Institutional trading and stock returns

In this study, we explore the dynamics of the relation between institutional trading and stock returns. We find that stock returns Granger-cause institutional trading (especially purchases) on a quarterly basis. The robust and significant causality from equity returns to institutional trading can be largely explained by the time-series variation of market returns, that is, institutions buy more popular stocks after market rises. Stock returns appear to be negatively related to lagged institutional trading. A further analysis of the behavior of trading and the returns of the traded stocks reveals evidence that stocks with heavy institutional buying (selling) experience positive (negative) excess returns over the previous 12 months.     

Caught on tape: Institutional trading,stock returns,and earnings announcements

Many questions about institutional trading can only be answered if one tracks high-frequency changes in institutional ownership. In the United States, however, institutions are only required to report their ownership quarterly in 13-F filings. We infer daily institutional trading behavior from the “tape”, the Transactions and Quotes database of the New York Stock Exchange, using a sophisticated method that best predicts quarterly 13-F data from trades of different sizes. We find that daily institutional trades are highly persistent and respond positively to recent daily returns but negatively to longer-term past daily returns. Institutional trades, particularly sells, appear to generate short-term losses—possibly reflecting institutional demand for liquidity—but longer-term profits. One source of these profits is that institutions anticipate both earnings surprises and post-earnings announcement drift. These results are different from those obtained using a standard size cutoff rule for institutional trades.     

Effect of auditing: Evidence from variability of stock returns and trading volume

Although the benefits of auditing are uncontroversial in developed markets,there is scant evidence about its effect in emerging economies.Auditing derives its value by increasing the credibility of financial statements,which in turn increases investors’reliance on them in developed markets.Financial statement information is common to all investors and therefore increased reliance on it should reduce divergence in investors’assessment of firm value.We examine the effect of interim auditing on inter-investor divergence with a large sample of listed Chinese firms and find that it decreases more for firms whose reports are audited compared to non-audited firms.This finding suggests that investors rely more on audited financial information.Results of this study are robust to variations in event window length and specification of empirical measures.     

Private placements of convertible securities: stock returns,operating performance and abnormal accruals

This study examines long‐run stock returns, operating performance and abnormal accruals of private placements of convertible securities. We investigate the effects surrounding private placements to test and differentiate the implications of several competing hypotheses. While the monitoring and certification hypotheses suggest positive effects, the managerial entrenchment, overvaluation and windows‐of‐opportunity hypotheses suggest the opposite. We find that placing firms generally experience positive effects in the pre‐periods and negative effects in the post‐periods. Our overall findings are more consistent with the predictions of the overvaluation and windows‐of‐opportunity hypotheses while our post‐placement evidence is also consistent with the predictions of the managerial entrenchment hypothesis.     

Technical trading rules for nonlinear dynamics of stock returns: evidence from the G-7 stock markets

This paper explores a possible link between an asymmetric dynamic process of stock returns and profitable technical trading rules. Using the G-7 stock market indexes, we show that the dynamic process of daily index returns is better characterized by nonlinearity arising from an asymmetric reverting property. The asymmetric reverting property of stock returns is exploitable in generating profitable buy and sells signals for technical trading strategies. The bootstrap analysis shows that not all nonlinearities generate profitable buy and sell signals, but rather only the nonlinearities generating a consistent asymmetrical pattern of return dynamics can be exploitable for the profitability of the trading rules. The significant positive (negative) returns from buy (sell) signals are a consequence of trading rules that exploit the asymmetric nonlinear dynamics of the stock returns that revolve around positive (negative) unconditional mean returns under prior positive (negative) return patterns. Our results corroborate the arguments for the usefulness of technical trading strategies in stock market investments.     

Stock returns,trading volume,and volatility: The case of African stock markets

The presence of the African Stock Markets (ASMs) in the global frontier markets indices confirms their global portfolio diversification role. This study investigates the asymmetric and intertemporal causality among the stock returns, trading volume, and volatility of eight ASMs. Results based on the linear model reveal that return generally Granger cause trading volume. However, evidence from the quantile regression shows that lagged trading volume has a negative causal effect on returns at low quantiles and positive causal effects at high quantiles. This evidence is consistent with volume-return equilibrium models, disposition and overconfidence models, and information asymmetry models. The positive causal effects of volatility on volume support the dispersion of beliefs model. In contrast, intertemporal evidence of contemporaneous and lagged causal relationships from trading volume to volatility supports the mixture of distribution hypothesis, sequential information acquisition hypothesis, and dynamic efficient market hypothesis. Volume-return and return-volume causality dynamics are quantile-specific and therefore driven by market conditions. However, the volume-volatility causality is dependent on volatility regimes. The linear model results confirm how model misspecification can distort and even reverse empirical evidence relative to nonlinear models.     

