DEALER BID-ASK SPREADS AND OPTIONS TRADING ON OVER-THE-COUNTER STOCKS

In this study the impact of option listings on bid-ask spreads for over-the-counter stocks is examined. Option listings are hypothesized to impact spreads by affecting the inventory-holding cost and/or the informed risk component of spreads. Univariate tests reveal that the commencement of options trading is accompanied by a statistically significant decline in percentage spreads. In addition, it is found that there is a significant rise in the average daily stock trading volume in the post-option-listing period, while there is no significant change in variance of the underlying stock returns in the short term. Regression results indicate that some stocks experience a decline in spreads even after controlling for changes in inventory-holding costs. The univariate and regression results taken in conjunction indicate a favorable impact of option listings on both the inventory-holding cost and informed-trading risk components of spread determinants. The combined evidence suggests that initiation of options trading enhances the overall liquidity of the underlying stock.     

AN EXAMINATION OF MARKET REACTION TO SUBSTANTIAL SHIFTS IN DIVIDEND POLICY

This study provides further empirical evidence on the informational content of dividends hypothesis. To reduce the misclassification of unfavorable and favorable dividend announcements, which can result when small dividend changes are included, the analysis is restricted to cases where a substantial shift in dividend policy has occurred. Specifically, the authors examine the aggregate market response to announcements of (1) omitted dividends, (2) dividend decreases of at least 25 percent, (3) dividend increases of at least 25 percent, and (4) initial dividend payments. The results indicate that announcements of dividend omissions and large decreases have a pronounced downward impact on stock prices even though the market has anticipated the forthcoming news to a large degree. Similarly, the market reaction to initial dividend declarations is found to be substantial and much greater than previously found for favorable dividend classifications in general.     

AN EMPIRICAL EXAMINATION OF FINANCIAL LIBERALIZATION AND THE EFFICIENCY OF EMERGING MARKET STOCK PRICES

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from sixteen countries and three composite portfolios, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient before the actual liberalization.     

STOCK MARKET SEASONALITY AND TAXES: AN EXAMINATION OF THE TAX-LOSS SELLING HYPOTHESIS

Recent empirical studies have found evidence that supports the tax loss selling explanation of seasonal effects in stock returns. Using other test procedures, the present authors conclude that the support found in other studies is likely to be the result of spurious correlation between returns of stocks selected as tax-loss selling candidates and the January returns of these stocks.     

INFORMATION CONTENT OF QUALIFIED AUDIT OPINIONS FOR OVER-THE-COUNTER FIRMS

This study investigates the information content of the initial public announce-ment of an audit qualification for a sample of American firms traded over-the-counter. These firms have smaller predisclosure information sets than New York Stock Exchange (NYSE) and American Stock Exchange (ASE) firms. The results of research focusing on NYSE and ASE firms cannot, therefore, be extended to the over-the-counter (OTC) market. When the qualification is not confined to a 'bad news' scenario, a significant market reaction to the announcement is found, indicating that audit qualification announcements for OTC firms do, indeed, have information content.     

ACCOUNTING FOR THE COST OF CAPITAL: AN EMPIRICAL EXAMINATION

One of accounting's oldest issues, accounting for interest costs, has become a subject of increased concern in recent years. This study empirically addresses the issue of whether the cost of equity capital should be charged against income. Fourteen measures of the cost of equity capital are examined. The empirical tests involve contemporaneous correlation of accounting betas for each income measure with market betas for a sample of 200 companies. The results of these association tests indicate that income measures, net of the cost of equity capital, may have greater information content than income as presently reported.     

AN EXAMINATION OF MERGER SYNERGISM

The empirical research discussed in this paper measures the synergistic effects of mergers on the stockholders of the acquiring and acquired firms. Synergism is defined as the incremental wealth to the shareholders of both merging firms due to the merger—net of any potential gains achievable through investors' personal diversification over the common stocks of the merging firms. Three types of mergers are identified and studied—nonconglomerate, conglomerate with increasing financial leverage, and conglomerate with decreasing financial leverage. The results indicate that these types of mergers are affected differently by the combination. Moreover, the evidence suggests operational and/or financial synergism.     

AN EMPIRICAL EXAMINATION OF THE EXISTENCE OF A SIGNALING VALUE FUNCTION FOR DIVIDENDS

The purpose of this study is to address the reliability of dividend signals. To determine if dividend signals are followed by changes in earnings in a direction consistent with the signal, the dividend-earning relationship is examined using both Granger tests of causality and nonparametric tests. Results are consistent with the hypothesis that dividend signals are followed by unanticipated changes in earnings in the subsequent two quarters.     

THE OVER-THE-COUNTER MARKET AND NEW YORK STOCK EXCHANGE TRADING HALTS

This paper examines the over-the-counter (OTC) market activities for stocks temporarily suspended by the New York Stock Exchange (NYSE). Unlike previous studies, we use transaction-to-transaction data on the NASDAQ during NYSE trading halts to investigate the price adjustment process between market equilibria. The evidence indicates that while being halted by the NYSE, the same stocks have exhibited significantly greater volatility in the OTC market. Since the volatile price movement is mainly random and provides no arbitraging opportunities for the OTC market traders, we do not find support for the proposal that trading halts should be mandatory for all trading locations.     

THE SLOPE OF THE TERM STRUCTURE OF CREDIT SPREADS: AN EMPIRICAL INVESTIGATION

In this article we analyze the slope of the term structure of credit spreads. We investigate the explanatory role of interest rate, market, and idiosyncratic equity variables that the recent empirical literature highlights as important determinants of credit spread levels. This study extends the analysis and assesses its effect on credit slopes for a sample of corporate bonds. We find that these factors affect credit spreads at short and long maturities in a significantly different way. A closer inspection of the credit spread slope also reveals that it is a useful indicator of the direction of changes in future short‐term credit spreads. This evidence has important implications for the trading and risk management of portfolios of bonds with different maturities.     

DOMINANCE CRITERIA FOR THE RANKING OF PROJECTS WITH AN IMPERFECT CAPITAL MARKET

Dominance criteria are established for problems of choice between alternative discrete investments where financial markets have unequal borrowing and lending interest rates. In the general case, the necessary and sufficient condition for all investors to prefer cash flow Q to cash flow R under non-satiety, is that Q can be converted to a superior flow to R - element by element. Where negative arguments of the decision maker's utility function are prohibited, it is necessary and sufficient that realisable value for Q exceeds realisable value for R at all times. A four stage procedure completes the decision making process where no inter-project dominance exists.