THE ROLE OF INFORMATION AND THE TIME BETWEEN TRADES: AN EMPIRICAL INVESTIGATION
Authors: Fletcher Roy A.
Published: August 2014

Previous studies propose that the time between trades is a measure of the existence of information and a manifestation of the demand and supply of liquidity. I find evidence that the time between trades is a measure of the existence of information. However, the evidence does not imply that liquidity constraints are an unimportant determinant of price changes. Further investigation indicates that price changes are partially related to liquidity constraints, when the liquidity constraint is measured by the availability of multiple counterparties. Finally, I find some evidence that information about trades, not necessarily related to information about the underlying asset, also affects price changes.
A MULTIFACTOR MODEL OF THE QUALITY OPTION IN TREASURY FUTURES CONTRACTS
Authors: Ritchken Peter , Sankarasubramanian L.
Published: August 2014

The values of quality options in Treasury futures contracts are set relative to the prices of all coupon bonds in their respective deliverable sets. As a result, any model used to value the quality option should set its price relative to the set of observed bond prices. This requirement rules out the use of most simple equilibrium models that represent all bond prices in terms of a finite number of state variables. We use the two‐factor Heath‐Jarrow‐Morton model, which permits claims to be priced relative to observable bond prices, to investigate the potential value of the quality option in Treasury bond and note futures. We show that the quality option has significantly more value in a two‐factor interest rate economy than in a single‐factor economy, and that ignoring it could lead to significant mispricing.
TESTS OF RANDOM WALK AND MARKET EFFICIENCY FOR LATIN AMERICAN EMERGING EQUITY MARKETS
Authors: Urrutia Jorge L.
Published: August 2014

Variance‐ratio methodology is used to test the hypothesis that Latin American emerging equity market prices follow a random walk. The data are monthly index prices in local currency from December 1975 to March 1991 for Argentina, Brazil, Chile, and Mexico. The variance‐ratio tests reject the random walk hypothesis. However, runs tests indicate that Latin American equity markets are weak‐form efficient. These empirical findings suggest that domestic investors might not be able to develop trading strategies that would allow them to earn excess returns.
LONG‐RUN RELATIONS IN EXCHANGE MARKETS: A TEST OF COVERED INTEREST PARITY
Authors: Abeysekera Sarath P. , Turtle Harry J.
Published: August 2014

We examine long‐run relations implied by covered interest parity (CIP) in possibly cointegrated and nonstationary data series. Empirical evidence suggests that, ignoring market imperfections, CIP failed over January 6, 1984, through December 6, 1991, using weekly data from four major currencies relative to the U.S. dollar. The multivariate maximum likelihood vector autoregressive (VAR) methodology does not require data differencing and hence retains valuable information lost in previous research examining international market flows. Rejections are robust to both subperiod analysis and alternative interest rate series. Although test rejections are highly statistically significant, attainable economic profits appear small. Practitioners will find economic profits inconsequential relative to reasonable bounds on market frictions such as transaction costs. Nonetheless, the use of CIP to determine forward rates identically from interest rates and spot rates in academic studies is called into question.
VOLATILITY AND LIQUIDITY AT NYSE OPENING CALLS: A CLOSER LOOK
Authors: Lee Jie‐Haun , Lin Ji‐Chai
Published: August 2014

The literature suggests that the bid‐ask spread is responsible, at least in part, for greater price volatility and more negative autocorrelation at the open than at the close. In this study, we find that these phenomena are not related to the bid‐ask spread, but are related instead to pricing errors by specialists or limit‐order traders around the open. We use George, Kaul, and Nimalendran's (1991) model, which is less biased than Roll's (1984) model, to estimate the implied spread. The results show that, on average, the implied spread earned by liquidity suppliers is lower at the open than at the close. These results refute the contention that specialists exploit their monopoly position and earn a higher profit at the opening call. The evidence is consistent with the hypothesis that specialists set a lower cost of immediacy to encourage trading and the release of more information at the opening call. This could reduce information asymmetry and make subsequent trades in the continuous market more profitable.
PERFORMANCE OF STOLL's SPREAD COMPONENT ESTIMATOR: EVIDENCE FROM SIMULATIONS, TIME‐SERIES, AND CROSS‐SECTIONAL DATA
Authors: Brooks Raymond , Masson Jean
Published: August 2014

