Hidden liquidity: An analysis of order exposure strategies in electronic stock markets

Many stock exchanges choose to reduce market transparency by allowing traders to hide some or all of their order size. We study the costs and benefits of order exposure and test hypotheses regarding hidden order usage using a sample of Euronext-Paris stocks, where hidden orders represent 44% of the sample order volume. Our results support the hypothesis that hidden orders are associated with a decreased probability of full execution and increased average time to completion, and fail to support the alternate hypothesis that order exposure causes defensive traders to withdraw from the market. However, exposing rather than hiding order size increases average execution costs. We assess the extent to which non-displayed size is truly hidden and document that the presence and magnitude of hidden orders can be predicted to a significant, but imperfect, degree based on observable order attributes, firm characteristics, and market conditions. Overall, the results indicate that the option to hide order size is valuable, in particular, to patient traders.     

INFLATION AND THE DISPERSION OF REAL WAGES*

The article studies the effects of inflation on real wage dispersion in a search‐monetary framework. The economy is characterized by frictions in both the goods and the labor markets. In the goods market, buyers and sellers bargain over prices, whereas in the labor market firms post wage offers. In equilibrium, a lower inflation rate increases the dispersion of real wages. This result is consistent with both the observed trends in wage dispersion and the inflation rate witnessed in the 1980s and the 1990s in the United States and the empirical literature linking reduced inflation to greater wage dispersion.     

Enforceable Accounting Rules and Income Measurement by Early 20th Century Railroads

We investigate the extent to which income measurement by major early 20th‐century U.S. railroads shows evidence of lower income smoothness and increased conservatism following new fixed asset accounting rules issued by the Interstate Commerce Commission (ICC) in 1907 and 1908 and concurrent rate regulation regime shifts. Accounting rules promulgated by the ICC after the Hepburn Act of 1906 are the first accounting rules in U.S. history in which regulators could enforce such rules under federal law to increase compliance. Our samplewide results are more consistent with increased conservatism than with income smoothing. Additional tests indicate these effects are more pronounced for firms subject to more intense rate regulation by the ICC, which suggests that the tie‐in between accounting regulation and product/service market regulation influences how managers respond to new accounting rules.     

Do the diversification choices of individual investors influence stock returns?

This paper shows that the diversification choices of individual investors influence stock returns. A zero-cost portfolio that takes a long (short) position in stocks with the least (most) diversified individual investor clientele generates an annual, risk-adjusted return of 5–9%. This spread reflects the combined effects of sentiment-induced mispricing, narrow risk framing, and asymmetric information, where the sentiment effect is the strongest. Furthermore, the influence on returns is stronger among smaller, low institutionally owned, and hard-to-arbitrage stocks. These results are robust to concerns about relatively short sample size, improper factor model specification, slow information diffusion, and high transactions costs.     

Identifying Long Run Supply Curve of India

Identifications of a vertical then a horizontal supply curve are successively imposed on Indian time series inflation and industrial output growth data in a two-equation Structural Vector Autoregression (SVAR) model. The results provide an indirect test of the identifications. A high elasticity of long run supply cannot be ruled out, because supply shocks have a large impact on inflation and demand has a large and persistent effect on output levels. But supply is subject to frequent shocks. Estimated structural shocks, capture historical recessions and turning points well. Pro-cyclical policy induced demand shocks aggravated negative supply shocks or failed to take full advantage of positive supply side developments.

     

The Race that Stops a Nation: The Demand for the Melbourne Cup

This article uses the bounds testing procedure to cointegration, within an autoregressive distributed lag framework to estimate the determinants of attendance at the Melbourne Cup from its inception from 1861 to 2002. Following the literature on the demand for professional team sports, attendance is specified as a function of economic, demographic and race-specific factors. The main findings are that real income and population size are the major determinants of attendance in the long run, while in the short run the weather is the most important factor explaining attendance.     

Sensemaking and sensegiving in strategic change initiation

This paper reports an ethnographic study of the initiation of a strategic change effort in a large, public university. It develops a new framework for understanding the distinctive character of the beginning stages of strategic change by tracking the first year of the change through four phases (labeled as envisioning, signaling, re-visioning, and energizing). This interpretive approach suggests that the CEO's primary role in instigating the strategic change process might best be understood in terms of the emergent concepts of ‘sensemaking’ and ‘sensegiving’. Relationships between these central concepts and other important theoretical domains are then drawn and implications for understanding strategic change initiation are discussed.     

The mismanagement of customer loyalty

Who wouldn't want loyal customers? Surely they should cost less to serve, they'd be willing to pay more than other customers, and they'd actively market your company by word of mouth, right? Maybe not. Careful study of the relationship between customer loyalty and profits plumbed from 16,000 customers in four companies' databases tells a different story. The authors found no evidence to support any of these claims. What they did find was that the link between customers and profitability was more complicated because customers fall into four groups, not two. Simply put: Not all loyal customers are profitable, and not all profitable customers are loyal. Traditional tools for segmenting customers do a poor job of identifying that latter group, causing companies to chase expensively after initially profitable customers who hold little promise of future profits. The authors suggest an alternative approach, based on well-established "event-history modeling" techniques, that more accurately predicts future buying probabilities. Armed with such a tool, marketers can correctly identify which customers belong in which category and market accordingly. The challenge in managing customers who are profitable but disloyal--the "butterflies"--is to milk them for as much as you can while they're buying from you. A softly-softly approach is more appropriate for the profitable customers who are likely to stay loyal--your "true friends." As for highly loyal but not very profitable customers--the "barnacles"--you need to find out if they have the potential to spend more than they currently do. And, of course, for the "strangers"--those who generate no loyalty and no profits--the answer is simple: Identify early and don't invest anything.