Stock price reaction following large one-day price changes: UK evidence

We examine the short-term price reaction of 424 UK stocks to large one-day price changes. Using the GJR-GARCH(1,1), we find no statistical difference amongst the cumulative abnormal returns (CARs) of the Single Index, the Fama–French and the Carhart–Fama–French models. Shocks ?5% are followed by a significant one-day CAR of 1% for all the models. Whilst shocks ?−5% are followed by a significant one-day CAR of −0.43% for the Single Index, the CARs are around −0.34% for the other two models. Positive shocks of all sizes and negative shocks ?−5% are followed by return continuations, whilst the market is efficient following larger negative shocks. The price reaction to shocks is unaffected when we estimate the CARs using the conditional covariances of the pricing variables.     

Stabilization and the aftermarket prices of initial public offerings

The paper examines the determinants of stabilization and its impact on the aftermarket prices. We use a unique dataset to relax several assumptions in the stabilization literature. We find that underwriters support IPO prices shortly after listing, particularly in cold markets and when demand is weak. We also show that stabilized IPOs are more common amongst reputable underwriters. This finding suggests that stabilization may be used as a mechanism to protect the underwriter’s reputation. It also implies that reputable underwriters may possess private information and price IPOs closer to their true values (i.e., higher than those indicated by the weak premarket demand). Consistent with the latter view, we show that stabilized IPOs are offered at higher prices and suffer less underpricing than those indicated by the premarket demand, firm characteristics and market-wide conditions. The post-IPO performance results indicate that stabilized IPOs are unlikely to be mispriced as their prices do not exhibit any significant reversal after the initial stabilization period. We conclude that stabilization may be superior to underpricing as it protects investors from purchasing overpriced IPOs, benefits issuers by reducing the total money “left on the table” and enhances the overall profitability of underwriters.     

Investor sentiment and the cross-section of stock returns: new theory and evidence

Review of Quantitative Finance and Accounting - Narrative reporting is an important avenue for investors to know more about a company from the eyes of its board of directors. This study aims to...     

Price,volume and spread effects associated with the expiry of lock-in agreements: Evidence from the Hong Kong IPO market

We examine the price, volume and bid–ask spread reactions to lock-in expiries in Hong Kong IPOs. We show that the lock-in expiry causes an increase in both trading volume and bid–ask spread, but no significant change in the share price. We attribute the absence of a price reaction to the fact that most of the Hong Kong IPO firms are controlled by one or two non-institutional shareholders who choose not to sell their shares after the lock-in expiry. Another plausible reason for the absence of a price reaction may be the period studied by this paper which follows the publication of a number of studies on lock-in expiry. The publication of the anomaly may have arbitraged away any gains internationally. The absence of significant abnormal returns around the lock-in expiry confirms the semi-strong form of the efficient market hypothesis. Our results are consistent with the European evidence, but contradict the findings of most US studies. We show that the volume and spread increases are not caused by the sales by locked-in insiders around the lock-in expiry. The volume increase may be caused by the presence of undisclosed insider transactions around the lock-in expiry. This may well be the case, since the insider trading disclosure requirement does not apply to transactions that result in a change of less than one percentage point to an insider holding. Finally, we show that the wider spread is likely to be caused by market makers charging high information rent to protect themselves against potential trading with informed insiders.     

New evidence on the price and liquidity effects of the FTSE 100 index revisions

We study the price and liquidity effects following the FTSE 100 index revisions. We employ the standard GARCH(1,1) model to allow the residual variance of the single index model (SIM) to vary systematically over time and use a Kalman filter approach to model SIM coefficients as a random walk process. We show that the observed price effect depends on the abnormal return estimation methods. Specifically, the OLS-based abnormal returns indicate that the price effect associated with the index revision is temporary, whereas both SIM with random coefficients and GARCH(1,1) model suggest that both additions and deletions experience permanent price change. Added (removed) stocks exhibit permanent (temporary) change in trading volume and bid-ask spread. The analysis of the spread components suggests that the permanent change associated with additions is a result of non-information-related liquidity. We interpret the permanent price effect of additions and deletions combined with the permanent (temporary) shift in liquidity of added (removed) stocks as evidence in favour of the imperfect substitution hypothesis with some non-information-related liquidity effects in the case of additions.     

Stock price reaction to profit warnings: the role of time-varying betas

This study investigates the role of time-varying betas, event-induced variance and conditional heteroskedasticity in the estimation of abnormal returns around important news announcements. Our analysis is based on the stock price reaction to profit warnings issued by a sample of firms listed on the Hong Kong Stock Exchange. The standard event study methodology indicates the presence of price reversal patterns following both positive and negative warnings. However, incorporating time-varying betas, event-induced variance and conditional heteroskedasticity in the modelling process results in post-negative-warning price patterns that are consistent with the predictions of the efficient market hypothesis. These adjustments also cause the statistical significance of some post-positive-warning cumulative abnormal returns to disappear and their magnitude to drop to an extent that minor transaction costs would eliminate the profitability of the contrarian strategy.     

Foreign Direct Investment from Emerging Markets to Africa: The HRM Context

In this article, we explore what determines the decisions of emerging‐market multinational corporations (MNCs) to invest in Africa and whether this is any different from their counterparts in mature markets, focusing on the HRM context. More specifically, we explore the effect of potential host‐country wages, local capabilities, and the relative rights of owners versus workers on foreign direct investment (FDI) decisions, as well as other relevant factors such as mineral resources and corruption. We found that emerging‐market MNCs were not deterred by relatively weak property owner rights (as indeed, was also the case for their counterparts from mature markets); hence, any weakening of countervailing worker rights is unlikely to unlock significant new FDI. However, emerging‐market MNCs were more likely to invest in low‐wage economies and did not appear to be concerned by local skills gaps; the latter would reflect the relative de facto ease with which even partially skilled expatriate labor can be imported into many African countries. At the same time, a reliance on low‐wage, unskilled labor, coupled with the extensive usage of expatriates, brings with it a wide range of challenges for the HR manager, which a firm committed to cost‐cutting may lack the capabilities to resolve. © 2014 Wiley Periodicals, Inc.     

Systematic liquidity risk and stock price reaction to shocks

This study examines the relationship between systematic liquidity risk and stock price reaction to large 1‐day price changes (or shocks). We base our analysis on a yearly updated constituents list of the FTSE All share index. Our overall results are consistent with the price continuation hypothesis, which suggests that positive (negative) shocks will be followed by positive (negative) abnormal returns. However, further analysis indicates that stocks with low systematic liquidity risk react efficiently to both positive and negative shocks, whereas stocks with high systematic liquidity risk underreact to both positive and negative shocks. Our results are valid irrespective of various robustness tests such as size of the shock, size of the firm, month‐of‐the‐year and day‐of‐the‐week effects. We conclude that trading on price patterns following shocks may not be profitable, as it involves taking substantial liquidity exposure.     

A Distance-Based Collective Weak Ordering

A group decision-making approach can be seen as a two stage process. The first stage allows for multi-cirteria evaluation of the alternatives and the second aims at deriving a collective weak ordering from the partial orderings supplied by the members after the first stage. The problem of combining the weak orderings to form a collective ranking is investigated. An axiomatic structure relating to the concept of distance between binary relations is developed. An algorithm for deriving the collective weak ordering is proposed, based on the idea of ranking first the least dominated alternatives.