Insiders’ incentives for asymmetric disclosure and firm-specific information flows

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.     

Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio

This study proposes a new price impact ratio as an alternative to the widely used Amihud’s (2002) Return-to-Volume ratio. We demonstrate that the new price impact ratio, which is deemed Return-to-Turnover ratio, has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991–2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of a size bias. More importantly, it encapsulates the stocks’ cross-sectional variability in trading frequency, a relatively neglected but possibly important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock returns by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation.     

The risk in hedge fund strategies: Theory and evidence from long/short equity hedge funds

Theory suggests that long/short equity hedge funds' returns come from directional as well as spread bets on the stock market. Empirical analysis finds persistent net exposures to the spread between small vs large cap stocks in addition to the overall market. Together, these factors account for more than 80% of return variation. Additional factors are price momentum and market activity. Combining two major branches of hedge fund research, our model is the first that explicitly incorporates the effect of funding (stock loan) on alpha. Using a comprehensive dataset compiled from three major database sources, we find that among the three thousand plus hedge funds with similar style classification, less than 20% of long/short equity hedge funds delivered significant, persistent, stable positive non-factor related returns. Consistent with the predictions of the Berk and Green (2004) model we find alpha producing funds decays to “beta-only” over time. However, we do not find evidence of a negative effect of fund size on managers' ability to deliver alpha. Finally, we show that non-factor related returns, or alpha, are positively correlated to market activity and negatively correlated to aggregate short interest. In contrast, equity mutual funds and long-bias equity hedge funds have no significant, persistent, non-factor related return. Expressed differently, L/S equity hedge funds, as the name suggests, do benefit from shorting. Besides differences in risk taking behavior, this is a key feature distinguishing L/S funds from long-bias funds.     

Agency Costs and the Short‐Run Stock Price Response to Capital Expenditures

We estimate the short‐run stock price response to unanticipated capital expenditures. We use association study methodology to avoid the self‐selection bias in event studies and to facilitate construction of a large sample of firm‐years likely to exhibit agency problems. We find that the average price response to routine capital expenditures is negative, and that commonly used agency cost measures explain fully the negative response. Subsample results support the conclusion that the market is skeptical of cash flow financed spending by low‐q firms and even capital spending by high‐q firms when the firm is large and q is only marginally high.     

The influence of governance on investment: Evidence from a hazard model

Does corporate governance affect the timing of large investment projects? Hazard model estimates suggest strong shareholder governance may deter managers from pursuing large investments. Controlling for investment opportunities, firms with good governance experience longer spells between large investments. However, in the presence of financial constraints or strong CEO incentives (high delta (δ)), we find no such timing differences. Finally, these higher investment hazard firms exhibit significantly negative long-run operating and stock performance. Overall, our findings are consistent with the notion that poor governance associates with overinvestment.     

Stock market trading activity and returns around milestones

We study the relation between daily stock market trading activity and the Dow Jones Industrial Average's (DJIA) movement around millenary milestones—numbers that end in three zeros. We find aggregate turnover to be 5% lower when the DJIA level is less than 1% away from the nearest milestone. The effect emerges as the DJIA approaches a milestone from below, and is stronger for first-time milestones compared to subsequent passages. The aggregate price impact is large, such that daily stock returns show a negative abnormal performance of − 10 basis points. Our findings suggest that millenary milestones of the DJIA play a role in some investors' decision making.     

Are liquidity and corporate control priced by shareholders? Empirical evidence from Swiss dual class shares

Stadard asset pricing models generally exclude corporate control and liquidity considerations as joint explanatory factors of the stock price formation process. This empirical study investigates their influence on Swiss Bearer and Registered share prices issued by the same firm. It is shown that the statistical properties of both shares' returns differ without implying profitable arbitrage opportunities. A multifactor model of the ‘premium’ between Bearer and Registered stock prices is then proposed and tested. The results show that the freely negotiable equity book value, the existence of dominant shareholder positions and ownership transfer regime changes are significant variables in explaining the dual class share price differential.     

Inside shareholders’ effective tax rates and dividends

Using information collected from the Swedish tax authorities, we calculate insiders’ actual effective tax rates on dividends. With this unique dataset, we find a significant negative cross-sectional relationship between insiders’ effective tax rates and dividend payout. This result is consistent with a tax-induced clientele effect for dividends. We also look at the impact of large block trades on dividends. We find that when insiders with zero effective taxes sell blocks, subsequent dividend payments are significantly more likely to decrease. This provides evidence that large shareholders are adjusting dividends for their individual tax situations.     

