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.     

Is Financial Flexibility a Priced Factor in the Stock Market?

This paper develops a factor analysis–based measure for shifts in corporate financial flexibility (FFLEX) that can be observed from public accounting information. Companies that experience positive shifts in FFLEX are associated with higher future investment growth opportunities. We show that FFLEX is a robust determinant of future stock returns. Firms that have increased their financial flexibility are associated with lower stock returns in the subsequent period. A zero‐cost return portfolio produces a significant positive monthly premium of 0.69%, which is driven by covariance (risk). Risk inherent in the flexibility factor is not explained away by either prominent pricing characteristics or factors.     

Is there Value-Added Information in Liquidity and Risk Premiums?

Size has become a significant factor in explaining returns. According to the size effect, smaller capitalization stocks on average outperform larger capitalization stocks over long periods of time. This paper first documents the traditional size effect on the French market for the 1986–1998 period. It introduces a new proxy for size, free float, which is argued to be the appropriate measure of size and liquidity for most non‐US markets. Evidence is presented of a negative link between historical returns and free float. The link is significant even outside of the month of January, a notable divergence from results obtained on the NYSE. The rest of the paper is an attempt to take advantage of this 'ex‐post' phenomenon on an 'ex‐ante' basis, with an empirical study of the link between expected return, risk, and liquidity in a sample consisting of the main 150 stocks quoted on the Paris Bourse between January 1986 and January 1998. Liquidity premiums are estimated for portfolios from both a univariate and a multivariate perspective. The paper shows how risk and liquidity premiums can be used separately or in tandem for market timing and asset allocation. In all cases, the use of both premiums together leads to superior performance. Results confirm our measurements of liquidity and liquidity premiums and supply evidence that liquidity premiums together with risk premiums are useful in active asset management.     

Are Tax Effects Important in the Long-Run Fisher Relationship? Evidence from the Municipal Bond Market

Are nominal bonds appropriately discounted for taxes? Empirical estimates of the response of nominal interest rates to changes in inflation, the Fisher effect, have failed to produce a definitive answer. Four reasons have been put forward as possible explanations: (i) Tobin effects, (ii) fiscal illusion, (iii) peso problems, and (iv) different estimators. Utilizing data on taxable and tax-exempt bond interest rates and several different estimators, we find that the Fisher effect estimates are always larger for the taxable bond relative to the tax-exempt bond, suggesting that fiscal illusion and different estimators cannot account for the previous results.     

Liquidity Crunch in the Interbank Market: Is it Credit or Liquidity Risk, or Both?

The interplay between liquidity and credit risks in the interbank market is analyzed. Banks are hit by idiosyncratic random liquidity shocks. The market may also be hit by bad news at a future date, implying the insolvency of some participants and creating a lemons problem; this may end up with a gridlock of the interbank market at that date. Anticipating such possible contingency, banks currently long of liquidity ask a liquidity premium for lending beyond a short maturity, as a compensation for the risk of being short of liquidity later and being forced to liquidate some illiquid assets. When such premium gets too high, banks currently short of liquidity prefer to borrow short term. The model is able to explain some stylized facts of the 2007–2009 liquidity crunch affecting the money market at the international level: (i) high spreads between interest rates at different maturities; (ii) “flight to overnight” in traded volumes; (iii) ineffectiveness of open market operations, leading the central banks to introduce some relevant innovations into their operational framework.     

What Does the Corporate Bond Market Know?

Do related markets reflect new information simultaneously? For high‐yield bonds, a large abnormal price decline in a corporation's most liquid bond over a month is followed by an average abnormal stock price decline of ?1.42%. This effect is larger for stocks that have increased in value and for volatile stocks. It is also larger for bonds with high coupons and shorter maturities. These results support the view that high‐yield corporate bonds have an informational edge when news is negative and stock returns are noisy, and add to the growing literature on the substantial lags in price discovery between related markets.     

Competition Issues in the Market for Audit and Assurance Services: Are the Concerns Justified?

