Abnormal trading volume,news and market efficiency: Evidence from the Jamaica Stock Exchange

This paper investigates market efficiency of the Jamaica Stock Exchange (JSE). Together, weak and semi-strong form efficiency claim that historical and newly released public information do not predict future stock price movement. We test both forms of market efficiency by analyzing stock price behavior during times of abnormal trading volume and around the release dates of earnings information. Abnormal trading volume may be driven by liquidity demand or reflect new or private information flow to the market. Using JSE data over the period 2000 to 2021, we find price dynamics consistent with price pressure as firms experience negative abnormal returns on the day of abnormal trading activity but offsetting positive abnormal stock returns on the following day. Further findings show post earnings announcement drift on the JSE. Taken as a whole, the evidence suggests violations of market efficiency and has implications for capital allocation in this emerging market.     

The Impact of Publication of Analysts' Recommendations on Returns and Trading Volume

Publication of security analysts' recommendations in the column “Inside Wall Street,” which is published in Business Week, induces abnormal returns on the publication day and the following day. The abnormal returns are robust to the use of alternative samples and methodologies. The publication increases trading volumes for the securities that are recommended to be purchased, but not for securities that are recommended to be sold. The abnormal returns and trading volumes support the view that stock prices do not adjust instantaneously when new information arrives, and that the time pattern of price adjustment depends on the time pattern of the accessibility of the information. The authors find no statistically significant difference between the average abnormal returns that are induced by recommendations that appear at the beginnings of “Inside Wall Street” columns (and are covered more extensively than others) and the average abnormal returns induced by other recommendations.     

Prebid Run‐Ups Ahead of Canadian Takeovers: How Big Is the Problem?

This paper studies the price‐volume dynamics ahead of takeover announcements for 399 Canadian firms from 1985 to 2002. I find evidence consistent with insiders trading illegally, creating both abnormal returns (ARs) and abnormal turnover (AT) ahead of the announcement. The rise in AT begins far ahead of the actual announcement, accompanied by ARs in the last five trading days, consistent with more informed trading. Data on disclosed insider trading indicate a sharp increase in volume prior to the takeover announcement, suggesting that insiders make use of private information. This study confirms the importance of AT for triggering an insider trading investigation.     

A test of the Investor's Daily stock ranking system

This paper examines the profitability of trading strategies derived from stock rankings published in Investor's Business Daily. The best system provides market-adjusted abnormal monthly returns of 1.81% from buying S&P 500 stocks, and a 3.18% abnormal return on an arbitrage portfolio. Stocks selected for trading have above average volatility, but a portion of abnormal return may be a reward for identifying stocks with short-run sustainable price momentum. Results seem indicative of market inefficiency, but the phenomena may be temporary since abnormal returns are lower during the second half of the data set.     

Investor activism and takeovers

Recent work documents large positive abnormal returns when a hedge fund announces activist intentions regarding a publicly listed firm. We show that these returns are largely explained by the ability of activists to force target firms into a takeover. For a comprehensive sample of 13D filings by portfolio investors between 1993 and 2006, announcement returns and long-term abnormal returns are high for targets that are ultimately acquired, but not detectably different from zero for firms that remain independent. Firms targeted by activists are more likely than control firms to get acquired. Finally, activist investors’ portfolios perform poorly during a period in which market wide takeover interest declined.     

FT coverage and UK target price run-ups

We focus on the market expectation hypothesis to explain the increase in share prices and trading volume of target firms before their merger announcements that have conventionally been attributed to either insider trading or market expectation. We use Financial Times (FT) coverage as a proxy of merger expectation and search for relevant articles for 783 UK target firms between 1998 and 2010. We identify a total of 1049 rumour articles and find that the FT market expectation proxy explains a small percentage of the target price run-ups. Results are strong during the sample period, even though the magnitude for both returns and trading volume tends to decrease within recent years. There is also a strong contemporaneous relation between abnormal returns and trading volume. Unexplained increases in target prices and trading volume may be attributed to insider trading.     

Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies

While takeover targets earn significant abnormal returns, studies tend to find no abnormal returns from investing in predicted takeover targets. In this study, we show that the difficulty of correctly identifying targets ex ante does not fully explain the below‐expected returns to target portfolios. Target prediction models’ inability to optimally time impending takeovers, by taking account of pre‐bid target underperformance and the anticipation of potential targets by other market participants, diminishes but does not eliminate the potential profitability of investing in predicted targets. Importantly, we find that target portfolios are predisposed to underperform, as targets and distressed firms share common firm characteristics, resulting in the misclassification of a disproportionately high number of distressed firms as potential targets. We show that this problem can be mitigated, and significant risk‐adjusted returns can be earned, by screening firms in target portfolios for size, leverage and liquidity.     

