Fund Manager Succession in Closed-End Mutual Funds

Managing the succession process by the hiring and firing of key executives is one of the important functions of a board of directors. In this research we study successions of fund managers in the closed‐end mutual fund industry. The agency issues inherent in closed‐end mutual funds makes them a unique laboratory for such a study. Our results suggest that while the overall abnormal returns of these manager changes are statistically insignificant, that the returns are more positive for funds with large expense ratios and for funds trading at a discount. We also find the abnormal returns are negatively related to the percentage of inside director stock ownership. Corporate bond funds and international equity funds react more negatively to these announcements than other types of funds. The abnormal returns do not appear to be related to board composition, but board composition does vary across fund type, and may therefore indirectly influence the results.     

Trading volume in options and common stock around quarterly earnings announcements

This study examines trading in call and put options around quarterly earnings announcements and investigates whether the existence of these options affects the common stock trading volume response to these announcements. We find that the options trading volume reaction to earnings announcements is larger than the corresponding reaction in common stock. Consistent with the idea that options provide an alternative vehicle for trading on information, the existence of these options lowers the level of trading in common stock. Options also appear to offer investors an alternative method of taking short positions, as shown by the symmetric stock market trading volume reaction to good versus bad news for firms with listed options. In contrast, firms without listed options exhibit a larger trading volume response to good news than to bad news of similar magnitude.     

Options trading volume and stock price response to earnings announcements

We examine the effect of options trading volume on the stock price response to earnings announcements over the period 1996–2007. Contrary to previous studies, we find no significant difference in the immediate stock price response to earnings information announcements in samples split between firms with listed options and firms without listed options. However, within the sample of firms with listed options stratified by options volume, we find that higher options trading volume reduces the immediate stock price response to earnings announcements. This conforms with evidence that stock prices of high options trading volume firms have anticipated and pre-empted some earnings information in the pre-announcement period. We also find that higher abnormal options trading volume around earnings announcements hastens the stock price adjustment to earnings news and reduces post-earnings announcement drift.     

The Client Is King: Do Mutual Fund Relationships Bias Analyst Recommendations?

This paper investigates whether the business relations between mutual funds and brokerage firms influence sell‐side analyst recommendations. Using a unique data set that discloses brokerage firms’ commission income derived from each mutual fund client as well as the share holdings of these mutual funds, we find that an analyst's recommendation on a stock relative to consensus is significantly higher if the stock is held by the mutual fund clients of the analyst's brokerage firm. The optimism in analyst recommendations increases with the weight of the stock in a mutual fund client's portfolio and the commission revenue generated from the mutual fund client. However, this favorable recommendation bias toward a client's existing portfolio stocks is mitigated if the stock in question is highly visible to other mutual fund investors. Abnormal stock returns are significantly greater both for the announcement period and, in the long run, for favorable stock recommendations from analysts not subject to client pressure than for equally favorable recommendations from business‐related analysts. In addition, we find that, subsequent to announcements of bad news from the covered firms, analysts are significantly less likely to downgrade a stock held by client mutual funds. Mutual funds increase their holdings in a stock that receives a favorable recommendation but this impact is significantly reduced if the recommendation comes from analysts subject to client pressure.     

Informed trading around earnings and mutual fund alphas

We examine whether informed trading around earnings announcements drives mutual fund performance. The measure is motivated by prior studies arguing that a mutual fund is skilled if it buys stocks with subsequent high earnings announcement returns. We find that this measure predicts future mutual fund returns. On average, after adjusting for Carhart’s four risk factors, the top decile of mutual funds outperforms the bottom decile by 44 basis points per quarter. By decomposing fund alphas into two components in their relations to earnings, we find that this measure is only associated with earnings-related fund alphas. This measure can also be used to predict stock returns at future earnings announcements.     

Mutual fund herding its impact on stock returns: Evidence from the Taiwan stock market

Using quarterly ownership data which identify identity codes of mutual funds in Taiwan, we investigate mutual fund herding and its impact on stock price. We show that mutual funds tend to follow their own steps in trading rather than follow trades made by other funds. More importantly, evidence of price continuation following mutual fund herd buying suggests that such herding is based on value-relevant information and is consistent with the investigative herding hypothesis. Alternatively, evidence of return reversal following mutual fund herd selling suggests that such herding is non-informational and is consistent with the characteristic herding hypothesis.     

