Tick size change on the Stock Exchange of Thailand

This paper explores the impact of an exogenous tick size reduction on bid-ask spreads, depths, and trading volume on the Stock Exchange of Thailand (SET). On November 5, 2001, the SET implemented a tick size reduction on stocks priced below THB 25. Even though trading on SET is largely dominated by retail investors, the tick reduction produces similar empirical results found in markets where institutional investors are more dominant. Tick reduction on the SET is associated with declines in spreads, and quoted and accumulated market depths. The study finds no significant change in trading volume due to the reduction.

Price–volume relations of DAX companies

This study provides empirical evidence of the joint dynamics between stock returns and trading volume using stock data of DAX companies. Contemporaneous as well as dynamic interactions are investigated for a period from January 1994 to December 2005 on a daily basis. Our results suggest that there is almost no relationship between stock return levels and trading volume in either direction. We find that trading volume is contemporaneously positively related to return volatility. In addition, we establish that lagged return volatility induces trading volume movements. Finally, we examine dependencies in the tails and find no significant support for the hypothesis of the independence of the maximal values of absolute returns and trading volume.

The ex-dividend day stock price anomaly: evidence from the Greek stock market

This paper examines the ex-dividend stock price and trading volume behavior in the Greek stock market for the period 2000–2004. We use both standard event-study methodology and cross-sectional regression analysis in assessing the ex-dividend stock price anomaly. We find that stock prices drop less than the dividend amount. By examining abnormal returns as well as abnormal trading volume around the ex-dividend day, we find strong evidence of short-term trading, which is consistent with the presence of dividend-capturing activities around the ex-dividend day. The results from the cross-sectional regression analysis confirm that the short-term trading hypothesis explains the ex-dividend day stock price anomaly in Greece.

Retail Investors and the Trading of Treasury Securities

I analyze implicit transaction costs of trading government debt securities on the Spanish stock exchanges (SE) electronic trading system. The SE’s multilateral system is used mainly as an outlet for retail investors to liquidate Treasury accounts positions before maturity. I compare identical Treasury security trades on the same day in two different markets: the SE and the interdealer market. By analyzing these yield spreads I learn more about the behavior of the markdowns included in the retail prices from the institutional prices. I find evidence that these yield premia depend on traditional features to explain wholesale market liquidity premia.

Organized labor and information asymmetry in the financial markets

Prior results from the labor relations literature suggest that revealing information weakens management’s position in collective bargaining. Thus, when facing organized labor, management has an incentive to preserve the information asymmetry with outsiders. This study uses a sample from a large cross-section of the economy over several years to test this relation. Results are consistent with this prediction. Strong organized labor is associated with higher bid-ask spreads, higher probability of informed trading, lower trading volume and lower analyst coverage. These relations hold after controlling for numerous factors such as growth opportunities or risk.

Short interest in exchange-traded funds

Short selling exchange-traded funds (ETFs) has become a common means of speculating or hedging in response to pessimistic expectations about a specific market or sector, as the short interest of ETFs is more than 10 times that of individual stocks, on average. We determine that sector-based ETFs have an abnormally large short interest level, whereas international ETFs have an unusually small short interest level. The level of short interest is larger for ETFs that have a higher trading volume and a lower market capitalization, regardless of the type of ETF assessed. The level of short interest is lower for ETFs representing indexes that have tradable derivatives, but higher for international ETFs representing indexes that have tradable derivatives. We also determine that the level of short interest in an ETF serves as an effective signal of bearish sentiment when considering all ETFs, but is not an effective signal when isolating any particular type of ETF.

The impact of H-share derivatives on the underlying equity market

We conjecture that an introduction of the Hong Kong Hang Seng Chinese Enterprise Stock Index (H-share Index) futures induces additional speculating activities in the underlying equities, leading to an increase in volatility and volume of the underlying stocks. Whereas, a subsequent introduction of H-share index options increases the level of informed trading and opens up opportunities for speculative and arbitrage activities using futures directly against options. These futures and options trading activities are much cheaper and more efficient than using the underlying stocks, leading to a significant decline in spot market volatility and volume. Our results are consistent with these arguments. We also find that derivative trading does not change the liquidity of H-share constituent stocks. Further tests based on the difference-in-difference approach confirm that the above findings are robust.

