Forthcoming Articles

Full text of published articles can be found on the Wiley page here:

Final issue assignment is subject to change.

May 2019 Issue

Early Movers Advantage? Evidence from Short Selling during After Hours on Earnings Announcement Days

by Chinmay Jain, Archana Jain, Christine Jiang

We examine short sellers’ after-hours trading (AHT) following quarterly earnings announcements released outside of the normal trading hours. Our innovation is to use the actual short trades immediately after the announcements. We find that on these earnings announcement days, there is significant shorting activity in AHT relative to shorting activity both during AHT on non-announcements days as well as during regular trading sessions around announcements. Short sellers who trade after-hours on announcement days earn an excess return of 0.82 percent and 1.40 percent during before-market-open (BMO) and after-market-close sessions (AMC), respectively. The magnitude of these returns increases to 1.48 (3.92) percent for BMO (AMC) earnings announcements with negative surprise. We find that the reactive short selling during AHT has information in predicting future returns. Short-sellers’ trades have no predictive power if they wait for the market to open to trade during regular hours. In addition, we find that the weighted price contribution during AHT increases with an increase in after-hours short selling. Overall, our results suggest that short sellers in AHT are informed. Our findings remain robust using alternative holding periods and after controlling for macroeconomic news announcements during BMO sessions. Download pdf

The Endogeneity of Trading Volume in Stock and Bond Returns: An Instrumental Variable Approach

by Ehab Yamani and David Rakowski
This paper investigates the joint determination of trading volume and returns. Our approach follows from the argument that trading activity depends on security returns, thus resulting in a reverse causality from returns to trading activity. Using exogenous instruments for security trading activity, we estimate a system of two-stage simultaneous equations to better model the return-volume relationship. Our results confirm that returns and trading volume are determined simultaneously in both stock and corporate bond markets and that conclusions about the direction and significance of causality between volume and returns can be reversed once one corrects for the endogeneity of volume.

Is Financial Flexibility a Priced Factor in the Stock Market?

by Suresh Kumar Oad Rajput, Udomsak Wongchoti, Jianguo Chen, Robert Faff

This paper develops a factor analysis–based measure for shifts in corporate financial flexibility (FFLEX) that can be observed from public accounting information. Companies that experience positive shifts in FFLEX are associated with higher future investment growth opportunities. We show that FFLEX is a robust determinant of future stock returns. Firms that have increased their financial flexibility are associated with lower stock returns in the subsequent period. A zero-cost return portfolio produces a significant positive monthly premium of 0.69%, which is driven by covariance (risk). Risk inherent in the flexibility factor is not explained away by either prominent pricing characteristics or factors. Download pdf

Regulatory Soft Interventions in the Chinese Market: Compliance Effects and Impact on Option Market Efficiency

by:  Jimmy Hilliard and Haoran Zhang

Securities Laws in China are administered by the Chinese Securities Regulatory Commission. Under the state-controlled financial system, the CSRC works with state-controlled financial firms and suggests, but does not mandate, actions to be taken in the equity market, especially during periods of market stress. These soft interventions are used to block trades associated with short-sales, significantly reducing short-sales volume. There is overwhelming evidence of increased deviations from put-call parity and changes in implied volatility after soft interventions. Our results are robust after allowing for bid-ask spreads, taxes, transaction costs and Difference-in-Differences comparisons with control securities in the Hong Kong market. Download pdf

Age-Dependent Increasing Risk Aversion and the Equity Premium Puzzle

Farka, Mira ; DaSilva, Amadeu; Giannikos, Christos

We introduce a new preference structure, age-dependent increasing risk aversion, in an OLG model with borrowing constraints, and examine the behavior of equity premium in this framework. We find that IRA preferences generate results that are more consistent with U.S. data without assuming unreasonable levels of risk aversion. The relative difference between the two risk aversions (how much more risk-averse old agents are relative to the middle aged) matters more than the average risk aversion in the economy (how much more risk averse both cohorts are). Our findings are robust with respect to a number of model generalizations.  download

August 2019 Issue

Increasing the Tick: Examining the impact of the tick size change on market fee venues

by: Justin Cox, Bonnie Van Ness, Robert Van Ness

This paper investigates the effects of an increase in tick size on order and trading flow across market fee models. Using the pilot firms in the SEC’s Tick Size Pilot Program, we document that trade and order volume declines on maker-taker fee models after the tick size implementation. Further, our results indicate that the inverted fee models (taker-maker) experience a significant increase in both trade and order volume.  Download pdf

