SHORT SELLING AND MISPRICINGS WHEN FUNDAMENTALS ARE KNOWN: EVIDENCE FROM NYSE‐TRADED CLOSED‐END FUNDS

The larger a closed‐end fund's premium over its portfolio value, the more intensely it is sold short. This behavior should reduce mispricings. However, short selling affects neither the observed rate at which premia revert to fundamental values nor the rate of return on a fund's shares. This apparent contradiction can be explained as follows: short selling does reduce prices, but the effect is impounded into prices by the time short positions are tabulated by the NYSE each month. Consequently, the monthly short selling data do not predict future price movements.     

UNDERWRITER REPUTATION AND AFTERMARKET PERFORMANCE OF CLOSED‐END FUNDS

I find a positive relation between underwriter reputation and the initial and long‐run aftermarket performance of closed‐end funds. This relation persists even after controlling for fund characteristics, types, and investment strategies. The positive relation between underwriter reputation and initial returns supports the notion that prestigious investment bankers tend to promote a price run‐up in the immediate aftermarket to enhance their reputation with the issuers and the investors. The better long‐run performance for funds underwritten by prestigious underwriters suggests that prestigious underwriters protect their reputation by underwriting only high‐quality issues that will perform well in the long run.     

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.     

PRICE AND QUANTITY QUOTES ON NASDAQ: A STUDY OF DEALER QUOTATION BEHAVIOR

We show that the majority of quotes posted by NASDAQ dealers are noncompetitive and only 19.5% (18.4%) of bid (ask) quotes are at the inside. The percentage of dealer quotes that are at the inside is higher for stocks with wider spreads, fewer market makers, and more frequent trading, and lower for stocks with larger trade sizes and higher return volatility. These results support our conjecture that dealers have greater incentives to be at the inside for stocks with larger market‐making revenues and smaller costs. Dealers post large depths when their quotes are at the inside and frequently quote the minimum required depth when they are not at the inside. The latter quotation behavior leads to the negative intertemporal correlation between dealer spread and depth.     

IS THE BOOK‐TO‐MARKET RATIO A MEASURE OF RISK?

We develop a leverage‐based alternative to traditional asset pricing models to investigate whether the book‐to‐market ratio acts as a proxy for risk. We argue that the book‐to‐market ratio should act as a proxy because of the expected relations between (1) financial risk and measures of capital structure based on the market value of equity and (2) asset risk and measures of capital structure based on the book value of equity. We find no relation between average stock returns and the book‐to‐market ratio in all‐equity firms after controlling for firm size, and an inverse relation between average stock returns and the book‐to‐market ratio in firms with a negative book value of equity.     

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.     

INFORMATION ASYMMETRY,DIVIDEND STATUS,AND SEO ANNOUNCEMENT‐DAY RETURNS

We analyze the relation between the dividend‐paying status of a firm and the seasoned equity offering (SEO) announcement‐day return. Asymmetric information theory suggests there should be a positive relation: the larger the disagreement, particularly between managers and shareholders, the larger the price drop on the SEO announcement day. However, this theoretical result has not been supported by prior empirical research. In this article we reconcile the gap between the theory and extant empirical results by identifying a structural change in the way the stock market treats dividend‐paying firms. Since the mid‐1980s the difference in information asymmetry between dividend‐ and non‐dividend‐paying firms has increased sharply. As a result, before the mid‐1980s the market did not differentiate strongly between them, but subsequently the market has reacted less negatively to announcements by dividend payers.     

DIFFERENCES OF OPINION,OVERCONFIDENCE, AND THE HIGH‐VOLUME PREMIUM

We argue that both differences of opinion and overconfidence lead to high‐volume shocks. However, a high‐volume shock induced mainly by differences of opinion (overconfidence) will lead to superior (inferior) stock returns. Empirically, Asian financial markets, in contrast to U.S. markets, reveal weaker and inconsistent high‐volume premiums. The inconsistency may be attributable to investor's overconfidence. Additional evidence based on U.S. data supports this view, as a high‐volume shock accompanied by increased institutional ownership yields substantially higher high‐volume premiums than otherwise, and high‐volume premiums generally are much stronger in down‐market states than up‐market states.     

DIVERGENCE OF OPINION AND LONG‐TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Miller's hypothesis posits that divergence of opinion can lead to asset overvaluation and subsequent long‐term underperformance in markets (such as initial public offerings [IPOs]) with restricted short‐selling. Consistent with this hypothesis, we find that early‐market return volatility, a proxy for divergence of opinion, is negatively related to subsequent IPO long‐term abnormal returns. This relation holds after accounting for other factors that previous studies suggest affect long‐term abnormal returns for IPOs (including another proxy for divergence of opinion). Moreover, we find that this relation is stronger in IPO markets than in non‐IPO markets (where short‐selling restrictions are less stringent), again consistent with Miller's hypothesis.     

INTANGIBLE ASSETS,BOOK‐TO‐MARKET,AND COMMON STOCK RETURNS

I examine two anomalies where the Fama and French three‐factor model fails to adequately explain monthly industry and index returns. Both anomalies are consistent with a bad model problem where the book‐to‐market factor introduces a negative bias in the intercepts. I propose the intangibles model as an alternative where the three‐factor model is known to have difficulty. This alternative model, which replaces the book‐to‐market factor with zero investment portfolio returns based on prior investments in intangible assets, is well specified in random samples, has comparable power, and fully explains both anomalies.     

