Knowledge that Transforms

This paper examines the price effect of institutional stock trading, using a unique data set that reports the transactions (large and small) of 37 large institutional money management firms. The direction of each trade and the identity of the management firm behind each trade are known. Although institutional trades are associated with some price pressure, we find that the average effect is small. There is also a marked asymmetry between the price impact of buys versus sells. We relate our findings to various hypotheses on the elasticity of demand for stocks, the cost of executing transactions, and the determinants of market impact. Although market capitalization and relative trade size influence the market impact of a trade, the dominant influence is the identity of the money manager behind the trade.

We examine the proportion of a stock's cumulative price change that occurs in each trade-size category, using transactions data for a sample of NYSE firms. Although the majority of trades are small, most of the cumulative stock-price change is due to medium-size trades. This evidence is consistent with the hypothesis that informed trades are concentrated in the medium-size category, and that price movements are due mainly to informed traders' private information.

This paper develops tests of inequality restrictions implied by conditional asset pricing models. The methodology is easy to implement, requires little knowledge of the conditional distribution of asset returns, and is valid under fairly weak assumptions. As an application, we test whether the ex ante risk premium is always positive. We report reliable evidence that the ex ante risk premium is negative in some states of the world; these states are related to periods of high expected inflation and especially to downward-sloping term structures.

This study examines price stabilization in new equity issues. Stabilizationtruncates the distribution of post-issue prices at a floor price, lowering the risk of adverse price moves and hence, in a competitive dealer market, reducing the bid-ask spread. Using 1.523 NASDAO-traded firm- commitment initial public offerings issued between 1982 and 1987, we find that spreads narrow when the market price is close to the offer price and stabilization is most likely. Moreover, significant negative returns are documented after the hypothesized termination of stabilizing activities, suggesting that stabilization, and its cessation, affect market prices.

Data for the 516 papers published in volumes 1–30 of the Journal of Financial Economics in the period 1974–91 are analyzed. 477 authors from 136 institutions contributed papers, and these papers received 16,231 citations according to the Social Science Citation Index. Lists of authors and institutions who have contributed the most papers to the JFE and a list of the mostly highly-cited JFE papers show why the Journal has been successful in influencing the finance and economics literature during its first 18 years.

This paper documents that the relation of the final offer price to the range of anticipated offer prices disclosed in the preliminary prospectus is a good predictor of initial returns. Issues that have final offer prices which exceed the limits of the offer range have greater underpricing than all other initial public offerings, and are also more likely to increase the number of shares issued. These results are consistent with the pricing and allocation schedule proposed by Benveniste and Spindt (1989), in which shares in an offering are rationed and prices only partially adjust to new information.

There is a significant foreign influence on the risk premium for U.S. assets. Using a bivariate GARCH-in-mean process, we find that the conditional expected excess return on U.S. stocks is positively related to the conditional covariance of the return of these stocks with the return on a foreign index but is not related to its own conditional variance. Further, we are unable to reject the international version of the CAPM. We present evidence for different model specifications, multiple-day returns, and alternative proxies for foreign stock returns.

It seems plausible that an increase in stock market volatility raises required stock returns, and thus lowers stock prices. We develop a formal model of this volatility feedback effect using a simple model of changing variance (a quadratic generalized autoregressive conditionally heteroskedastic, or QGARCH, model). Our model is asymmetric and helps to explain the negative skewness and excess kurtosis of U.S. monthly and daily stock returns over the period 1926–1988. We find that volatility feedback normally has little effect on returns, but it can be important during periods of high volatility.

We estimate the conditional distribution of trade-to-trade price changes using ordered probit, a statistical model for discrete random variables. This approach recognizes that transaction price changes occur in discrete increments, typically eighths of a dollar, and occur at irregularly-spaced time intervals. Unlike existing models of discrete transactions prices, ordered probit can quantify the effects of other economic variables like volume, past price changes, and the time between trades on price changes. Using 1988 transactions data for over 100 randomly chosen U.S. stocks, we estimate the ordered probit model via maximum likelihood and use the parameter estimates to measure several transaction-related quantities, such as the price impact of trades of a given size, the tendency towards price reversals from one transaction to the next, and the empirical significance of price discreteness.

This paper argues that corporations may use convertible bonds as an indirect way to get equity into their capital structures when adverse-selection problems make a conventional stock issue unattractive. Unlike other theories of convertible bond issuance, the model here highlights: 1) the importance of call provisions on convertibles and 2) the significance of costs of financial distress to the information content of a convertible issue.