Options trading activity and firm valuation

Options may have an effect on firm value because they help complete markets and stimulate informed trades. However, these benefits are likely to manifest themselves in active, rather than inactive, options markets. Supporting this observation, we find that firms with more options trading have higher values of Tobin's q, after accounting for other determinants of value. Corporate investment in firms with greater options trading is more sensitive to stock prices. Options trading affects firm valuation more strongly in stocks with greater information asymmetry. These results indicate that options trading is positively associated with firm values as well as information production.     

Are future capital gain opportunities important in the market for corporate control? Evidence from China

Stock prices of Chinese target companies react positively to the announcement of block trades. Such a reaction is greater when publicly tradable shares (PTS) are transferred than when bidders obtain nonpublicly tradable shares (NPTS). PTS transactions also perform significantly better in the long run than do NPTS transactions. These results suggest that stock liquidity matters for corporate control rights transactions to improve target firms' management. We also find that bidders appoint a new CEO or chief director in more than half of the cases of block trades. Better stock price performance for PTS transactions comes mainly from targets with high Tobin's Q. Capital gain opportunities are likely to motivate bidders to expand target firms' businesses for capital gains.     

Oil price uncertainty and stock price informativeness: Evidence from investment-price sensitivity in China

We study the effects of oil price uncertainty (OPU) on stock price informativeness based on investment-price sensitivity. Using Chinese stocks from 2008 to 2021, we find a negative relationship between OPU and the strength of Tobin's q (a standardized measure of prices) for predicting investment opportunities. This finding is likely due to the crowding out of informed investors rather than the financial constraints brought by a higher cost of capital. Investment-price sensitivity also decreases more among firms in less-competition, high sales volatility, and lower analysts' attention. What is more, the reduction in investment-price sensitivity is more concentrated in public utilities, agriculture & livestock, and industry instead of in real estate or commerce industries. These findings indicate that OPU decreases the acquisition of information related to firms, and consequently, price informativeness for future investment decisions.     

Tobin's q-Ratio and Market Reaction to Capital Investment Announcements

There is a significant positive relation between Tobin's q-ratio and the magnitude of stock market reaction to capital investment announcements. The findings have the following implications for capital investment theory: (i) The results provide evidence substantiating the link between the q-ratio and real investment for industrial firms. For public utilities however, no such link exists, (ii) The study finds that average q and marginal q are correlated but the relation is somewhat more complicated than simple equality as assumed by numerous empirical studies. (iii) The findings suggest that investors can use average Tobin's q-ratio to identify companies with profitable real capital investment opportunities.     

Local investors,price discovery,and market efficiency

This study examines the effect of locally informed investors on market efficiency and stock prices using large power outages, which are exogenous events that constrain trading. Turnover in stocks headquartered in an outage area with 0.5% of U.S. electrical customers drops by 3–7% on the first full day of the outage, and bid–ask spreads narrow by 2.5%. Firm-specific price volatility is 2.3% lower on blackout dates. This effect is larger for smaller, lesser-known stocks and in higher income areas. Consistent with a valuation discount and higher expected returns for stocks with more informed traders, firms with a one-standard-deviation higher local trading propensity have market-to-book values that are 5% lower, Tobin's Q that is 6% lower, annualized four-factor alphas that are 1.2% higher, and average spreads that are 6.5% higher. Together, the evidence suggests that informed investors contribute disproportionately to both liquidity and price discovery, and that these contributions are reflected in valuations and expected returns.     

Short selling,margin trading,and the incorporation of new information into prices

Utilizing daily data on Chinese stocks' short selling and margin trading activities and intraday stock trade and quote data, we find a positive association between the degree of information efficiency of stock prices and the intensity of short selling and margin trading. Short selling (margin buying) escalates during the 5 days immediately before significant negative (positive) information events, which suggests short sellers (margin buyers) anticipate forthcoming news. Using the adverse selection component of the bid–ask spread as a proxy, we find that short selling and margin trading are associated with an improved information environment. Taken together, our empirical evidence supports the conjecture that short selling and margin trading in the Chinese market help stock prices incorporate new information more efficiently. Utilizing the unique Chinese regulation, we also examine the role of brokerages authorized for such trading and document a non-linear relation between pricing efficiency and the number of authorized brokerages.     

Stock Market Efficiency and Economic Efficiency: Is There a Connection?