Stoll (1989) introduces an intuitive procedure to estimate the basic components of the bid‐ask spread (order‐processing cost, inventory cost, and adverse‐selection cost). He also provides reasonable estimates of the magnitudes of the order‐processing, inventory, and adverse‐selection costs of making markets for a large cross‐section of NASDAQ/NMS stocks. Empirical applications of Stoll's model produce widely different estimates of the bid‐ask spread components. We derive the sampling properties of Stoll's estimator of the realized bid‐ask spread, i.e., the sum of the order‐processing and inventory components. We test Stoll's model in simulations, using the ideal conditions implied by the model. We conclude that noise in serial covariance estimates causes estimates of the realized spread to be severely biased and highly unreliable in short time‐series and small cross‐sectional samples.
AN ANALYSIS OF THE DECISION TO OPT OUT OF PENNSYLVANIA SENATE BILL 1310
Authors: Janjigian Vahan , Trahan Emery A.
Published: August 2014

Pennsylvania Senate Bill 1310 protects firms from unsolicited takeover bids. It was signed into law on April 27, 1990, and gave firms ninety days to opt out of all or some of its provisions. During the twenty months before the Bill's introduction, firms choosing protection outperformed firms opting out of at least one provision. Institutions owned a greater percentage of shares of firms opting out of select provisions of the Bill, indicating that shareholder pressure influenced the opt‐out decision. No significant differences are found in share price performance, CEO turnover, or restructurings during the twenty months following the last opt‐out date. But firms opting out exhibit superior accounting performance two years after the Bill's enactment.
THE COSTS OF RAISING CAPITAL
Authors: Lee Inmoo , Lochhead Scott , Ritter Jay , Zhao Quanshui
Published: August 2014

We report the average costs of raising external debt and equity capital for U.S. corporations from 1990 to 1994. For initial public offerings (IPOs) of equity, the direct costs average 11.0 percent of the proceeds. For seasoned equity offerings (SEOs), the direct costs average 7.1 percent. For convertible bonds, the direct costs average 3.8 percent. For straight debt issues, the direct costs average 2.2 percent, although they are strongly related to the credit rating of the issue. All classes of securities exhibit economies of scale, although they are less pronounced for straight debt issues. IPOs also incur a substantial indirect cost due to short‐run underpricing. Most large equity offers include an international tranche, although debt issues do not.
TAKEOVER RIGHTS AND THE VALUE OF RESTRICTED SHARES
Authors: Maynes Elizabeth
Published: August 2014

The premium paid for superior voting shares relative to restricted shares in dual‐class equity firms is well documented but not fully explained. In this paper, evidence that the premium reflects the expectation of higher cash flows in takeovers for superior shares is found by examining regulatory actions that changed the right of restricted shares to participate in takeovers. The extension of takeover rights to restricted shares resulted in a significant decline in the premium for superior shares, and the retraction of takeover rights had the reverse effect. This supports the hypothesis that the market expected the restricted shares to be treated less favorably in takeovers.
BANK REGULATIONS, CAPITAL STRUCTURE, AND RISK
Authors: Mazumdar Sumon C.
Published: August 2014

The joint influence of the Federal Reserve's (Fed) discount window credit and reserve requirements and FDIC's deposit insurance on a bank's optimal capital structure and asset risk choices is analyzed. The specific seniority of such regulatory claims, and potentially strong negative correlation between bank asset classes, significantly alters our traditional view of such regulatory influences on bank behavior. I find that the discount window's presence does not always prompt bank risk taking and leverage, but it does partially offset such incentives under certain conditions. In addition to its cost, a reserve requirement provides the bank with an indirect subsidy that may encourage deposit funding. Thus, regulatory reforms, such as the FDIC Improvement Act of 1991, which curtail banks' access to the discount window, may not always be appropriate to resolve a bank's incentive for moral hazard behavior. The Fed's presence needs to be more comprehensively examined to design effective regulatory policy.
THE EFFECT OF THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ON BANK STOCKS
Authors: Liang Youguo , Mohanty Sunil , Song Frank
Published: August 2014

