Informational leverage: the problem of noise traders

The literature suggests that security design can be used to manipulate the information content of securities prices [what is referred to as the “informational leverage effect” in Boot and Thakor (J Finance 48, 1349–1378, 1993)]. The informational leverage effect arises in this literature in a market microstructure environment in which noise trade is exogenous, which is a fairly standard assumption dating back to the framework developed in Grossman and Stiglitz (Am Econ Rev 70, 393–408, 1980). This assumption is relaxed in our paper, and we show that the informational effects described in the related literature become less clear cut when noise trading activity is endogenous. We find that the intensity and direction of these effects depends crucially on the parameters describing the modeling environment. The elegant point of the informational leverage literature is that these effects arise largely independently of such parameters, but with endogenous noise trading that is no longer true. This literature may, therefore, lead to too strong conclusions being drawn about the relationship between information revelation and security design. We are very grateful for the helpful comments made by an anonymous referee.     

The price discovery role of day traders in futures market: Evidence from different types of day traders

Using proprietary account-level transaction data in the futures market where day traders are self-declared ex ante, this study investigates whether day traders enhance price discovery at the market level. From a natural classification of day traders, we find that heterogeneous day traders have differential effects on price discovery. Self-declared day traders, who benefit from low margin requirement, do not improve price discovery measured by information share. In contrast, non-declared traders, who are not self-declared as day traders, improve price discovery. Their positive impacts on price discovery are particularly significant during periods of high volatility and arrival of new information. Overall, a margin stimulating policy may encourage more day trading, but may also attract overconfident investors, especially inexperienced ones, and who do not enhance price discovery.     

Strategic behavior and regulation research in accounting

This paper focuses on models of political behavior that implicitly or explicitly form the foundation for empirical economic consequences studies in accounting. The studies that have appeared adopt a single-period of single-agendum-item perspective. This paper discusses differences in rational political behavior that arise naturally in single-period versus multiperiod settings. The behavioral implications of varying configurations of available information on agents' “ preferences” are also considered. Because of the tremendously complex empirical domain being studied, examples are relied on heavily to motivate the discussion rather than engaging in a formal modeling exercise.     

Debt contracts in the presence of performance manipulation

Empirical evidence suggests that firms often manipulate reported numbers to avoid debt covenant violations. We study how a firm’s ability to manipulate reports affects the terms of its debt contracts and the resulting investment and manipulation decisions that the firm implements. Our model generates novel empirical predictions regarding the use and the level of debt covenant, the interest rate, the efficiency of investment decisions, and the likelihood of covenant violations. For example, the model predicts that the optimal debt contract for firms with relatively strong (weak) corporate governance (i.e., cost of manipulation) induces overinvestment (underinvestment). Moreover, for firms with strong (weak) corporate governance, an increase in corporate governance quality leads to tighter (looser) covenant, more (less) frequent covenant violations and lower (higher) interest rate. Our model highlights that the interest rate, which is a common proxy for the cost of debt, neither accounts for the distortion of investment efficiency nor the expected manipulation costs arising under debt financing. We propose a measure of cost of debt capital that accounts for these effects.     

Strategic behavior within families of hedge funds

The paper investigates the strategic behavior of hedge fund families. It focuses on decisions to start and liquidate family-member funds. Hedge fund families tend to liquidate funds that underperform compared to other member funds, and to replace them by new ones. By choosing a launch time after a short period of superior performance by their member funds, families extend the spillover to new funds. Hedge fund families seem to be more experienced in promoting their funds and attracting fund inflow than in generating superior performance. This results in higher dollar compensation earned by managers within multi-fund families than in stand-alone funds.     

Strategic performance management: A balanced approach to performance management issues in local government

The drive for reform in the public sector worldwide has focussed attention on the measurement of performance in public sector organizations. This is particularly true in local government. Local government has traditionally been concerned with measuring the delivery of primary objectives, or results, at the expense of secondary objectives, or the determinants of organizational performance. Current strategic management literature suggests that there should be a strong linkage between strategic plans and performance measures.Kaplan and Norton’s (1992) balanced scorecard and Fitzgeraldet al. ’s (1991) results and determinants framework can provide this linkage. This paper reports on research into performance management systems in local government using the four dimensions of the balanced scorecard: financial, community, internal business processes and innovation and learning. It shows how the focus in this system of local government has been on the results of council work, ie. financial performance and to a lesser extent on how the community views performance. Local government performance measurement pays much less attention to the determinants, or means of achieving long-term, sustained organizational improvement in internal business processes, and innovation and learning. Whilst these issues are recognized as important, there are few measurement processes in place to manage performance in these areas. Strategic performance management demands an approach that recognizes the importance of a focus on both results and the means of achieving these results. This paper highlights a suggested framework for strategic and balanced local government performance measurement.     