In a capitalist economy, prices serve to equilibrate supply and demand for goods and services, continually changing to reallocate resources to their most efficient uses. However, secondary stock market prices, often viewed as the most “informationally efficient” prices in the economy, have no direct role in the allocation of equity capital since managers have discretion in determining the level of investment. What is the link between stock price informational efficiency and economic efficiency? We present a model of the stock market in which: (i) managers have discretion in making investments and must be given the right incentives; and (ii) stock market traders may have important information that managers do not have about the value of prospective investment opportunities. In equilibrium, information in stock prices will guide investment decisions because managers will be compensated based on informative stock prices in the future. The stock market indirectly guides investment by transferring two kinds of information: information about investment opportunities and information about managers' past decisions. However, because this role is only indirect, the link between price efficiency and economic efficiency is tenuous. We show that stock price efficiency is not sufficient for economic efficiency by showing that the model may have another equilibrium in which prices are strong-form efficient, but investment decisions are suboptimal. We also suggest that stock market efficiency is not necessary for investment efficiency by considering a banking system that can serve as an alternative institution for the efficient allocation of investment resources.     

Trading frenzies and their impact on real investment

We study a model in which a capital provider learns from the price of a firm's security in deciding how much capital to provide for new investment. This feedback effect from the financial market to the investment decision gives rise to trading frenzies, in which speculators all wish to trade like others, generating large pressure on prices. Coordination among speculators is sometimes desirable for price informativeness and investment efficiency, but speculators' incentives push in the opposite direction, so that they coordinate exactly when it is undesirable. We analyze the effect of various market parameters on the likelihood of trading frenzies to arise.     

Short sales constraint and SEO pricing

We examine the influence of SEC's Rule 105 on informed trading and the information content of stock prices around an SEO's offer day. We show that constraints on short sales inhibit informed trading and hamper incorporation of information into stock prices for offers whose traders have private adverse information and without options listing. The constraints contribute to increased price uncertainty and higher market sensitivity to seller-initiated trading. After controlling for other causes of SEO discounts, we find that the decrease in information content of stock prices just before an offer day has a significant impact on the SEO's value discount.     

Investment efficiency,state-owned enterprises and privatisation: Evidence from Viet Nam in Transition

Our research firstly tests the difference in investment efficiency between state-owned enterprises (SOEs) and private firms and secondly evaluates the effect of privatisation and equitisation policies on the investment efficiency of former state owned enterprises (SOEs). We use a novel dataset from Viet Nam which covers large and non-listed SMEs across construction, manufacturing, and service sectors. Our methodology uses a structural model to test the relationship between Tobin's Q and capital spending. While evident differences in investment efficiency are found across heterogeneous groups of private firms (size, industry, financially constrained and location), we find no evidence of investment spending being linked to marginal returns by SOEs across all sectors and size classes. However, former SOEs that have been privatised and equitized with a minority state shareholding display positive links between Q and investment. In fact, the link is stronger for these firms than for private firms. Differences are also evident across size and sector highlighting that the method of divestment chosen by government shareholders has a differential impact on efficiency across groups of firms and industries.     

THE SPEED OF ADJUSTMENT OF PRICES TO PRIVATE INFORMATION: EMPIRICAL TESTS

We estimate speeds of adjustment of individual stock prices to private information using daily data. We use a model in which private information gives rise to return variance and private information decays linearly over time. We find that, on average, about 85 percent to 88 percent of private information is incorporated into prices within one trading day, with variation depending upon the stock's trading volume and whether the stock is listed on an exchange. The findings support strong form market efficiency.     

Were internal capital markets affected by the ‘perfect’ pension storm?

We examine capital expenditures in multi-segment firms before and after the “perfect storm” that affected pension plans between 2000 and 2002, when bond yields and stock prices both fell precipitously. Our sample of firms went from having overfunded to underfunded pension plans as a result of the storm. We examine the segment-level relation between investment, Tobin's q, and cash flow both before and after the event. We find mixed evidence on the change in the relation between investment and q, which may be a result of measurement error in q. We find stronger evidence for the conclusion that after the pension storm, firms with underfunded pension plans directed more investment towards segments that produce higher cash flow.     

The effect of tick size on managerial learning from stock prices

We investigate the effect of tick size, a key feature of market microstructure, on managerial learning from stock prices. Using a randomized controlled tick-size experiment, the 2016 Tick Size Pilot Program, we find that a larger tick size increases a firm's investment sensitivity to stock prices, suggesting that managers glean more new information from stock prices to guide their investment decisions as the tick size increases. Consistently, we also find that changes in managerial beliefs, as reflected in adjustments of forecasted capital expenditures, respond more strongly to market feedback under a larger tick size. Additional evidence suggests the following mechanism through which tick size affects managerial learning: a larger tick size reduces algorithmic trading, in turn encouraging fundamental information acquisition. Increased fundamental information acquisition generates incremental information about growth opportunities, macroeconomic factors, and industry factors, with respect to which the market has a comparative information advantage over management.     

