WHAT DRIVES INVESTMENT FLOWS INTO SOCIAL TRADING PORTFOLIOS?

We investigate investment flows into more than 5,300 social trading portfolios that are issued as structured products and are tradable at a regular exchange. We find that investment flows chase past performance. However, in contrast to mutual fund flows, the flow–performance relation exists nearly exclusively for the best performing social trading portfolios. Flows follow raw returns rather than factor model alphas. Additionally, flows are highly persistent. Finally, social trading portfolios with higher visibility on the web page of the social trading platform as well as traders communicating actively to investors via public comments attract higher inflows.     

TO PURCHASE OR TO POOL: DOES IT MATTER?

The recent decision by the Financial Accounting Standards Board to eliminate pooling accounting for acquisitions raises several important questions: Does the choice of “purchase” or “pooling” affect firm valuations? How do differences in goodwill and its amortization affect cash flow and price/earnings multiples? How has the market reacted to purchase and pooling acquisition announcements? The authors' new research suggests that the market already judges mergers and acquisitions based on fundamental economics, not on GAAP earnings. In a study of 1,442 large acquisitions in the 1990s, the authors find that, in the first month after the announcement of pooled transactions, the acquirer's stock fell by an average of almost 4%. By contrast, the market reaction to purchase acquisitions was extremely favorable, with a 3% positive abnormal return in the first month. But what about the ongoing effect of goodwill amortization on values? In the second part of their two-part study, the authors report that the P/E multiples of acquirers reporting increases in goodwill amortization increase significantly following the acquisitions, and that the increases in P/E are large enough to offset the negative impact of goodwill amortization on earnings. Moreover, the authors also tested for and were unable to find any evidence of a market bias against balance sheet goodwill as an indicator of future amortization charges. The authors thus conclude that changes in accounting for acquisitions should not be a concern for acquirers, and that the elimination of pooling should have no lasting impact on corporate strategic decisions or M&A activity. Nevertheless, they do suggest that companies with significant goodwill would benefit from making their amortization transparent in their financial statements by, for example, breaking out amortization from depreciation on their income statements.     

DOES SPEED MATTER? THE ROLE OF HIGH-FREQUENCY TRADING FOR ORDER BOOK RESILIENCY

We analyze limit order book resiliency following liquidity shocks initiated by large market orders. Based on a unique data set, we investigate whether high-frequency traders are involved in replenishing the order book. Therefore, we relate the net liquidity provision of high-frequency traders, algorithmic traders, and human traders around these market impact events to order book resiliency. Although all groups of traders react, our results show that only high-frequency traders reduce the spread within the first seconds after the market impact event. Order book depth replenishment, however, takes significantly longer and is mainly accomplished by human traders’ liquidity provision.     

ARE THE STRUCTURAL CHANGES IN MUTUAL FUNDS INVESTING DRIVING THE U.S. STOCK MARKET TO ITS CURRENT LEVELS?

We examine the long-run equilibrium relation between the net flow of funds into equity mutual funds and the S&P 500 index. Applying the Engle and Granger error correction methodology followed by a state space procedure, we find that the levels of the stock market are influenced by the net flow of funds into equity mutual funds. Our findings indicate that the U.S. equity market appears to be rationally adjusting to a structural change in the behavior of the U.S. investing public.     

INTRADAY STEALTH TRADING: WHICH TRADES MOVE PRICES DURING PERIODS OF HIGH VOLUME?

Research documents a U-shaped intraday pattern of returns. We examine which trade sizes drive the U-shaped pattern and find that intraday price changes from larger trades exhibit a U-shaped pattern whereas price changes from smaller trades show a reverse U-shaped pattern. We argue that price changes from smaller trades are higher during the middle of the day because informed investors break up their trades to disguise their information when intraday volume is low. Price changes from larger trades are likely higher at the beginning and end of the day because high volume allows informed investors to increase their trade size without revealing their information to the market.     

