ARE PRICE LIMITS EFFECTIVE? EVIDENCE FROM THE ISTANBUL STOCK EXCHANGE

There is considerable discussion about controlling volatility by imposing price limits on asset prices. We examine the effects of price limits on a stock market by testing the volatility spillover, delayed price discovery, and trading interference hypotheses in a leading emerging market, the Istanbul Stock Exchange, which has a unique market microstructure as related to price limits. Our results support the volatility spillover, delayed price discovery, and trading interference hypotheses. We also show price locks at limits provide significantly stronger evidence regarding the effects of price limits than limit moves only. Finally, price limits have a significant effect on the stock market, casting doubt on their effectiveness.     

STOCK MARKET REACTION TO ETHICAL INITIATIVES OF DEFENSE CONTRACTORS: THEORY AND EVIDENCE

This paper offers an Investor Decision Framework (IDF) to describe and measure investor behavior toward social responsibility information. This framework seeks to explain how investors perceive the effects of social responsibility information on firm value. The formation in 1986 by 32 major defense contractors of the Defense Industries Initiative (DII) provides an ideal example to assess stock market reaction to an ethical initiative. The performance of the DII firms was compared with that of a control group of non-DII defense firms, which did not sign the agreement, in order to measure and determine the extent to which the market placed substance on the DII as a public commitment to ethics. We initially posited that the DII firms stock price would move in a significantly positive direction. However, when our analysis revealed a significant negative impact not only on DII, but also on non-DII defense stock prices, we were forced to reject thisa priorihypothesis. The market interpreted this ethical initiative as (i) a precursor of future sanctions towards firms engaged in defense contracting or (ii) as a penalty for social irresponsibility imposed by socially conscious investors. Either way, it would have a negative impact upon future cash flows.     

STOCK MARKET REACTION TO GOOD AND BAD INFLATION NEWS

This article shows that differentiating between good and bad inflation news is important to understanding how inflation affects stock market returns. Summing positive and negative inflation shocks as in previous studies tends to wash out or mute the effects of inflation news on stock returns. More specifically, we find that, depending on the economic state, positive and negative inflation shocks can produce a variety of stock market reactions. We conclude that the effect of inflation on stock returns is conditional on whether investors perceive inflation shocks as good or bad news in different economic states.     

SHORT SELLING AND PRICE DISCOVERY: EVIDENCE FROM AMERICAN DEPOSITARY RECEIPTS

The underlying shares of some American Depositary Receipts (ADRs) can be short sold in their home markets, and others cannot. This institutional feature offers a unique opportunity to investigate the relation between short selling and price discovery. We hypothesize and confirm that ADR short selling on a U.S. exchange is more informative when the ADRs’ underlying shares cannot be short sold in the home market. These and related results suggest that short sellers make a significant contribution to price discovery. Short sellers’ trading activity, representing more than 20% of total ADR share volume, increases the benefits of cross‐listing on U.S. exchanges.     

STATE DEPENDENCY OF BANK STOCK REACTION TO FEDERAL FUNDS RATE TARGET CHANGES

We investigate the effects of changes in the federal funds target rate on bank stock returns through an event‐study analysis. We examine the state dependency of such effects and focus on the surprise elements of policy changes derived from the federal funds futures market. Although we confirm an inverse relation between bank stock returns and changes in the federal funds target rate previously supported in the literature, we find that bank stock returns only respond to surprise or unexpected changes in the federal funds target rate. We also find that such responses are conditional on the context in which policy changes take place.     

BANK PRIVATIZATION AND CONVERGENCE OF PERFORMANCE: INTERNATIONAL EVIDENCE

We trace the extent of performance deviation of privatized banks from established private banks in 30 countries from 1994 to 2005 and investigate the role of bank regulatory and supervisory norms, market competition, ownership structure, deposit insurance scheme, and governance structure affecting the deviation. Evidence shows that privatization does improve the performance of banks in the first year of being privatized, but performance gradually declines, which is consistent with the government restructuring argument before the privatization. Governance, foreign ownership, banking freedom (regulations), and the deposit insurance scheme in respective economies are found to affect performance deviation significantly.     

INSTITUTIONAL TRADING AND OPENING PRICE BEHAVIOR: EVIDENCE FROM A FAST‐EMERGING MARKET

Using daily and intraday data, we investigate the cross‐sectional relation between stock prices and institutional trading in the Taiwan stock market. Consistent with the investigative herding hypothesis, we find that institutional herding exists because of institutional positive feedback trading behavior rather than following trades made by other institutions, as suggested by the information cascade hypothesis. Moreover, the positive correlation between institutional trade imbalance and stock returns mainly comes from institutional positive feedback trading. The institutional trading decisions rely on returns measured not only over the lagged trading day but also over the opening session during the same day.     