In this study we use a multivariate regression model to investigate the effect of the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 on returns to the shareholders of bank‐holding companies. The empirical results suggest that the shareholders of well‐capitalized banks benefited from the enactment of the FDICIA, while those of undercapitalized banks experienced significant losses during the announcement period. However, the shareholders of adequately capitalized banks did not gain or lose significantly from the enactment of the FDICIA. The FDICIA also affected stock returns of large and small bank‐holding companies similarly.
THE DEALERS' PRICE/SIZE QUOTE AND MARKET LIQUIDITY
Authors: Mann Steven V. , Ramanlal Pradipkumar
Published: August 2014

We model trading in a competitive securities market where informed traders and liquidity traders transact with dealers. The dealers' entire published quote is modeled: bid‐ask prices and the number of shares the dealer is willing to buy/sell at these prices (i.e., size quotes). We argue that size quotes are a more informative indicator of market liquidity than the bid‐ask spread's adverse‐selection component. Moreover, the size quotes reveal several market characteristics that cannot be inferred from the bid‐ask spread's adverse‐selection component alone. The model generates a number of empirically testable predictions that clarify certain key elements of market liquidity.
JANUARY RETURN SEASONALITY IN REAL ESTATE INVESTMENT TRUSTS: INFORMATION VS. TAX‐LOSS SELLING EFFECTS
Authors: Friday H. Swint , Peterson David R.
Published: August 2014

We examine the January return seasonality of real estate investment trust (REIT) common stock and underlying assets. Both stock returns and the National Assocation of Realtors median home price index exhibit January seaonals. However, the median home price index explains little of the seasonal stock returns, and a significant January effect in stock returns remains for small REITs. Thus, information effects are not the likely cause of the January effect in REITs. Further analysis indicates that tax‐loss selling is the more likely cause of the January effect.
THE ECONOMIC EXPOSURE OF U.S. MULTINATIONAL FIRMS
Authors: Chow Edward H. , Lee Wayne Y. , Solt Michael E.
Published: August 2014

In this paper we find that the exchange rate exposure of individual firms increases with the return horizon. Also, the cross‐sectional differences in the magnitude of exposure of individual firms are significantly related to firm size but not to the relative portion of foreign sales to total sales. The empirical evidence is consistent with the hypothesis that hedging activities exhibit economies of scale, and, consequently, the magnitude of economic exposure is less for larger firms than for smaller firms.
THE CORPORATE SELL‐OFF DECISION OF DIVERSIFIED FIRMS
Authors: Steiner Thomas Lorenz
Published: August 2014

In this paper I explore the determinants of the corporate sell‐off decision of diversified firms during the 1980s. The literature on sell‐offs suggests performance, debt, number of operating segments, and level of ownership by officers and directors may play a role in the decision by firms to sell off assets. Empirical results show the probability of a sell‐off is significantly negatively related to firm performance, significantly positively related to debt, significantly positively related to the number of business segments, and significantly negatively related to the level of officer and director ownership.
VOLATILITY TRANSMISSION AND PATTERNS IN BUND FUTURES
Authors: Franses Philip Hans , van leperen Reinoud , Kofman Paul , Martens Martin , Menkveld Bert
Published: August 2014