Herding in the German Mutual Fund Industry

This paper analyses the trading activity of German mutual funds in the 1998–2002 period to investigate whether German mutual fund managers are engaged in herding behaviour. Another objective of the study is to determine the impact of this herd‐like trading on stock prices. Our results provide evidence of herding and positive feedback trading by German mutual fund managers. We show that a significant portion of herding detected in the German market is associated with spurious herding as a consequence of changes in benchmark index composition. Investigating the impact of mutual fund herding on stock prices, we find that herding seems to neither destabilise nor stabilise stock prices.     

Exploiting International Stock Market Correlations with Open-end International Mutual Funds

Investors can exploit the correlations between international stock markets by trading no-load, open-end, international mutual funds. These investors in effect cheat passive investors because they buy the mutual funds at their net asset values, which do not reflect information released during the US trading day. The strategy we examine yields an annual rate of return 800 basis points above the S&P500, over a period of almost eight years.     

Insider stock pledging and stock price informativeness: Evidence from India

Insiders’ shares can act as collateral while raising funds from lenders. This study examines the impact of insiders’ stock pledging activities on stock price informativeness using a sample of 1835 Indian firms. Our findings report that insider stock pledging increases the informational efficiency of stock prices. This informational efficiency increases for larger firms with: (1) financial constraints (high leverage and low cash holdings); (2) greater reliance on trade credit; and (3) higher indulgence in related party transactions. We also provide evidence on abnormal share turnover as a trading mechanism through which insider stock pledging is related to stock price informativeness. Our findings are robust across different specifications and after accounting for endogeneity issues.     

Institutional Ownership and the Dynamics of Trading Volume around FFO Announcements

We examine the effect of institutional ownership on abnormal trading volume around the announcement of funds from operations (FFO) by real estate investment trusts (REITs). Our central thesis is that abnormal trading volume is lower for the more informed institutions vis a vis non-sophisticated retail investors/institutions. We find a negative relationship between ownership by pension funds and abnormal trading volume around quarterly FFO announcements. However, ownership by the other types of institutions is unrelated to abnormal trading volume. Consistent with the view that some institutional investors are more informed than individual investors and therefore respond less to end of year announcements, we find that higher ownership by investment advisors is associated with lower levels of trading volume around end of year FFO announcements. Lastly, we find no evidence of institutional sell-offs associated with announcements of less than expected FFO.     

Persistence of announcement effects on the intraday volatility of stock returns: Evidence from individual data

We analyze the persistence effects in the empirical relationship between announcement releases and return volatilities of four major companies of the French stock market using high frequency data over the period 1995–1999. Besides its institutional stability, this sample period avoids the econometric difficulties inherent to simultaneous news arrivals. Our approach contributes to the relevant literature in that we focus on individual stock volatilities rather than indices, we distinguish firm‐specific and macroeconomic announcements, and we endogenize both the durations of announcement effects and the response patterns of equity prices. We find that our individual volatilities are affected by a systematic market effect, calendar effects, announcements related to the firms’ macroeconomic environment and announcements related to the firms’ and their competitors’ strategic dealings and commercial outcomes. We find evidence that all volatility responses are gradual with persistence horizons ranging from one to three hours, revealing a significant degree of inefficiency of the French stock market over the period. This inefficiency can be viewed as a breeding ground for the implementation of more performant informational and trading systems that allowed markets to move towards more efficiency.     

Insider Trading and Firm Performance Following Open Market Share Repurchase Announcements

The long‐run performance of equity securities subsequent to announcements of open market repurchases (OMR) remains a contentious topic. In this paper we propose the “dichotomous expectations hypothesis” which posits that insider trading following share repurchase announcements reveals private information concerning the future operating performance of announcing firms. In particular, insider abnormal purchases (abnormal sales) should predict an improvement (decline) in operating performance that leads to higher (lower) long‐run stock returns. Our hypothesis offers a credible economic link between insider trading and subsequent long‐run stock performance through the intervening variable of operating performance. The empirical results show consistency with this linkage.     

