Knowledge that Transforms

Previous research documents positive ex‐dividend day returns in excess of one percent in the unique institutional setting of Hong Kong, where neither dividends nor capital gains are taxed. Short‐term arbitrage trades around the ex‐day were hampered by physical settlement procedures. After the recent switch to an electronic settlement system, which enables such trades, ex‐day abnormal returns have declined to an insignificant 0.17 percent. This drop is more pronounced for high‐yield stocks, which are more likely to attract dividend capture trading. The evidence points to the crucial role of short‐term traders in ensuring the pricing efficiency of financial markets.

This paper examines the relation between the premium on closed‐end funds and organizational features of the funds and advisors, including the compensation scheme of the investment advisor. We find that the fund premium is larger when: (a) the advisor's compensation is more sensitive to fund performance; (b) the assets managed by the advisor are concentrated in the fund in question; (c) the advisor manages other funds with low compensation sensitivity to performance and with low concentration of assets managed by the advisor; and (d) the advisor's compensation contract evaluates performance relative to a benchmark.

A traditional explanation for stock splits is that they increase the number of small shareholders who own the stock. A possible reason for the increase is that the minimum bid‐ask spread is wider after a split and brokers have more incentive to promote a stock. I document a large number of small buy orders following Nasdaq and NYSE/AMEX splits during 1993 to 1994. I also find strong evidence that trading costs increase, and weak evidence that costs of market making decline following splits. This is consistent with splits acting as an incentive to brokers to promote stocks.

The role that financial innovation plays in financial markets is very controversial. To provide insight into this role, we examine how market participants use the highly successful Treasury STRIPS program. We find that investors use the option to create Treasury‐derivative STRIPS primarily to make markets more complete and take advantage of tax and accounting asymmetries. Although liquidity‐related factors help explain differences in the prices of Treasury bonds and STRIPS, we find little evidence that the option to strip and reconstitute securities is used for speculative or arbitrage‐related purposes.

This paper provides an analysis of the citation counts of articles published in the leading finance journals. It identifies the determinants of the most prevalent measure of influence for finance journals, the Social Sciences Citation Index impact factors. It finds that impact factors are affected by citations outside the finance field, are not affected by the distribution of published articles across subfields, and are good predictors of the long‐term citation counts of articles. The citation impact factors are reduced for both the Journal of Financial Economics and The Journal of Finance by their publication of other than regular articles.

Various theories have been proposed to explain momentum in stock returns. We test the gradual‐information‐diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm‐specific information, especially negative information, diffuses only gradually across the investing public.

This paper documents some empirical facts about ex‐day abnormal returns to high dividend yield stocks that are potentially subject to corporate dividend capture. We find that average abnormal ex‐dividend day returns are uniformly negative in each year after the introduction of negotiated commission rates and that time variation in ex‐day returns during the negotiated commission rates era is consistent with corporate tax‐based dividend capture. Ex‐day returns are more negative when the tax advantage to corporate dividend capture is greatest and more positive when increases in transaction costs and risk reduce incentives to engage in corporate tax‐based dividend capture.

We derive an expression for the critical stock price for the American put. We start by expressing the put price as an integral involving first‐passage probabilities. This approach yields intuition for Merton's result for the perpetual put. We then consider the finite‐lived case. Using (1) the fact that the put value ceases to depend on time when the critical stock price is reached and (2) the result that an American put equals a European put plus an early‐exercise premium, we derive the critical stock price. We approximate the critical‐stock‐price function to compute accurate put prices.

Weights in the Toronto Stock Exchange 300 index are determined by the market values of the included stocks' public floats. In November 1996, the exchange implemented a previously announced revision of its definition of the public float. This revision, which increased the floats and the index weights of 31 stocks, conveyed no information and had no effect on the legal duties of shareholders. Affected stocks experienced statistically significant excess returns of 2.3 percent during the event week, and no price reversal occurred as trading volume returned to normal levels. These findings support downward sloping demand curves for stocks.

This paper tests whether managers repurchase stock when their assessment of the firm's economic value exceeds the market value. Using the forecasts managers would have if they had perfect foresight, we estimate economic value using an earnings‐based valuation model. The major findings are as follows: (1) 74 percent of the firms that repurchase shares via fixed‐price tender offers are undervalued relative to their preannouncement economic value; this percentage is significantly lower for a control sample, (2) the tender premium is highly correlated with the magnitude of undervaluation, and (3) the decision to satisfy oversubscription demand is influenced significantly by the magnitude of undervaluation.