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Abstracts of Articles in
The Financial Review
Vol. 36, No. 2 - May 2001
“Underwriter Lock-Up Releases, Initial Public Offerings and After-market Performance”
Terrill R. Keasler“Evidence and Implications of Increases in Trading Volume Around Exchange Listings”
Kishore Tandon and Gwendolyn P. Webb“Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market”
Narayanan Jayaraman, Melissa B. Frye, and Sanjiv Sabherwal“Combining Bond Rating Forecasts Using Logit”
Mark Kamstra, Peter Kennedy, and Teck-Kin Suan“Internal Finance and Corporate Investment”
Shady Kholdy and Ahmad Sohrabian“Market Quote and Spread Component Cost Behavior Around Trading Halts for Stocks Interlisted on the Montreal and Toronto Stock Exchanges”
Lawrence Kryzanowski and Howard Nemiroff“Sources of Capital Market Segmentation: Empirical Evidence from Finland”
Mika Vaihekoski and Kim Nummelin“Determinants of Foreign Ownership in Newly Privatized Companies in Transition Economies”
Christopher W. Anderson, Tomas Jandik, and Anil K. Makhija“Synthetic Trades and Calendar Day Patterns The Case of the Dollar/Sterling Markets”
Janet S. Thatcher and Lloyd P. Blenman
“Underwriter Lock-Up Releases, Initial Public Offerings and After-market Performance”
Terrill R. Keasler
Volume 36, No. 2, pp. 1-20The lock-up agreement between an underwriter and an issuing firm’s principals prohibits sale of securities for a period of time following the offering date. Investment banks must support the stock following an offering. The lock-up assures investors that the restricted shares will not enter the market, at least for a period of time. Negative abnormal returns prior to the lock-up release show that unrestricted investors liquidate positions prior to the scheduled lock-up release. Negative abnormal returns are more robust for firms that are not influenced by SEC Rule 144 than for firms that are.
“Evidence and Implications of Increases in Trading Volume Around Exchange Listings”
Kishore Tandon and Gwendolyn P. Webb
Volume 36, No. 2, pp. 21-44After controlling for market volume trends and differences in volume measurement between the Nasdaq and the exchanges, we find that mean trading volumes increase significantly for Nasdaq stocks that list on the Amex or the NYSE. Furthermore, stocks with low (high) pre-listing volume tend to realize the largest volume increases (decreases) as well as the best (worst) post-listing performance. Our results support the hypothesis that stocks with high past trading volumes tend to experience lower future returns, and shed new light on the nature and possible causes of poor post-listing stock performance.
“Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market”
Narayanan Jayaraman, Melissa B. Frye, and Sanjiv Sabherwal
Volume 36, No. 2, pp. 45-74This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery.
“Combining Bond Rating Forecasts Using Logit”
Mark Kamstra, Peter Kennedy, and Teck-Kin Suan
Volume 36, No. 2, pp. 75-96Companies sometimes use statistical analysis to anticipate their bond ratings or a change in the rating. However, different statistical models can yield different ratings forecasts, and there is no clear rule for which model if preferable. We use several forecasting methods to predict bond ratings in the transportation and industrial sectors listed by Moody’s bond rating service. A variant of the ordered-logit regression-combining method of Kamstra and Kennedy 1998 yields statistically significant, quantitatively meaningful improvements over its competitors, with very little computational cost.
“Internal Finance and Corporate Investment”
Shady Kholdy and Ahmad Sohrabian
Volume 36, No. 2, pp. 97-114This paper examines Pecking Order/Free Cash Flow behavior in small ($25-$50 million), medium ($100-250 million), and large ($1000 million and over) firms. The purpose is to offer an explanation for the important role of cash flow on the investment expenditure of firms that is more complete than the commonly given accounts. The Pecking order theory (PO) emphasizes the value-enhancing influence of cash flow, while the free cash flow hypothesis (FCF) underscores its value-destroying effect. Using the vector error correction model, we find that although the overall behavior of small firms support the pecking order theory, the cash flow of these firms does not have any causal effect on their investment. We further find evidence of free cash flow theory in large firms.
“Market Quote and Spread Component Cost Behavior Around Trading Halts for Stocks Interlisted on the Montreal and Toronto Stock Exchanges”
Lawrence Kryzanowski and Howard Nemiroff
Volume 36, No. 2, pp. 115-138We use intraday and transactions on halted securities that interlisted on the Toronto Stock Exchange and Montreal Exchange to decompose the spreads and examine quote depths. Our results show that order-processing costs differ for trading halts at the open compared to halts during the rest of the trading day. We find that the adverse-selection cost component of the spread is higher around trading halts and highest at the trading halt. We also find that print-media articles that appear within the four-day window centered on the halt have no impact on the time-series behavior of the spread cost.
“Sources of Capital Market Segmentation: Empirical Evidence from Finland”
Mika Vaihekoski and Kim Nummelin
Volume 36, No. 2, pp. 139-160Because Finland has experienced profound economic changes and financial deregulation since the mid-1980s, we use it as a laboratory to explore issues related to time-varying global equity market integration. Using a Finnish perspective, we construct two different portfolios of Finnish firms and a conditional one-factor international asset pricing model. We examine whether the segmentation varies over time and across assets. We use time-series variables for changing market integration (lagged foreign equity ownership, difference between Finnish and German short-term interest rates, and a portfolio-specific liquidity measure) and cross-sectional variables (size, and book-to-market ratios and industry sector) to show variation in integration.
“Determinants of Foreign Ownership in Newly Privatized Companies in Transition Economies”
Christopher W. Anderson, Tomas Jandik, and Anil K. Makhija
Volume 36, No. 2, pp. 161-176We investigate determinants of foreign ownership in newly privatized firms. We analyze data on privatized Czech firms to address two related general questions. First, what characteristics distinguish transaction firms that attract a foreign investor? Second, how do firm-specific characteristics influence the size of the foreign equity stake? Our results suggest that foreign investors i) seek safe, profitable firms in which they can exert unchallenged influence on corporate governance and then ii) structure their equity stakes to mitigate agency costs and political risk.
“Synthetic Trades and Calendar Day Patterns The Case of the Dollar/Sterling Markets”
Janet S. Thatcher and Lloyd P. Blenman
Volume 36, No. 2, pp. 177-200Significant day of the week patterns are shown to exist in the dollar/sterling market. These patterns are associated with the returns to synthetic and actual forward trades as well as to spot trades. These trading strategies, geared to buying or selling sterling, reflect different timing, if not valuation, considerations on the part of traders. Nevertheless, pronounced calendar patterns are observed on Wednesdays for all the trading strategies evaluated. This is attributable to significantly different risks on Wednesdays. The observed end-of-the-week patterns in forward returns persist and reinforce the returns at the start of the next week of trading. Furthermore, the overall returns to forward speculation on Fridays and Mondays are of opposite sign. Our results on calendar day patterns are thus supported by both parametric and non-parametric tests. We provide evidence that the frequency of synthetic trading opportunities is inversely related to maturity. We also find that the period of market turbulence analyzed did not trigger abnormal opportunities for covered interest arbitrage.