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.

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.

How Do Employees View Their Underwater Stock Options?: Evidence from the Stock Option Exchange Program

This paper examines the participation decisions of employees in a stock option exchange program aimed at restoring value to underwater options. The program invites employees to exchange their existing underwater options for new options, the value of which is determined by the company stock price in 6 months and 1 day. The participation turns out to vary cross-sectionally and, perhaps surprisingly, the employees do not surrender all their underwater options. We find that employees actively and rationally consider a variety of factors to make their participation decisions, rather than blindly surrendering their underwater options. The participation decisions of non-executive employees seem to be well anticipated by stock market investors, since no abnormal stock returns are related to the participation decisions.

Investment opportunities,free cash flow,and stock valuation effects of secured debt offerings

This paper examines the role of investment opportunities and free cash flow in explaining the source of the stock valuation effects of secured debt offerings. We find a significantly positive relation between a firm's investment opportunities and its stock price response to announcements of secured debt issues. This evidence supports the investment opportunities hypothesis that secured debt financing is more valuable for issuing firms with high growth opportunities. In contrast, we find a lack of support for the free cash flow hypothesis. These findings hold even after controlling for other potentially influential variables. Our study provides a better understanding of the relative importance of various potential determinants in explaining the variation in the valuation impact of secured debt issues.

The cross-sectional relationship between stock returns and domestic and global factors in the Chinese A-share market

By using an extension of the Fama and MacBeth cross-sectional regression model, this analysis examines the relationship between stock returns and (i) a local beta, (ii) two global betas, and (iii) some firm-specific characteristics in the Chinese A-share market. The results of the analysis suggest that neither the conditional local beta nor the global betas has a significant relationship with stock returns in A-shares. Our findings indicate that firm factors, such as the book-to-market ratio and firm size, are important in explaining stock returns. However, the size effect is sensitive to the specification of the model. Finally, the results of sub-period tests indicate that the A-share market did not become increasingly integrated with either the world stock markets or the Hong Kong stock market over the period 1995–2002.

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.

Specification analysis of corporate equity financing decision: a conditional residual approach

This article revisits the debate on the nature of private placements by specifying that informed insiders make trading decisions in the secondary market and equity issuance decision in the primary equity market (Lee and Wu (2008)). This article uses conditional residuals from the insider trading regression (abnormal insider trades) and conditional residuals from equity financing choice regression (unexpected equity financing choice) to measure private information. An important advantage of conditional correlation coefficient approach over the two-stage approach (Lee and Wu 2008) in testing the presence of asymmetric information is that the former is bounded by −1 and 1 and thus permits cross-sectional comparisons the relatedness between abnormal insider trades and unexpected equity financing choice.

Valuation and incentive effects of hurdle rate executive stock options

Traditional executive stock options are often criticized for inherently weak links between pay and performance. Hurdle rate executive stock options represent a viable improvement. However, valuing these options presents extraordinary analytic difficulties. With a constant dividend yield the strike price becomes a path-dependent function of the stock price and exact analytic valuation is intractable. To solve this problem, we apply the Monte Carlo valuation approach developed by Longstaff and Schwartz (Rev Financ Stud 4:113–147, 2001) to estimate the value of path-dependent American options. We also extend the methodology to incorporate the theoretical framework by Ingersoll (J Bus 79:453–487, 2006) to permit subjective valuation influenced by an executive’s risk aversion.

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.

Transaction Costs and Price Volatility: New Evidence from the Tokyo Stock Exchange

We investigate the volatility impacts of the full commission deregulation in Japan in October 1999, and find that the deregulation overall tends to significantly increase price volatility in the Japanese equity market, using alternative model specifications and control variables. This finding contrasts with previous evidence that implies a positive relation between transaction costs and price volatility, while consistent from the converse with the hypothesis proposed by Stiglitz (1989) and Summers and Summers (1989). Our results suggest that imposing higher transaction costs might still be a feasible policy tool for stabilizing the market by curbing short-term noise trading.

An integrated analysis of the association between accrual disclosure and the abnormal accrual anomaly

We find no evidence of accrual mispricing for firms that disclose accrual information at earnings announcements. For these firms, the market differentiates the discretionary from the nondiscretionary components of the earnings surprise. In contrast, the market fails to distinguish between the discretionary and the nondiscretionary components of the earnings surprise for firms that do not disclose accrual information at earnings announcements. These firms experience some stock price correction around the filing date. However, the correction is only partial, resulting in a post-filing drift.

Feasible momentum strategies: Evidence from the Swiss stock market

While there is little controversy on the profitability of momentum strategies, their implementation is afflicted with many difficulties. Most important, chasing momentum can generate high turnover. Though there are already several attempts to make momentum strategies less expensive with respect to transaction costs, we go a step further in the simplification of momentum strategies. By restricting our sample to Switzerland’s largest blue-chip stocks and choosing only one winner and one loser stock, we find average returns to our momentum arbitrage portfolios of up to 44% p.a. depending on the formation and holding periods. While unconditional risk models are at odds with momentum profits, stock market predictability and time-varying expected returns explain a large part of the momentum payoffs, including the post-holding period behavior of the winner and loser stocks (overreaction and subsequent price correction).

