Do spin-offs really create value? The European case

We study wealth effects for a sample of 156 spin-offs from 15 different European countries that were announced between January 1987 and September 2000. The cumulative average abnormal return over the 3-day event window is 2.62%. This number increases to 2.66% for the subsequently completed spin-offs. The cumulative average abnormal return is 3.57% for completed spin-offs by companies that increase their industrial focus and only 0.76% for non-focus increasing companies. The difference between these two sub-samples is significantly different from zero. These results are in line with previous studies for the US. The long-run returns in excess of matching firms are mostly insignificant for parents, subsidiaries and pro-forma combined firms. This result suggests that, unlike US spin-offs, European spin-offs are not associated with long-run superior performance.     

What should we know about momentum investing? The case of the Australian Security Exchange

This paper investigates Australian momentum strategies and their performance stability separately employing two samples a) the S&P/ASX 200 constituents and b) all market securities; for different time periods and market states. To avoid transaction intensive strategies, non-overlapping portfolios are employed. Results show that momentum performance is not sample specific and is positive in all cases, yet at varying magnitudes for different states and years. The profits are robust to univariate and multivariate risk considerations, seasonality (which is however present), and to different starting months.     

Do uninformed crossed and internalized trades tap into unexpressed liquidity? The case of Nokia

Crossed and internalized upstairs trades are analysed in a dataset in which institutional investors can be identified. Earlier findings that upstairs trading is uninformed, taps into unexpressed liquidity, and does not affect market quality are revisited. The permanent price effect of crossings and internalized upstairs trades is significantly lower than that of limit order book trades due to the fact that the least informed institutional trades are routed upstairs. Crossed and internalized trades affect the depth and transaction costs in the limit order book and a greater reliance is placed on the upstairs market when liquidity is low and volatility is high.     

Do monetary policy announcements affect stock prices in emerging market countries? The case of Thailand

We examine the effect of monetary policy announcements in Thailand, which is one of emerging market countries in Asia, on stock prices at the firm level. We find that the expected change, rather than the unexpected change, in interest rates affects stock prices. The stock price response to the interest rate announcement is asymmetric. For instance, the relation between interest rate surprises and stock prices is conditional on the direction of the interest rate change. In general, macroeconomic conditions and firm characteristics cannot explain the stock price reaction to the announcement. In addition, stock prices of firms in different industries appear to react heterogeneously to the interest rate announcement.     

Do birds of the same feather flock together?: The case of the Chinese states equity markets

We examine the equity market price interdependence between China, Hong Kong, Singapore, and Taiwan based on the [Journal of Econometrics 66 (1995) 225] causality test which we bootstrap with leveraged adjustments. A new information criterion is used to choose the optimal lag order. We cover the period January 1, 1993–September 10, 2001 taking into account the Asian financial crisis in 1997. We find that before the Asian crisis, the only interaction among the Chinese markets was between Singapore and the markets of Taiwan and Hong Kong with the causality running from the former to the latter. However, after the Asian crisis, the Chinese equity markets became more interdependent among themselves although Hong Kong remained non-influential.     

The cost of being late? The case of credit card penalty fees

This paper is the first in the literature to examine the determinants of US credit card penalty fees. Many critics of credit card fees – including a number of US Senators – have argued that credit card penalty fees reflect banks’ market share. Using a unique data set we find that fees are increasing in customer risk which supports the position of defenders of penalty fees, such as banks. However, our finding that fees are increasing in a bank's market share is consistent with the concerns expressed by politicians and regulators. We also find card penalty fees are direct substitutes for card interest rates.     

Do investors hold that they know? Impact of familiarity bias on investor’s reluctance to realize losses: Experimental approach

In this article we investigate the impact of familiarity bias on the individual investor’s reluctance to realize losses. Our experimental approach reveals a strong correlation between familiarity and disposition effect. We conducted 714 tests in which different respondents could sell stocks of two types – winners and losers. One group of respondents “owned” familiar assets and another group operated anonymous portfolios. The results of the experiment show that an individual investor’s tendency to ride losers too long is more than twice as high in the case of unfamiliar stocks as it is when assets are familiar to the holder.     

