Knowledge that Transforms

Members of the Institutional Investor All‐American Research Team supply more accurate earnings forecasts than other analysts when forecasts are matched by the corporation followed and by the date of brokerage house issuance. This contemporaneous advantage is complemented by a timing advantage; All‐Americans supply forecasts more often than other analysts. Stocks returns immediately following large upward forecast revisions suggest that All‐Americans impact prices more than other analysts. However, there is virtually no difference in returns following large downward revisions. Nevertheless, the collective results suggest a positive relation between reputation and performance, and, assuming that All‐Americans are better paid, pay and performance.

Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e., can hold the asset forever. By contrast, we show that if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibria, and herding speculators may even choose to study information that is completely unrelated to fundamentals.

The existing literature on the post‐merger performance of acquiring firms is divided. We re‐examine this issue, using a nearly exhaustive sample of mergers between NYSE acquirers and NYSE/AMEX targets. We find that stockholders of acquiring firms suffer a statistically significant loss of about 10% over the five‐year post‐merger period, a result robust to various specifications. Our evidence suggests that neither the firm size effect nor beta estimation problems are the cause of the negative post‐merger returns. We examine whether this result is caused by a slow adjustment of the market to the merger event. Our results do not seem consistent with this hypothesis.

This paper delineates the link between the existence of information, the timing of trades, and the stochastic process of prices. We show that time affects prices, with the time between trades affecting spreads. Because the absence of trades is correlated with volume, our model predicts a testable relation between spreads and normal and unexpected volume, and demonstrates how volume affects the speed of price adjustment. Our model also demonstrates how the transaction price series will be a biased representation of the true price process, with the variance being both overstated and heteroskedastic.

When IPO shares are sold sequentially, later potential investors can learn from the purchasing decisions of earlier investors. This can lead rapidly to “cascades” in which subsequent investors optimally ignore their private information and imitate earlier investors. Although rationing in this situation gives rise to a winner's curse, it is irrelevant. The model predicts that: (1) Offerings succeed or fail rapidly. (2) Demand can be so elastic that even risk‐neutral issuers underprice to completely avoid failure. (3) Issuers with good inside information can price their shares so high that they sometimes fail. (4) An underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market.

This paper analyzes how mutual fund performance relates to past performance. These tests are based on a multiple portfolio benchmark that was formed on the basis of securities characteristics. The authors find evidence that differences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns.

The outstanding face amount of plain vanilla interest rate swaps exceeds two trillion dollars. While pricing and hedging of such swaps appear to be quite simple, many existing theories are based on the incorrect characterization of a swap as a simple exchange of a fixed for a floating rate note. This characterization is not consistent with standardized swap contracts and the treatment of swaps in bankruptcy. This paper provides an alternative perspective on swaps.

The behavior of time-weighted bid-ask spreads over the trading day are examined. The plot of minute-by-minute spreads versus time of day has a crude reverse J-shaped pattern. Schwartz identifies four determinants of spreads: activity, risk, information, and competition. Using a linear regression model, a significant relationship between these same factors and intraday spreads is demonstrated, but dummy variables for time of day have a reverse J-shape. For given values of the activity, risk, information, and competition measures, spreads are higher at the beginning and end of the day relative to the interior period.

This paper analyzes how the daily opening and closing of financial markets affect trading volume. The authors model the desire to trade at the beginning and end of the day a a function of overnight return volatility. NYSE data from 1933-88 indicate that closing volume is positively related.to expected overnight volatility, while volume at the open is positively related to both expected and unexpected volatility from the previous night. The authors interpret the symmetric response of trading at the open and the close to expected volatility as being due to investor heterogeneities in the ability to bear risk when the market is closed. This desire of investors to trade prior to market closings indicates a cost of mandating marketwide circuit breakers.

Trading by corporate insiders and their tippees is analyzed in Anheuser-Busch's 1982 tender offer for Campbell Taggart. Court records that identify insider transactions are used to disentangle the individual insider trades from liquidity trades. Consistent with previous studies, insider trading was found to have had a significant impact on the price of Campbell Taggart. However, the impact of informed trading on the market is complicated. Trading volume net of insider purchases rose. Contrary to the broad implications of adverse selection models, Campbell Taggart's liquidity improved when the insiders were active in the market and all the insiders received superior execution for their orders.