The information content of stock splits

This study examines whether stock splits contain information content about future operating performance or whether splits are undertaken by firms to realign their share prices and to improve trading liquidity. In the four years following split announcements, splitting firms do not experience improved operating performance relative to non-splitting firms. Furthermore, stock split signals are not related to future profitability. The positive announcement effect can be explained by lower share prices and improved market liquidity following stock splits but not by split signals and post-split operating performance. Our results show very little evidence that stock splits signal improvement in long-run operating performance and are more consistent with the trading range/liquidity hypothesis.     

Executive compensation and informed trading in acquiring firms around merger announcements

This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put than call option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.).     

Price Performance Following Share‐Repurchase Announcements by Closed‐End Funds

We investigate the price performance of closed‐end funds that announce share‐repurchase programs. Closed‐end funds experience positive average stock‐price reactions to the announcements. The long‐run buy‐and‐hold abnormal returns of repurchasing funds over the subsequent three years are significantly higher than a nonrepurchasing control sample matched by size, type, investment style and geographic diversification. Funds with larger discounts, international funds, equity funds, and funds that announce larger repurchases or frequently announce repurchases, experience more positive stock‐price reactions. Except for larger repurchases, the same characteristics are associated with more positive long‐run buy‐and‐hold returns.     

Mutual Fund Herding and the Impact on Stock Prices

We analyze the trading activity of the mutual fund industry from 1975 through 1994 to determine whether funds "herd" when they trade stocks and to investigate the impact of herding on stock prices. Although we find little herding by mutual funds in the average stock, we find much higher levels in trades of small stocks and in trading by growth-oriented funds. Stocks that herds buy outperform stocks that they sell by 4 percent during the following six months; this return difference is much more pronounced among small stocks. Our results are consistent with mutual fund herding speeding the price-adjustment process.     

Does Shareholder Composition Matter? Evidence from the Market Reaction to Corporate Earnings Announcements

We examine whether institutional ownership composition is related to parameters of the market reaction to negative earnings announcements. When firms report earnings below analysts' expectations, the stock price response is more negative for firms with higher levels of ownership by momentum or aggressive growth investors. There is no evidence, however, that these institutions cause an “overreaction” to earnings news. Ownership structure is also related to trading volume and to stock price volatility on days around earnings announcements. Our findings are consistent with the idea that the composition of institutional shareholders effects stock price behavior around the release of corporate information.     

The Impact of Information Release on Stock Price Volatility and Trading Volume: The Rights Offering Case

This paper examines whether information released via rights offering announcements induces changes in price volatility and trading volume of underlying stock. The results of this paper provide support for the release of new information via offering announcements and evidence of its effects on price volatility and volume of underlying stock. Specifically, utilization of the announced information by investors is evidenced by greater trading volume following the announcement date than during the pre-announcement period. We interpret this result to mean that informedness dominates consensus. However, stock price volatility decreased from the pre-announcement period to the post-expiration period of rights offerings.     

Information sharing between mutual funds and auditors

This paper examines whether there is information sharing between mutual funds and their auditors about the auditors’ other listed firm clients. Using data from the Chinese market, we find that mutual funds earn higher profits from trading in firms that share the same auditors. The effects are more pronounced when firms have a more opaque information environment and when the audit partners for the fund and the partners for the listed firm share school ties. The evidence is consistent with information flowing from auditors to mutual funds, providing mutual funds with an information advantage in firms that share the same auditors. Our findings are robust to the use of audit-firm mergers and acquisitions (M&As) as exogenous shocks and several other robustness checks. We further find that auditors benefit by charging higher audit fees for mutual fund clients and by improving their audit quality for listed firm clients. Our study provides evidence of bi-directional information sharing between two important market intermediaries.     

Management Earnings Forecasts,Earnings Announcements,and Institutional Trading in China

Abstract:

In this study, we investigate the trading behavior of institutional investors in China according to management earnings forecasts (MEFs) and earnings announcements (EAs). MEFs are mandatory under the stringent regulatory framework in China. We find evidence that both MEFs and EAs have an effect on the market. However, MEFs have a bigger effect on the market than do EAs. According to a sample of semiannual observations of firms from 2003 to 2008, we find that changes in the stock ownership of institutions are positively associated with EAs but not significantly associated with MEFs. When we further examine the relations between institutional characteristics and trading strategies, we find that growth funds exploit the arbitrage opportunity of MEFs.