Knowledge that Transforms

This article examines the contribution of stock price overreaction and delayed reaction to the profitability of contrarian strategies. The evidence indicates that stock prices overreact to firm-specific information, but react with a delay to common factors. Delayed reactions to common factors give rise to a size-related lead-lag effect in stock returns. In sharp contrast with the conclusions in the extant literature, however, this article finds that most of the contrarian profit is due to stock price overreaction and a very small fraction of the profit can be attributed to the lead-lag effect.

This article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock. Investors trade competitively in the stock market based on their private information and the information revealed by the market-clearing prices, as well as other public news. We examine how trading volume is related to the information flow in the market and how investors' trading reveals their private information.

The relation between theorized components of the bid-ask spread and trade size for a sample of NYSE firms is examined. We find that the adverse selection component increases uniformly with trade size. Conversely, order processing costs decrease with increases in trade size for all but the largest trades. We find that order persistence decreases with trade size. The adverse selection component is highest at the beginning of the day and lowest at the end of the day for all but the largest trades. Trades of NYSE firms executed on regional exchanges or NASDAQ contain a large order processing cost component but no significant adverse information effect.

Journal Article A Critique of Size-Related Anomalies Get access Jonathan B. Berk Jonathan B. Berk University of British Columbia Address correspondence to Jonathan B. Berk, Faculty of Commerce, University of British Columbia, 2053 Main Mail, Vancouver, BC V6T 1Z2. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 8, Issue 2, April 1995, Pages 275–286, https://doi.org/10.1093/rfs/8.2.275 Published: 28 May 2015

This article explores the information effect of financial risk management. Financial hedging improves the informativeness of corporate earnings as a signal of management ability and project quality by eliminating extraneous noise. Managerial and shareholder incentives regarding information transmission may differ, however, leading to conflicts regarding an optimal hedging policy. We show that these incentives depend on the accounting information made available by the firm. Under some circumstances, if hedge transactions are not disclosed (i.e., firms report only aggregate earnings), managers hedge to achieve greater risk reduction than they would if full disclosure were required. In these cases, it is optimal for shareholders to request only aggregate accounting reports.

The emergence of new equity markets in Europe, Latin America, Asia, the Mideast and Africa provides a new menu of opportunities for investors.These markets exhibit high expected returns as well as high volatility.Importantly, the low correlations with developed countries' equity markets significantly reduces the unconditional portfolio risk of a world investor.However, standard global asset pricing models, which assume complete integration of capital markets, fail to explain the cross-section of average returns in emerging countries.An analysis of the predictability of the returns reveals that emerging market returns are more likely than developed countries to be influenced by local information.

[This article argues that the size-related regularities in asset prices should not be regarded as anomalies. Indeed, the opposite result is demonstrated. Namely, a truly anomalous regularity would be if an inverse relation between size and return was not observed. We show theoretically (1) that the size-related regularities should be observed in the economy and (2) why size will in general explain the part of the cross-section of expected returns left unexplained by an incorrectly specified asset pricing model. In light of these results we argue that size-related measures should be used in cross-sectional tests to detect model misspecifications.]

[Many financial claims specify fixed maximum payments, varying seniority, and absolute priority for more senior investors. These features are motivated in a model where a firm's manager contracts with several investors and firm output can only be verified privately at a cost. Debt-like contracts of varying seniority generally dominate symmetric contracts, and, when investors are risk neutral, it is optimal to use debt-like contracts where more senior claims have absolute priority over more junior claims. In addition to motivating several features of debt and preferred stock, the model offers an explanation for structures used in leveraged buyouts, asset-backed securitizations, and reinsurance contracts.]

[To investigate the effect of taxation on stock price and trading volume around the ex-dividend day, we use the Italian stock market, where dividends on two classes of stock are taxed differently. We find that the weighted average of investors' tax rates is reflected in the ex-day prices and the variance of the relative tax rate across investors is reflected in the volume of trades. We also show that higher transaction costs result in higher ex-dividend day excess returns and lower abnormal volume. This finding is consistent with "profit elimination" activity by institutions and corporations.]

[We present an economic mechanism and supportive empirical evidence for the transmission of information between equity securities first documented by Lo and MacKinlay (1990). It is argued that the past returns on stocks held by informed institutional traders will be positively correlated with the contemporaneous returns on stocks held by noninstitutional uninformed traders. Evidence consistent with this hypothesis is then presented. We document that the returns on the portfolio of stocks with the highest level of institutional ownership lead the returns on portfolios of stocks with lower levels of institutional ownership. This effect persists even after firm size is controlled for and is apparent at longer lags than the size-related lag effects documented in Lo and MacKinlay (1990).]