Securities and exchange
Chinese superstition in US commodity trading
Richard Chung, Ali Darrat & Bin Li
Applied Economics Letters, Winter 2014, Pages 171-175
Abstract:
We examine the potential effect of Chinese superstition on the prices of four commodities traded in the US commodity market using daily data from January 1994 to September 2012. We focus on market responses to days that Chinese traders superstitiously deem as either lucky or unlucky. Our results suggest that day 4 in the month (considered unlucky) is associated with significantly lower returns for three commodities (copper, cotton and soybean). The evidence controls for the possible effects of other anomalies and emerges despite the fact that China buys only about half of the US total exports of these commodities. These results seem in conflict with an efficient US commodity market as it opens the possibility for formulating profitable trading rules based on day 4 trading.
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Morten Sorensen, Neng Wang & Jinqiang Yang
NBER Working Paper, November 2013
Abstract:
We investigate whether the performance of Private Equity (PE) investments is sufficient to compensate investors (LPs) for risk, long-term illiquidity, management and incentive fees charged by the general partner (GP). We analyze the LP's portfolio-choice problem and find that management fees, carried interest and illiquidity are costly, and GPs must generate substantial alpha to compensate LPs for bearing these costs. Debt is cheap and reduces these costs, potentially explaining the high leverage of buyout transactions. Conventional interpretations of PE performance measures appear optimistic. On average, LPs may just break even, net of management fees, carry, risk, and costs of illiquidity.
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Information Asymmetry and Insider Trading: Evidence from Exogenous Changes in Analyst Coverage
Wei Wu
University of Chicago Working Paper, September 2013
Abstract:
I investigate the impact of the brokerage closure-related termination of analyst coverage, which increases the information asymmetry of the affected firms, on insider trading. Using a difference-in-differences approach, I find that after the termination of analyst coverage, corporate insiders obtain significantly higher abnormal returns and larger abnormal profits. Insiders' trading volume and transaction value remain unchanged in illiquid stocks, whereas they increase significantly in liquid stocks. The effects are more pronounced in firms with fewer analysts, and stronger prior to the adoption of the Sarbanes-Oxley Act. Overall, my findings establish a causal link between information asymmetry and insider trading.
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Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices
Nerissa Brown, Kelsey Wei & Russ Wermers
Management Science, forthcoming
Abstract:
This paper documents that mutual funds "herd" (trade together) into stocks with consensus sell-side analyst upgrades, and herd out of stocks with consensus downgrades. This influence of analyst recommendation changes on fund herding is stronger for downgrades, and among managers with greater career concerns. These findings indicate that career-concerned managers are incentivized to follow analyst information, and that managers have a greater tendency to herd on negative stock information, given the greater reputational and litigation risk of holding losing stocks. Furthermore, starting in the mid-1990s (when aggregate mutual fund equity ownership is significantly higher), stocks traded by career-concerned herds of fund managers in response to analyst recommendation changes experience a significant same-quarter price impact, followed by a sharp subsequent price reversal. Our evidence suggests that analyst recommendation revisions induce herding by career-concerned fund managers, and that this type of trading has become price destabilizing with the increasing level of mutual fund ownership of stocks.
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Abrupt rise of new machine ecology beyond human response time
Neil Johnson et al.
Scientific Reports, September 2013
Abstract:
Society's techno-social systems are becoming ever faster and more computer-orientated. However, far from simply generating faster versions of existing behaviour, we show that this speed-up can generate a new behavioural regime as humans lose the ability to intervene in real time. Analyzing millisecond-scale data for the world's largest and most powerful techno-social system, the global financial market, we uncover an abrupt transition to a new all-machine phase characterized by large numbers of subsecond extreme events. The proliferation of these subsecond events shows an intriguing correlation with the onset of the system-wide financial collapse in 2008. Our findings are consistent with an emerging ecology of competitive machines featuring 'crowds' of predatory algorithms, and highlight the need for a new scientific theory of subsecond financial phenomena.
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Do Stock Markets Catch the Flu?
Brian McTier, Yiuman Tse & John Wald
Journal of Financial and Quantitative Analysis, June 2013, Pages 979-1000
Abstract:
We examine the impact of influenza on stock markets. For the United States, a higher incidence of flu is associated with decreased trading, decreased volatility, decreased returns, and higher bid-ask spreads. Consistent with the flu affecting institutional investors and market makers, the decrease in trading activity and volatility is primarily driven by the incidence of influenza in the greater New York City area. However, the effect of the flu on bid-ask spreads and returns is related to the incidence of flu nationally. International data confirm our findings of a decrease in trading activity and returns when flu incidence is high.
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The Impact of Venture Capital Monitoring: Evidence from a Natural Experiment
Shai Bernstein, Xavier Giroud & Richard Townsend
Stanford Working Paper, October 2013
Abstract:
We examine whether venture capitalists contribute to the innovation and success of their portfolio companies, or merely select companies that are already poised to innovate and succeed. To do so, we exploit exogenous reductions in monitoring costs stemming from the introduction of new airline routes between venture capital firms and their existing portfolio companies. Within an existing relationship, we find that reductions in travel time are associated with an increase in the number of patents and number of citations per patent of the portfolio company, as well as an increase in the likelihood of an eventual IPO or acquisition. These results are robust when controlling for local shocks that could potentially drive the introduction of the new airline routes. We further document that the effect is concentrated in routes that connect lead VCs with portfolio companies, as opposed to other investors. Overall, these results are consistent with the monitoring channel and hence indicate that venture capitalists' physical presence at their portfolio companies is an important determinant of innovation and success.
