THE ADJUSTMENT OF STOCK PRICES TO COMPLETELY UNANTICIPATED EVENTS

This paper utilizes standard cumulative residual analysis to study the response of stock prices to completely unanticipated events—fatal commercial airline crashes. Results indicate that the immediate negative reaction to fatal airline crashes is significant for only one full trading day after the event occurs. Hence, the market appears to assimilate the new information rapidly, even if the crash occurs in a remote geographic location. The paper also considers market response after the initial reaction period by assuming that the actual cumulative average residuals are drawn from the same distribution as the pre-crash base period and by calculating the probabilities that observed changes would occur. Results provide no evidence that underreaction or overreaction appeared in the initial response period. The hypothesis of complete, immediate adjustment is also supported by a repetition of the analysis on the subsample of airplane crashes where the greatest potential loss occurs.     

EMPIRICAL TESTS OF THE EFFICIENCY OF THE CURRENCY OPTION MARKET

Tests of a hedge and a rational boundary of the efficiency of the currency option market are conducted in this study. These tests use transactions data and account for the effects of currency and option bid/ask spreads, synchronization of option prices and underlying exchange rates, market depth, execution lags, and transaction costs. Currency options, unlike domestic stock options, exhibit continuous dividends. The nature of the option and of the data set employed makes the immediate exercise lower bound test one of the purest tests of market efficiency to date. Results reported here indicate no ability to earn abnormal economic or riskless arbitrage profit for the period when these tests are conducted.     

RATIONAL EXPECTATIONS AND THE DYNAMIC ADJUSTMENT OF SECURITY ANALYSTS' FORECASTS TO NEW INFORMATION

We report the results of unbiasedness tests of security analysts' earnings forecasts. By examining how analysts incorporate new information into their updated earnings forecasts we can analyze directly the effect of new information on analysts' forecast revisions and evaluate whether these revised forecasts converge to rational expectations forecasts. The forecasts made by security analysts participating in the Institutional Brokers Estimate System (IBES) database are analyzed. Using standard statistical tests, we reject the simple form of the rational expectations hypothesis. However, by extending the standard tests used in previous studies, we obtain results that suggest that analysts' earnings forecasts conform to a dynamic form of rationality. The tendency of revised forecasts to converge stochastically toward the rational expectations forecast cautions against the rejection of more complicated forms of rationality.     

AN EMPIRICAL EXAMINATION OF THE IMPACT OF LIMITED REVIEW ON EQUITY PRICES

SEC Accounting Series Release No. 177 required independent auditors to make a limited review of summarized quarterly data included in annual reports. This paper examines the reaction of investors to earnings announcements based on financial statements subject to limited review relative to announcements when no auditor involvement was required. The reaction of market participants is measured by an abnormal daily return metric of the common stock surrounding the published earnings announcement in The Wall Street Journal. As hypothesized, no difference in investor reaction is observed for the sample of firms subject to limited review for the 1977 fiscal year, but exempt in the 1976 fiscal year.     

THE ROLE OF INFORMATION AND THE TIME BETWEEN TRADES: AN EMPIRICAL INVESTIGATION

Previous studies propose that the time between trades is a measure of the existence of information and a manifestation of the demand and supply of liquidity. I find evidence that the time between trades is a measure of the existence of information. However, the evidence does not imply that liquidity constraints are an unimportant determinant of price changes. Further investigation indicates that price changes are partially related to liquidity constraints, when the liquidity constraint is measured by the availability of multiple counterparties. Finally, I find some evidence that information about trades, not necessarily related to information about the underlying asset, also affects price changes.     

AN EMPIRICAL EXAMINATION OF FINANCIAL LIBERALIZATION AND THE EFFICIENCY OF EMERGING MARKET STOCK PRICES

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from sixteen countries and three composite portfolios, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient before the actual liberalization.     

THE FUNDAMENTAL DETERMINANTS OF TRADING VOLUME REACTION TO FINANCIAL INFORMATION: EVIDENCE AND IMPLICATIONS FOR EMPIRICAL CAPITAL MARKET RESEARCH

Prior empirical research indicates that trading volume reaction to new information increases with the heterogeneity of investors’ prior beliefs. We examine three potential factors that theoretical models of financial economists show determine trading volume reaction to new information: heterogeneous prior beliefs, differential interpretation, and the consensus effect—the extent to which the information causes their beliefs to converge or diverge. We find that these three factors have a distinct and significant incremental effect on trading volume, thereby suggesting that empirical trading volume models that exclude or fail to control for any of these determinants are misspecified with biased estimated coefficients.     

INFORMATION ASYMMETRY AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS: FURTHER EMPIRICAL EVIDENCE

Information Asymmetry is usually assumed in most explanations of the underpricing of initial public offerings (IPOs). In Baron's (1982) model, the underwriter is better informed than the issuing firm concerning the demand for the IPO. The greater uncertainty associated with the demand will lead to a greater underpricing due to the enhanced value of the underwriter's expertise. In the case that the issuer is also an informed investment banker, Baron's hypothesis predicts no underpricing. Our results based on Canadian investment bankers do not support Baron's hypothesis.