Concerns regarding the perceived lack of competition in the market for audit and assurance services has been widely publicised in the popular press on many occasions over many years. The Office of Fair Trading (OFT) in the United Kingdom (UK) decided that competition problems in the audit market warranted a referral to the UK Competition Commission (OFT 115‐11, October 2011). The UK Competition Commission released its report before the end of 2013 for implementation in the near future. This exploratory study investigates in an Australian context the views of stakeholder groups (including regulators, standard setters, audit suppliers, purchasers and financial statement users) regarding the level of competition in the market for audit and assurance services, and what potential remedies could be implemented to deal with such concerns. The findings in this study do not fully support the acceleration in the global debate on audit concentration and competition. Only users of financial reports consider that competition in the audit services market is insufficient. The other stakeholder groups do not share this view, although regulators and standard setters did have concerns over the lack of choice for large company audits. We need to consider the structural benefits and the continued viability of each of these large players (the Big Four), when considering these ‘lack of choice’ concerns. The level of competition is discussed essentially at firm level; however, underlying all of this are the consequences for the efficiency of the capital market.     

Does IFRS Mandatory Adoption Affect Information Asymmetry in the Stock Market?

The purpose of International Financial Reporting Standards (IFRS), adopted mandatorily by European listed firms in 2005, is to increase the transparency and the comparability of accounting information, which should have led to improvements in these firms’ information environments. This study uses market microstructure proxies for information asymmetry to examine the effects of IFRS adoption on the level of information asymmetry in the Spanish stock market. Therefore, we consider a setting with substantial differences between local standards – Spanish Accounting Standards (SAS) ? and IFRS and where the level of enforcement is low. By controlling for conventional determinants of information asymmetry and firms’ characteristics that influence their information environments, we find a reduction of information asymmetry after IFRS adoption. Our findings suggest that the mandatory switch from local accounting standards to IFRS conveys benefits to the market, even when the enforcement level is not strong.     

Is There Private Information in the FX Market? The Tokyo Experiment

We provide evidence of private information in the foreign exchange market. The evidence comes from the introduction of trading in Tokyo over the lunch hour. Lunch-return variance doubles with the introduction of trading, which cannot be due to public information since the flow of public information did not change with the trading rules. We then exploit microstructure theory to discriminate between the two alternatives: private information and mispricing. Four key results support the predictions of private-information models. Three of these involve changes in the intraday volatility U-shape. The fourth is that opening trade causes mispricing's share in variance to fall.     

Are Financial Constraints Priced? Evidence from Firm Fundamentals and Stock Returns

Using comprehensive firm‐ and aggregate‐level data, this paper studies the real and financial implications of capital market imperfections. We first examine whether financially constrained firms' business fundamentals (capital spending and operating earnings) are more sensitive to macroeconomic movements than unconstrained firms' fundamentals. We then examine whether financial constraint “return factors” respond to macroeconomic shocks in tandem with the responses from business fundamentals. The evidence in this paper points to financial constraints affecting both fundamental quantities and asset returns.     

Do Mergers Improve Information? Evidence from the Loan Market

We examine the informational effects of M&As by investigating whether bank mergers improve banks' ability to screen borrowers. By exploiting a data set in which we observe a measure of a borrower's default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while nonrisky borrowers enjoy lower interest rates. These informational benefits appear to derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties. Our evidence suggests that part of these informational improvements stem from the consolidated banks using "hard" information more intensively.     

Do Proprietary Algorithmic Traders Withdraw Liquidity during Market Stress?

We investigate the role of proprietary algorithmic traders in facilitating liquidity in a limit order market. Using order‐level data from the National Stock Exchange of India, we find that proprietary algorithmic traders increase limit order supply following periods of both high short‐term stock‐specific volatility and extreme stock price movement. Even following periods of high marketwide volatility, they do not decrease their supply of liquidity. We define orders from high‐frequency traders as a subclass of orders from proprietary algorithmic traders that are revised in less than three milliseconds. The behavior of high‐frequency trading mimics the behavior of its parent class. This is inconsistent with the theory that fast traders leave the market when stress situations arise, although their limit‐order‐supplying behavior becomes weaker when the increase in short‐term volatility is more informational than transitory. Agency algorithmic traders and nonalgorithmic traders behave opposite to proprietary algorithmic traders by reducing the supply of liquidity during stress situations. The presence of faster traders in the market possibly instills the fear of adverse selection in them. We document that the order imbalance of agency algorithmic traders is positively related to future short‐term returns, whereas the order imbalance of proprietary algorithmic traders is negatively related to future short‐term returns.     