Abnormal returns and asymmetric information surrounding strategic and financial acquisitions

Using takeover bids from the United States, we investigate the importance of information asymmetry in self-selection when evaluating the abnormal returns of financial versus strategic takeover targets during a period of possible informed trade. Sample selection bias due to differences in financial versus strategic takeover bid information environments is controlled for using Heckman's model. Results show that takeover announcements are not randomised, indicative of timed announcements, and further that private equity firms exhibit lower price impact post-announcement. We conclude that the long-term financial motive of private equity takeovers, coupled with higher private information pre-announcement, leads to lower abnormal returns post-announcement.     

The Performance of the European Market for Corporate Control: Evidence from the Fifth Takeover Wave

This paper presents an in‐depth analysis of the performance of large, medium‐sized, and small corporate takeovers involving Continental European and UK firms during the fifth takeover wave. We find that takeovers are expected to create takeover synergies as their announcements trigger statistically significant abnormal returns of 9.13% for the target and of 0.53% for bidding firms. The characteristics of the target and bidding firms and of the bid itself are able to explain a significant part of these returns: (i) deal hostility increases the target's but decreases bidder's returns; (ii) the private status of the target is associated with higher bidder's returns; and (iii) an equity payment leads to a decrease in both bidder's and target's returns. The takeover wealth effect is however not limited to the bid announcement day but is also visible prior and subsequent to the bid. The analysis of pre‐announcement returns reveals that hostile takeovers are largely anticipated and associated with a significant increase in the bidder's and target's share prices. Bidders that accumulate a toehold stake in the target experience higher post‐announcement returns. A comparison of the UK and Continental European M&A markets reveals that: (i) the takeover returns of UK targets substantially exceed those of Continental European firms. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure in Continental Europe allow bidding firms to adopt takeover strategies enabling them to act opportunistically towards the target's incumbent shareholders.     

Empirical Identification of Non-Informational Trades Using Trading Volume Data

This paper empirically identifies non-informational and informational trades using stock returns and trading volume data of the U.S., Japanese, and U.K. stock markets and five individual firms. We achieve the identification by imposing a restriction from theoretical considerations. Our results show that trading volume is mainly driven by non-informational trades, while stock price movements are primarily driven by informational trades. We also find that, around the 1987 stock market crash, trading volumes due to non-informational trades increased dramatically, while the decline in stock market prices was due mainly to informational trades. Increases in volatilities both in returns and in trading volumes during and after the crash are mainly due to non-informational trades. Regarding the trading volume-serial correlation in the stock returns relationship, we find evidence that is consistent with theoretical predictions that non-informational components can account for high trading volume accompanied by a low serial correlation of stock returns.     

Informed and uninformed trading on the Australian dollar

Using a high-frequency data set of the spot Australian/US dollar, this study examines the distribution of quotes, spreads, and returns across the trading day. By identifying the direction of trade and the subsequent quote returns from contributing banks, the segmented nature of the market into market-makers and informed and uninformed traders is investigated. The results suggest that the economic gain possible from private information is maximised over 2 to 5 quotes and is rapidly eroded by 20 quotes (about 2 min later during busy trading times) as other new information enters the market. Also, the analysis is revealing of discontinuities in trading and the volatility of pricing across the trading day.     

Ripple effects of the 2011 Japan earthquake on international stock markets

This paper provides a comprehensive analysis of the impacts of Japan’s 2011 earthquake on 19 stock market sector returns in Japan and its trading partners both in the short and long run. Using an event study methodology, we find that the impact of this event was not limited to Japan or industries directly hit by the earthquake. Our short-run analysis indicates that all sector indices in Japan and many in its trading partners were affected by the earthquake. The direction of the impact on trading partners, however, was not the same for all sectors; while the earthquake adversely affected the majority of the sectors analyzed, some sectors benefited. Further, we find that the magnitude of the abnormal returns did not systematically vary across trading partners according to their shares in Japan’s trade flow. The long-run analysis reveals how the consequences of the earthquake unfolded beyond the event date.     

The intraday impact of company responses to exchange queries

This study investigates Australia’s unique continuous disclosure regime using intraday data on the Australian Securities Exchange (ASX) over the period January 2010–April 2012. We examine abnormal returns and trading volumes that accrue to shareholders immediately after an announcement responding to a trading induced query. The use of intraday data permits us to examine the direct impact of these events, and the length of time the market takes to incorporate this information with a higher degree of precision than the research currently on offer. The study is framed within an event study methodology, with a number of robustness measures: a matched sample approach; analysis of cross-sectional determinants; the removal of penny stocks; and, procedures to account for sample selection bias. We find significant share price reversals following a query announcement, with a reversal of 3.3% by the end of the widest event interval. Our study also provides evidence that the market takes up to 60 min to impound this information. Overall, we provide support for the efficacy of the query framework administered by the ASX.     