Stock return variances: The arrival of information and the reaction of traders

Asset prices are much more volatile during exchange trading hours than during non-trading hours. This paper considers three explanations for this phenomenon: (1) volatility is caused by public information which is more likely to arrive during normal business hours; (2) volatility is caused by private information which affects prices when informed investors trade; and (3) volatility is caused by pricing errors that occur during trading. Although a significant fraction of the daily variance is caused by mispricing, the behavior of returns around exchange holidays suggests that private information is the principle factor behind high trading-time variances.     

Coexistence of disposition investors and momentum traders in stock markets: experimental evidence

Prior research documents that many investors disproportionately hold on to losing stocks while selling stocks which have gained in value. This systematic behavior is labeled as the “disposition effect”. The phenomenon can be explained by prospect theory's idea that subjects value gains and losses relative to a reference point like the purchase price (PP), and that they are risk-seeking in the domain of possible losses and risk-averse when a certain gain is obtainable. Our experiments were designed to test whether individual-level disposition effects attenuate or survive in a dynamic market setting. We analyze a series of 36 stock markets with 490 subjects. The majority of our investors demonstrate a strong preference for realizing winners (paper gains) rather than losers (paper losses). We adopt different reference points and compare the behavioral patterns across three main trading mechanisms, i.e. rules of price formation. The disposition effect is greatly reduced only within high-pressure mechanisms like a dealer market (DM) when the last price (LP) is assumed as a reference point, which is a more market driven (external) benchmark. If disposition investors use the PP as a reference point, which is a more mental-accounting driven (internal) benchmark, they die hard in all market settings. Interestingly, our markets do not collapse or become illiquid by disposition investors' reluctance to trade. A main reason for this is the coexistence of two or more groups of investors, e.g. momentum traders and disposition investors.     

Performance and learning in an ambiguous environment: A study of cryptocurrency traders

We investigate the performance and learning ability of traders in an environment governed by ambiguity, such as the cryptocurrency market. Using a profit decomposition methodology, we find significant cross-sectional and temporal heterogeneity in performance. Traders do not learn to progressively increase the magnitude of returns; however, they are able to improve on their ability to realise profits as a mechanism of adaptation to survive through ambiguity. This adaptation increases as traders progress through their career. Moreover, we find evidence in support of the gambler’s fallacy. We argue that learning in ambiguous environments has limitations, allowing traders primarily to survive.     

Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze

This paper investigates an attempted delivery squeeze in a bond futures contract traded in London. Using cash and futures trades of dealers and customers, we analyze their strategic trading behavior, price distortion, and learning in a market manipulation setting. We argue that marked differences in settlement failure penalties in the cash and futures markets create conditions that favor squeezes. We recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity dates, and that exchanges mark-to-market their contract specifications more frequently, or consider a cash-settled contract on a basket of bonds.     

Real earnings manipulation and future performance: A revisit using quarterly data of firms with debt covenants

We investigate the implications of real earnings manipulation (REM) and reversals of REM on firms’ future operating performance using quarterly data of firms with debt covenants. In the presence of debt covenants, firms are under persistent pressure to deliver financial results that exceed the thresholds of the debt covenant requirements. We find that REM is associated with lower future operating performance. More importantly, the reversals of REM in the following quarter have an incremental positive effect on future performance, which largely offsets the negative effect of REM. These results provide new evidence on REM reversals that differs from the existing literature. Instead of interpreting the reversals as an indication of true REM based on their negative association with future performance documented in Vorst (2016), our results suggest that REM reversals may be indicative of firms rewinding REM subsequently, which reduces the REM damage to firms’ future operations.     

IQ,trading behavior,and performance

We analyze whether IQ influences trading behavior, performance, and transaction costs. The analysis combines equity return, trade, and limit order book data with two decades of scores from an intelligence (IQ) test administered to nearly every Finnish male of draft age. Controlling for a variety of factors, we find that high-IQ investors are less subject to the disposition effect, more aggressive about tax-loss trading, and more likely to supply liquidity when stocks experience a one-month high. High-IQ investors also exhibit superior market timing, stock-picking skill, and trade execution.     

