WHO ARE THE NOISE TRADERS?

Closed‐end funds often trade at a discount to net asset value. Previous research suggests that the positive correlation in discounts is associated with investor sentiment that causes systematic mispricing by noise traders. We use a newly available sample of daily fund valuations to examine the relation between intraday trading activity and discount changes. Contrary to the assumption that retail investors are noise traders, we find no relation between discount changes and the order‐flow imbalances of individual investors. Large daily discount changes are associated with institutional trading, and this may reflect the price inelasticity of closed‐end fund shares.     

Fund flows and performance: New evidence from retail and institutional SRI mutual funds

In this paper we provide a comprehensive analysis of the performance of US SRI mutual funds as well as its relation to the flow of new money that those funds experience in the context of investors sophistication. In particular, we compare the performance of SRI funds with their conventional peers, matched by both managers and characteristics criteria, using several performance measures. We investigate the role of investors sophistication and its influence on the flow-performance and performance-flow relations within the retail and institutional SRI fund shareclasses. For the analysis of the flow-performance relation we use portfolio approach along with monotonic relation test, while the shape of the flow-performance relation is studied using piecewise linear panel regressions. For the performance-flow relation, the flow and unexpected flow portfolios are formed and their risk-adjusted performance is evaluated. We find that SRI mutual fund sector earns positive abnormal returns before expenses and retail SRI funds outperform their institutional peers both, before and after fees. No differences in performance when we consider SRI and conventional funds run by the same management companies. Moreover, we find a positive flow-performance relation which is convex for retail SRI funds but no convexity is found for the institutional ones. We cannot confirm the smart money effect for retail SRI funds, instead we find a dumb money effect for SRI institutional funds. Our paper provides new insights into the role of the investors sophistication for those relations in the presence of sustainability preferences.     

Do Fund Flow‐Return Relations Depend on the Type of Investor? A Research Note

This study investigates whether the relation between aggregate fund flow and market returns differs between retail and institutional funds. For the retail fund sample, we document a contemporaneous relation between flow and market returns and also find evidence of feedback trading. In contrast, there is little evidence of a relation between flow and market returns for the institutional fund sample. Consequently, it appears that retail and institutional fund investors use different investment strategies, with retail investors following a more naive strategy. We find no evidence of flow inducing price pressure for either type of fund.     

Investor monitoring and differences in mutual fund performance

A number of mutual funds cater exclusively to institutional investors. Although institutional funds might be a natural place to look for “smart money”, agency costs associated with delegated monitoring may lead to less monitoring and worse overall performance. We split institutional funds based on proxies for the degree of investor oversight, and we find that institutional funds with low initial investment requirements and funds with retail mates perform significantly worse than other institutional funds both before and after adjusting for risk and expenses. Tracking error is especially important in the flow-performance relationship of institutional funds with high minimum investment requirements.     

Institutional investment in online business lending markets

We provide new insights into the business lending decisions of institutional investors in online credit markets by benchmarking their lending performance against that of retail investors.We find superior performance for loans financed by institutional investors, although large sized retail investor groups achieve equivalent performance. Lending decisions of institutional investors are not default risk minimising, and we quantify lending inefficiencies. From a platform perspective, we show that (i) the platform-administered loan allocation process is not biased in favour of institutional investors, (ii) institutional participation in the retail marketplace is not a distorting factor in loan performance, and (iii) the platform’s move to a fixed rate system had detrimental effects on loan outcomes for institutional investors. The superior loan performance achieved by institutional investors is confined to the auction period, when institutional investors had autonomy over setting interest rates.     

Investor sentiment and the risk–return relation: A two-in-one approach

Traditional finance theory posits a positive risk–return relation, but empirical evidence is inconclusive. Retail investor sentiment has long been viewed as a distorting factor, while more recently institutional investor sentiment is thought to play a role. We examine the separate and joint impacts of retail and institutional investor sentiments on the risk-return relation. We find, at both market and firm levels, the risk-return relation is more likely to be distorted by the two investor-type sentiments jointly, rather than separately. We further find a cross-sectional pattern, with the risk-return relation being more sensitive to investor sentiment for stocks with specific characteristics.     

Transparency in IPO mechanism: Retail investors’ participation,IPO pricing and returns

Using data from the transparent Indian IPO setting, the paper examines retail investors’ participation, their influence on IPO pricing and the returns they make on IPO investment. The transparency in the mechanism, which allows investors to observe prior investors’ participation, leads to demand which is concentrated at either one or two points of the offer price range. Analysis of investors’ demand during the offer period shows that the participation of retail investors is significantly influenced by the participation of institutional investors. We examine IPO pricing and find that favourable demand by retail investors is positively associated with a high IPO price even after controlling for demand by institutional investors. Further, we find that due to aggressive bidding by overconfident investors, retail investors are, on average, unlikely to make positive allocation weighted initial returns even in a setting where they do not have to compete with institutional investors. Retail investors, however, can earn significant positive allocation weighted initial returns if they limit their participation in IPOs with above average institutional investors’ demand.     

