Specialists,Limit‐Order Traders,and the Components of the Bid‐Ask Spread

This study compares the components of the bid‐ask spread estimated from quotes that reflect the trading interest of specialists with those estimated from limit‐order quotes and all available quotes for a sample of New York Stock Exchange (NYSE) stocks. The results show that the adverse selection component of the spread estimated from specialist quotes is significantly smaller than the corresponding figures from limit‐order quotes and entire quotes. We interpret this as evidence that NYSE specialists transfer at least a part of adverse selection costs to outsiders through the discretionary use of limit orders. Our results show that the estimation/interpretation of the components of the spread using quote data that include both specialist and limit‐order interests is problematic.     

Price Clustering on the Tokyo Stock Exchange

This paper examines price clustering on the Tokyo Stock Exchange (TSE). Regardless of tick and lot size, prices ending in zero and five are the most popular. The TSE has no market makers or direct negotiation between traders; therefore, clustering is not explained by collusion or negotiation. Our evidence supports the attraction hypothesis. Clustering also extends to order book depth. There is evidence of strategic trading behavior as traders place orders one price tick better than zero and five to avoid queuing orders at prices ending in these digits. Strategic trading behavior declined and clustering increased when the market became anonymous.     

Dividend preference of tradable‐share and non‐tradable‐share holders in Mainland China

Comprehensive data on corporate announcements of Chinese firms allows us to examine the preference for, and determinants of, cash and stock dividends. The results indicate that Chinese public investors prefer stock dividends over cash dividends, which are preferred by large state and legal person shareholders generally. Stock dividends, which do not require an explicit cash outflow from a firm, are found to be positively related to higher earnings, supporting the signalling hypothesis of dividend policy. In an imperfect market, these results have some implications for government regulation of financial markets.     

The Impact of Cross‐Listing on the Home Market's Information Environment and Stock Price Efficiency

We empirically examine changes in information asymmetry and informational efficiency of cross‐listed stocks in their home market around a cross‐listing in the United States. We estimate intraday market microstructure measures of information asymmetry and price efficiency, and find that a U.S. cross‐listing significantly improves the quality of a firm's information environment and stock price efficiency in the home market. This improvement is stronger for cross‐listings that take place after the adoption of Sarbanes‐Oxley Act. Our results demonstrate that stricter disclosure from a U.S. cross‐listing is beneficial, in line with the legal and reputational bonding hypotheses.     

IPO Placement Risk and the Number of Co‐Managers

Previous studies show that co‐managers mainly affect initial public offering (IPO) aftermarket activities. We investigate the role of co‐managers in IPO pre‐market activities. We argue that co‐managers help reduce IPO placement risk and hypothesize that IPO issuers hire more co‐managers when placement risk is higher. We find the number of co‐managers is positively associated with three proxies for placement risk. IPOs with more price uncertainty and high‐tech IPOs hire more co‐managers, while IPOs in regulated industries hire fewer co‐managers. We also find larger IPOs, recent IPOs, and IPOs with more reputable lead underwriters hire more co‐managers.     

A new perspective on post‐earnings‐announcement‐drift: Using a relative drift measure

Prior research finds that there is a delayed reaction to both analyst‐based earnings surprises and random‐walk‐based earnings surprises. Focusing on the market reaction from the post‐announcement window, prior studies show that analyst‐based drift is larger than random walk‐based drift. This finding is counter‐intuitive if we believe large, sophisticated investors tend to trade on analysts’ forecast earnings news and thus react faster and more completely than smaller and less sophisticated investors react to random walk earnings news. In this study, we construct a relative measure of post‐earnings‐announcement drift (PEAD) (i.e., drift as a proportion of total market reaction to earnings news) which we refer to as the ‘drift ratio’, and we provide evidence, consistent with our intuition, that analyst‐based drift ratio is smaller (not greater) than random‐walk‐based drift ratio. We find that this difference is more pronounced in more recent periods and for firms with more sophisticated investors. Our approach to measure the PEAD is more intuitive than that in traditional PEAD literature. Our results thus complement existing research findings by utilizing the drift ratio measure to generate new insights about the drift phenomenon.     

Price Movers on the Stock Exchange of Thailand: Evidence from a Fully Automated Order‐Driven Market

This study examines which trade sizes move stock prices on the Stock Exchange of Thailand (SET), a pure limit order market, over two distinct market conditions of bull and bear. Using intraday data, the study finds that large‐sized trades (i.e., those larger than the 75th percentile) account for a disproportionately large impact on changes in traded and quoted prices. The finding remains even after it has been subjected to a battery of robustness checks. In contrast, the results of studies conducted in the United States show that informed traders employ trade sizes falling between the 40th and 95th percentiles ( Barclay and Warner, 1993 ; Chakravarty, 2001 ). Our results support the hypothesis that informed traders in a pure limit order market, such as the SET, where there are no market makers, also use larger‐size trades than those employed by informed traders in the United States.     