LONG-TERM STOCK PRICE REVERSALS IN THE UK: EVIDENCE FROM REGRESSION TESTS

This paper seeks to advance our knowledge about the UK evidence on long-term stock price reversals. Many of the major studies of long-term reversals have been done using US data, prompting fears about data snooping biases. There have been comparatively few UK studies and they have all employed contrarian portfolio techniques to identify evidence of reversals. None of these UK studies has used cross-section regression tests, which have been employed in some of the US investigations, and this paper aims to fill this gap. We find evidence of stock price reversals, even after controlling for time-varying risk and restricting the study to larger, UK-listed companies—that is, companies that are frequently traded, more heavily regulated and extensively analysed by market commentators, analysts and institutional investors.     

CONVERTIBLE DEBT AND RISK‐SHIFTING INCENTIVES

I argue that convertible debt, in contrast to its perceived role, can produce shareholders’ risk‐shifting incentives. When a firm's capital structure includes convertible debt, every investment decision affects not only the distribution of the asset value but also the likelihood that the debt will be converted and thereby the distribution of the firm's leverage. This suggests that managers can engage in risk‐increasing projects if a higher asset risk generates a more favorable distribution of leverage. Empirical evidence using 30 years of data supports my argument.     

THE USE OF ACQUISITIONS AND JOINT VENTURES BY U.S. BANKS EXPANDING ABROAD

We examine international bank expansions, which are classified as banking (scale related) or nonbanking (complementary) moves into developed or developing markets. The market responds favorably to expansions through joint ventures by U.S. banks, and insignificantly to expansions through acquisitions. Accounting and operating performances (for joint venture banks) and long‐period holding returns (for acquisitions) show improvement in the two years following the announcement. Systematic risk declines for the sample overall, for acquisitions, and for expansions into developing countries. In general, scale or developing expansions are better pursued through acquisitions, whereas complementary or developed expansions are best pursued through joint ventures.     

MANAGERIAL OWNERSHIP,TAKEOVER DEFENSES,AND DEBT FINANCING

We examine the effect of agency conflicts on debt financing and show that managerial ownership and its interaction with takeover defenses affect these decisions. We find that (1) the relation between leverage and takeover defenses becomes insignificant when we control for the interaction of these defenses with managerial ownership, and (2) firms with large managerial ownership operate at high debt levels unless they have a large number of takeover defenses. Therefore, a two‐dimensional aspect of governance that includes the interaction between managerial ownership and takeover defenses is useful in understanding the effect of agency conflicts on firms' debt financing decisions.     

INVESTOR REACTION TO MUTUAL FUND PERFORMANCE: EVIDENCE FROM UK DISTRIBUTION CHANNELS

Existing work on the flow–performance relation in mutual funds focuses on the average U.S. investor, obscuring the contributions of different clienteles. We analyze UK data on monthly fund sales and purchases made via seven distinct distribution channels. We show that there exist marked differences in the reaction to fund performance between different types of retail and institutional investors. These differences can be understood by considering the incentives of parties involved in each channel. Our analysis indicates that the well‐documented aggregate net flow–performance convexity in mutual funds is driven by the extreme reaction of retail inflows to favorable performance, particularly from independently advised investors.     

ON THE INFORMATIONAL EFFECT OF SHORT‐SALES CONSTRAINTS: EVIDENCE FROM THE TOKYO STOCK EXCHANGE

Using a database of stock lending fees for Japanese centralized margin transactions, I show that short‐sales constraints reduce the adjustment speed of stock prices to negative information before the announcements of revised earnings forecasts disclosed by firms in the Tokyo Stock Exchange from July 1998 to December 2001. I find that the cumulative abnormal returns (CARs) of the stocks with high short‐sales costs are insensitive to negative information on pre‐announcement days, but the CARs of these stocks become significantly lower than the CARs of the stocks with low short‐sales costs when the announcements reveal negative information to the public.     

MANAGERIAL INCENTIVES AND THE USE OF FOREIGN‐EXCHANGE DERIVATIVES BY BANKS

We examine the effect of managerial compensation and ownership on the use of foreign‐exchange derivatives by U.S. bank holding companies. We focus on derivatives used for purposes other than trading to investigate derivative use in a hedging framework. We use instrumental variables probit and sample‐selection models to estimate the effects of endogenous and exogenous factors on the probability and extent of foreign‐exchange derivatives used. We find that the use of derivatives is inversely related to option awards but positively related to managerial ownership. Finally, our results suggest that ownership by large institutional shareholders provides incentive for managers to hedge.