The role of trades in price convergence: A study of dual-listed Canadian stocks

We examine the role of trades in restoring price parity for equities trading in multiple markets. Using a sample of stocks trading on the Toronto Stock Exchange and on the NYSE, AMEX or NASDAQ, we contrast price convergence when market makers (a) observe only lagged quotes from both markets and (b) also observe local order flow. Traditional error correction model estimates show that prices in the two markets adjust towards parity in response to quoted price discrepancies, meaning that observation of the cross-market quote helps restore parity. Including order flow in an augmented error correction model, we find that incremental price convergence occurs when trades are routed to the market with the better price, and the importance of quotes in the price convergence process is reduced. Cross-sectional analysis reveals that the importance of order flow in each market is decreasing in firm size and increasing in measures of liquidity. Our findings point to an important, and hitherto unexamined, role for trades in promoting inter-market price convergence.     

Ex-dividend price behavior of common stocks

This study examines common stock prices around ex-dividend dates.Such price data usually contain a mixture of observations -some with and some without arbitrageurs and/or dividend capturersactive. Our theory predicts that such mixing will result ina nonlinear relation between percentage price drop and dividendyield - not the commonly assumed linear relation. This predictionand another important prediction of theory are supported empirically.In a variety of tests, marginal price drop is not significantlydifferent from the dividend amount. Thus, over the last severaldecades, one-for-one marginal price drop has been an excellent(average) rule of thumb.     

The history and performance of concept stocks

This study investigates the performance of firms with extremely high levels of market to sales value (“concept stocks”). To many observers, these stocks appear overvalued. However, proponents argue that because of their unique characteristics, traditional pricing models fail to value these firms correctly. Ex post, the debate can be resolved through an analysis of the long-term performance of concept stocks. En route to testing the implied overpricing hypothesis we document several important findings. First, the identity and characteristics of concept stocks have changed markedly over time. Although the obvious recent examples are internet and biotech stocks, concept stocks vary widely by industry over the past four decades. The industries containing the most popular concept stocks evolve from oil and gas extraction in the 1960s and 1970s, to computer and office equipment in the 1980s, and to computer-related services in the 1990s. Second, although concept stocks tend to be young, small, growth stocks in the 1990s, they exhibit a wide range of characteristics throughout the sample period. Third, the relative pricing of concept stocks (compared to either a control sample or the entire population) has changed dramatically over time. The average concept stock sold for approximately three times sales in the late 1960s and 1970s, five times sales in the 1980s and nearly 17 times sales in the 1990s. Finally, we find evidence supporting the overpricing hypothesis. Concept stocks under-perform significantly in the long run. This under-performance is more severe for Nasdaq firms and in the most recent two decades. The results are separate from glamour, IPO, industry, or contrarian effects and remain after an extensive sensitivity analysis.     

JIT performance effects: A research note

This paper uses a sample of 131 just-in-time (JIT) firms and their matched non-JIT firms to examine whether adoption of JIT improves firm performance. Tobin's Q and return on assets (ROA) are used to measure firm performance. Overall, the results indicate that statistically significant differences in Tobin's Q and ROA were observed in a pre- and post-test of JIT adopters and between matched non-JIT adopters.     

The performance of stocks that are reverse split

An unusually high number of Nasdaq National Market stocks were reverse split following the decline in Nasdaq prices in the year 2000. We test whether these splits were driven by the overall market decline. We find that the performance of stocks with reverse splits in poor overall stock market conditions is better (less negative) than that in good market conditions, and that the differences in performance appear three to five months after the split. This suggests that the longer-term outcomes of reverse stock splits are associated with the market environment at the time of the split. In view of this, changes that Nasdaq made to relax some of its listing standards are well justified.

Portfolio choice with indivisible and illiquid housing assets: the case of Spain

This paper studies the investment decisions of Spanish households using a unique data-set, the Spanish Survey of Household Finance (EFF). We propose a theoretical model in which households, given a fixed investment in housing, allocate their net wealth across bank time deposits, stocks and mortgage. Besides considering housing as an indivisible and illiquid asset that restricts the portfolio choice decision, we take into account the financial constraints that households face when they apply for external funding. For every representative household in the EFF, we solve this theoretical problem and obtain the theoretically optimal portfolio that is then compared with households’ actual choices. We find that households significantly under-invest in stocks and deposits while the optimal and actual mortgage investments agree. Considering the three types of financial assets at once, we find that the households headed by highly financially sophisticated, older, retired, richer, and unconstrained persons are the ones investing more efficiently.     

