Are margin traders informed?

The literature offers contradictory views on the informativeness of margin trading using various measures of information content. Utilising data from a Chinese margin‐trading pilot programme initiated in 2010, this paper investigates whether margin traders are informed by directly examining the return predictability of margin‐trading activity. We find that margin‐trading activities cannot positively predict future stock returns. Moreover, we explore some non‐informational trading strategies used by margin traders, e.g., positive‐feedback strategies and moving‐average trading rules. These results suggest that margin traders are noise traders rather than informed traders, and margin trading conveys no new firm‐specific information.     

Are short sellers incrementally informed prior to earnings announcements?

Contrary to the hypothesis that informed short sellers increase their positions prior to earnings announcements, we find that short activity declines in the pre-announcement period compared with activity in non-announcement time. This statistically significant, but economically modest, decline may suggest that the fraction of informed short sellers actually increases if (as Diamond and Verrecchia (1987) suggest) the uncertainty around earnings announcements increases short selling costs and causes uninformed short sellers to withdraw from the market. While we find a statistically and economically significant inverse relation between pre-announcement short activity and announcement period returns, when we control for the non-announcement ability of short sellers to predict future returns documented by Diether et al. (2009), the significance of the relation between pre-announcement short activity and announcement period returns vanishes. Thus, we infer that short sellers are not incrementally informed prior to earnings announcements.     

Are candlestick technical trading strategies profitable in the Japanese equity market?

We show that candlestick charting, the oldest known form of technical analysis, is not profitable in the Japanese equity market over the 1975–2004 period. Candlestick technical analysis, which was developed in Japan in the 1600s, is deeply intertwined with Japanese culture and is very popular in Japan. However, there is no evidence candlestick technical trading strategies add value in either the entire 30 year period, in three 10 year sub-periods or in bull or bear markets.

Are institutional investors informed? The case of dividend changes for REITS and Industrial Firms

Review of Quantitative Finance and Accounting - Prior evidence on whether institutions are informed about dividend changes is mixed. We contribute to this debate by examining institutional trade...     

Which institutional investor types are the most informed?

We examine the informativeness of quarterly disclosed portfolio holdings across four institutional investor types: hedge funds, mutual funds, pension funds and private banking firms. Overweight positions outperform underweight positions only for hedge funds. By decomposing holdings and stock returns, we find that hedge funds are superior to other institutional investors both at picking industries and stocks and that they are better at forecasting long‐term as well as short‐term returns. Furthermore, our results show that hedge funds, mutual funds and pension funds are able to successfully time the market. The outperformance of hedge funds is not explained by a liquidity premium.     

Are cryptocurrencies homogeneous?

This article investigates if cryptocurrencies returns' are similarly affected by a selection of demand- and supply-side determinants. Homogeneity among cryptocurrencies is tested via a least absolute shrinkage and selection operator (LASSO) model where determinants of Bitcoin returns are applied to a sample of 12 cryptocurrencies. The analysis goes beyond existing research by simultaneously covering different periods and design choices of cryptocurrencies. The results show that cryptocurrencies are heterogeneous, apart from some similarities in the impact of technical determinants and cybercrime. The cryptocurrency market displays evidence of substitution effects, and design choices related explain the impact of the determinants of return.     

Are leaders portable?

Does management talent transfer from one company to another? The market certainly seems to think so. Stock prices spike when companies announce new CEOs from a talent generator like General Electric. But how do these executives perform over the long term? The authors studied the careers of 20 former GE executives who went on to lead other major organizations, with strikingly uneven results. Even the best management talent, the authors found, is transferable only if it maps to the challenges of the new environment. More specifically, the authors identified five types of skills that may or may not transfer to a new job: general management human capital, or the skills to gather, cultivate, and deploy financial, technical, and human resources; strategic human capital, or individuals' expertise in cost cutting, growth, or cyclical markets; industry human capital, meaning the technical and regulatory knowledge unique to an industry; relationship human capital, or the extent to which a manager's effectiveness can be attributed to his or her experience working with colleagues or as part of a team; and company-specific human capital, or the knowledge about routines and procedures, corporate culture and informal structures, and systems and processes that are unique to a company. The GE executives' performance as CEOs depended on whether their new organizations were able to leverage each type of skill. The authors'findings challenge the conventional wisdom on human capital, which holds that there are two types of skill: general management, which is readily transferable, and company specific, which is not. In fact, they argue, other types of management capabilities can make a significant contribution to performance, and company-specific skills can be an asset in a new job.     

