ly chain relationships are sometimes detrimental to the partnering firms, and short sellers recognize this before the rest of the market. Suppliers and customers that are in linked, close supply chain relationships have higher short interest on average. Further, higher short interest increases the likelihood of large, linked customers reporting negative earnings surprises, whereas suppliers with high short interest are more likely to report negative earnings surprises, irrespective of the supply chain structure. Short selling is informative to capital markets because these suboptimal relationships eventually lead to dependent suppliers being delisted from a stock exchange for financial distress reasons.
The events surrounding the stock-price peak of March 2000 are commonly interpreted as the bursting of a technology or Internet bubble, with some researchers pointing out that the pattern could also arise in fundamental models. We inform the debate by studying the long-run performance of Internet and technology stocks from March 2000 onward. Using calendar-time regressions, we do not find conclusive evidence of negative abnormal returns. The results are consistent with a new interpretation of the events; namely, the price drop of the early 2000s was not warranted in light of future cash flows and risk.
We propose a dynamic version of the dividend discount model, solve it in closed-form, and assess its empirical validity. The valuation method is tractable and can be easily implemented. We find that our model produces equity value forecasts that are very close to market prices, and explains a large proportion of the observed variation in share prices. Moreover, we show that a simple portfolio strategy based on the difference between market and estimated values earns considerably positive returns. These returns cannot be simply explained neither by the Fama French 3-factor model (even after adding a momentum factor) nor the Fama French 5-factor model.
We show that highly liquid Exchange-Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele amongst institutional investors: i) relative liquidity is significantly more important for short- than for long-term investors; and ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. The two findings provide evidence that relative liquidity encourages short-term demand.
Exchange traded funds (ETF) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ETFs to trade at a premium to NAV as well as the life-cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations (TESD) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.
This paper exploits the unique experimental setting created by nearly 1,300 new single stock futures listings on the OneChicago exchange between 2003 and 2009, to investigate the impact of derivatives introductions on the tightness of short sale constraints facing their underlying assets. After controlling explicitly for supply and demand conditions in the stock lending market, this experiment reveals a precipitous decline in active utilization rates and loan fees in the lending market, after the futures introductions. The paper provides strong evidence supporting the view that derivatives represent a viable alternative synthetic short selling venue relaxing short sale constraints facing their underlying assets.
We compare intraday impacts of Federal Reserve decision announcements and Minutes releases between 2004 and 2015 on 1,997 equity return and volatility series. We find that returns are unresponsive to either news release, but conditional volatility increases for both, manifesting immediately after each information release, and persisting for 30 Minutes post-announcement. These effects are larger for decisions than for Minutes releases. Upon stratifying firms by trading intensity, we find most “high trading intensity” firms respond to these announcements, while “low trading intensity” firms are less affected. Our results show that traders respond, albeit differently, to both sets of information releases.
Using a matched sample of separately managed accounts (SMAs) and mutual funds (MFs) with the same portfolio manager and investment style, we find that concurrently managed MFs consistently underperform their SMAs counterparts. Fund characteristics and liquidity betas fail to fully explain the underperformance. An event-study analysis finds that the weights placed into top (bottom)-performing stocks increase for existing SMAs (MFs) and negative return gaps increase for the MFs after the onset of concurrent management. We find that higher compensation collected by SMA fund managers are associated with more unseen managerial actions which positively contribute to the SMA return gap.
We examine the influence of investor conferences on firms’ stock liquidity. We find that firms participating in conferences experience a 1.4% to 2.8% increase in stock liquidity compared to non-conference firms. Consistent with investor conferences improving firm visibility, the increase in liquidity is larger for firms with low pre-conference visibility and varies predictably with conference characteristics that affect the ability of investors to revise their beliefs about the firm. However, for firms with a large investor base and high visibility, conference participation is associated with a decline in stock liquidity, consistent with investor conferences exacerbating the information asymmetry among investors.
One of the most distinct trends in capital markets over the past two decades has been the rise in the equity ownership of passive financial institutions. We propose that this rise has had a negative effect in price informativeness. By not trading around firm-specific news, passive investors reduce the firm-specific component of total volatility and increase stock correlations. Consistent with this hypothesis, we find that the growth in passive institutional ownership is robustly associated with the growth in market model R2s of individual stocks since the early 1990s. Additionally, we find a negative relation between passive ownership and earnings predictability, an informativeness proxy.