GLAMOUR VERSUS VALUE: TRADING BEHAVIOR OF INSTITUTIONS AND INDIVIDUAL INVESTORS

We design a new metric to measure the net buying and selling by institutions and individual investors and find that from 1980 to 2004 institutional investors were net buyers of growth stocks and net sellers of value stocks, implying that individual investors were net buyers of value stocks and net sellers of glamour stocks. The institutional preference for glamour and value stocks seems to be related to sell‐side analysts' recommendations and recent favorable stock price performances, especially during the post‐1994 period. Finally, the institutional buying of growth stocks and sale of value stocks was not based on superior information.     

MUTUAL FUNDS SELECTION BASED ON FUNDS CHARACTERISTICS

The popular investment strategy in the literature is to use only past performance to select mutual funds. We investigate whether an investor can select superior funds by additionally using fund characteristics. After considering the fund fees, we find that combining information on past performance, turnover ratio, and ability produces a yearly excess net return of 8.0%, whereas an investment strategy that uses only past performance generates 7.1%. Adjusting for systematic risks, and then using fund characteristics, increases yearly alpha significantly from 0.8% to 1.7%. The strategy that also uses fund characteristics requires less turnover.     

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.     

TRADING‐VOLUME SHOCKS AND STOCK RETURNS: AN EMPIRICAL ANALYSIS

We examine high‐volume premiums based on weekly risk‐adjusted returns. Significant average weekly abnormal high‐volume premiums up to 0.50% per week are documented for 1962–2005. Most premiums are generated in the first two weeks and monotonically decline as holding periods are extended. Evidence of reversal is found as the holding periods are extended. Premiums depend on realized turnover in the holding period. The last finding supports the theories of Miller and Merton. Finally, we test whether premiums are compensation for taking additional risk. Negative skewness, idiosyncratic risk, and liquidity risk do not explain the high‐volume premiums.     

SENSITIVITY OF INVESTOR REACTION TO MARKET DIRECTION AND VOLATILITY: DIVIDEND CHANGE ANNOUNCEMENTS

We examine whether investor reactions are sensitive to the recent direction or volatility of underlying market movements. We find that dividend change announcements elicit a greater change in stock price when the nature of the news (good or bad) goes against the grain of the recent market direction during volatile times. For example, announcements to lower dividends elicit a significantly greater decrease in stock price when market returns have been up and more volatile. Similarly, announcements to raise dividends tends to elicit a greater increase in stock price when market returns have been normal or down and more volatile, although this latter tendency lacks statistical significance. We suggest an explanation for these results that combines the implications of a dynamic rational expectations equilibrium model with behavioral considerations that link the responsiveness of investors to market direction and volatility.     

DAY‐END EFFECT ON THE PARIS BOURSE

We study the day‐end effect on the Paris Bourse, a computerized order‐driven market with competing dealers. The day‐end return is approximately double the magnitude found in U.S. data and is nearly four times larger for stocks trading with a registered dealer. However, this is largely explained by the time between trades and the bid‐ask spread. Unlike the U.S. data, the effect does not decline as stock price increases, probably because of a variable tick size in the Paris market. Finally, a change to a closing call auction in May 1996 for a subset of stocks did not reduce the day‐end effect.     

SECURITIES PRICE EFFECTS OF UNIONIZATION LEGISLATION

Prior studies document that firms experience negative stock price effects in response to unionization. We study the economic effects of a radical change in unionization legislation in New Zealand and hypothesize that the stock price effect of unionization is a function of prior unionization status of firms. We provide evidence that legislative events that increase the likelihood of introducing more stringent legislation do not affect stock prices of high‐unionized firms, whereas low‐unionized firms are affected negatively and significantly. Legislative events that signal less stringent unionization legislation result in significant stock price increases for all firms.     

MODELS OF STOCK MARKET PREDICTABILITY

I briefly review the success of past studies purporting to explain equity valuations and predict future equity returns. The Campbell‐Shiller mean reversion models are contrasted with an expanded version of the so‐called Federal Reserve model. At least from 1970 to 2003, Federal Reserve–type models did somewhat better at predicting long‐horizon returns than did a mean reversion model based on dividend yields and price‐earnings multiples. However, timing investment strategies based on any of these prediction models do no better than a buy‐and‐hold strategy. Although some predictability of returns exists, there is no evidence of any systematic inefficiency that would enable investors to earn excess returns.     

WHAT'S IN A NICKNAME? PRICE AND VOLUME EFFECTS OF A PURE TICKER SYMBOL CHANGE

We examine the effect of a voluntary change in ticker symbol without other contemporaneous corporate events such as a name change. We find significant declines in trading volume and prices on the effective date of the ticker change. We segment the sample by exchange listing, share turnover activity, and subperiod. We observe declines in trading volume in all subsamples and negative abnormal returns in recent years.     

THE IMPORTANCE OF LIQUIDITY AS A FACTOR IN ASSET PRICING

We employ the Fama‐French time‐series regression approach to examine liquidity as a risk factor affecting stock returns. Prior studies establish liquidity as an important consideration in investment decisions. Here, liquidity is found to be an important factor affecting portfolio returns, even after the effects of market, size, book‐to‐market equity, and momentum are considered. Nonzero intercepts remain, however, indicating continued missing risk factors.