Efficiency in housing markets: Which home buyers know how to discount?

We test for efficiency in the Swedish co-op market by examining the negative relationship between the sales price and the present value of future monthly payments or ‘rents’. If the co-op housing market is efficient, the present value of co-op rental payments due to underlying debt obligations of the cooperative should be fully reflected in the sales price. However, a one hundred kronor increase in the present value of future rents only leads to an approximately 75 kronor reduction in the sales price. These inefficiencies are larger at the lower end of the housing market and in poorer, less educated regions and appear to reflect both liquidity constraints and the existence of more ‘sophisticated’ buyers in higher educated areas. Overall, our findings suggest that there is some systematic failure to properly discount the future stream of rent payments relative to the up front sales price.     

Can margin traders predict future stock returns in Japan?

A growing body of literature suggests that investor sentiment affects stock prices both at the firm level and at the market level. This study examines the relationship between investor behavior and stock returns focusing on Japanese margin transactions using weekly data from 1994 to 2003. Margin trading is dominated by individual investors in Japan. In analysis at the firm level, we find a significant cross-sectional relationship between margin buying and stock returns. Both market-level and firm-level analyses show that margin buying traders follow herding behavior. They seem to follow positive feedback trading behavior for small-firm stocks and negative feedback trading behavior for large firm stocks. Our results show that information about margin buying helps predict future stock returns, especially for small-firm stocks at short horizons. The predictive power does not diminish even after controlling for firm size and liquidity.     

Stock or cash? The trade-offs for buyers and sellers in mergers and acquisitions

In 1988, less than 2% of large deals were paid for entirely in stock; by 1998, that number had risen to 50%. The shift has profound ramifications for shareholders of both the acquiring and acquired companies. In this article, the authors provide a framework and two simple tools to guide boards of both companies through the issues they need to consider when making decisions about how to pay for--and whether to accept--a deal. First an acquirer has to decide whether to finance the deal using stock or pay cash. Second, if the acquirer decides to issue stock, it then must decide whether to offer a fixed value of shares or a fixed number of them. Offering cash places all the potential risks and rewards with the acquirer--and sends a strong signal to the markets that it has confidence in the value not only of the deal but in its own stock. By issuing shares, however, an acquirer in essence offers to share the newly merged company with the stockholders of the acquired company--a signal the market often interprets as a lack of confidence in the value of the acquirer's stock. Offering a fixed number of shares reinforces that impression because it requires the selling stockholders to share the risk that the value of the acquirer's stock will decline before the deal goes through. Offering a fixed value of shares sends a more confident signal to the markets, as the acquirer assumes all of that risk. The choice between cash and stock should never be made without full and careful consideration of the potential consequences. The all-too-frequent disappointing returns from stock transactions underscore how important the method of payment truly is.     

Female directors: Why are some less informed than others?

We find the limited supply of female directors, rather than gender differences or boardroom biases, can create an informational disadvantage for some female independent directors, as measured by their open market trading profits. The information disparity is largely isolated to firms with abnormally low representation by female directors. Female independent directors who are located further away from the company's headquarters, have less industry experience or have shorter tenure exhibit the most limited information access. Accounting for these obstacles reduces the gender disparity in information. We further find that this information disparity among female independent directors contributes to the variation in their influence on board monitoring. More informed female independent directors are associated with fewer restatements, lower abnormal CEO compensation and higher Tobin's Q. Our results have several policy implications.     

Are busy boards detrimental?

Busy directors have been widely criticized as being ineffective. However, we hypothesize that busy directors offer advantages for many firms. While busy directors may be less effective monitors, their experience and contacts arguably make them excellent advisors. Among IPO firms, which have minimal experience with public markets and likely rely heavily on their directors for advising, we find busy boards to be common and to contribute positively to firm value. Moreover, these positive effects of busy boards extend to all but the most established firms. Benefits are lowest among Forbes 500 firms, which likely require more monitoring than advising.     