Stock reaction to dividend savings of convertible preferred calls: Free cash flow or price pressure effects?

Calls of in-the-money convertible preferred stock typically induce dividend savings for the firm, since preferred dividends exceed common stock dividends. Prior research finds that these savings are negatively related to stock returns at call announcement and argues that the market expects managers to abuse the increased free cash flow. This paper finds that dividend savings are closely related to call size, suggesting other explanations. Larger calls experience a more negative announcement reaction. Consistent with temporary liquidity effects, there is a price reversal during the conversion period, which is greater for larger calls.     

Liquidity, analysts, and institutional ownership

In this paper, we investigate the empirical relationship between institutional ownership, number of analysts following and stock market liquidity. We find that firms with larger number of financial analysts following have wider spreads, lower market quality index, and larger price impact of trades. However, we find that firms with higher institutional ownership have narrower spreads, higher market quality index, and smaller price impact of trades. In addition, we show that changes in our liquidity measures are significantly related to changes in institutional ownership over time. These results suggest that firms may alleviate information asymmetry and improve stock market liquidity by increasing institutional ownership. Our results are remarkably robust to different measures of liquidity and measures of information asymmetry.     

The persistent effects of a false news shock

In September 2008, a six-year-old article about the 2002 bankruptcy of United Airlines' parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company's stock price to drop by as much as 76% in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2% below the previous close. We explore this natural experiment by using a simple asset-pricing model to study the aftermath of this false news shock. We find that, after three trading sessions, the company's stock was still trading below the two-standard-deviation band implied by the model and that it returned to within one standard deviation only during the sixth trading session. On the seventh day after the episode, the stock was trading at the level predicted by the asset-pricing model. We investigate several potential explanations for this finding, but fail to find empirical evidence supporting any of them. We also document that the false news shock had a persistent negative effect on the stock prices of other major airline companies. This is consistent with the view that contagion effects would have dominated competitive effects had the bankruptcy actually taken place.     

政府治理、控制权结构与投资决策—基于家族上市公司的经验证据

本文基于双重代理视角分析了地方政府治理水平和控制权结构影响家族企业投资行为的机理。以2002～2008年间我国家族上市公司为研究样本,实证检验发现,超额控制程度较高的家族企业,其内部人有动机为实现其私人收益,忽略资本市场股票价格所提供的投资机会信号,偏离最优投资决策,降低公司投资股价之间敏感度。而较高的地方政府治理水平一方面通过约束内部人的机会主义行为,另一方面使企业拥有更多的外部融资便利,减少与政府的协调成本,提高市场配置资源的能力,从而提高投资股价敏感度。进一步研究发现,家族超额控制降低投资-股价敏感度的动机在地方政府治理水平较差的家族企业中更为显著,并且会降低投资对公司业绩的贡献程度。该研究发现不仅有助于我们从理论层面更好地理解镶嵌于政府层面代理问题的中国家族企业的投资行为,而且对于提高地方政府在维持证券市场的公共治理水平,进而推动我国家族企业健康发展有着重要的政策意义。     

Why Do Price Limits Exist in Stock Markets? A Manipulation‐Based Explanation

Numerous stock market regulators around the world impose daily price limits on individual stock price movements. We derive a simple model that shows that price limits may deter stock market manipulators. Based on our model's implications, we predict that regulators impose price limit rules for markets where the likelihood of manipulation is high. We present empirical evidence consistent with this hypothesis. Our study is the first to formally propose a manipulation‐based rationale for the existence of price limits in stock markets.     

The value of excess cash and corporate governance: Evidence from US cross-listings

We examine whether and how a US cross-listing mitigates the risk that insiders will turn their firm’s cash holdings into private benefits. We find strong evidence that the value investors attach to excess cash reserves is substantially larger for foreign firms listed on US exchanges and over-the-counter than for their domestic peers. Further, we show that this excess-cash premium stems not only from the strength of US legal rules and disclosure requirements, but also from the greater informal monitoring pressure that accompanies a US listing. Overall, because investors’ valuation of excess cash mirrors how they expect the cash to be used, our analysis shows that a US listing constrains insiders’ inefficient allocation of corporate cash reserves significantly.     