Weather and intraday patterns in stock returns and trading activity

We examine the relation between weather in New York City and intraday returns and trading patterns of NYSE stocks. While stock returns are found to be generally lower on cloudier days, cloud cover has a significant influence on stock returns only at the market open. There are significantly more seller-initiated trades when there is more cloud cover at the market open, which is consistent with the return results. Cloudy skies are associated with higher volatility and less market depth over the entire trading day. Finally, cloud cover is not significantly correlated with spread measures and turnover ratios. The findings overall suggest that weather has a significant influence on investors’ intraday trading behavior.     

Revisiting the empirical linkages between stock returns and trading volume

This paper investigates whether the empirical linkages between stock returns and trading volume differ over the fluctuations of stock markets, i.e., whether the return–volume relation is asymmetric in bull and bear stock markets. Using monthly data for the S&P 500 price index and trading volume from 1973M2 to 2008M10, strong evidence of asymmetry in contemporaneous correlation is found. As for a dynamic (causal) relation, it is found that the stock return is capable of predicting trading volume in both bear and bull markets. However, the evidence for trade volume predicting returns is weaker.     

The impact of Saturday trading on stock returns: Evidence from the Tokyo stock exchange January 1976 to January 1989

This paper examines the impact of TSE Saturday trading on daily TOPIX returns and TSE trading volume over the January 1976 to January 1989 period. Saturday trading is shown to have no significant impact on mean stock returns for the other days of the week. However, a significant shift in the pattern of Monday and Tuesday TOPIX returns is documented in the post-August 1986 period. This shift does not appear to be related to Saturday trading. TSE Saturday trading is found to have a significant impact on the variance of stock returns on surrounding days. In addition, trading volume is significantly lower on trading days surrounding Saturday trading. These findings are relevant to the timing of portfolio adjustment decisions.     

Discount rate changes,stock market returns,volatility, and trading volume: Evidence from intraday data and implications for market efficiency

We examine the effect of discount rate changes on stock market returns, volatility, and trading volume using intraday data. Equity returns generally respond negatively and significantly to the unexpected announcements; however, the effect of expected changes on equity returns is insignificant. Furthermore, our results indicate that equity prices respond to announcements within the trading period/hour after the information release. An indication of a return reversal is too small to cover the full transaction costs. Unexpected discount rate changes also contribute to higher market volatility although the volatility is short-lived. Similarly, unexpected changes in discount rates induce larger trading volume while expected changes do not. Abnormal trading volume occurs only in period t. Our results also support the notion that unexpected changes in the discount rates impact market returns irrespective of the Federal Reserve operating procedures.     

The interaction between foreigners' trading and stock market returns in emerging Europe

This paper presents the first comprehensive study of foreigners' trading in European emerging stock markets, using complete data compiled at the destination. We also compare European results to Asia, to which available evidence is mainly confined. The findings provide new insight on foreigners' trading: in addition to rebalancing, risk appetite and global information are global drivers of net foreign flows. Foreigners' negative-feedback-trade with respect to local returns at longer horizons. They do so with an asymmetry: they sell following increases but do not buy following declines. Net foreign flow persistence decreases with local return volatility.     

Insider trading and future stock returns in firms with concentrated ownership levels

We investigate the relationship between insider trading and stock returns in firms with concentrated ownership. To this end, we employ data from East Asian countries which span the period January 2003 to May 2012. Consistent with the previous literature, we find a significantly negative relation between the selling activity of insiders and stock returns. However, contrary to studies which focus on highly developed markets, we find that the buying activity of insiders is also inversely related to future stock returns. Our analysis shows that top directors with higher ownership levels drive this result, suggesting that the trading activity of insiders is not always associated with profit-making motives and can be explained by their level of ownership. Furthermore, we demonstrate that a trading strategy which focuses solely on purchases made by top directors with high ownership levels yields negative returns. The paper has important implications for outside investors who mimic the trading activity of insiders with the aim to realise profits.     

Does program trading contribute to excess comovement of stock returns?