The price impact of foreign institutional herding on large-size stocks in the Taiwan stock market

This study constructs a panel threshold regression model to explore the price impact of foreign institutional herding of firms listed in the Taiwan Stock Exchange during January 2000 to June 2008. Our panel threshold model is constructed to explore the price impact of foreign institutional investors?? herding in the Taiwan stock market after controlling the firm size. By examining the presence of threshold effect, this study analyzes whether firm size would obviously and asymmetrically affect the explanation for the effect of changes in foreign investors?? share ownership on abnormal returns. The empirical results of this study find the significant evidence of threshold effect which divides the stocks into large-size and small-size firms. It is found that foreign institutional investors in the Taiwan stock market tend to hold large-size stocks listed in the Taiwan Stock Exchange. There is an apparent increase in the subsequent abnormal returns on large-size stocks bought in bulk by foreign investors. The signals of changes in share ownership initiated by foreign institutional investors would reveal further information for improving the performance of asset reallocation decisions in Taiwan. The panel threshold model constructed in this paper well describes the price impact of institutional herding yet eschews the possibly subjective data snooping issue resulting from the two-pass sorting method as proposed by previous related researches.     

Dual-listings on international exchanges: the case of emerging markets' stocks

This paper examines the effects on stock returns of dual-listing on an international exchange. My sample consists of 70 firms from 10 emerging markets that dual-listed on the NYSE, NASDAQ and SEAQ-I (London) over the period 1991–1995. I evaluate whether an international dual-listing has any significant effect on returns, for the particular case of emerging markets' firms, and I proceed to investigate whether there is evidence to support an International Asset Pricing based explanation. In addition I compare the impact of US and London SEAQ-I listings. My results confirm previous empirical findings on international listings: the firms in my sample experience significant positive abnormal returns before listing and a significant decline in returns following listing. Evidence seems to be supportive of the segmentation hypothesis: dual-listing effects are more pronounced for emerging markets' listings and that pattern is similar across exchanges.
G15     

Short-term market reaction after extreme price changes of liquid stocks

In our empirical study we examine the dynamics of the price evolution of liquid stocks after experiencing a large intra-day price change, using data from the NYSE and the NASDAQ. We find a significant reversal for both intra-day price decreases and increases. Volatility, volume and, in the case of the NYSE, the bid–ask spread, which increase sharply at the event, stay significantly high days afterwards. The decay of the volatility follows a power law in accordance with the `Omori law'. While on the NYSE the large widening of the bid–ask spread eliminates most of the profits that can be achieved by an outside investor, on the NASDAQ the bid–ask spread stays almost constant, yielding significant short-term profits. The results thus give an insight into the size and speed of the realization of an excess return for providing liquidity in a turbulent market.     

A note on the location choice of multinational banks: The case of Japanese financial institutions

There are many studies investigating the location choice of foreign direct investment (FDI) of US banks. Nigh et al. (Journal of International Business Studies 17 (1986) 59–72) find that the choice does not depend on local banking opportunity. This paper examines what factors affect the location choice of Japanese multinational financial institutions. Our results are consistent with previous studies analyzing US banks in that the FDI of the manufacturing industry is an important determinant of the location choice of Japanese financial institutions. However, our results differ from Nigh et al., in that Japanese financial institutions choose their locations at least partially based on the local banking opportunity in the host countries.     

A note on price noises and their correction process: Evidence from two equal-payoff government bonds

The study offers the most direct evidence to date on price noises in call auctions and their correction. We examine a unique sample of two identical securities (two equal-payoff Israeli government bonds) that were traded on separate yet almost simultaneous auctions on the Tel-Aviv Stock Exchange (TASE). The prices of the bonds were equal on average. However, on most of the sample days there were price differences between the bonds. Various estimates suggest that the price noise in one bond is practically uncorrelated with that of the other, and both disappear by the end of the next-day auction.     

The price impact of the disposition effect on the ex-dividend day of NYSE and AMEX common stocks

We empirically test whether the disposition effect has an asymmetrical impact on the price adjustment on the ex-dividend day of common stocks listed in NYSE and AMEX during the 2001–2008 period. We find that stocks with accrued gains have a greater ex-day price drop ratio (PDR) than stocks with accrued losses. We also find a positive relationship between the PDR and the capital gains overhang that has significant explanatory power over the cross-sectional variability of the PDR. Moreover, the capital gains overhang seems to explain part of the time variation of the PDR for a particular stock that can be a winner or loser at different times. We attribute our results to the disposition effect because active (limited) selling by holders of winning (losing) stocks will most likely accelerate (restrain) the downward price adjustment on the ex-dividend day.     

UK interim and final dividend reductions: a note on price reaction

Price reactions to interim and final dividend reductions are found to be significantly negative and stronger for interim dividend reductions. Although the market reacted negatively around final dividend reduction announcements it bounced back to its prior level within one month of the announcements. The magnitude of price reactions to dividend reductions is found to be statistically related to the size of the dividend reduction, the post-announcement effect from day 2 to day 20, the pre-announcement effect from day ?20 to day ?2, the gearing ratio and the dummy variable interim versus final dividend reduction.     

A note on an analytical valuation formula for unprotected American call options on stocks with known dividends

This note provides simple analytic formulas for the value of an American call option on a stock with known dividends.     