Stock Market Anomalies: What Can We Learn from Repurchases and Insider Trading?

We examine whether managers’ trading decisions (both at a firm and personal level) are correlated with trading strategies suggested by the operating accruals and the post-earnings announcement drift (SUE) anomalies. We discuss advantages and disadvantages of the use of managerial trading activity to infer managers’ private valuation about their own securities. Our results provide corroborative evidence for the accruals anomaly, i.e., managers’ repurchase and insider trading behavior varies consistently with the information underlying the operating accruals trading strategy. On the other hand, we do not find corroborative evidence for the SUE anomaly.

Change in value relevance of quarterly foreign sales data of U.S. multinational corporations after adopting SFAS 131

This paper investigates the change in value relevance of quarterly foreign sales data of U.S.-based multinational enterprises after adopting Statement of Financial Accounting Standards No. 131 (SFAS 131). First, I examine whether the interim foreign sales data of all sample firms are valued at a higher rate by equity investors after the firms adopt SFAS 131. My empirical findings indicate that for all sample firms the value relevance of quarterly foreign sales data increases after the firms adopt SFAS 131. I then examine whether the valuation consequence of firms that change their geographic segment definition after they adopt SFAS 131—segment change firms—changes after those firms adopt SFAS 131. Based on the empirical results, I conclude that quarterly foreign sales data of segment change firms are priced at a relatively higher rate after SFAS 131 is adopted.

Return enhancement trading strategies for size based portfolios

Recent theoretical work suggests that definitions of market efficiency that allow for the possibility of time-varying risk-premia will generally lead to return sign predictability. Consistent with this theory, we show that a logit model based on the lagged value of the market risk premium is useful for successfully predicting the return sign for CRSP small decile portfolio returns, but not large ones. We additionally employ this model in market timing simulations of micro-cap mutual funds in which investment can actually be made. The results indicate that a market-timing strategy based on our return-sign forecasting model outperforms a buy-and-hold strategy for 13 of 14 micro-cap funds studied. On average, the buy-and-hold strategy produces an average compound return of 11.98% per annum versus an average of 16.60% for the market-timing strategy. Nevertheless, trading restrictions make the return-sign forecasting model more practical to employ by the micro-cap fund portfolio manager rather than the individual fund investor.

NYSE execution quality subsequent to migration to hybrid

In October 2006, the NYSE began rolling-out phase three of a four-phase plan initiate its new Hybrid trading mechanism. The results show that this new trading platform introduced a much larger proportion of electronic transactions relative to floor auction transactions. This migration to electronic transactions is further evidenced by a mirror shift in price discovery from floor trades to trades marked for automatic electronic execution. In addition, the move to Hybrid trading introduced a significant decrease in inventory control costs, as well as a noticeable increase in trade persistence. Finally, the new trading platform has increased the speed with which orders are met, and has also decreased the proportion of executed shares which receive price improvement.

The impact of exchange rate risk on international asset pricing under various market structures

This article derives international equity pricing relations by taking into account inflationary exchange risk under various forms of market segmentation/integration. In a mean-variance framework, a two-country, two-period, two-goods model is analyzed under three different market structures: segmented, mildly segmented and integrated. It is found that as long as investors are consuming imported goods, in the presence of market frictions, inflationary exchange risk is an important determinant of real equity prices. This is the case because inflationary exchange rate affects the real purchasing power of investors.

Index Futures and Predictability of the Underlying Stocks’ Returns: The Case of the Nikkei 225

Theories predict that launching index futures could affect the price informativeness for the underlying stocks. We test this hypothesis by taking advantage of the introduction of the Nikkei 225 futures contracts in Singapore on September 3, 1986. Employing two alternative statistical methods applied to both daily and weekly data, we find that, following the listing of the index futures, returns become significantly more random and less predictable for the underlying stocks, even after controlling for concurrent marketwide shifts. These findings suggest improved price informativeness for the underlying stocks, which is further corroborated by their higher trading volume following the event.