Daily returns of stocks with high program trading comove more with each other but less with others. This significant comovement is disconnected with market movements and news of fundamentals and becomes stronger when market uncertainty is higher. It can be explained by neither the hypotheses of gradual information diffusion and liquidity provision nor the effects of quantitative trading signals, earnings announcements and index fund trading. Its non-fundamental nature is further demonstrated by the observation of program trading stimulating return reversals. Underlying this comovement is the high persistence of program trading. Our findings support the theory of habitat investing and demonstrate program trading creates a distinct source of excess return comovement.     

Speculative trading and stock returns: A stochastic dominance analysis of the Chinese A-share market

The pricing of A-shares in China has long puzzled financial economists. This paper applies recent tests of stochastic dominance (SD) to examine whether differences in the return distributions of A- and B-shares in China are consistent with market efficiency. As SD is nonparametric, market efficiency can be examined without the joint test problem arising from misspecifications in the asset pricing benchmark. Our results show A-shares have second-order dominated B-shares from 1996 to 2005. This dominance was most significant during the market segmentation period, but has continued, albeit to a lesser extent even after the B-share market was opened to local investors in 2001. Our results are robust to using residual returns from an international asset pricing model instead of raw returns. We conclude that the superior performance of A-shares cannot be attributed to risk. The results are more likely due to a return bias caused by intense speculation among retail individuals under limited arbitrage.     

Optimal stock trading with personal taxes: Implications for prices and the abnormal January returns

The tax law confers upon the investor a timing option - to realize capital losses and defer capital gains. With the tax rate on long term gains and losses being about half the short term rate, the law provides a second timing option - to realize losses short term and gains long term, if at all. Our theory and simulation over the 1962–1977 period establish that taxable investors should realize long term gains in high variance stocks and repurchase stock in order to realize potential future losses short term. Tax trading does not explain the small-firm anomaly but predicts a seasonal pattern in trading volume which maps into a seasonal pattern in stock prices, the January anomaly, only if investors are irrational or ignorant of the price seasonality.     

Information-based stock trading and managerial incentives: evidence from China's stock market

This paper uses stock price informativeness, or information-based stock trading, to help explain the pay–performance sensitivity (PPS) of chief executive officer (CEO) compensation in China's listed firms. We argue that higher stock price informativeness, which we measure by the probability of informed trading, helps and encourages shareholders to incentivize the top management team based on stock market performance. The regression results support our argument and show that a higher level of stock price informativeness is associated with higher CEO PPSs. Moreover, the impact of stock price informativeness on CEO incentives is stronger for privately controlled listed firms than it is for state-controlled listed firms. The results also hold when information asymmetry is approximated by the accuracy and dispersion of the earnings forecasts made by financial analysts.     

Extreme volumes and expected stock returns: Evidence from China's stock market

We examine the relation between extreme trading volumes and expected returns for individual stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange over the July 1994–December 2000 interval. Contrasted with the evidence obtained from the US data [J. Finance 56 (2001) 877], our results show that stocks experiencing extremely high (low) volumes are associated with low (high) subsequent returns. Moreover, this extreme volume–return relation significantly co-varies with security characteristics like past stock performance, firm size, and book-to-market values. In particular, stocks with extreme volumes are related to poorer performance if they are past winners, large firms, and glamour stocks than if they are past losers, small firms, and value stocks, respectively. These results are robust to both daily and weekly samples as well as stock exchange sub-samples. Although the liquidity premium hypothesis of Amihud and Mendelson [J. Financ. Econ. 17 (1986) 223] provides a partial explanation for the extreme volume–return relation, our results fit better the behavioral hypothesis of Baker and Stein [J. Financ. Mark. 7 (2004) 271].     

Momentum in stock returns: evidence from an emerging stock market

This study examines the presence and sources of momentum profits in the Dhaka stock exchange (DSE). Although the short-term reversal and intermediate-term momentum are found to be evident, short-term reversal is not as consistent and significant as intermediate-term momentum. Further examination shows that momentum profits in the DSE cannot be explained by the rational source like market factor but can be explained by the size factor. We argue that presence of large number of small stocks and lack of arbitrage opportunity could be the possible causes of momentum effect in the DSE.     

Short-sale inflow and stock returns: Evidence from Japan

Using a 10-year panel of flow-based information on stock borrowings and constructing a flow-based measure for shorting demand, I examine the relation between shorting demand and subsequent stock price movements. I find that the least heavily shorted stocks tend to outperform the most heavily shorted stocks and that this outperformance persists up to three months. In addition, using proxies for information asymmetry derived from the market microstructure literature, I find that this outperformance is not confined to stocks with high information asymmetry. These empirical findings indicate that short sellers act not only as informed investors who gain negative news but also as skillful investors who detect stock price deviations from fundamental values.