Do boards know when they hire a CEO that is a good match? Evidence from initial compensation

Are CEO initial compensation packages based on variations in the expected match quality of the hiring firms? Using CEO tenure as a proxy for expected match quality, and a sample of CEO turnovers between 1992 and 2006, we find that CEOs that experience good matches, defined as tenures exceeding four years, have higher initial compensation packages. We also find evidence from exogenous switching regression models that inside CEOs receive a higher good match premium than outside CEOs. To account for economic and regulatory changes across our sample period, we divide our sample into three subsamples: 1992–1997, 1998–2002, and 2003–2006, and repeat our analyses. Even though the positive relation between expected match quality and initial compensation persists across all periods, we find that the good match premium for inside and outside CEOs does not differ in the post-2002 period. We attribute this result to increased board independence and changes in regulation (Sarbanes–Oxley) in the post-2002 sample period.     

Is competition beneficial? The case of exchange traded funds

New ETF creation has surged in recent years, giving investors the option to choose from a wide range of similar ETFs within each group of competitors. We identify groups of ETFs that can be considered direct competitors and examine the impact of competition on their market quality. Results show improved market quality measures when competition increases. A change equivalent to going from a monopoly to a highly competitive market results in a 29% decrease in bid–ask spreads, a 72% decrease in illiquidity, and a 52% increase in turnover. However, we find that competition has a differential impact on ETFs according to their market depth. Market quality improves with competition for large or well-performing ETFs, while it worsens for small or under-performing ETFs. A case study on ETFs banned by the SEC in March 2010 further highlights our results in the artificially controlled competitive environment of the moratorium.     

Do locals know better? A comparison of the performance of local and foreign institutional investors

We compare the performance of local versus foreign institutional investors using a comprehensive data set of equity holdings in 32 countries during the 2000–2010 period. We find that foreign institutions perform as well as local institutions on average, but only domestic institutions show a trading pattern consistent with an information advantage. Our results suggest a smart-money effect of local institutions in countries subject to higher information asymmetry, non-English speaking countries, countries with less efficient stock markets, with poor investor protection, or high levels of corruption. The local advantage is more pronounced in periods of market turmoil and in illiquid stocks.     

Does model complexity improve pricing accuracy? The case of CoCos

Review of Derivatives Research - In this study, we analyze whether model complexity improves accuracy of CoCo pricing models. We compare the out-of-sample pricing ability of four models using a...     

Are fairness opinions fair? The case of mergers and acquisitions

Over the period 1994–2003, 80% of targets and 37% of acquirers obtain a third-party assessment of the fairness of a merger or acquisition. These fairness opinions do not affect deal outcomes when used by targets, but they affect deal outcomes when used by acquirers. The deal premium is lower in transactions if the acquirer obtains a fairness opinion, and is further reduced if multiple advisors provide an opinion. However, the acquirer's announcement-period return is 2.3% lower if the acquirer has a fairness opinion, especially if the acquirer pays a high premium, indicating that investors are skeptical of these transactions.     

Speculation or currency? Multi-scale analysis of cryptocurrencies—The case of Bitcoin

This paper proposes a novel two-stage VMD-based multi-scale regression to analyze various cryptocurrency attributes that are still unclear in the existing literature. In the first stage, Variational Mode Decomposition (VMD) is used to decompose the cryptocurrency prices into low, medium and high frequency modes with different attributes. In the second stage, the VMD-based multi-scale regression is proposed for these modes with selected explanatory variables. Using the proposed framework, we focus on analyzing the multiple attributes of daily Bitcoin price data as a case study. Empirical results indicate that the low-frequency mode has specific currency or long-term investment characteristics, unlike the short/medium-term investment attributes for the medium-frequency mode, while the high-frequency mode represents some speculation. Some events merely affect a single frequency mode, but others impact all frequency modes. The results of events analysis based on VMD could enhance the identification of the multiple attributes of Bitcoin. Our findings are insightful for future regulation and management of virtual currencies.     

