Knowledge that Transforms

We propose a link between market structure and the resulting market characteristics—tick size, bid-ask spreads, quote clustering, and market depth. We analyze transactions data of stocks traded on the London Stock Exchange, a dealer market. We conclude that market charateristics are endogenous to the market structure. The London dealer market does not have a mandated tick size, and it exhibits higher spreads, higher quote clusterings, and higher market depth than the NYSE auction market. Clustering of trade prices is similar in London and New York.

Jonathan Clarke, Craig Dunbar, Kathleen M. Kahle, Long-Run Performance and Insider Trading in Completed and Canceled Seasoned Equity Offerings, The Journal of Financial and Quantitative Analysis, Vol. 36, No. 4 (Dec., 2001), pp. 415-430

I examine the impact of mutual fund manager replacement on subsequent fund perfor? mance. Using a sample of 393 domestic equity and bond fund managers that were replaced over the 1979-1991 period, for the underperformers, I document significant improvements in post-replacement performance relative to the past performance of the fund. On the other hand, the replacement of overperforming managers results in deterioration in postreplacement performance. I find evidence supporting the presence of strategic risk shifting in the fund portfolios prior to replacement. Furthermore, consistent with the notion of win? dow dressing, I document that the level of portfolio turnover activity decreases significantly in the post-replacement period. Lastly, the replacement of poor performers is preceded by significant decreases in net new inflows in the fund.

I consider a market microstructure model in which the rates of public and private informa? tion arrival are probabilistic. The latter depends on the availability of private information that is stochastically changing over time. In equilibrium, traders estimate the availability of private information using past periods' trading volume and use this information to adjust their strategies. The time-series properties include contemporaneous correlation between price variability and volume and autocorrelation in price variability (similar to GARCH). The model explains why trading volume contains useful information for predicting volatil? ity and provides predictions on the limit and market order placement strategies of traders.

David M. Reeb, Sattar A. Mansi, John M. Allee, Firm Internationalization and the Cost of Debt Financing: Evidence from Non-Provisional Publicly Traded Debt, The Journal of Financial and Quantitative Analysis, Vol. 36, No. 3 (Sep., 2001), pp. 395-414

J. Carr Bettis, John M. Bizjak, Michael L. Lemmon, Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders, The Journal of Financial and Quantitative Analysis, Vol. 36, No. 3 (Sep., 2001), pp. 345-370

Extending an empirical technique developed in Easley, Kiefer, and O'Hara (1996), (1997a), we examine different hypotheses about stock splits. In line with the trading range hypothesis, we find that stock splits attract uninformed traders. However, we also find that informed trading increases, resulting in no appreciable change in the information content of trades. Therefore, we do not find evidence consistent with the hypothesis that stock splits reduce information asymmetries. The optimal tick size hypothesis predicts that stock splits attract limit order trading and this enhances the execution quality of trades. While we find an increase in the number of executed limit orders, their effect is overshadowed by the increase in the costs of executing market orders due to the larger percentage spreads. On balance, the uninformed investors' overall trading costs rise after stock splits.

Daily returns are used to examine how mutual funds actively alter the risk of their portfolios in response to past performance. Compared to monthly data, daily returns produce much more efficient estimates of fund volatility, which give vastly different inferences about the behavior of fund managers. In particular, monthly results consistent with under-performers increasing their risk relative to better performing funds disappear with daily data. The differences in the monthly and daily results arise from biases in the monthly volatility estimates attributable to daily return autocorrelation.

Early studies find that option introductions tend to raise the price of underlying stocks. More recent research indicates that post-1980 option introductions are associated with negative abnormal returns in underlying stocks. Other studies document increased short sale activities following option listing. This paper provides evidence that the documented abnormal returns and changes in short interest around option listings are consistent with the mitigation of short sale constraints resulting from the option introduction, and that both the abnormal returns and short interest changes around listing dates can be predicted using ex ante characteristics of the underlying stock.

Public discussion about corporate use of derivatives focuses on whether firms use derivatives to reduce or increase firm risk. In contrast, em- pirical, academic studies of corporate derivatives-use take it for granted that firms hedge with derivatives. Using data from financial statements of 425 large u.s. corporations, we investigate whether firms systematically reduce or increase their riskiness with derivatives. We find that many firms manage their exposures with large derivatives positions. Nonetheless, compared to firms that do not use financial derivatives, firms that use derivatives display few, if any, measurable differences in risk that are associated with the use of derivatives.