We analyze intraday volatility behavior for the Bund futures contract that is traded simultaneously at two competing exchanges. We investigate the transmission of volatility between the exchanges. We find that the lead/lag relations are restricted to a few minutes and do not reveal a dominant leader. We then analyze patterns in intraday volatility. We find that volatility behaves similarly at both exchanges; i.e., it decreases from the opening until early afternoon and increases thereafter. The same pattern is detected in explanatory variables such as traded volume and time‐between‐trades.
TIME‐VARYING TERM PREMIA AND THE BEHAVIOR OF FORWARD INTEREST RATE PREDICTION ERRORS
Authors: Iyer Sridhar
Published: August 2014

In this paper I examine the time‐varying expected term premium argument for the failure of the expectations hypothesis of the term structure of U.S. interest rates. Using an unobserved components model to estimate expected term premia from March 1951 to January 1991, I find considerable variation in estimated premia and significant persistence in their volatility over time.
THE EFFECT OF SELF‐TENDER OFFERS ON EARNINGS EXPECTATIONS
Authors: Best Ronald W. , Best Roger J. , Hodges Charles W.
Published: August 2014

We examine financial analysts' earnings revisions after self‐tender offers. Consistent with the assertions of earlier studies that self‐tender offers signal future performance, financial analysts significantly increase their forecasts of earnings for firms that announce self‐tender offers. However, the revisions differ based on the method chosen to repurchase shares. For Dutch auction offers, analysts significantly revise their estimates of short‐term earnings only. For fixed‐price tender offers, analysts increase both short‐term and long‐term earnings estimates. Also, long‐term earnings revisions are significantly related to announcement‐period abnormal returns for fixed‐price tender offers, which suggests that fixed‐price self‐tender offers convey more positive information about future earnings than do Dutch auction offers.
CHANGES IN TRADING ACTIVITY FOLLOWING STOCK SPLITS AND THEIR EFFECT ON VOLATILITY AND THE ADVERSE‐INFORMATION COMPONENT OF THE BID‐ASK SPREAD
Authors: Desai Anand S. , Nimalendran M. , Venkataraman S.
Published: August 2014

We examine changes in trading activity around stock splits and their effect on volatility and the adverse‐information component of the bid‐ask spread. Even after controlling for microstructure biases, we find a significant increase in volatility after the split. Changes in total volatility and in its permanent component are positively related to changes in the number of trades. This suggests that both informed and noise traders contribute to changes in trading activity. Further, while the adverse‐information component of the spread increases unconditionally after the split, the change is negatively related to the change in trading activity. The results suggest that a crucial determinant of liquidity changes after a stock split is the success of the split in attracting new trades in the security.
THE SURVIVAL ZONE FOR A BOND WITH BOTH CALL AND PUT OPTIONS EMBEDDED
Authors: Martzoukos Spiros H. , Barnhill Theodore M.
Published: August 2014

We present a numerical method to price bonds that have multiple embedded options with an emphasis on the case with both long call and short put options. The valuation framework is a one‐factor model for the term structure of interest rates, where the instantaneous interest rate is allowed to follow a fairly general stochastic process. The equilibrium interest rates that define the free boundaries for the embedded call and put options are given. We demonstrate the survival zone within which a bond with both long call and short put options remains afloat. We show that even moderate levels of transaction costs can have a significant effect on exercise of options.
RANDOM WALK TESTS FOR LATIN AMERICAN EQUITY INDEXES AND INDIVIDUAL FIRMS
Authors: Grieb Terrance , Reyes Mario G.
Published: August 2014

In this study we re‐examine the presence of random walk in stock prices in Brazil and Mexico. We employ variance ratio tests on weekly stock returns for indexes as well as individual firms. The results reveal mean aversion in Mexico at both the index level and the firm level. In contrast, the Brazil indexes show a greater tendency toward random walk; however, the results for the individual firms suggest mean reversion. The results cannot be attributed to a firm size effect. Evidence is presented in favor of a greater degree of nonsynchronous trading for Brazilian securities than for Mexican securities.
AN EMPIRICAL EXAMINATION OF FINANCIAL LIBERALIZATION AND THE EFFICIENCY OF EMERGING MARKET STOCK PRICES
Authors: Kawakatsu Hiroyuki , Morey Matthew R.
Published: August 2014