The Impact of Mispricing and Asymmetric Information on the Price Discount of Private Placements of Common Stock

The price discount on privately placed stock is large and can vary substantially among firms. While earlier studies attribute price discounts on privately placed stock to illiquidity and costs of gathering information, we offer a more complete explanation. We find that firms exhibiting higher overvaluation have significantly larger price discounts in private stock sales. We also find that higher levels of asymmetric information about the issuing firm and about the stock market environment at the time of the private placement cause more pronounced discounts in the offer price. Our analysis also shows that post-issue abnormal returns following private placements are higher when discounts are less pronounced.     

Market uncertainty and disclosure of internal control deficiencies under the Sarbanes–Oxley Act

This study examines cross-sectional differences in stock market reactions to the disclosure of internal control deficiencies under Section 302 of the Sarbanes–Oxley Act. We hypothesize that the market punishment for internal control problems will be less severe for internal control disclosure that helps reduce market uncertainty around the disclosure. We also predict that such a relation is dependent on the types of disclosure and the market’s prior knowledge of the credibility of firms’ financial reporting. Consistent with our hypothesis, we find that when firms disclose their internal control deficiencies, their abnormal stock returns are negatively associated with changes in market uncertainty (e.g., changes in the standard deviations of daily stock returns) around the disclosure. We also find that the impact of the uncertainty reduction is greater for voluntary disclosures of non-material weakness, especially those made in the context of previous suspicious events. The negative impact of changes in market uncertainty on the abnormal stock returns remains intact even after controlling for possible simultaneity. An analysis using financial analysts’ earnings forecasts dispersion as an alternative proxy for uncertainty confirms the results.     

An empirical analysis of the economic impact of federal terrorism reinsurance

This paper examines the role of the federal government in the market for terrorism reinsurance. We investigate the stock price response of affected industries to a sequence of 13 events culminating in the enactment of the Terrorism Risk Insurance Act (TRIA) of 2002. In the industries most likely to be affected by TRIA—banking, construction, insurance, real estate investment trusts, transportation, and public utilities-the stock price effect was primarily negative. The Act was at best value-neutral for property-casualty insurers because it eliminated the option not to offer terrorism insurance. The negative response of the other industries may be attributable to the Act's impeding more efficient private market solutions, failing to address nuclear, chemical, and biological hazards, and reducing market expectations of federal assistance following future terrorist attacks.     

Price discovery in currency markets

This paper examines the price discovery process in currency markets, basing its analysis on the pivotal distinction between the customer (end-user) market and the interdealer market. It first provides evidence that this price discovery process cannot be based on adverse selection between dealers and their customers, as postulated in standard models, because the spreads dealers quote to their customers are not positively related to a trade’s likely information content. The paper then highlights three factors familiar in the literature – fixed operating costs, market power, and strategic dealing – that may explain the cross-sectional variation in customers’ spreads. The paper finishes by proposing a price discovery process relevant to liquid two-tier markets and providing preliminary evidence that this process applies to currencies.     

Profit or politics? Understanding renationalizations in Russia

This study examines firm-level determinants of the government incentives to acquire controlling stakes in private companies. Using a novel hand-collected dataset of 153 largest listed and unlisted Russian companies, I investigate the methods and the rationales of a 2004–2008 wave of selected nationalizations in a post-privatization market. I find robust evidence that formerly privatized and domestically-owned companies in strategically important sectors face the highest risks of corporate control transfers from private to state hands. I also find that the corporate tax evasion is another significant determinant of a firm nationalization. Contrary to commonly held beliefs, there is little evidence that renationalizations in Russia are driven by firm profitability factors: the government neither systematically “cherry-picks” best performers nor addresses market failures by rescuing national champions in financial distress. These results contribute to t'he politics and finance literature by providing new firm-level evidence on the importance of strategic nationalism in the government's decision to intervene into the corporate control structures.     

Volatility and covariation of financial assets: A high-frequency analysis

Using high frequency data for the price dynamics of equities we measure the impact that market microstructure noise has on estimates of the: (i) volatility of returns; and (ii) variance–covariance matrix of n assets. We propose a Kalman-filter-based methodology that allows us to deconstruct price series into the true efficient price and the microstructure noise. This approach allows us to employ volatility estimators that achieve very low Root Mean Squared Errors (RMSEs) compared to other estimators that have been proposed to deal with market microstructure noise at high frequencies. Furthermore, this price series decomposition allows us to estimate the variance covariance matrix of n assets in a more efficient way than the methods so far proposed in the literature. We illustrate our results by calculating how microstructure noise affects portfolio decisions and calculations of the equity beta in a CAPM setting.