Evidence of Managerial Timing: The Case of Exchange Listings
Gwendolyn P. Webb
City University of New York - Baruch
Abstract
Before an exchange listing, stock performance is exceptionally high. Earlier research reports that post-listing performance is poor. I document that the post-listing performance of most firms that list on either the American Stock Exchange or the New York Stock Exchange differs little from that of similar stocks that do not list. However, listing stocks that experience the highest pre-listing performance underperform their control stocks after listing. This finding supports the hypothesis that managers can time exchange listings around a peak in stock performance.
Risk Preferences and Information Flows in Racetrack Betting Markets
Kenneth L. Rhoda
La Salle University
Gerard T. Olson
Villanova University
Jack M. Rappaport
La Salle University
Abstract
Racetrack betting markets provide a unique environment to study risk preferences of investors. In this paper, we define the effects of different risk preferences on the subjective and objective probabilities of winning at racetracks. Our results indicate that up to three groups of bettors participate in these markets: risk-loving, risk-averse with an entertainment value in their utility functions, and risk-averse with superior information or analytical ability. We find that information flows from the tote board concerning the three groups' behavior may be used to earn abnormal and possibly positive returns.
Liquidity and Tick Size: Does Decimalization Matter?
Greg MacKinnon
Howard Nemiroff
St. Mary's University - Nova Scotia
Abstract
The effect of the move to decimalization by the Toronto Stock Exchange, where the minimum tick size was decreased to $0.05 from $0.125, is examined. Liquidity is measured by the price impact of unexpected volume. Results show an unambiguous gain to investors. Effective spreads decrease significantly, but the price impact is unaffected. In addition, evidence indicates an increase in trading activity in absolute terms as well in relation to U.S. exchanges for cross-listed stocks. This is consistent with the observed decrease in transaction costs.
Asset-Allocation Decisions When Risk Is Changing
Elizabeth Sheedy
Robert Trevor
Macquarie University - Australia
Justin Wood
Barclays Global Investors, Australia
Abstract
Various risk estimation methods have been proposed in response to evidence that risk is changing. We investigate the effect of alternative risk-estimation methods in the context of asset-allocation decisions that seek to minimize portfolio risk. The risk measures considered include the traditional fixed-window method, exponential smoothing and GARCH. Our findings confirm that the choice of risk measure can make a significant difference to the efficiency of asset-allocation decisions and therefore to investment outcomes and fund rankings. We find that the traditional fixed-window method is rarely optimal and that measures that account for volatility clustering are generally preferable.
Are the Structural Changes in Mutual Funds Investing Driving the U.S. Stock Market to Its Current Levels?
Michael Mosebach
Mohammad Najand
Old Dominion University
Abstract
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.
Economies of Scale in Mutual Fund Administration
David A. Latzko
Pennsylvania State , York Campus
Abstract
Since many mutual fund expenses are fixed costs, asset growth should reduce the ratio of fund expenses to average net assets. A translog cost function is estimated for a sample of 2,610 funds to evaluate the existence and extent of scale economies in mutual fund administration. The elasticity of fund expenses with respect to fund assets is significantly less than one, indicating there are scale economies in mutual fund administration. Average costs diminish over the full range of fund assets; however, the really rapid decrease in average costs is exhausted by about $3.5 billion in fund assets.
Borrowing Relationships, Monitoring and the Influence on Loan Rates
Manoj Athavale
University of North Texas
Robert O. Edmister
University of Mississippi
Abstract
While monitoring borrowers, a bank obtains private information about its customers, giving the bank an informational advantage in the production of subsequent services. Competing theories exist on the way banks use this advantage in the pricing of subsequent services to the customer. If moral hazard limits the transfer of private information, the borrowing relationship transforms into an informational monopoly, and can be characterized as a "wasting asset." Alternately, if the banks competitive environment necessitates that cost economies are shared, the relationship has "value." Ordering pairs of successive loans made to a particular borrower as prior loans and subsequent loans, and controlling for environmental, borrower, and loan characteristics, we show that the subsequent loan is priced significantly lower than the prior loan.
Illiquidity Risk, Project Characteristics and the Optimal Maturity of Corporate Debt
Sudipto Sarkar
University of Houston
Abstract
I derive the optimal maturity period for corporate debt used to finance a specific project, when costly financial distress is triggered by inability to meet coupon obligations. My model predicts a negative relation between bond risk and maturity, and it explains why high-grade bonds show greater maturity dispersion than low-grade bonds, as observed in U.S. corporate bond markets. The major determinant of bond maturity is project duration for low-risk bonds and project risk for high-risk bonds. Other determinants of bond maturity are debt burden, reorganization costs, corporate tax rate, interest rate, and project growth rate.