Three types of agents acting on different information sets are considered: fully informed agents, insiders, and outsiders. Differences in information quality are shown to affect the properties of their optimal portfolios. For an outsider, the share of wealth invested in the stock is decreasing in the variance of the stock. However, for an insider, the effect of an increasing stock variance on the optimal portfolio weight is ambiguous. In a calibration to U.S. data, the confidence intervals of the insider’s demand for the stock converge, whereas the outsider’s confidence intervals become wider.

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The Original Maturity of Corporate Bonds: The Influence of Credit Rating, Asset Maturity, Security and Macroeconomic Conditions

Geetanjali Bali, Frank S. Skinner

We examine the determinants of the new issue maturity of corporate bonds. As credit rating decreases, new bond issues have longer maturities but substantial variation in maturity within each rating class remains. We seek to explain the variation of new issue maturity within credit classes. We find that asset maturity, security covenants, and macroeconomic conditions influence the new issue maturity of bonds within rating categories.

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The Subjective Valuation of Indexed Stock Options and their Incentive Effects

A. Louis Calvet, Abdul H. Rahman
Unpublished Appendix

We analyze the potential role of indexed stock options in future pay-for-performance executive compensation contracts. We present a unified framework for index-linked stock options, discuss their incentive effects, argue that indexation schemes based on the capital-asset pricing model (CAPM) are the most suitable for executive compensation, and derive a subjective pricing model for the class of CAPM-based indexed stock options. Contrary to earlier work, executives would not be motivated to take on investment projects with high idiosyncratic risk once their lack of wealth diversification and degree of risk aversion are factored into the analysis.

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Valuation and Performance of Reacquisitions Following Equity Carve-outs

Kimberly Gleason, Jeff Madura, Anita K. Pennathur

While previous literature reports a positive market reaction to parent companies conducting carve-outs, we find that the response to carve-outs that are ultimately reacquired is negative or insignificant. Reacquired units perform considerably worse than those that are not reacquired. Thus, parents may perceive that the market does not recognize the potential of these poorly performing units, and reacquires them to capitalize on the parents’ private information. The reacquisition announcement results in a favorable market reaction for the parents and the units. However, parents experience negative long-term buy-and-hold abnormal returns when they reacquire less than 100% of units’ shares.

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Block Trade Price Asymmetry and Changes in Depth: Evidence from the Australian Stock Exchange

Hamish D. Anderson, Sapphire Cooper, Andrew K. Prevost

This paper examines the price response to large block transactions on the Australian Stock Exchange during the 1999 sample period. We find asymmetry in the price reaction between buyer- and seller-initiated trades with respect to size and resiliency following the trade. We extend previous research by examining order book changes surrounding block trades and relating price effects to changes in book depth. Purchases are associated with persistent order book imbalance, while the sales imbalance is insignificant. Cross-sectional analysis demonstrates that price resiliency following a trade is related to the speed at which limit orders arrive to replenish book depth.

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The Impact of Pennies on the Market Quality of The Toronto Stock Exchange

Brian F. Smith, D. Alasdair S. Turnbull, Robert W. White

Using detailed order flow data from The Toronto Stock Exchange, this paper finds no evidence that a smaller tick size lessens market liquidity for either small or large traders. Rather, there is evidence of lower trading costs, faster time to order execution, and greater price continuity. Consistent with a penny tick allowing a finer pricing grid search, there is an increase in the number of Change Former Orders and cancellations.

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The Asymmetric Impact of Monetary Policy on Currency Markets

Bento J. Lobo, Ali F. Darrat, Sanjay Ramchander

This study examines whether tightening and easing actions of the Federal Reserve symmetrically influence currency markets. Using daily data on four exchange rates from 1989 to 2001, we find that changes in the Fed’s interest rate target are positively related to changes in the value of the dollar. Surprises associated with monetary tightening have a larger announcement effect compared to monetary easing for the British pound, German mark and Canadian dollar whereas the opposite is true for the Japanese yen. The results appear to be driven by the reactions of foreign central banks to Fed actions, the Fed's credibility as a policy maker and by the change in the Fed's disclosure policy beginning in 1994.

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