Securities Transaction Tax and Market Efficiency: Evidence from the Japanese Experience

This study examines the effect of transaction costs on the time series behavior of stock returns over a period surrounding the April 1989 changes in tax rates on securities transactions and capital gains in Japan. We find significant decreases in estimates of the first-order autocorrelation in returns for Japanese stocks listed in Japan, but no changes for Japanese stocks dually listed in the United States as American Depository Receipts (ADRs), which were not subject to the tax law change. We also find lower price basis between the ADRs and their underlying Japanese stocks. These results are consistent with the hypothesis that a reduction in transaction costs improves the efficiency of the price discovery process.

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.

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.

Measuring the impact of sales on earnings and equity price

In this paper we examine how sales affect earnings and in turn the stock price using a model in which sales contribute to earnings by a fixed sales margin rate and the stock price responds more sensitively to sales-induced earnings than to non-sales-induced earnings. We report that the regression coefficient of the sales margin (2.54) is about three times the earnings response coefficient (0.85) for the full sample and can be as high as 19 times the earnings response coefficient for an industry (i.e., 11.95 vs. 0.62 for restaurants). We contribute to the literature by identifying and documenting factors that make separating out the sources of earnings more important in equity pricing.

Firm valuation, abnormal earnings, and mutual funds flow

We examine the valuation effects of overall demand for corporate equities combined with the influence of abnormal earnings and unexpected funds flow. Our results indicate that the expected and unexpected net new total flow of funds into all stock mutual funds do not by themselves have a meaningful effect on firm equity valuation. However, we find the combination of unexpected funds flow and realized abnormal earnings have significant and important valuation effects. Importantly, the valuation impact is greatest for those firms with high earnings growth potential that also operate in an environment characterized by high information asymmetry.

Are executive stock option exercises driven by private information?

In this study, we investigate the extent to which exercise of executive stock options is based upon private information. Contrary to popular belief, we find that shares are held more than 30 days following over a quarter of options exercised. Partitioning the data, we find weak evidence that decisions to exercise and sell immediately are prompted by bad news and stronger evidence that decisions to exercise and hold for at least 30 days are prompted by good news. Enhancing the power of our tests by considering several factors important to exercise decisions, we find that the higher the opportunity costs of early exercise as measured by the time-value of options, the greater the trading profits to executives. We also find that the greater the disguise provided by incentives to diversify and consume as measured by the depth of options in the money, the greater the trading profits to executives who exercise and sell. Turning to non-exercise decisions, we find that a strategy of holding options rather than shares to exploit good news yields positive abnormal returns consistent with theoretical predictions in the absence of dividends.

Financial Leverage,CEO Compensation,and Corporate Hedging: Evidence from Real Estate Investment Trusts

This paper studies the determinants of corporate hedging practices in the REIT industry between 1999 and 2001. We find a positive significant relation between hedging and financial leverage, indicating the financial distress costs motive for using derivatives in the REIT industry. Using estimates of the Black–Scholes sensitivity of CEO’s stock option portfolios to stock return volatility and the sensitivity of CEO’s stock and stock option portfolios to stock price, we find evidence to support managerial risk aversion motive for corporate hedging in the REIT industry. Our results indicate that CEO’s cash compensation and the CEO’s wealth sensitivity to stock return volatility are significant determinants of derivative use in REITs. We also document a significant positive relation between institutional ownership and hedging activity. Further, we find that probability of hedging is related to economies of scale in hedging costs.

The valuation consequences of voluntary accounting changes

Firm management typically claims that voluntary accounting method changes (VACs) are made to enhance the informativeness of earnings by better matching accounting practices with economic reality. In contrast, skeptics argue that managers adopt new accounting procedures to opportunistically manage earnings and influence their firm’s stock price. In this paper, we investigate these alternative motives for VACs. Specifically, we investigate whether VACs cause equity prices to deviate from their fundamental values in the short-term by studying the long-run stock-price performance for a sample of firms that voluntarily change accounting methods. In addition, we investigate changes in earnings informativeness by examining the behavior of earning response coefficients and the relationship between earnings and future cash flows in years surrounding the VAC event. In contrast to prior research, we find little evidence that a strategy based solely on the earnings effect of a VAC can generate abnormal returns. While we find weak evidence of post-VAC abnormal returns for extreme VACs, this result appears to be driven by the accruals anomaly documented in Sloan [Sloan, R. G. (1996). The Accounting Review, 71, 289–315]. Our evidence further suggests that earnings informativeness is not significantly altered by voluntary changes in accounting methods. Taken together, our evidence suggests the market recognizes the financial statement effects of alternative acceptable accounting methods and efficiently processes the valuation implications of VACs.