Heterogeneity in the Effect of Managerial Equity Incentives on Firm Value

Bradley Benson, Jung Chul Park, Hui James

We document significant heterogeneity in the relation between CEO equity incentives and firm value using quantile regression. We show that CEO delta is more effective in the presence of ample investment opportunities, while CEO vega is more beneficial for firms lacking investment opportunities. Further, Tobin’s Q increases in CEO delta for more risk tolerant firms but increases in CEO vega for more risk averse firms. We also observe that higher monitoring intensity after the Sarbanes-Oxley (SOX) Act reduces CEO delta’s role in compensation. Risk aversion alters the optimal incentive-value relation, and the nature of this relation also depends on the level of Tobin’s Q.  Download pdf

Tiered Information Disclosure: An Empirical Analysis of the Advance Peek into the Michigan Index of Consumer Sentiment

Chang, Yuanchen ; Wu, Weishao; Liu, Wenchien; Suardi, Sandy

This paper studies market microstructure implications of informed high frequency traders (HFTs) from two-second of advance peek into the Michigan Index of Consumer Sentiment (ICS), provided by Thomson Reuters to its elite customers. Using individual stocks in the NASDAQ dataset, we show how HFTs trade around ICS events. We find that liquidity demanders during two seconds of advance peek earn substantive profits, which are consistent with the notion that HFTs’ informational advantages may increase adverse selection costs for other market participants. This evidence elucidates the debate on regulatory oversight and its role in circumventing the potentially adverse effects from an advance peek into ICS.  Download pdf

Does Increased Hedging Lead to Decreased Price Efficiency? The Case of VIX ETPs and VIX Futures

Frijns, Bart; Fernandez-Perez, Adrian; Tourani-Rad, Alireza; Webb, Robert

We examine the impact of the introduction of VIX Exchange Traded Products (ETPs) on the information content and pricing efficiency of VIX futures. We document that trades in VIX futures have become less informative and that pricing errors exhibit more persistence after the introduction of VIX ETPs. In addition, we observe that the price process of the VIX futures has become noisier over time. These findings suggest that the introduction of the VIX ETPs had a prominent effect on the properties and dynamics of the VIX futures. VIXETP.pdf

Asymmetric News Responses of High-Frequency and Non-High-Frequency Traders

Zhang, Sarah

Using NASDAQ trade and Reuters news data, I show that the response of aggressive non-high-frequency traders (nHFTs) to news is stronger than that of aggressive high-frequency traders (HFTs). Classifying news into quantitative (“hard”) and less quantitative (“softer”) news, the trading response of aggressive nHFTs to softer news exceeds HFTs’ response. Positive news elicits greater return and nHFT responses than negative news during the 2008 financial crisis period. As this phenomenon persists even after excluding the 2008 short-sale ban, the results support the hypothesis of nHFTs exhibiting stronger asymmetric responses during crisis periods.  asymmetrichft.pdf

November 2019 Issue

Alphabeticity Bias in 401(k) Investing

Sardarli, Sabuhi; Doellman, Thomas; Itzkowitz, Jennifer; Itzkowitz, Jesse

Structural factors which cause irrational investment in defined contribution savings plans are of great concern. Using a proprietary database of 401(k) plans we show that alphabeticity – the order that fund names appear when listed in alphabetical order – significantly biases participants’ investment allocation decisions. While we show a larger impact as the number of funds in the plan increases, this bias is strong even when relatively few funds are available in the plan menu. Importantly, our findings suggest that a more strategic ordering of funds could result in favorable outcomes for participants.  alpha bias pdf

Sentimental Mutual Fund Flows

Jiang, George; Yuksel, H. Zafer

We show that many stylized empirical patterns for mutual fund flows are driven by investor sentiment. Specifically, when sentiment is high, investors exhibit a stronger tendency of chasing past fund performance; fund flows are less sensitive to fund expenses; and investors are attracted more to funds with sheer visibility. Moreover, the well-documented positive relation between fund flows and future fund performance is significant only during high sentiment periods and is mainly driven by expected component of fund flows. Finally, we show that mutual fund investors exhibit a significantly negative timing ability at the individual fund level when sentiment is high.  sentiment_mutual_funds.pdf

Intangible Capital, Volatility Shock, and the Value Premium

Ahn, Yongkil

This paper extends the canonical, neoclassical investment-based asset-pricing model through the incorporation of intangible capital and the formulation of a joint productivity distribution with economic uncertainty shocks at the firm level. The distinctive evolutionary dynamics of intangible capital as opposed to that of physical capital mitigate the negative impact of temporary uncertainty shock on production and serve well to explain the value premium with modest assumptions. The value premium is unconditionally positive but the realized value spread plummets to negative after major transient second-moment shocks, e.g., the Loma Prieta Earthquake and the 9/11 terrorist attack.  intangible_capital.pdf

Why Do Large Shareholders Adopt a Short-Term versus a Long-Term Investment Horizon in Different Firms?