Too much of a good incentive? The case of executive stock options

Using a utility-maximization framework, I show that the incentive to increase stock price does not always increase as more options are granted. Keeping the total cost of his compensation fixed, granting more options creates greater incentives to increase stock price only if option wealth does not exceed a certain fraction of total wealth. Beyond this critical level, granting more options actually reduces incentive effects and becomes counterproductive. In addition, stock options also create incentive to reduce (increase) idiosyncratic (systematic) risk. These incentive effects are sensitive to the choice of exercise price.     

Do IFRS Reconciliations Convey Information? The Effect of Debt Contracting

We examine whether earnings reconciliation from U.K. generally accepted accounting principles (GAAP) to International Financial Reporting Standards (IFRS) convey information. As a result of debt contracting, mandatory accounting changes are expected to affect the likelihood of violating existing covenants based on rolling GAAP, leading to a redistribution of wealth between shareholders and lenders. Consistent with this prediction, we find significant market reactions to IFRS reconciliation announcements. These market reactions are more pronounced among firms that face a greater likelihood and costs of covenant violation and early announcements. While the association between later announcements and weaker market reactions is consistent with contractual implications of technical changes to earnings, which investors quickly learn to predict, it is inconsistent with IFRS forcing all firms in the sample to reveal firm-specific information through accruals. Thus, by showing that mandatory IFRS also affects debt contracting, we expand on existing IFRS research that focuses on how accounting quality and cost of capital are impacted.     

The Landscape of Economic Growth: Do Middle-Income Countries Differ?

We review the growth experience of middle-income countries. Economic factors associated with growth appear to differ between middle-income and other countries. The efficiency of the financial system is importantly related to the growth rate in low- and middle-income countries, but appears to matter less as one moves up the income scale. Demographic variables also matter importantly in low-income countries. In middle-income countries, in contrast, measures of the financial system no longer appear to matter as importantly, as if inefficiencies in banking and financial systems are no longer as binding a constraint as at earlier stages of financial development; nor are demographic variables as important as before. At this point, other variables gain a growing role: these include whether the country experiences a banking or currency crisis, the extent of non-foreign direct investment capital inflows, and government debt as a share of gross domestic product.     

The performance of venture capital investments: Do investors overreact?

Using a unique proprietary data set of over 5400 realized and unrealized venture capital investments between 1980 and 2005, we examine the impact of demand-related factors, e.g. entrepreneurial activity, as well as supply-related factors, i.e. money provided by VC investors, on the return of individual VC investments. This way, we are able to shed more light on the question whether volatile VC investment returns are rather driven by fundamental changes with regard to the number of attractive investment opportunities or by the overreaction by investors. We find that rising demand for VC, i.e. an increase in entrepreneurial activity, results initially in higher returns. However, our results also indicate that overreaction on the supply side can be observed, destroying deal-level results. Overfunding, specifically overinvesting seems to be a recurring characteristic of the VC industry. In fact, contra-cyclical investment strategies yield highest deal-level returns.     

Rewarding risk-taking or skill? The case of private equity fund managers

We examine whether typical private equity fund compensation contracts reward excessive risk-taking rather than managerial skill. Our analysis is based on a novel model of investment value, cash flows, and fee dynamics of private equity funds. Given the embedded option-like fee components, our results demonstrate that fund managers indeed have an incentive for excessive risk-taking when only fee income from the current fund is considered. However, when managers also consider potential compensation from follow-on funds, their risk-taking incentives depend on their individual skill levels, and skilled managers will have an incentive to reduce fund risk. We also show that managers must generate substantial abnormal returns in order to compensate investors for the given fee components.     

The economic function of credit rating agencies – What does the watchlist tell us?

Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody’s rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract á la Boot et al. (2006), inducing the companies “on watch” to abstain from risk-augmenting actions. The agencies’ economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function.     

The information content of stock split announcements: Do options matter?

We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.