Effects of order flow imbalance on short-horizon contrarian strategies in the Australian equity market

We use Lo and MacKinlay's [Lo, A.W., MacKinlay, C., 1990. When are contrarian profits due to stock market overreaction? The Review of Financial Studies 3, 175–205.] contrarian portfolio approach to examine the profitability of short-horizon contrarian strategies in the context of the Australian Stock Exchange. The results show that simple contrarian strategies lead to small but still statistically significant profits when applied to daily and intra-day portfolio formation. However, the profits are not sufficient to cover transaction costs for institutional investors. The source of contrarian profits is also analyzed leading to the conclusion that stock market overreaction is found to be the primary source of contrarian profits. We also examine the relation between the degree of return reversal and order flow activity after abnormal price changes. We find that the degree of return reversal is positively related to the level of order flow imbalance. Larger profits are generated from order flow based contrarian strategies when the order flow imbalances are high.     

Determinants of bid and ask quotes and implications for the cost of trading

Financial transaction costs are time varying. This paper proposes a model that relates transaction cost to characteristics of order flow. We obtain qualitatively consistent model results for different stocks and across different time periods. We find that an unusual excess of buyers (sellers) relative to sellers (buyers) tends to increase the ask (bid) price. Hence, the ask and bid components of spread change asymmetrically about the efficient price. For a fixed order imbalance surprise these effects are muted when unanticipated total volume is high. Unexpected high volatility in the transaction price process tends to widen the spread symmetrically about the efficient price. Our findings are consistent with predications from market microstructure theory that the cost of market making should depend on both the risk of trading with better-informed traders and inventory risk. We also find that order flow surprises have a significant impact on the efficient price and can also explain a substantial amount of persistence in the volatility of the efficient price. This dependence does not violate the efficient market hypothesis since the surprises, by definition, are not predictable.     

Institutional Ownership and the Dynamics of Trading Volume around FFO Announcements

We examine the effect of institutional ownership on abnormal trading volume around the announcement of funds from operations (FFO) by real estate investment trusts (REITs). Our central thesis is that abnormal trading volume is lower for the more informed institutions vis a vis non-sophisticated retail investors/institutions. We find a negative relationship between ownership by pension funds and abnormal trading volume around quarterly FFO announcements. However, ownership by the other types of institutions is unrelated to abnormal trading volume. Consistent with the view that some institutional investors are more informed than individual investors and therefore respond less to end of year announcements, we find that higher ownership by investment advisors is associated with lower levels of trading volume around end of year FFO announcements. Lastly, we find no evidence of institutional sell-offs associated with announcements of less than expected FFO.     

Real Estate Ownership, Leasing Intensity, and Value: Do Stock Returns Reflect a Firm’s Real Estate Holdings?

Little is known about the effects of real estate ownership and leasing on the stock return characteristics of public firms. In this study, we first examine the sensitivity of retail firm returns to a real estate factor over the period 1998?C2008. The retail industry is chosen because of the significant use of real estate in a typical retail firm??s production function. Consistent with our expectations, retail stocks exhibit positive real estate risk exposure, even after controlling for sensitivity to general market risk as well as other standard risk factors. The second part of our analysis examines whether the intensity of real estate ownership and the use of off-balance operating leases to finance real property holdings are reflected in the market and real estate betas of retail stocks. We find that greater use of off-balance sheet operating leases is associated with higher market betas. In fact, the use of operating leases appears to have a larger impact on sensitivity to market risk than does the use of on-balance sheet debt. Our findings also confirm our hypothesis that real estate intensive firms display significantly greater exposure to a real estate factor. Moreover, our results strongly suggest that investors are fully aware of the risk associated with off-balance sheet operating leases.     

Block Trade Price Asymmetry and Changes in Depth: Evidence from the Australian Stock Exchange

This paper examines the price response to large block transactions on the Australian Stock Exchange during the 1999 sample period. We find asymmetry in the price reaction between buyer‐ and seller‐initiated trades with respect to size and resiliency following the trade. We extend previous research by examining order book changes surrounding block trades and relating price effects to changes in book depth. Purchases are associated with persistent order book imbalance, while the sales imbalance is insignificant. Cross‐sectional analysis demonstrates that price resiliency following a trade is related to the speed at which limit orders arrive to replenish book depth.     

IPO auctions and private information

IPO auctions, which provide an impartial way of determining IPO pricing and share allocations, offer a natural setting for examining whether institutional investors possess private information, and for measuring how valuable their information is. Analyzing detailed bidding data from Taiwan’s discriminatory (pay-as-bid) auctions, we find that, relative to retail investors, institutional investors tend to bid higher in auctions when IPO shares are more valuable, and that underpricing is larger in auctions with relatively higher institutional bids. These results imply that institutional investors are better informed about IPO value, and that they obtain higher information rents when they bid higher relative to retail investors. We estimate the value of institutional investors’ private information to be worth about 8.68% of return, which is the extra rate of return they command on their informational advantages over retail investors.     