Are inflation expectations rational?

Several recent papers report evidence of an apparent statistical bias in inflation expectations and interpret these findings as overturning the rational expectations hypothesis. In this paper, we investigate the validity of such an interpretation. We present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions. By construction, model agents form “rational” expectations. We run a standard regression on equilibrium realizations of inflation and inflation expectations over sample periods corresponding to those tests performed on actual data and find evidence of an apparent bias in inflation expectations. Our experiments suggest that this incorrect inference is largely the product of a small sample problem, exacerbated by short-run learning dynamics in response to infrequent shifts in monetary policy regimes.     

Are credit ratings procyclical?

This paper studies the influence of the state of the business cycle on credit ratings. In particular, we assess whether rating agencies are excessively procyclical in their assignment of ratings. Our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms, in addition to indicators of macroeconomic conditions. Utilizing annual data on all US firms rated by Standard & Poor’s, we find that ratings do not generally exhibit excess sensitivity to the business cycle. In addition, we document that previously reported findings of a secular tightening of ratings standards are not robust to a more complete accounting of systematic changes to measures of risk.     

Are Information Attributes Priced?

A seminal model in finance links cost of equity capital to information precision, composition and dissemination. Using realized returns to proxy for cost of equity capital and the probability of an informed trade (PIN) to proxy for composition, prior research documents results consistent with the model's prediction regarding composition. Nonetheless, prior research that examines the construct validity cautions against the use of future realized returns to proxy for cost of equity capital and recommend r_{DIV_PREM} or r_{PEG_PREM} instead. The authors speculate but do not demonstrate how the results in existing research might be incorrect due to their use of realized returns. This paper provides such evidence. We find that the authors inference regarding PIN is dependent on their choice of realized returns to proxy for cost of equity capital. We also estimate a more complete specification of the model that includes precision and dissemination, and we decompose PIN into its component parts to isolate that portion of PIN that varies with dissemination. These refinements allow for new insights regarding the veracity of the model's predictions. We conclude that cost of equity capital is increasing in composition, and decreasing in dissemination, and find some, albeit not conclusive support, for the prediction that cost of equity capital is decreasing in precision.     

Are Odd-Lot Orders Informed?

Using a version of the ITCH data set time stamped to the millisecond, O'Hara, Yao and Ye find that odd-lot trades are highly informed. However, NASDAQ reports trades based on the size of the resting limit order, creating a bias in the count of odd-lot trades. Using ITCH data from 2013, time stamped to the nanosecond, we find that roughly 50% of odd-lot trades are created by the resting limit order and are part of larger marketable orders. We show that odd-lot marketable orders are not more informed than round/mixed lot marketable orders.     

Are IPOs Really Underpriced?

While IPOs have been underpriced by more than 10% during thepast two decades, we find that in a sample of more than 2,000IPOs from 1980 to 1997, the median IPO was significantly overvaluedat the offer price relative to valuations based on industrypeer price multiples. This overvaluation ranges from 14% to50% depending on the peer matching criteria. Cross-sectionalregressions show that "overvalued" IPOs provide high first-dayreturns, but low long-run risk-adjusted returns. These overvaluedIPOs have lower profitability, higher accruals, and higher analystgrowth forecasts than "undervalued" IPOs. Ex post, the projectedhigh growth of overvalued IPOs fails to materialize, while theirprofitability declines from pre-IPO levels. These results suggestIPO investors are deceived by optimistic growth forecasts andpay insufficient attention to profitability in valuing IPOs.     

Are workpaper reviews preparer-specific?

We investigate the potential for preparer specific performance dimensions to influence workpaper reviewer's judgments and actions. In a 2 × 2 experimental design, we manipulate two factors: 1) the amount of time, relative to the budgeted hours, expended by the preparer to complete the workpaper, and 2) preparer interpersonal behaviors during the course of the audit. The participants in our sample consist of 138 Mexican audit managers and seniors representing all four Big 4 public accounting firms. Although the participants reviewed an identical workpaper, the results of our experiment reveal that reviewers wrote significantly fewer(more) review comments and judged it to be of higher(lower) quality when the preparer completed the workpaper under(over) the budgeted time or when the preparer demonstrated good(poor) interpersonal behaviors.