Knowledge that Transforms

Financial market regulations require various “insiders” to disclose their trades after the trades are made. We show that such mandatory disclosure rules can increase insiders’ expected trading profits. This is because disclosure leads to profitable trading opportunities for insiders even if they possess no private information on the asset’s value. We also show that insiders will generally not voluntarily disclose their trades, so for disclosure to be forthcoming, it must be mandatory. Key to the analysis is that the market cannot observe whether an insider is trading on private information regarding asset value or is trading for personal portfolio reasons.

Journal Article Costly State Verification and Multiple Investors: The Role of Seniority Get access Andrew Winton Andrew Winton Northwestern University Address correspondence to Andrew Winton, KGSM/Finance, 2001 Sheridan Road, Evanston, IL 60208. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 8, Issue 1, January 1995, Pages 91–123, https://doi.org/10.1093/rfs/8.1.91 Published: 28 May 2015

Yasushi HamaoColumbia UniversityJoel HasbrouckNew York UniversityThis article investigates the behavior of intra-day trades and quotes for individual stocks onthe Tokyo Stock Exchange (TSE). We examine thetransaction and quote record for three firms forthe first 3 months of 1990. Our findings suggestthat the immediacy available (at least for smalltrades) in the market is high, despite the re-liance on public limit orders to supply liquidity.When orders that would otherwise walk throughthe limit order book are converted into limit or-ders, execution is delayed; but some orders exe-cute (at least in part) at more favorable prices.

This article examines the conditions under which bank lenders make concessions by taking equity in financially distressed firms. I show that the role banks play in debt restructurings depends on the financial condition of the firm, the existence of public debt in the firm's capital structure and the ability of public debt to be restructured. Empirically, I find that for firms with public debt outstanding, banks never make concessions unless public debtholders also restructure their claims. When banks do take equity, on average they obtain a substantial proportion of the firm's stock, and they maintain their position for over two years.

A dynamic finite-horizon market for a risky asset with a continuum of risk-averse heterogeneously informed investors and a risk-neutral competitive market-making sector is examined. The article analyzes the effect of investors' horizons on the information content of prices. It is shown that short horizons enhance or reduce accumulated price informativeness depending on the temporal pattern of private information arrival. With concentrated arrival of information, short horizons, reduce final price informativeness; with diffuse arrival of information, short horizons enhance it. In the process a closed-form solution to the dynamic equilibrium with long-term investors is derived.

Foreign exchange returns exhibit behavior difficult to reconcile with standard theoretical models. This article asks whether the recent findings of long swings in exchange rates between appreciating and depreciating periods affect estimates of the foreign exchange risk premium. We demonstrate how the “peso problem” introduced by expected shifts in exchange rate regimes can affect inferences about the risk premium in at least two ways: (1) it can make the foreign exchange risk premium appear to contain a permanent disturbance when it does not; and (2) it can induce bias in the foreign exchange return regressions such as in Fama (1984).

In this article we provide econometric tools for the evaluation of intertemporal asset pricing models using specification-error and volatility bounds. We formulate analog estimators of these bounds, give conditions for consistency, and derive the limiting distribution of these estimators. The analysis incorporates market frictions such as short-sale constraints and proportional transactions costs. Among several applications we show how to use the methods to assess specific asset pricing models and to provide non-parametric characterizations of asset pricing anomalies.

In the absence of frictions, the value of the underlying asset implied by option prices must equal its actual market value. With frictions, however, this requirement need not hold. Using S&P 100 index options data, I find that the implied cost of the index is significantly higher in the options market than in the stock market, and is directly related to measures of transaction costs and liquidity. I show that the Black-Scholes model has strong bid-ask spread, trading volume, and open interest biases. Option pricing models that relax the martingale restriction perform significantly better.

This article provides a theory of foreign equity investment restrictions. We consider a model where the demand function for domestic shares differs between domestic and foreign investors because of deadweight costs in holding domestic and foreign securities that depend on the country of residence of investors. We show that domestic entrepreneurs maximize firm value by discriminating between domestic and foreign investors. The model implies that countries benefitting from capital flight have binding ownership restrictions such that foreign investors pay a higher price for shares than domestic investors. The empirical implications of this theory are supported by evidence from Switzerland. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

This article examines potential explanations for the wealth effects surrounding dividend change announcements. We find that new information concerning managers' investment policies is not revealed at the time of the dividend announcement. We also find that dividend increases (decreases) are associated with subsequent significant increases (decreases) in capital expenditures over the three years following the dividend change, and that dividend change announcements are associated with revisions in analysts' forecasts of current earnings. These results are consistent with the cash flow signaling hypothesis rather than the free cash flow hypothesis as an explanation for the observed stock price reactions to dividend change announcements.