A CONCEPTUAL FRAMEWORK FOR CORPORATE RISK DISCLOSURE EMERGING FROM THE AGENDA FOR CORPORATE GOVERNANCE REFORM

During the last decade an implicit conceptual framework for internal control and corporate risk management has arisen from risk management practice and policy within UK companies. An explicit conceptual framework for risk management is now emerging and is expressed in the Turnbull Report. In this paper, we develop a diagrammatic representation for the conceptual framework for internal control, risk management and risk disclosure. We consider the recent practical and policy developments in the disclosure of risk-related information in order to establish the current state of the art of corporate risk disclosure. Thus, we focus only on the disclosure aspect of the conceptual framework for internal control. We use a questionnaire survey to canvas the attitudes of UK institutional investors towards risk disclosure in relation to their portfolio investment decisions. Our empirical findings indicate that institutional investors do not generally favour a regulated environment for corporate risk disclosure or a general statement of business risk. The respondents agree that increased risk disclosure would help them in their portfolio investment decisions. However, for other aspects of the risk disclosure issue they are more neutral in attitude. Further, we found that the variation in the attitudes of institutional investors appears to be associated with the characteristics of the funds they manage as well as with their investment horizons. Further, we find that institutional investors’ perceptions of corporate governance are related to their investment horizons, among other factors.     

Does foreign institutional ownership motivate firms in an emerging market to increase voluntary disclosure? Evidence from Taiwan

This study examines the relationship between foreign institutional ownership and voluntary disclosure in an emerging market. By exploiting a unique dataset of daily foreign investment flow and ownership data from Taiwan, this paper examines whether foreign ownership is associated with the likelihood of holding conference calls and investigates whether conference calls are informative to foreign market participants. After controlling for other characteristics of a firm??s information environment, we find that the decision to hold conference calls is positively associated with foreign institutional ownership. We also provide evidence that the trading turnover by foreign institutional investors immediately increases after the conference calls, indicating that conference calls are informative for foreign institutional investors. Our results are robust, after controlling for endogeneity.     

How do passive funds act as active owners? Evidence from mutual fund voting records

The rise of passive institutional investors in the U.S. stock market raises questions about the governance implications to their portfolio firms. While the existing literature documents positive governance changes when passive institutional ownership displaces retail ownership, it remains unclear how passive institutional ownership approaches corporate governance differently than their active peers. This paper compares the proxy voting behaviors between same-family passive and active mutual funds with identical investment styles. We find that passive funds are not more likely to vote in favor of governance reforms than active funds. We also provide suggestive evidence that besides voting, the influence of passive funds on corporate governance also operates through a “behind the scenes” channel.     

Probability of information-based trading and the January effect

We investigate the seasonality in the probability of information-based trading (PIN)–return relationship, the ‘January PIN effect’. We find that on average stock returns decrease with PIN in January, in contrast to other calendar months. This pattern is more apparent for small stocks. We argue that this seasonality is related to the January effect. According to the analysis, the December selling pressure associated with the January effect decreases in PIN, especially for small stocks. This suggests that when the price bounces back in January, low-PIN stocks will exhibit a larger return within a small stock group, leading to the negative PIN–return pattern. Furthermore, this seasonality is not the same as other January anomalies associated with momentum and idiosyncratic risk.     

The information content of retail investors’ order flow

In this paper, we provide evidence that the trading activity of small retail investors carries significant genuine information that can be exploited for the short-term out-of-sample forecasting of foreign exchange rates. Our findings are based on a unique dataset of around 2000 retail investors from the OANDA FXTrade electronic trading platform. Our results are consistent with the view that in the foreign exchange market private information is highly dispersed, but can be extracted by observing customer order flow. Previous studies, however, focused on the information content of costumer order flow of dealers in the interbank market, whose clients are themselves large institutional and professional investors. Our study is the first that analyzes a crowd of small retail investors and shows that even the trading activity of these investors contains, on aggregate, important non-public information that can be exploited for short-term exchange rate forecasting. Our findings lead us to conjecture that retail investors (on aggregate) are not pure noise traders but process dispersed information at least partially in a similar way as large institutional investors and hence place their orders accordingly.     

Twitter activity,investor attention,and the diffusion of information

We examine the impact of Twitter attention on stock prices by examining over 21 million company‐specific tweets over a 5‐year period. Through a quasi‐natural experiment identifying official Twitter outages, we find that Twitter influences stock trading, especially among small, less visible securities primarily traded by retail investors. In addition, we determine that Twitter activity is associated with positive abnormal returns and when tweets occur in conjunction with traditional news events, more information is spread to investors. Finally, we show that retail investor activity drives the Twitter effect as institutional investors less actively trade the affected stocks.     

Retail investor information demand – speculating and investing in structured products

We study the impact of retail investor information demand on trading in bank-issued investment and leverage structured products, which are specifically designed for retail investors. Stock-specific information demand positively predicts speculative trading activity. Furthermore, we find a positive relationship between market-wide information demand and order aggressiveness and order uncertainty for speculating and investing activity. Whereas information supply is associated with speculative long positions, information demand does not induce investors to be predominantly long or short. Finally, we do not find retail investor information demand to contribute to an upward price pressure on security prices. In contrast, information supply exerts negative price pressure. Overall, retail investor trading in individual stocks is much more strongly influenced by market-wide information demand instead of firm-specific information demand. This implies a low informational efficiency of retail investor speculation and investing activity.