Climate Change and Asset Prices: Are Corporate Carbon Disclosure and Performance Priced Appropriately?

This paper empirically assesses the relevance of information on corporate climate change disclosure and performance to asset prices, and discusses whether this information is priced appropriately. Findings indicate that corporate disclosures of quantitative greenhouse gas (GHG) emissions and, to a lesser extent, carbon performance are value relevant. We use hand‐collected information on quantitative GHG emissions for 433 European companies and build portfolios based on GHG disclosure and performance. We regress portfolios on a standard four factor model extended for industry effects over the years 2005 to 2009. Results show that investors achieved abnormal risk‐adjusted returns of up to 13.05% annually by exploiting inefficiently priced positive effects of (complete) GHG emissions disclosure and good corporate climate change performance in terms of GHG efficiency. Results imply that, firstly, information costs involved in carbon disclosure and management do not present a burden on corporate financial resources. Secondly, investors should not neglect carbon disclosure and performance when making investment decisions. Thirdly, during the period analysed, financial markets were inefficient in pricing publicly available information on carbon disclosure and performance. Mandatory and standardised information on carbon performance would consequently not only increase market efficiency but result in better allocation of capital within the real economy.     

Who Gambles in the Stock Market?

This study shows that the propensity to gamble and investment decisions are correlated. At the aggregate level, individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery-type stocks increases during economic downturns. In the cross-section, socioeconomic factors that induce greater expenditure in lotteries are associated with greater investment in lottery-type stocks. Further, lottery investment levels are higher in regions with favorable lottery environments. Because lottery-type stocks underperform, gambling-related underperformance is greater among low-income investors who excessively overweight lottery-type stocks. These results indicate that state lotteries and lottery-type stocks attract very similar socioeconomic clienteles.     

How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

The events following Lehman's failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of short‐term credit markets and the role of central banks as back‐stop liquidity providers. The Federal Reserve's response to financial disruptions in the United States importantly included the creation of liquidity facilities. Using a differences‐in‐differences approach, we evaluate one of the most unusual of these interventions—the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. We find that this facility helped stabilize asset outflows from money market funds and reduced asset‐backed commercial paper yields significantly.     

Does Greater Market Transparency Reduce Information Asymmetry?

This research aims to determine whether the degree of asymmetric information decreases with greater pre-trade transparency in the Taiwan stock market. We used the probability of informed trading based on the Markov regime-switching model in an order-driven auction market to investigate this topic. Information asymmetry showed no conspicuous variations with greater transparency. However, after further grouping, the empirical results revealed that increased transparency facilitated a decrease in information asymmetry in the sub-samples, which originally exhibited greater information asymmetry. In addition, the intraday patterns of probability of informed trading revealed that greater transparency facilitates decreased market information asymmetry after opening.     

Market opportunities and owner identity: Are family firms different?

We test the hypothesis that ownership of a firm does not affect the firm's ability to seize market opportunities once decisions about productive structure are taken into account. By grouping firms in size clusters having a similar distance between the actual and the optimal size, we assess how the sensitivity of a firm's sales to market demand changes in response to differences in the owner's identity. We use data from a panel of 4696 continental western European firms over the period 1995–2010 and Eurostat 3-digit sectoral data on firm size distribution. Empirical evidence rejects the hypothesis of ownership irrelevance: family firms are less sensitive to market demand than other firms, in particular when the actual size of the firm is larger than optimal and in the case of both founder- and heir-run family firms.     

Earnings Announcement Lags and Market Responses—Does the Tone of the News and the Market Sentiment Matter?

We investigate earnings announcement lags (period from the end of the reporting period until the announcement date) for the good and the bad quarterly earnings news across different market sentiment periods as well as market reactions thereto. Companies listed on Baltic stock exchanges exhibit clear signs of strategic timing of earnings announcements. Earnings announcement lags for the bad news tend to be longer than those for the good news. This difference is more pronounced during low market sentiment periods. If the release of the bad news is postponed, abnormal return responses remain lower, as expected.