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from sixteen countries and three composite portfolios, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient before the actual liberalization.
THE EFFECT OF INSTITUTIONAL INTEREST ON THE INFORMATION CONTENT OF DIVIDEND‐CHANGE ANNOUNCEMENTS
Authors: Alangar Sadhana , Bathala Chenchuramaiah T. , Rao Ramesh P.
Published: August 2014

We test the hypothesis that the information content of dividend‐change announcements, as reflected in stock prices, is directly related to the degree of pre‐announcement information asymmetry in the stock. The dividend‐change announcements include initiations, large increases, large decreases, and omissions. Information asymmetry is proxied by the proportion of stock held by institutions. Consistent with the hypothesis, we document a significantly positive relation between the absolute values of the announcement‐period excess returns and the degree of pre‐announcement information asymmetry in the stock. This finding appears to hold for all types of dividend changes except dividend omissions.
RECENT GROWTH IN NASDAQ TRADING VOLUME AND ITS RELATION TO MARKET VOLATILITY
Authors: Freund Steven , Webb Gwendolyn P.
Published: August 2014

We document a significant increase in Nasdaq trading volume relative to New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) trading volumes. Although recent increases in the number of shares traded are reported in the financial press, we also find it present in the percentage of dollar values traded. We then examine correlations between trading volume and several measures of market volatility. Nasdaq volume appears to be more closely correlated with residual variance, while NYSE and AMEX volumes are more closely correlated with overall market variance. We conclude that the type and quantity of information driving trading are different on Nasdaq than on the two exchanges, and that the relative growth in Nasdaq volume cannot be attributed solely to differences in the methods of counting volume in the two market environments.
UNDERWRITING SPREADS AND REPUTATIONAL CAPITAL: AN ANALYSIS OF NEW CORPORATE SECURITIES
Authors: Carow Kenneth A.
Published: August 2014

When entering a new security market, investment banks must establish their reputation. This is done through direct experience in the security market or through reputational capital established in existing security markets. I examine the effects of underwriters' market reputation in publicly underwritten offerings in forty‐three financial innovations and find more significant entry barriers for less prestigious underwriters. An analysis of underwriting spreads reveals first‐issue pricing advantages due to reputational capital. Unlike the more prestigious underwriters, the less prestigious underwriters reduce spreads upon first entry into each new security market to overcome their lack of market reputation.
LIQUIDITY AND MATURITY EFFECTS AROUND NEWS RELEASES
Authors: Christie‐David Rohan , Chaudhry Mukesh
Published: August 2014

We study the effects of liquidity and term‐to‐maturity following macroeconomic news announcements. To do this we select five instruments that differ in liquidity, or term‐to‐maturity, or both, and examine their response to the release of macroeconomic news. The results from this study suggest that variance on announcement days is higher in more liquid, longer term‐to‐maturity instruments. When instruments differ in both term‐to‐maturity and liquidity, term‐to‐maturity effects dominate. Tests for persistence in higher volatility in the five instruments following news releases show that most of the effects of the announcements seem to be well absorbed within fifteen minutes of the announcements. However, the evidence also suggests that the effects persist for longer periods in instruments that are more liquid. Term‐to‐maturity appears to have little or no effect in this instance.
ON THE WEALTH EFFECTS OF THE SUPERVISORY GOODWILL CONTROVERSY
Authors: Bierman Leonard , Fraser Donald R. , Zardkoohi Asghar
Published: August 2014

We provide evidence on the potential wealth effects of the 1996 U.S. Supreme Court decision that the U.S. government had violated contractual obligations when, in 1989, it passed legislation prohibiting savings and loan associations from counting “supervisory goodwill” as capital. The Supreme Court decision produced large wealth gains for the savings and loan plaintiffs, as did prior court decisions in favor of these savings and loans. However, little evidence exists to suggest negative market responses to important events surrounding the 1989 legislation.
EXCHANGE LISTINGS AND DELISTINGS: THE ROLE OF INSIDER INFORMATION AND INSIDER TRADING
Authors: Lamba Asjeet S. , Khan Walayet A.
Published: August 2014

