Dividend yields and stock returns: Implications of abnormal January returns

This study examines the empirical relation between stock returns and (long-run) dividend yields. The findings show that much of the phenomenon is due to a nonlinear relation between dividend yields and returns in January. Regression coefficients on dividend yields, which some models predict should be non-zero due to differential taxation of dividends and capital gains, exhibit a significant January seasonal, even when controlling for size. This finding is significant since there are no provisions in the after-tax asset pricing models that predict the tax differential is more important in January than in other months.     

Optimal bond trading with personal taxes

Tax considerations governing bondholders' optimal trading include: capital loss realization; capital gain deferment; change of the long-term holding period status to short-term by sale of the bond and repurchase, to realize future losses short-term; raising the basis above par by sale of the bond and repurchase, to deduct the amortized premium from ordinary income. The optimal policy which incorporates transactions costs and conforms to the IRS code substantially differs from the buy-and-hold and continuous-realization policies. Failure to account for optimal trading may seriously bias econometric estimation of the yield curve and the tax bracket of the marginal bondholders.     

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.     

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.     

Volatility spillovers between oil prices and stock sector returns: Implications for portfolio management

In this article we take a recent generalized VAR-GARCH approach to examine the extent of volatility transmission between oil and stock markets in Europe and the United States at the sector-level. The empirical model is advantageous in that it typically allows simultaneous shock transmission in the conditional returns and volatilities. Insofar as volatility transmission across oil and stock sector markets is a crucial element for portfolio designs and risk management, we also analyze the optimal weights and hedge ratios for oil-stock portfolio holdings with respect to the results. Our findings point to the existence of significant volatility spillover between oil and sector stock returns. However, the spillover is usually unidirectional from oil markets to stock markets in Europe, but bidirectional in the United States. Our back-testing procedures, finally, suggest that taking the cross-market volatility spillovers estimated from the VAR-GARCH models often leads to diversification benefits and hedging effectiveness better than those of commonly used multivariate volatility models such as the CCC-GARCH of Bollerslev (1990), the diagonal BEKK-GARCH of Engle and Kroner (1995) and the DCC-GARCH of Engle (2002).     

Insider employee stock option trading and stock prices

The question of which factors determine corporate bonds pricing is investigated by analysing the spreads of eurobonds issued by major G-10 companies during the 1991–2001 period. Three main results emerge from the analysis. First, bond ratings appear as the most important determinant of yield spreads, with investors’ reliance on rating agencies judgments increasing over time. Second, the primary market efficiency and the expected secondary market liquidity are not relevant explanatory factors of spreads cross-sectional variability. Finally, rating agencies adopt a different, ‘through the cycle’, evaluation criteria of default risk with respect to the forward looking one adopted by bond investors.     

Oil prices,earnings, and stock returns

Review of Accounting Studies - Research has failed to document a consistent association between oil prices and stock prices. We propose and examine whether that failure is due to the need to link...     

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.     

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.     

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.     

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.     

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 strike prices of stock options for effort-averse executives

This paper evaluates the common practice of setting the strike prices of executive option plans at-the-money. Hall and Murphy [Hall, Brian, Murphy, Kevin J., 2000. Optimal exercise prices for executive stock options. American Economic Review 90 (2), 209–214] claim this practice to be optimal since it maximizes the sensitivity of compensation to firm performance. However, they do not incorporate effort and the possibility that managers are effort-averse into their model. We revisit this question while explicitly introducing these factors and allowing the reward package to include fixed wages, options, and stock grants. We simulate the manager’s effort choice and compensation as well as the value of shareholders’ equity under alternative compensation schemes, and identify schemes that are optimal. Our simulations indicate that, when abstracting from tax considerations, it is optimal to award managers with options that will most likely be highly valuable (i.e., substantially in-the-money) on their expiration date. Prior to 2006, the tax code and financial reporting standards provided incentives to award options that are closer to the money when issued than the options that were optimal in the absence of these considerations. Recent tax and reporting changes voided these incentives and thus we predict that these changes will induce firms to issue options with lower strike prices than those that were issued prior to 2006.     

The Feller diffusion,filter rules and abnormal stock returns

We determine the conditional expected logarithmic (i.e. continuously compounded) return on a stock whose price evolves in terms of the Feller diffusion and then use it to demonstrate how one must know the exact probability density that describes a stock’s return before one can determine the correct way to calculate the abnormal returns that accrue on the stock. We show in particular that misspecification of the stochastic process which generates a stock’s price will lead to systematic biases in the abnormal returns calculated on the stock. We examine the implications this has for the proper conduct of empirical work and for the evaluation of stock and portfolio performance.     

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.     

The weekend effect on the distribution of stock prices: Implications for option pricing

Evidence of weekend effects on the distribution of security returns suggests that returns are generated by a process operating closer to trading time rather than calendar time. In contrast, accumulation of interest over the weekend follows a calendar-time process. Since both the variance of returns and the interest rate are important parameters of the Black-Scholes option pricing model, this paper suggests that the model be stated to account for this by utilizing a trading-time variance and a calendar-time interest rate. Empirical evidence indicates that this allows the model to better explain market option prices.     

The effect of personal taxes and dividends on capital asset prices: Theory and empirical evidence

This paper derives an after tax version of the Capital Asset Pricing Model. The model accounts for a progressive tax scheme and for wealth and income related constraints on borrowing. The equilibrium relationship indicates that before-tax expected rates of return are linearly related to systematic risk and to dividend yield. The sample estimates of the variances of observed betas are used to arrive at maximum likelihood estimators of the coefficients. The results indicate that, unlike prior studies, there is a strong positive relationship between dividend yield and expected return for NYSE stocks. Evidence is also presented for a clientele effect.