Size-related anomalies and stock return seasonality: Further empirical evidence

This study examines, month-by-month, the empirical relation between abnormal returns and market value of NYSE and AMEX common stocks. Evidence is provided that daily abnormal return distributions in January have large means relative to the remaining eleven months, and that the relation between abnormal returns and size is always negative and more pronounced in January than in any other month — even in years when, on average, large firms earn larger risk-adjusted returns than small firms. In particular, nearly fifty percent of the average magnitude of the ‘size effect’ over the period 1963–1979 is due to January abnormal returns. Further, more than fifty percent of the January premium is attributable to large abnormal returns during the first week of trading in the year, particularly on the first trading day.     

The deal of the century in Chile Endesa España's takeover of Enersis

We analyze the effect of the announcement of the tender offer made by Endesa España to control Enersis Chile through the Chispas holding structure. In this clinical study of the case, we summarize the salient points of the Chispa case—one of the most controversial in Chile—and obtain the abnormal returns to the shareholders of the target firm using three alternative models for robustness of results: the constant mean model, the market model, and the market model adjusted for non-synchronous trading problems. Contrary to expectations based on prior empirical research in the United States and United Kingdom, our results demonstrate the absence of positive cumulative abnormal returns (CARs) for Chispa stockholders during the takeover bidding event window. We present evidence in this case that the governance structure of the target firm led to this seeming anomaly and conclude that the generally accepted theories of corporate control and governance in the United States and United Kingdom do not automatically apply to developing countries with differing legal environments.     

Liquidity and Returns to Target Shareholders in the Market for Corporate Control: Evidence from the US Markets

In this paper we analyze how stock market liquidity affects the abnormal return to target firms in mergers and tender offers. We predict that target firms with poorer stock market liquidity receive larger announcement day abnormal returns based on the following considerations. First, target firms with poorer stock market liquidity receive greater liquidity improvements after a merger or tender offer. Second, deals that involve less liquid targets are less anticipated and/or more likely to be completed. Third, less liquid stocks have more diverse reservation prices across shareholders and thus require a higher takeover return. Consistent with these expectations, we show that abnormal returns to target firms’ shareholders are significantly and positively related to the difference in liquidity (measured by the bid‐ask spread) between acquirers and targets as well as the magnitude of target firms’ liquidity improvement.     

Information Discovery in Share Lockups: Evidence from the Split‐Share Structure Reform in China

We document a prominent abnormal stock return of –14% during the [–120, +20] day window around 482 lockup expirations in the split‐share structure reform in China. The abnormal stock returns (selling volumes) are positively (negatively) correlated with firm information transparency and postreform performance improvement, but negatively (positively) related to the level of agency problems, suggesting the existence of information‐based trading during the lockups. We present important evidence that institutional investors, especially mutual funds, possess superior information discovering capabilities than that of individual investors. Our findings confirm the information roles of lockups as a tool to signal firm quality and a commitment device to alleviate agency problems.     

Venture capital trusts and the expiration of IPO lock-up provisions

Venture capital trusts (VCTs) were introduced to provide private equity capital for small expanding companies and to promote innovation. Investors in initial public offerings are rewarded with tax relief on the cost of lock-up provisions to stabilize the market. This paper examines the market reaction and trading activity around the expiration of lock-up provisions of 148 VCTs listed on the London Stock Exchange from 1995 to 2006. Downward-sloping demand curve theory suggests that an increased supply of VCT shares at the expiry date could shift their value to a new equilibrium at a lower price. Supporting this prediction, we document evidence of negative abnormal returns as well as permanent increases in the price discount relative to net asset value and trading volumes at and around the expiries of the required holding periods of VCTs. In addition, less negative abnormal returns, lower abnormal discounts and lower abnormal trading volumes are associated with VCTs that invest in AIM-listed companies due to lower information asymmetry, that experience lower prior performance due to a less pronounced disposition effect, and that are subject to a shorter lock-up horizon or are offering more generous tax benefits.     

Predicting European Takeover Targets

This article extends the Palepu (1986) acquisition likelihood model by incorporating measures of a technical nature, e.g. momentum, trading volume as well as a measure of market sentiment. We use the proposed model to predict takeover targets in a large sample of European and cross‐border merger and acquisition deals and validate its performance on an in‐ and out‐of‐sample basis. The robustness of the proposed model is investigated across several dimensions. In addition we explore the ability of the model to form the basis of successful takeover timing investment strategies. The results of our empirical analysis suggest that the proposed model predicts European takeover targets with relatively high accuracy and is able to determine portfolios that earn significant returns which are not explained by conventional risk factors.     

An empirical investigation of whether Australian capital gains tax reforms influence individual investor behaviour

This paper examines whether an asset's qualification for discounted tax treatment is associated with positive abnormal trading volumes and negative abnormal returns, as would be predicted if investors modified their behaviour to reduce their tax liability. Our examination of 152 initial public offerings (IPOs) documents that there is an incremental increase in abnormal trading volume for those IPOs that have experienced a significant increase in price since listing over those IPOs that have increased only marginally. Although we provide only limited evidence to suggest that this increase in trading volume is accompanied by a decrease in returns, this is not unexpected in a market that has anticipated this type of behaviour by the relatively small proportion of individual investors able to benefit from the discounted tax treatment.