On the Magnet Effect of Price Limits

The ‘magnet’ or ‘gravitational’ effect hypothesis asserts that, when trading halts are rule‐based, investors concerned with a likely impediment to trade advance trades in time. This behaviour actually pushes prices further towards the limit. Empirical studies about the magnet effect are scarce, most likely because of the unavailability of data on rule‐based halts. In this paper, we use a large database from the Spanish Stock Exchange (SSE), which combines intraday stock specific price limits and short‐lived rule‐based call auctions to stabilise prices, to test this hypothesis. The SSE is particularly well suited to test the magnet effect hypothesis since trading halts are price‐triggered and, therefore, predictable to some extent. Still, the SSE microstructure presents two particularities: (i) a limit‐hit triggers an automatic switch to an alternative trading mechanism, a call auction, rather than a pure halt; (ii) the trading halt only lasts 5 minutes. We find that, even when prices are within a very short distance to the price limits, the probability of observing a limit‐hit is unexpectedly low. Additionally, prices either initiate reversion (non limit‐hit days) or slow down gradually (limit‐hit days) as they come near the intraday limits. Finally, the most aggressive traders progressively become more patient as prices approach the limits. Therefore, both the price patterns and the trading behaviour reported near the limits do not agree with the price limits acting as magnetic fields. Consequently, we conclude that the switching mechanism implemented in the SSE does not induce traders to advance their trading programs in time.     

Non‐Monotonicity of the Tversky‐Kahneman Probability‐Weighting Function: A Cautionary Note

Cumulative Prospect Theory has gained a great deal of support as an alternative to Expected Utility Theory as it accounts for a number of anomalies in the observed behavior of economic agents. Expected Utility Theory uses a utility function and subjective or objective probabilities to compare risky prospects. Cumulative Prospect Theory alters both of these aspects. The concave utility function is replaced by a loss‐averse utility function and probabilities are replaced by decision weights. The latter are determined with a weighting function applied to the cumulative probability of the outcomes. Several different probability weighting functions have been suggested. The two most popular are the original proposal of Tversky and Kahneman and the compound‐invariant form proposed by Prelec. This note shows that the Tversky‐Kahneman probability weighting function is not increasing for all parameter values and therefore can assign negative decision weights to some outcomes. This in turn implies that Cumulative Prospect Theory could make choices not consistent with first‐order stochastic dominance.     

A High‐Frequency Investigation of the Interaction between Volatility and DAX Returns

One of the most noticeable stylised facts in finance is that stock index returns are negatively correlated with changes in volatility. The economic rationale for the effect is still controversial. The competing explanations have different implications for the origin of the relationship: Are volatility changes induced by index movements, or inversely, does volatility drive index returns? To differentiate between the alternative hypotheses, we analyse the lead‐lag relationship of option implied volatility and index return in Germany based on Granger causality tests and impulse‐response functions. Our dataset consists of all transactions in DAX options and futures over the time period from 1995 to 2005. Analyzing returns over 5‐minute intervals, we find that the relationship is return‐driven in the sense that index returns Granger cause volatility changes. This causal relationship is statistically and economically significant and can be clearly separated from the contemporaneous correlation. The largest part of the implied volatility response occurs immediately, but we also observe a smaller retarded reaction for up to one hour. A volatility feedback effect is not discernible. If it exists, the stock market appears to correctly anticipate its importance for index returns.     

Stock price firm‐specific information on the choice of stock payment in mergers and acquisitions

Previous studies on the choice of stock payment in M&A mainly focus on managerial private information. This study shows that managers also learn new firm‐specific information from financial markets in making this decision. The acquirer's stock price firm‐specific information increases the stock‐payment‐to‐Q sensitivity. The target's stock price firm‐specific information decreases the stock payment probability. Further analyses on deal and firm characteristics as well as shareholder wealth in stock mergers support the managerial learning argument. Overall, this study highlights a new set of information that affects the form of merger payment in mergers and acquisitions.     

Increasing the Tick: Examining the Impact of the Tick Size Change on Maker‐Taker and Taker‐Maker Market Models

We investigate the effects of an increase in tick size on order and trading flow across market fee models. Using the pilot firms in the U.S. Securities and Exchange Commission's Tick Size Pilot Program, we document that trade and order volume declines on maker‐taker fee models after the tick size implementation. We find that the inverted fee models (taker‐maker) experience an increase in both trade and order volume. Additionally, we find that a tick size adjustment has a substantial influence on market participation in maker‐taker fee models. We also find that measures of both hidden and algorithmic trading decline with an increasing tick size, which is strongly moderated by the differences in the maker‐taker and taker‐maker fee models.     