We examine whether insiders systematically exploit their private information before exchange listings and delistings they are likely to know about before outsiders/investors. Analyzing a comprehensive sample of over‐the‐counter (OTC) firms, which listed on the New York Stock Exchange (NYSE) or American Stock Exchange (AMEX) during 1977–93, we find evidence that insiders act on their private information of an impending exchange listing by purchasing or postponing the sale of stock on private account. For firms delisting from the NYSE or AMEX, we find that insiders of these firms sell stock on private account before delisting. Overall, the evidence indicates that insiders act on their private information before exchange listings and delistings.
SHAREHOLDER‐MANAGEMENT CONFLICT AND EVENT RISK COVENANTS
Authors: Roth Greg , McDonald Cynthia G.
Published: August 2014

Event risk covenants (ERCs), such as poison puts, can protect bondholders from losses related to highly leveraged transactions. Previous observers argue that managers could use ERCs primarily to benefit shareholders or to entrench, and the evidence on the shareholder wealth effects of ERCs is conflicting. Using data not previously exploited and an innovative method of isolating the wealth effects of ERCs, we find that ERCs decrease shareholder wealth. Additional evidence suggests that firms with greater shareholder‐management conflict are more likely to use ERCs. Overall, the evidence from this study supports the entrenchment view of ERCs.
EVIDENCE OF MANAGERIAL TIMING: THE CASE OF EXCHANGE LISTINGS
Authors: Webb Gwendolyn P.
Published: August 2014

Before an exchange listing, stock performance is exceptionally high. Earlier research reports that post‐listing performance is poor. I document that the post‐listing performance of most firms that list on either the American Stock Exchange or the New York Stock Exchange differs little from that of similar stocks that do not list. However, listing stocks that experience the highest pre‐listing performance underperform their control stocks after listing. This finding supports the hypothesis that managers can time exchange listings around a peak in stock performance.
ARE THE STRUCTURAL CHANGES IN MUTUAL FUNDS INVESTING DRIVING THE U.S. STOCK MARKET TO ITS CURRENT LEVELS?
Authors: Mosebach Michael , Najand Mohammad
Published: August 2014

We examine the long‐run equilibrium relation between the net flow of funds into equity mutual funds and the S&P 500 index. Applying the Engle and Granger error correction methodology followed by a state space procedure, we find that the levels of the stock market are influenced by the net flow of funds into equity mutual funds. Our findings indicate that the U.S. equity market appears to be rationally adjusting to a structural change in the behavior of the U.S. investing public.
TIME‐VARYING VOLATILITY IN CANADIAN AND U.S. STOCK INDEX AND INDEX FUTURES MARKETS: A MULTIVARIATE ANALYSIS
Authors: Racine M. D. , Ackert Lucy F.
Published: August 2014

We use a multivariate generalized autoregressive heteroskedasticity model (M‐GARCH) to examine three stock indexes and their associated futures prices: the New York Stock Exchange Composite, S&P 500, and Toronto 35. The North American context is significant because markets in Canada and the United States share similar structures and regulatory environments. Our model allows examination of dependence in volatility as it captures time variation in volatility and cross‐market influences. Estimated time variation in volatility is significant, and the volatilities are highly positively correlated. Yet, we find that the correlation in North American index and futures markets has declined over time.
THE INFORMATION CONTENT OF ORDERS ON THE SAUDI STOCK MARKET
Authors: Al‐Suhaibani Mohammad , Kryzanowski Lawrence
Published: August 2014

