The Financial Review

Abstracts of November 2003 Issue

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The Financial Review, Vol. 38, No. 4

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Profit Warnings and Timing

  Dave Jackson, Jeff Madura

What Can ‘Nine-Eleven’ Tell Us about Closed-end Fund Discounts and Investor Sentiment?

  Timothy R. Burch, Douglas R. Emery, Michael E. Fuerst

Does an Industry Effect Exist for Initial Public Offerings?

  Aigbe Akhigbe, Stephen F. Borde, Ann Marie Whyte

Motives in the Acquisitions of Nasdaq Targets Turing the Aftermath of the 1987 Crash

  Vijay Gondhalekar, Yatin Bhagwat

Pricing U.S. Dollar Index Futures Options: An Empirical Investigation

  Vivek Bhargava, John M. Clark

Market Segmentation and Information Asymmetry in Chinese Stock Markets: A VAR Analysis

  Jian Yang

Return Linkages between Dual Listings bnder Arbitrage Restrictions: A Study of Indian Stocks and Their London Global Depositary Receipts

  Palani-Rajan Kadapakkam, Lalatendu Misra


Profit Warnings and Timing

  Dave Jackson, Jeff Madura
  Volume 38, No. 4, pp. 497-513

We find that profit-warning announcements elicit a strong negative market response that is not sensitive to timing of the warning in advance of the earnings announcement. Share prices begin to adjust about five days before a profit warning, and the market response is not complete until about five days after the warning. The accumulated response over the 11-day period ending five days after the announcement is -21.7%. The profit warning effect over the two-day announcement period is 32 times the valuation effect upon subsequent release of the actual earnings. There is no evidence of a reversal after this period, and therefore no sign that the market response is excessive.

Keywords: profit warnings

JEL Classifications: G14

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What Can ‘Nine-Eleven’ Tell Us About Closed-end Fund Discounts and Investor Sentiment

  Timothy R. Burch, Douglas R. Emery, Michael E. Fuerst
  Volume 38, No. 4, pp. 515-529

We use the horrific events of September 11, 2001 ("nine-eleven") as a natural test of the hypothesis that closed-end mutual fund discounts from fund net asset values reflect small investor sentiment. Because nine-eleven was a sudden, unforeseen, and significant negative exogenous shock to the world, the capital markets, and investor sentiment, our test avoids many of the problems of extant studies. Discounts worsened dramatically following the event, and then recovered alongside the broader market. This finding is consistent with the hypothesis that discounts reflect the sentiment of small investors, who took their cues from the broader market’s overall movement.

Keywords: investor sentiment, closed-end fund discounts

JEL Classifications: G14

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Does an Industry Effect Exist for Initial Public Offerings?

  Aigbe Akhigbe, Stephen F. Borde, Ann Marie Whyte
  Volume 38, No. 4, pp. 531-551

We examine the impact of initial public offerings (IPOs) on rival firms and find that the valuation effects are insignificant. This insignificant reaction can be explained by offsetting information and competitive effects. Significant positive information effects are associated with IPOs in regulated industries and the first IPO in an industry following a period of dormancy. Significant negative competitive effects are associated with larger IPOs in competitive industries, those in relatively risky industries, those in high performing industries, and those in the technology sector. IPO firms that use the proceeds for debt repayment appear to represent a more significant competitive threat to rival firms relative to IPO firms that use their proceeds for other purposes.

Keywords: Initial public offering, IPO, intra-industry effects, competitive effects, information effects

JEL Classifications: G14

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Motives in the acquisitions of NASDAQ targets during the aftermath of the 1987 crash

  Vijay Gondhalekar, Yatin Bhagwat
  Volume 38, No. 4, pp. 553-569

After the crash of 1987, the Nasdaq composite index stayed below the pre-crash level for nearly two years. Takeover activity surged in this after-crash period. We compare the motives in the acquisitions of Nasdaq targets during the after-crash period with those in the ten-year period before the crash. We find that the announcement period return to acquirers and the proportion of acquirers with positive gains declines in the after-crash period. For both the periods, agency is the motive for takeovers that have negative total gains (acquirer + target), but synergy and hubris are co-motives for takeovers that have positive total gains. The proportion of takeovers in which the managers of acquirers act against the interest of the shareholders increases after the crash.

Keywords: synergy, agency, hubris, crash, takeovers

JEL Classifications: G34

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Pricing U.S. Dollar Index Futures Options: An Empirical Investigation

  Vivek Bhargava, John M. Clark
  Volume 38, No. 4, pp. 571-590

This paper develops a pricing model and empirically tests the pricing efficiency of options on the U.S. Dollar Index (USDX) futures contract. Empirical tests of the model indicate that the market consistently overprices these options relative to the derived model. This overpricing is more pronounced for out-of-the-money options than for in-the-money options and more pronounced for put options than for call options. To validate the above results, delta neutral portfolios are created for one- and two-day holding periods and consistently generate positive arbitrage profits, indicating that on average the market overprices the options on the USDX futures contracts.

Keywords: USDX futures option pricing

JEL Classifications: G13

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Market Segmentation and Information Asymmetry in Chinese Stock Markets: A VAR Analysis

  Jian Yang
  Volume 38, No. 4, pp. 591-609

This study examines the market segmentation and information asymmetry patterns in Chinese stock markets. The recursive cointegration analysis confirms that each of six markets is not linked with other markets in the long run. Further, the result from data-determined forecast error variance decomposition clearly shows that foreign investors in the Shanghai B-share market are better informed than Chinese domestic investors in two A-share markets and foreign investors in Shenzhen and Hong Kong markets over time. The finding challenges a widespread assumption of less informed foreign investors in the literature, but suggests that foreign investors could be more informed in emerging markets.

Keywords: market segmentation, information asymmetry, Chinese stock markets, directed acyclic graphs, forecast error variance decomposition

JEL Classifications: G15, G32

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Return Linkages Between Dual Listings Under Arbitrage Restrictions: A Study of Indian Stocks and Their London Global Depositary Receipts

  Palani-Rajan Kadapakkam, Lalatendu Misra
  Volume 38, No. 4, pp. 611-633

We examine the linkages between returns on Indian Global Depositary Receipts (GDRs) in London and their underlying stocks in India. GDR returns are sensitive to returns observed earlier in India. This sensitivity is more pronounced for more liquid GDRs. Although arbitrage is not feasible for GDRs that sell at a premium, these GDRs are, nevertheless, sensitive to Indian returns. The sensitivity is greater for GDRs selling at a discount, where costly arbitrage is feasible. GDR returns have a significant but small effect on subsequent returns of the underlying stocks, with more liquid GDRs having a slightly greater impact.

Keywords: Indian stocks, GDRs, international market linkages, emerging markets, arbitrage restrictions, liquidity

JEL Classifications: G14, G15, N25

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