DO INSTITUTIONS PREFER HIGH‐VALUE ACQUIRERS? AN ANALYSIS OF TRADING IN STOCK‐FINANCED ACQUISITIONS

If owners of target shares in a stock‐for‐stock merger perceive the acquirer as overvalued, they should sell their holdings more aggressively to profit before such overvaluation dissipates. We study institutional owners of targets and find that slightly more than half liquidate their shares in stock mergers, consistent with high institutional‐share turnover rates found in the prior literature. However, share retention is higher when valuation measures suggest greater acquirer overvaluation, regardless of whether institutional owners generally prefer growth or value stock. Institutions that prefer large‐cap, growth stock are most enthusiastic about bids from large, high‐valuation acquirers, and substantially increase their stakes in such deals.     

DOES IT PAY TO DISCLOSE MANAGERIAL EARNINGS INFORMATION EARLY?

Does it pay to voluntarily disclose the manager's private information about the firm's earnings prospects before the mandatory announcement date? This question has been a subject of much debate because prior research establishes both benefits and costs of early information disclosure. We provide evidence on the net effect of such disclosure by examining its impact on firm value. Using a large sample and correcting for self‐selection bias, we find that early disclosure of the manager's private earnings information enhances the end‐of‐period value of the firm.     

WHAT HAPPENED TO THE WILLINGNESS OF COMPANIES TO INVEST AFTER THE FINANCIAL CRISIS? EVIDENCE FROM LATIN AMERICAN COUNTRIES

In this article we investigate the changes in corporate investment dynamics in the aftermath of the global financial crisis. Using firm-level data from six Latin American countries from 2002 to 2015, we show that firms are less constrained and have greater ability to invest after the crisis. However, the willingness of firms to invest optimally is reduced. This is supported by strong evidence that during the postcrisis period investment–cash flow sensitivity disappears, investment-q sensitivity increases, and the estimated speeds of adjustment for target investment decrease. Moreover, after the crisis, firms notably increase their efforts to attain optimal cash and leverage levels. Our analysis implies that firms may not always be willing to invest optimally. The willingness to invest optimally appears to be time variant and moves together with the dynamics of cash and leverage policies, albeit in opposite directions.     

ARE WATCH PROCEDURES A CRITICAL INFORMATIONAL EVENT IN THE CREDIT RATINGS PROCESS? AN EMPIRICAL INVESTIGATION

The Boot, Milbourn, and Schmeits (2006) model (Boot model) predicts certain credit rating events are likely to be more informative than others and that credit watch procedures are an important driver of such differences. We test the core empirical predictions of their model. Our sample comprises U.S. corporate issuer credit ratings provided by Moody's, 1990–2006. Our findings fail to uncover compelling evidence for the empirical predictions of the Boot model in relation to the role of watch procedures as coordinating mechanisms. Rather, our findings are more supportive of the view that rating agencies are always at an informational advantage relative to investors.     

BOND MARKET REACTION TO STOCK REPURCHASES: IS THERE A WEALTH TRANSFER EFFECT?

We reexamine the bondholder wealth impact of stock repurchases with a focus on the wealth transfer effect. We do not detect any transfer of wealth from bondholders to shareholders surrounding open market stock repurchases. For the overall sample (1994–2002), using daily data we document a significant decrease in bond yields surrounding repurchase announcements. Subsamples classified by attributes that capture wealth transfer propensity also do not reveal evidence consistent with a wealth transfer effect. Correlation analysis between bond and stockholder wealth effects similarly is not supportive of a wealth transfer effect. Contrary to the wealth transfer hypothesis, we document a greater proportion of bond rating upgrades than downgrades in the three months following a repurchase announcement. Our results are robust to alternate bond price data and event return methodology.     

WHAT'S IN A NAME? A CAUTIONARY TALE OF PROFITABILITY ANOMALIES AND LIMITS TO ARBITRAGE

The recent literature investigating profitability anomalies defines profitability in various ways (i.e., gross, operating, and cash based). We show that limits to arbitrage are associated with returns of gross and cash-based operating profitability anomalies, suggesting mispricing. In contrast, returns from the operating profitability strategy have no relation with barriers to arbitrage and exhibit no evidence of mispricing. Additionally, we show that the differential effects of limited arbitrage-related mispricing of gross and cash-based operating profitability anomalies are attributable to their respective correlations with selling, general, and administrative (SG&A) expense and accruals anomalies. We find that SG&A return predictability, like that of accruals, is related to limits to arbitrage. These findings suggest that investors and researchers should proceed with caution when searching for return predictability by redefining profitability measures.