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Han (Andy) Kim & Felix Meschke
University of Kansas Working Paper, October 2013
Abstract:
We investigate whether media attention systematically affects stock prices through the trading of individual investors by exploiting the substantial discrepancy between perceived and actual information content of 6,937 CEO interviews on CNBC. The average cumulative abnormal stock return over the [-2, 0] trading day window is 1.62%, yet prices exhibit strong reversion of 1.08% over the following ten trading days. The magnitude of price response is positively correlated with the viewership as well as the language tone of the CEO. We find that individual investors are net buyers on the interview days, and that they keep on buying if the interview was both carried out by attractive anchorwoman and was watched by more male viewers. The price reversal is attributable to abnormal short-selling volume on interview day. Moreover, we find that the price run-up before the interviews is largely driven by individual investors that are excited even at the pre-announcement of the interview. We also find evidence of asymmetric attention cascade coming from CNBC interview upon the tone of media coverage of the firm, tilted towards the negative.
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Uninvited U.S. Investors? Economic Consequences of Involuntary Cross-listings
Peter Iliev, Darius Miller & Lukas Roth
Journal of Accounting Research, forthcoming
Abstract:
We study the economic consequences of a recent SEC securities regulation change that grants foreign firms trading on the U.S. OTC market an automatic exemption from the reporting requirements of the 1934 Securities Act. We document that the number of voluntary (sponsored) OTC cross-listings did not increase following the regulation change, suggesting that it did not achieve its intended purpose of increasing voluntary OTC cross-listings through a reduction in compliance costs. We do find that the design of the regulation allowed financial intermediaries to create an unprecedented number of involuntary (unsponsored) OTC ADRs: 1,700 unsponsored ADR programs for 920 firms were created for companies that had previously chosen not to cross-list in the United States. Our difference-in-differences analysis based on a matched sample approach documents that foreign firms forced into the U.S. capital markets experience a significant decrease in firm value, and we further show that the decrease in firm value is related to an increase in U.S. litigation risk. We also find that depositary banks' propensity to involuntarily cross-list firms is positively related to banks' expected fee revenue, and that banks chose firms that incur high costs when involuntarily cross-listed. Our results provide evidence that securities regulation can be exploited for private gain and result in costly unintended consequences.
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Gregory Saxton & Ashley Anker
Journal of Communication, forthcoming
Abstract:
New media have markedly enhanced individuals' capacity to produce and disseminate original knowledge; however, the literature has not extensively examined the broad effects of such decentralized production processes. This study thus focuses on a unique context - the stock market - in which it is possible to test the aggregate impact of blog-based information production. Using data on 150 top financial bloggers and stock returns from the S&P 500, this study supports the hypothesis that financial blogging activity diminishes harmful information asymmetries between key market investors. This study thus adds to the "media effects" literature, highlights the societal relevance of bloggers, and shows how economic concepts and financial market settings can be employed for powerfully testing communication theories.
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Home Bias and Local Contagion: Evidence from Funds of Hedge Funds
Clemens Sialm, Zheng Sun & Lu Zheng
NBER Working Paper, October 2013
Abstract:
This paper analyzes the geographical preferences of hedge fund investors and the implication of these preferences for hedge fund performance. We find that funds of hedge funds overweight their investments in hedge funds located in the same geographical areas and that funds of funds with a stronger local bias exhibit superior performance. However, this local bias of funds of funds adversely impacts the hedge funds by creating excess comovement and local contagion. Overall, our results suggest that while local funds of funds benefit from local performance advantages, their local bias creates market segmentation that could destabilize financial markets.
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Voluntary Disclosure and Information Asymmetry: Evidence from the 2005 Securities Offering Reform
Nemit Shroff et al.
Journal of Accounting Research, December 2013, Pages 1299-1345
Abstract:
In 2005, the Securities and Exchange Commission enacted the Securities Offering Reform (Reform), which relaxes "gun-jumping" restrictions, thereby allowing firms to more freely disclose information before equity offerings. We examine the effect of the Reform on voluntary disclosure behavior before equity offerings and the associated economic consequences. We find that firms provide significantly more preoffering disclosures after the Reform. Further, we find that these preoffering disclosures are associated with a decrease in information asymmetry and a reduction in the cost of raising equity capital. Our findings not only inform the debate on the market effect of the Reform, but also speak to the literature on the relation between voluntary disclosure and information asymmetry by examining the effect of quasi-exogenous changes in voluntary disclosure on information asymmetry, and thus a firm's cost of capital.