A censored stochastic volatility approach to the estimation of price limit moves

A censored stochastic volatility model is developed to reconstruct a return series censored by price limits, one popular form of market stabilization mechanisms. When price limits are reached, the observed prices are truncated and the equilibrium prices are unobservable, which makes further financial analyses difficult. The model offers theoretically sound estimates of censored returns and is demonstrated via simulations to outperform existing approaches with respect to the estimates of model parameters, unconditional means, and standard deviations. The algorithm is applied to model stock and futures returns and results are consistent with the simulation outcomes.     

A note on the “risk-adjusted” price–concentration relationship in banking

Price–concentration studies in banking typically find a significant and negative relationship between consumer deposit rates (i.e., prices) and market concentration. This implies highly concentrated banking markets are “bad” for depositors. It also provides support for the Structure-Conduct-Performance hypothesis and rejects the Efficient-Structure hypothesis. However, these studies have focused almost exclusively on supply-side control variables and neglected demand-side variables when estimating the reduced form price–concentration relationship. For example, previous studies have not included in their analysis bank-specific risk variables as measures of cross-sectional derived deposit demand. We find that when bank-specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50%. We offer an explanation for these results based on the correlation between a bank’s risk profile and the structure of the market in which it operates. These results suggest that it may be necessary to reconsider the well-established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks. This has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies. And, in a more general sense, these results suggest that any Structure-Conduct-Performance based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables. And, thus, the results from those studies may be spurious.     

The price impact of order book events: market orders,limit orders and cancellations

While the long-ranged correlation of market orders and their impact on prices has been relatively well studied in the literature, the corresponding studies of limit orders and cancellations are scarce. We provide here an empirical study of the cross-correlation between all these different events, and their respective impact on future price changes. We define and extract from the data the ‘bare’ impact these events would have if they were to happen in isolation. For large tick stocks, we show that a model where the bare impact of all events is permanent and non-fluctuating is in good agreement with the data. For small tick stocks, however, bare impacts must contain a history-dependent part, reflecting the internal fluctuations of the order book. We show that this effect can be accurately described by an autoregressive model of the past order flow. This framework allows us to decompose the impact of an event into three parts: an instantaneous jump component, the modification of the future rates of the different events, and the modification of the jump sizes of future events. We compare in detail the present formalism with the temporary impact model that was proposed earlier to describe the impact of market orders when other types of events are not observed. Finally, we extend the model to describe the dynamics of the bid–ask spread.     

Slow diffusion of information and price momentum in stocks: Evidence from options markets

This paper investigates the source of price momentum in the stock market using information from options markets. We provide direct evidence of the gradual information diffusion model in Hong and Stein (1999): momentum profits are larger for stocks whose information diffuses slowly into the stock market. We exploit the options markets to identify stocks with slow information diffusion speed. As informed traders trade options to realize the information that has not been fully incorporated in the stock price, we are able to enhance the momentum strategy by selecting winner/loser stocks with high growth/large drop in call option implied volatility. Our empirical strategy generates a risk-adjusted alpha of 1.8% per month over the 1996–2011 period, during which the simple momentum strategy fails to perform. The results are robust to the impact of earnings announcement, transaction costs, industry concentration, and choice of options’ moneyness and time-to-maturity. Finally, our finding is not driven by existing stock- or option-related characteristics that are known to improve momentum.     

The usefulness of a performance measurement system in the daily life of an organisation: a note on a case study

The design and introduction of performance measurement systems in business organisations continues to be one of the areas within Management Accounting that attracts a great deal of interest. We have focused on this field using the case study method, a research approach which is helpful for the development of greater understanding of innovative management accounting systems, discarding other methods, such as data collection through surveys.The research work we present here aims to examine the usefulness of performance indicators in a Spanish subsidiary of a North American multinational company dedicated to the car sector. The present performance measurement system, which undergoes annual revisions, was designed and introduced by the management team of the Spanish plant and does not exist in any other plant in the group with the same structure and complexity. How it works is not therefore the result of any imposition by headquarters but is rather the result of negotiation and consensus within the plant itself, its main aim being to motivate behaviour.Access to a wealth of both quantitative and qualitative information has enabled us to (i) observe the integration of this performance measurement system within the organisational structure of the plant, its continuing revision, the resources it has at its disposal, its usefulness for achieving employee involvement, its capacity to motivate learning, its relation with the incentive system, and also (ii) to suggest a correlation between certain measures of the performance measurement system and profitability.     

The makings of an information leader: the intraday price discovery process for individual stocks in the DJIA

The main purpose of this paper is to construct an intraday arbitrage price series for each stock in the DJIA using information in the Diamond Trust Fund ETF. We then compute the information shares (Hasbrouck in J Finan 50(4):1175–1199, 1995) for the actual versus the arbitrage prices for each stock. While previous literature documents that ETFs lead stock indices in information origination, we find that some firms are “information leaders” in that the information share that comes from the stock price is larger than that which comes from the ETF-related arbitrage price. Further analysis is conducted to uncover the firm-specific factors that are related to a stock’s role in information generation.