Capital gains tax,supply‐driven trading and ownership structure: direct evidence of the lock‐in effect

This study investigates the effect of differential capital gains tax rates on investor trading and share prices in a unique market setting that facilitates the resolution of conflicting prior evidence of holding period tax incentives. In particular, we examine whether the concessionary tax treatment of long‐term capital gains increases the supply of shares that qualify for long‐term status, thereby causing downward price pressure. We find evidence of abnormal seller‐initiated trading following the 12‐month anniversary of listing for IPO firms that appreciate in price (‘winners’) and report no such evidence for firms that decline in price (‘losers’). Consistent with the tax concessions being greater for individual than institutional investors, we report that abnormal seller‐initiated trading is mitigated by higher levels of ownership by institutional investors. We also report limited evidence, for winners, of declining share prices upon qualifying for long‐term tax status.     

Wisdom of Crowds: Cross‐Sectional Variation in the Informativeness of Third‐Party‐Generated Product Information on Twitter

This paper examines whether third‐party‐generated product information on Twitter, once aggregated at the firm level, is predictive of firm‐level sales, and if so, what factors determine the cross‐sectional variation in the predictive power. First, the predictive power of Twitter comments increases with the extent to which they fairly represent the broad customer response to products and brands. The predictive power is greater for firms whose major customers are consumers rather than businesses. Second, the word‐of‐mouth effect of Twitter comments is greater when advertising is limited. Third, a detailed analysis of the identity of the tweet handles provides the additional insights that the predictive power of the volume of Twitter comments is dominated by “the wisdom of crowds,” whereas the predictive power of the valence of Twitter comments is largely attributable to expert comments. Furthermore, Twitter comments not only reflect upcoming sales, but also capture an unexpected component of sales growth.     

Re‐Use of Collateral in the Repo Market

This paper introduces a methodology to estimate the re‐use of collateral based on actual transaction data. With a comprehensive data set from the Swiss franc repo market we are able to provide the first systematic study on the re‐use of collateral. We find that re‐using collateral was most popular prior to the financial crisis when roughly 10% of the outstanding interbank volume was secured with re‐used collateral. Furthermore, we show that the re‐use of collateral increases with the scarcity of collateral. By giving an estimate of the collateral re‐use and explaining its drivers, the paper contributes to the on‐going debate on collateral availability.     

The impacts of parent’s listing status on subsidiary’s financial constraint and cost of equity capital: the case of equity carve‐outs

We find that listed parents’ carve‐outs have investment‐cash‐flow sensitivities 70 per cent lower than unlisted parents’ carve‐outs, on average. Such a finding is stronger when we consider only equity carve‐outs in technological industries. The finding suggests that listed parents are more capable of alleviating the financial constraint of their carved‐out units than private parents. Our further analysis shows that listed parents’ carve‐outs also have a lower cost of equity than their counterparts, but such difference cannot be explained by corporate transparency, as implied by analyst coverage and analysts’ forecast dispersion. Therefore, we argue that the benefits from affiliation with a listed parent to the carve‐out come mainly from the parent’s financial support rather than an increase in corporate transparency.     

Is Investment‐Cash Flow Sensitivity Caused by Agency Costs or Asymmetric Information? Evidence from the UK

We investigate the investment‐cash flow sensitivity of a large sample of the UK listed firms and confirm that investment is strongly cash flow‐sensitive. Is this sensitivity a result of agency problems when managers with high discretion overinvest, or of asymmetric information when managers owning equity are underinvesting if the market (erroneously) demands too high a risk premium? We find that investment‐cash flow sensitivity results mainly from the agency costs of free cash flow. The magnitude of the relationship depends on insider ownership in a non‐monotonic way. Furthermore, we obtain that outside blockholders, such as financial institutions, the government, and industrial firms (only at high control levels), reduce the cash flow sensitivity of investment via effective monitoring. Finally, financial institutions appear to play a role in mitigating informational asymmetries between firms and capital markets. We corroborate our findings by performing additional tests based on the stochastic efficient frontier approach and power indices.     

Microdata Evidence on the Empirical Importance of Selection Effects in Menu‐Cost Models

We use microdata on product prices linked to information on the producing firms that set them to study to what extent the timing of price changes reacts to changes in marginal cost. This self‐selection of price changes is a key feature in the canonical Menu‐Cost model a la Golosov and Lucas Jr. (2007), which may generate near monetary neutrality (Golosov and Lucas Jr. 2007, Karadi and Reiff 2016), but is absent in the Calvo (1983) model. We find that the microdata strongly favors the Calvo (1983) model. Thus, upstream in the supply chain, price setting is best characterized by a very low degree of self‐selection into price changes.     

Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years

We commemorate the 50th anniversary of Ball and Brown [1968] by chronicling its impact on capital market research in accounting. We trace the evolution of various research paths that post–Ball and Brown [1968] researchers took as they sought to build on the foundation laid by Ball and Brown [1968] to create a body of research on the usefulness, timeliness, and other properties of accounting numbers. We discuss how those paths often link back to the groundwork laid and questions originally posed in Ball and Brown [1968].