Tosun, Onur

I ask why the same large shareholders have different investment horizons. Using data for 1998–2013, I examine four fundamental firm policies for their potential influence on blockholders’ investments with different time horizons. The panel OLS, difference-in-difference (using the Sarbanes-Oxley Act), logistic and dynamic GMM regression analyses reveal that blockholders adopt a short-term horizon in smaller firms with a less independent board, high leverage, and high dividends while the same blockholders keep their investments longer in firms with a more independent board and low dividends. Under various economic conditions, different firm characteristics gain importance in blockholders’ decision on short-term versus long-term investments. large_shareholders.pdf

Return Predictability: The Dual Signaling Hypothesis of Stock Splits

Gao, Lei; Elnahas, Ahmed; Ismail, Ghada

This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (over-optimistic/opportunistic) splits precede positive (negative) long-term buy-and-hold abnormal returns. Using the calendar month portfolio approach, we show that the zero-investment, ex-ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre-split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post-split long-term abnormal returns.  dual_signaling.pdf


Not Assigned to an Issue

How Firms Use Director Networks in Setting CEO Pay

Gatchev, Vladimir (contact); Cherry, Ian

We examine how firms use the network of overlapping directorships to determine chief executive officer (CEO) compensation. We contribute to related work by empirically exploring two competing hypotheses. In the first hypothesis, networks propagate relevant information used to establish good pay practices. In the second hypothesis, director networks are used opportunistically to benefit the CEO. The empirical findings are generally consistent with the first hypothesis. Yet, the importance of director networks is reduced when the CEO is entrenched and when management hires a compensation consultant. The latter finding is especially pronounced when director networks predict a reduction in CEO pay.  ceo_pay.pdf

Managerial Effect or Firm Effect: Evidence from Private Debt Market

Hasan, Iftekhar; Francis, Bill; Zhu, Yun

This paper provides evidence that the managerial effect is a key determinant of firms’ cost of capital, in the context of private debt contracting. Applying the novel empirical method developed by Abowd, Karmarz, and Margolis (1999) to a large sample that tracks the job movement of top managers, we find that the managerial effect is a critical and significant factor that explains a large part of the variation in loan contract terms more accurately than firm fixed effects. Additional evidence shows that banks “follow” managers when they change jobs and offer loan contracts with preferential terms to their new firms. managerialeffect.pdf

Local Corporate Misconduct and Local Initial Public Offerings

Palkar, Darshana; Kuvvet, Emre

This paper investigates the cost of going public through initial public offerings (IPOs) for firms located in regions with significant fraud density. We find that companies in regions with a high proportion of nearby firms that have committed corporate misconduct have more pronounced underpricing, experience higher post-IPO stock return volatility, and are more likely to withdraw their offerings. Overall, our results show that local corporate misconduct is associated with the pricing of initial public offerings, and the breach of trust is related to costly IPOs for newcomers.misconduct.pdf

What Determines Fund Performance Persistence? International Evidence

Ramos, Sofia; Ferreira, Miguel ; Keswani, Aneel; Miguel, Antonio

We study performance persistence across a global sample of equity mutual funds from 27 countries. In contrast to the existing U.S.-based evidence, we find that net performance persistence is present in the majority of fund industries, suggesting that fund manager skill is commonplace rather than a rarity. Consistent with the intuition that more competition in the mutual fund industry makes remaining a winner fund less likely but keeping a loser fund at the bottom of the performance ranks more probable, we show that competitiveness explains the cross-sectional variation in performance persistence.  persistence.pdf

Officers’ Fiduciary Duties and Acquisition Outcomes

Reza, Syed Walid

Using a Delaware case law that recognized officers’ distinct fiduciary duties (OFDs) for the first time in 2009, I examine the effect of OFDs on corporate acquisitions. I find that firms with entrenched officers prior to 2009 experienced increased announcement-period abnormal stock returns, mainly because their acquisitions created more synergies and reduced officers’ incentives to preserve control. These firms increased liability insurance premium expenditures, but reduced value-decreasing acquisition frequencies. Furthermore, the effect of OFDs is more pronounced in firms where officers are not directors, have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall, OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanism.  fiduciary.pdf

State Ownership and Banks’ Information Rents: Evidence from China

Wang, Wei; Yu, Fengyan; Liang, Qi

A bank with an information advantage regarding its client tends to hold up the borrower and charge higher interest rates. We conjecture that state-owned enterprises (SOEs), with worse information asymmetry, are subject to greater information rents. State-owned banks place less emphasis on information production and extract lower rents compared to profit-maximizing private banks. We use the decline of loan interest rates around the borrowers’ equity initial public offerings (IPOs) as the proxy of banks’ information rents. We find SOEs in China experience larger declines in interest rates around their IPOs, and the central government–controlled Big Four banks exhibit smaller declines in rates they charge.  state_ownership.pdf