Trading on inside information when there may be tippees

This paper compares four scenarios of a model in which, for the possible presence of tippees, firm insiders may not be the only persons having inside information. The four scenarios are that of free insider trading, that with a ban on insider trading, that of observable insider trading, and that with full disclosure of information. Each of these scenarios is shown to be strictly more efficient than the one before so long as there is a positive probability that a tippee exists. The paper sheds some light on why and how insider trading should be regulated, and also on the role of the disclosure system in the overall scheme of securities regulation.

Accounting conservatism and corporate governance

We predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism. Governance level is assessed using a composite measure that incorporates several internal and external characteristics. Consistent with our prediction, strong governance firms show significantly higher levels of conditional accounting conservatism. Our tests take into account the endogenous nature of corporate governance, and the results are robust to the use of several measures of conservatism (market-based and nonmarket-based). Our evidence is consistent with the direction of causality flowing from governance to conservatism, and not vice versa, indicating that governance and conservatism are not substitutes. Finally, we study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures. We find that, on average, strong-governance firms appear to use discretionary accruals to inform investors about bad news in a timelier manner.

Securitization of mezzanine capital in Germany

A recent trend in the German asset-backed securities (ABS) market is the securitization of subordinated loans and profit participation agreements (PPAs) granted to medium-sized enterprises (MEs). This paper provides an overview of this growing market and analyzes the benefits of such transactions for portfolio companies as well as for originators and potential investors. Simulations of 10 recent transactions indicate that despite the relatively low interest rates charged on obligors, originators and investors can earn attractive returns at fairly low risk. In particula, the junior tranches of these securitizations exhibit quite attractive risk-return profiles.

Market reactions to the disclosure of internal control weaknesses and to the characteristics of those weaknesses under section 302 of the Sarbanes Oxley Act of 2002

We examine the stock price reaction to management’s disclosure of internal control weaknesses under §302 of the Sarbanes Oxley Act and to the characteristics of these weaknesses, controlling for other material announcements in the event window. We find that some characteristics of the weaknesses—their severity, management’s conclusion regarding the effectiveness of the controls, their auditability, and the vagueness of the disclosures—are informative. We also find that the information content of internal control weakness disclosures depends on the severity of the internal control weakness. Moreover, in a sub-sample uncontaminated by other announcements in the event window, we find negative price reactions to the disclosure of internal control weaknesses and material weaknesses.

Herding,momentum and investor over-reaction

In this paper we study the impact of noise or quality of prices on returns. The noise arises from herding by market participants beyond what is justified by information. We construct a firm-quarter-specific measure of speculative intensity (SPEC) based on autocorrelation in daily trading volume adjusted for the amount of information available, and find that speculative intensity has a significant positive impact on returns. Both cross-sectional and time series variation in SPEC are consistent with conventional wisdom, and with implications of theories of herding as in DeLong et al. (1990, J Political Econ 98(4):703–738). We find that high-SPEC firms drive the returns to momentum trading strategies and that investor over-reaction is significant only in the case of high-SPEC firms.

Price reversals versus price continuations: the transitory price effects of futures trading extension on the underlying stock market

This paper examines the transitory price effects of index futures trading extension on the underlying stock market. Based on the model formulation of George and Hwang (1995) and Amihud and Mendelson (1987) and using the Hong Kong data, we find that the extension of futures trading hour helps to reduce the opening pricing errors and change the correlations between daytime and overnight stock returns. Our finding adds to the literature that the trading behavior of derivatives has a significant influence on the transitory price changes of the underlying cash products.

Trading Credit Default Swaps via Interdealer Brokers

Credit default swaps (CDSs) are among the most successful financial innovations of recent years, which is reflected in the rapidly expanding market. CDS trading occurs in the over-the-counter market, which relies heavily on broker intermediation to arrange trades. We provide empirical evidence that liquidity in the voice brokered market varies with the particulars of the CDS contracts and that the differences in market structure is reflected in the costs of liquidity. Moreover, the brokered and direct interdealer trading markets seem to be well integrated; thus the higher liquidity costs in the brokered market may reflect the value of intermediation. Hybrid market structures, which combine voice brokerage with an electronic platform, are discussed as a viable alternative to fully automated trading systems.