Neoclassical finance,behavioral finance and noise traders: A review and assessment of the literature

While mainstream neoclassical finance ignores the role played by noise traders, a significant amount of empirical evidence is available to show that noise traders are active market participants and that their participation gives rise to market anomalies. Unlike neoclassical finance, behavioral finance allows for market inefficiency on the grounds that market participants are subject to common human errors that arise from heuristics and biases. In this paper we review the literature on the behavior of noise traders and analyze the consequences of their presence in the market, starting with a distinction between neoclassical finance and behavioral finance. We identify the market anomalies that provide evidence for the tendency of markets to trade at irrational levels, demonstrate how noise trading is related to some market fundamentals, and describe the models used to quantify noise trader risk.     

Informed traders and their market preference: Empirical evidence from prices and volumes of options and stock

The causal structure of price and volume in options and stock markets is examined to investigate whether a preferred market for informed trading exists. The possible trade-off of leverage on one hand and liquidity and transactions costs on the other, and the effect of different market mechanisms, are discussed in this context.We test for cointegration and use the vector error correction (VEC) approach if we find it. Otherwise, causality tests are via the conventional vector autoregression (VAR). We find that volume leads price in both markets, but that option volume leads stock volume, and stock price leads option price. These results differ from previous studies. Potential explanations are discussed.     

高管团队激励分散度、企业风险承担与战略绩效研究

代理问题的存在会导致管理者“短视”,出于私利,管理者往往不愿意承担风险,这虽然会给企业带来短期经济利益,但也会给未来发展埋下隐患。为解决此类代理问题,高管团队成员激励将发挥关键作用。因此,研究高管团队激励对企业绩效影响,高管薪酬激励对企业风险承担影响以及企业风险承担对企业绩效影响,对于中国企业的激励契约设计、经济增长和潜在风险认识均具有重要实践意义。     

Information flow between the stock and option markets: Where do informed traders trade?

This paper investigates the flow of information between the equity and options markets. We argue that informed traders, in deciding where to place their trades, are not entirely indifferent to option moneyness, degree of information asymmetry, and option liquidity. Unlike some previous studies that find information to flow unilaterally from equity to options markets, we control for the above factors and discover feedback relations between trades in out-of-the-money (OTM) options and the underlying equities. The finding is consistent with the pooling equilibrium hypothesis, which asserts that informed traders trade in both the equity and options markets. Some informed traders are probably attracted to the out-of-the money options because of their higher liquidity, lower premiums, and higher delta-to-premium ratios, hence, lending support to the liquidity and leverage hypothesis.     

Daily income target effects: Evidence from a large sample of professional commodities traders

We provide evidence of rational reference-dependent preferences in the proprietary trading of professional traders. We find increased trading effort and risk taking by traders following morning losses. Further analysis provides no evidence of a deterioration in trading performance subsequent to losses, as neither risk-adjusted performance nor trade execution appear to be negatively affected by prior losses. The evidence supports the existence of rational reference-dependent preferences in the form of trader daily income targets: these professional traders exhibit increased work effort subsequent to abnormal morning losses. The evidence is inconsistent with the alternative explanation of costly loss aversion.     

Strategic orientation,organisational structure,and the associated effects on performance

The paper presents an investigation of the structural characteristics of firms' strategic orientation (as conceptualised by Miles and Snow (1978)). The associated relationships to profitability and perceived market share are studied in financial services firms, specifically in credit unions. The author finds that most firms have a mixed structural form, with fewer firms being either highly structured or lowly structured. Defenders are more likely than expected to be of mixed structural form and less likely to be highly structured. Prospectors are more likely than expected to be highly structured. Analysers are more likely than expected to be highly structured. Reactors show little variation from the expected distribution. No interaction of structure and strategy is evident on either share or profits. The results do indicate that strategic orientation has an influence on perceived market share, but not profitability. Reactors are shown to have significantly smaller market shares than the Prospectors, Analysers, and Defenders. Also, Defenders are shown to have smaller shares than Prospectors. On the other hand, structural form is shown to have an influence on profitability. The less structured firms are shown to be more profitable than either the highly structured or mixed structure firms. It appears, at least in this sample, that organisational structure is more relevant to profitability, while organisational strategy is more relevant to market share.