Corporate Governance and Company Performance in Australia

This study tests whether the adoption of Australian best practice corporate governance recommendations is associated with financial performance measured by return on assets (ROA) and Tobin's Q. Results suggest that recommended corporate governance structures relating to the adoption of board sub‐committees are sound policy recommendations that enhance performance using the accounting measure ROA and the market‐based measure Tobin's Q. In contrast, the emphasis on board independence guidelines, specifically having outside independent directors, has a negative impact on ROA and Tobin's Q. However, there are conflicting significant results between the accounting and market measures for having a dual CEO/chairperson and board size.     

New empirical evidence on the investment success of momentum strategies based on relative stock prices

This paper provides significant extensions and tests of momentum trading strategies based on relative prices that were first explored by George and Hwang (2004). We develop new momentum strategies based on the ratio of the current stock price to each of five different reference points in past prices: 52-week high, 52-week median, 52-week low, half-year high, and 2-year high. We measure their investment performance on the basis of the Fama and French 3-Factor and Momentum Model (Carhart four-factor model), and further employ the technique of nested trading strategies to measure incremental performance. The strategy based on the ratio of current stock price to its 52-week high price is the most profitable, and its performance is robust when tested over a wide range of financial and economic factors. Our results provide strong new evidence of the investment merits of a momentum trading strategy based on the 52-week high price ratio, and add new weight to challenges to the hypothesis that the stock market is efficient in the semi-strong sense.     

Overinvestment,corporate governance,and dividend initiations

Firms with low Tobin's Q and high cash flow have significantly more positive dividend initiation announcement returns than do other firms. I interpret this result as consistent with the hypothesis that reductions in the agency costs of overinvestment at firms with poor investment opportunities and ample cash flow are reflected in higher dividend initiation announcement returns. Further tests, such as examining the impact of governance metrics on initiation announcement returns following the dividend tax cut of 2003 and examining the long-run cash-retention policies of dividend-initiating firms, are consistent with this interpretation. There is also some evidence that is consistent with the cash flow signaling hypothesis, as dividend-initiating firms with low Tobin's Q and low pre-initiation cash flow experience substantial revisions in analysts' earnings forecasts and significantly positive initiation announcement returns.     

Returns to Initial Shareholders in Savings Institution Conversions: Evidence and Regulatory Implications

In this paper, stock prices for savings institutions that have converted to the stock form of organization are examined. Event-study methodology is used to focus on the returns to initial shareholders in the period immediately following initial trading. The results of the study indicate significant positive returns in savings institution conversions in the first several trading days, suggesting a one-time wealth transfer from depositors not exercising their rights to initial shareholders. The results also provide support for the efficiency of the market as the market price adjusts quickly in the first two days of trading after the public offering. Given the FHLBB's objectives, there appears to be little cause for regulatory concern although initial returns are significant.     

Bond vs stock market's Q: Testing for stability across frequencies and over time

In this paper we revisit the evidence recently provided by Philippon (2009) about the relationship among bond market's Q, stock market's Q and aggregate investments for the US. Specifically, we analyze the stability of the relationship between aggregate investment and the two measures of Q across frequencies and over time. We find that the relationship between aggregate investment and stock market's Q, in contrast to that with bond market's Q, is both frequency-dependent and time-varying. Both the successfulness of bond market's Q and the poor performance of the usual Tobin's Q can be explained by taking into account stability across frequencies of the first and instability over time of the latter.     

Comovement and investment banking networks

We test the hypothesis that investment banking networks affect stock prices and trading behavior. Consistent with the notion that investment banks serve as information hubs for segmented groups of investors, the stock prices of firms that use the same lead underwriter during their equity offerings tend to move together. We also find that when firms switch underwriters between their initial public offering (IPO) and a seasoned equity offering (SEO), they comove less with the stocks associated with the old bank and more with the stocks associated with the new bank. This change in comovement is greater for stocks completing their first SEO and for those experiencing large changes in institutional ownership.     

Conditional Equity Premium and Aggregate Corporate Investment

We document a strong negative relation between aggregate corporate investment and conditional equity premium estimated from direct stock market risk measures. Consistent with the investment-based asset pricing model, the comovement with conditional equity premium fully accounts for aggregate investment's market return predictive power. Similarly, conditional equity premium is a significant determinant of classic Tobin's q measure, although q has much weaker explanatory power for aggregate investment possibly because of its measurement errors. Moreover, the positive relation between aggregate investment and investor sentiment documented in previous studies reflects the fact that both variables correlate closely with conditional equity premium.