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Sending Mixed Messages: Investor Interpretations of Disclosures of Analyst Stock Ownership
Ahmed Taha & John Petrocelli
Psychology, Public Policy, and Law, forthcoming
Abstract:
Sell-side securities analysts who recommend stocks that they own have a conflict of interest. If investors buy the stocks in response to the analysts' recommendations, the stocks' prices will rise, increasing the analysts' personal wealth. Thus, analysts are legally required to disclose financial interests in securities of companies they cover. However, investors might view this disclosure favorably - for example, as a sign of the analyst's confidence in the stock - rather than unfavorably as the law intends. This article presents the results of an experiment indicating that investors view analyst stock ownership more unfavorably than favorably. In addition, the experiment's results suggest that disclosures that also briefly explain why analyst stock ownership creates a conflict of interest would lead investors to view it even more unfavorably.
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In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles
Benedetto De Martino et al.
Neuron, 18 September 2013, Pages 1222-1231
Abstract:
The ability to infer intentions of other agents, called theory of mind (ToM), confers strong advantages for individuals in social situations. Here, we show that ToM can also be maladaptive when people interact with complex modern institutions like financial markets. We tested participants who were investing in an experimental bubble market, a situation in which the price of an asset is much higher than its underlying fundamental value. We describe a mechanism by which social signals computed in the dorsomedial prefrontal cortex affect value computations in ventromedial prefrontal cortex, thereby increasing an individual's propensity to 'ride' financial bubbles and lose money. These regions compute a financial metric that signals variations in order flow intensity, prompting inference about other traders' intentions. Our results suggest that incorporating inferences about the intentions of others when making value judgments in a complex financial market could lead to the formation of market bubbles.
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Mood and the Market: Can Press Reports of Investors' Mood Predict Stock Prices?
Yochi Cohen-Charash et al.
PLoS ONE, August 2013
Abstract:
We examined whether press reports on the collective mood of investors can predict changes in stock prices. We collected data on the use of emotion words in newspaper reports on traders' affect, coded these emotion words according to their location on an affective circumplex in terms of pleasantness and activation level, and created indices of collective mood for each trading day. Then, by using time series analyses, we examined whether these mood indices, depicting investors' emotion on a given trading day, could predict the next day's opening price of the stock market. The strongest findings showed that activated pleasant mood predicted increases in NASDAQ prices, while activated unpleasant mood predicted decreases in NASDAQ prices. We conclude that both valence and activation levels of collective mood are important in predicting trend continuation in stock prices.
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Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance
David Robinson & Berk Sensoy
Review of Financial Studies, November 2013, Pages 2760-2797
Abstract:
We study the relations between management contract terms and performance in private equity using new data for 837 funds from 1984-2010. We find no evidence that higher fees or lower managerial ownership are associated with lower net-of-fee performance. Nevertheless, compensation rises and shifts to performance-insensitive components during fundraising booms. Further, the behavior of distributions around contractual fee triggers is consistent with an underlying agency conflict between investors and fund managers. Our evidence suggests that managers with higher fees deliver higher gross performance, and highlights that agency costs are an inevitable consequence of the information frictions endemic to agency relationships.
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What a Difference a Ph.D. Makes: More than Three Little Letters
Ranadeb Chaudhuri et al.
Indiana University Working Paper, October 2013
Abstract:
Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s' publications in leading economics and finance journals further enhance the performance gap.
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What causes the favourite-longshot bias? Further evidence from tennis
Jiří Lahvička
Applied Economics Letters, Winter 2014, Pages 90-92
Abstract:
In sports betting markets, bets on favourites tend to have a higher expected value than bets on longshots. This article uses a data set of almost 45 000 professional single tennis matches to show that the favourite-longshot bias is much stronger in matches between lower-ranked players, in later-round matches and in high-profile tournaments. These results cannot be solely explained by bettors being locally risk-loving or overestimating chances of longshots, but are consistent with bookmakers protecting themselves against both better informed insiders and the general public exploiting new information.
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Tyge Payne et al.
Strategic Entrepreneurship Journal, September 2013, Pages 230-251
Abstract:
Extending signaling theory by discussing rhetoric in terms of cost and observability, we examine the relationship between organizational virtue rhetoric in prospectuses and the performance of foreign IPOs from 35 different countries. We also explore how the nature of this relationship is contingent upon the level of perceived corruption for each IPO firm's home country, a pervasive and costly problem for emerging economy countries due to its impact on economic growth and national governance. Our results indicate that signaling organizational virtue in prospectuses leads to higher levels of foreign IPO performance, which is positively moderated by perceived home country corruption.
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Are Analysts' Recommendations Informative? Intraday Evidence on the Impact of Time Stamp Delays
Daniel Bradley et al.
Journal of Finance, forthcoming
Abstract:
We demonstrate that time stamps reported in I/B/E/S for analysts' recommendations released during trading hours are systematically delayed. Using newswire-reported time stamps, we find 30-minute returns of 1.83% (-2.10%) for upgrades (downgrades), but for this subset of recommendations we find corresponding returns of -0.07% (-0.09%) using I/B/E/S-reported time stamps. We also examine the information content of recommendations relative to management guidance and earnings announcements. Our evidence suggests that analysts' recommendations are the most important information disclosure channel examined.