Using order data for the Saudi Stock Market (SSM), we employ a new specification of an existing vector autoregressive (VAR) model to assess the information content of a newly submitted order. As predicted by the asymmetric information models, we find that larger and more aggressive orders are more informative. Private information is more important for infrequently traded stocks. Compared with previous findings, our findings imply the presence of much asymmetric information on the SSM. The correlation between a relative measure of informativeness and the spread provides further support for the previous empirical observation that these two variables measure different things and should not be used interchangeably.
BANK LOAN SALES: A NEW LOOK AT THE MOTIVATIONS FOR SECONDARY MARKET ACTIVITY
Authors: Demsetz Rebecca S.
Published: August 2014

Bank lending traditionally involves the extension of credit that is held by the originating bank until maturity. Loan sales allow banks to deviate from this pattern by transferring loans in part or in their entirety from their own books to those of another institution. I use a new methodology to test the validity of two hypotheses regarding banks' motivations for selling and buying loans: (1) the comparative advantage hypothesis, that banks with a comparative advantage in originating loans sell and those with a comparative advantage in funding loans buy; and (2) the diversification hypothesis, that banks lacking the ability to diversify internally use loan sales and purchases to achieve diversification. I also address the possibility that information asymmetries may increase the cost of participating in secondary markets. Particular attention is paid to the importance of affiliate relationships in overcoming informational barriers to participation. The empirical evidence presented here helps clarify the benefits of an active secondary loan market and generates predictions regarding the future of that market in a world of rapid consolidation and disappearing barriers to geographical expansion.
ON THE SHAREHOLDER WEALTH EFFECTS OF DEPOSIT INSURANCE PREMIUM REVISIONS ON LARGE, PUBLICLY TRADED COMMERCIAL BANKS
Authors: Biswas Rita , Fraser Donald R. , Hebb Gregory
Published: August 2014

Evidence is provided from changes in deposit insurance premiums in the early 1990s on the validity of the premium absorption hypothesis and the premium shifting hypothesis. Analysis of abnormal market returns associated with deposit insurance events using a market‐model event‐study methodology suggests that reductions in deposit insurance premiums are associated with increases in the market value of banking organizations; conversely, increases in deposit insurance premiums are associated with decreases in market wealth. The largest banks in the sample and banks with low equity capital (and low risk‐based capital ratios) appear to be most affected. These results are generally consistent with the premium absorption hypothesis but inconsistent with the premium shifting hypothesis.
PORTFOLIO FORMATION, MEASUREMENT ERRORS, AND BETA SHIFTS: A RANDOM SAMPLING APPROACH
Authors: Liang Bing
Published: August 2014

This article demonstrates that the portfolio approach could suffer a serious problem when the sorting variables contain not only true values but also measurement errors. The grouped measurement errors will be embedded into the data used to test financial models and further bias the testing results. To correct for this measurement‐error problem, I develop a random sampling approach to form portfolios. Results from this new methodology are unbiased and robust. By applying this methodology to investigate beta shifts, I show that the previous results about beta shifts are driven by measurement errors. The actual beta shift pattern is more complicated than that predicted by previous studies. The risk shift hypothesis is unlikely to explain the mean‐reversion puzzle for stock returns.

JEL classification: Gil, C43.
FURTHER EXAMINATION OF PRICE DISCOVERY ON THE NYSE AND REGIONAL EXCHANGES
Authors: Tse Yiuman
Published: August 2014

I re‐examine price discovery on the New York Stock Exchange (NYSE) and regional exchanges. I employ three common‐trend cointegration models to analyze the equilibrium dynamics between the NYSE and regional exchanges for the thirty Dow stocks. The overall results show that whether the regional exchanges free‐ride on the NYSE in obtaining equilibrium prices depends on whether trade prices or quotes are examined. The regional exchanges play a significant (though less important) role in the price‐discovery process for trade prices. However, the contributions of regional exchanges in price discovery of quotes are negligible. I explain the inconsistency between the results using quotes and those using trades. I also highlight the problems of using either quotes or trades in examining this free‐riding hypothesis and suggest future research on the different informativeness of trades on the NYSE and regional exchanges.

JEL classification: G20, C32.
SOFTWARE REVIEW
Authors: Ramanlal Pradipkumar
Published: August 2014

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