School Of Business Administration: Financial Review

This paper examines liquidity and quote clustering on the NYSE and Nasdaq using data after the two market reforms—the 1997 order-handling rule and minimum tick size changes. We find that Nasdaq-listed stocks exhibit wider spreads and smaller depths than NYSE-listed stocks and stocks with higher proportions of even-eighth and even-sixteenth quotes have wider quoted, effective, and realized spreads on both the NYSE and Nasdaq. This result differs from the findings by Bessembinder (1999, p. 404) that “trade execution costs on Nasdaq in late 1997 are no longer significantly explained by a tendency for liquidity providers to avoid odd-eighth quotations,” and “odd-sixteenth avoidance has little relevance for explaining post-reform Nasdaq trading costs."

Keywords: liquidity, spreads, depths, quote clustering, collusion

An Intraday Examination of the Components of the Bid-Ask Spread

Thomas H. McInish, Bonnie F. Van Ness

Volume 37, No. 4, November 2002, pp. 507-524

Using transactions data for a sample of NYSE stocks, we decompose the bid-ask spread (BAS) into order-processing (OP) and asymmetric information (AI) components using the techniques of George, Kaul, and Nimalendran (1991) and Madhavan, Richardson, and Roomans (1997). McInish and Wood (1992) demonstrate that the intraday behavior of BASs can be explained by variables measuring activity, competition, risk, and information. We investigate whether these variables explain the behavior of the OP and AI components of the spread over the trading day. We conclude that, on balance, the variables that determine the aggregate BAS also determine its intraday components.

Keywords: microstructure, bid-ask spread, spread components

The Performance of Internet Firms Following Their Initial Public Offering

Jarrod Johnston, Jeff Madura

Volume 37, No. 4, November 2002, pp. 525-550

We find that initial returns were more favorable for Internet initial public offerings (IPOs) than non-Internet firm IPOs. Since the demise of the Internet sector, the underpricing of Internet-firm IPOs is not significantly different from other IPOs. Initial returns of Internet firms are positively and significantly related to underwriter prestige and to pre-IPO market conditions. However, initial returns after the demise of the Internet sector are not significantly related to these characteristics. The aftermarket performance of Internet firms is initially favorable but weakens over time. Firms that experienced higher initial returns during the strong Internet cycle experience weaker aftermarket performance.

Keywords: IPO, initial public offering, underpricing, internet firms, cycles

Information Transfers Across Same-Sector Funds When Closed-End Funds Issue Equity

Eric J. Higgins, Shawn Howton, Shelly Howton

Volume 37, No. 4, November 2002, pp. 551-561

This study examines the reaction of non-issuing, same-sector funds when a closed-end fund announces a seasoned equity offering. The non-issuing, same-sector funds have a significant, negative announcement-day abnormal return. The abnormal returns for U.S. debt funds are less negative than U.S. equity and international debt funds. The abnormal returns for international debt funds are more negative than international equity funds. Announcement-day abnormal returns are directly related to the announcement-day abnormal return of the issuing fund and the premium/discount of the issuing fund. Announcement-day abnormal returns are inversely related to the premium/discount of the non-issuing, same-sector funds.

Keywords: seasoned offerings, closed-end funds intraindustry

Information Flows Across Markets: Evidence From China-Backed Stocks Dual-Listed in Hong Kong and New York

Xiaoqing Eleanor Xu and Hung-Gay Fung

Volume 37, No. 4, November 2002, pp. 563-588

Using a bivariate generalized autoregressive conditional heteroskedasticity (GARCH) model, we examine patterns of information flows for China-backed stocks that are cross-listed on exchanges in Hong Kong and New York. Results analyzing the dual-listed stocks indicate significant mutual feedback of information between domestic (Hong Kong) and offshore (New York) markets in terms of pricing and volatility. Stocks listed on the domestic market appear to play a more significant role of information transmission in the pricing process, whereas stocks listed on the offshore market play a bigger role in volatility spillover.

Keywords: information transmission, bivariate GARCH, China-backed ADRs

Market Structure and Return Volatility: Evidence from the Hong Kong Stock Market

Wilson H.S. Tong, K.S. Maurice Tse

Volume 37, No. 4, November 2002, pp. 589-612

There is no consensus about the cause for higher volatility at the market open than at the market close in the U.S. market. As an order-driven, non-specialist market, the Hong Kong stock market provides a useful setting for the examination. If halt of trade were the major cause of higher open-to-open volatility, the open-to-open volatility in the Hong Kong market would be higher. However, this is not observed. The autocorrelation of the open-to-open return series also indicates that the temporary price deviation at the market opening is not significant. We view these findings as consistent with the specialist argument.

Keywords: interdaily return volatility, volume, Hong Kong stock market, market microstructure, cross trading

The Effect of the Common Bond and Membership Expansion on Credit Union Risk

W. Scott Frame, Gordon V. Karels, Christine McClatchey

Volume 37, No. 4, November 2002, pp. 613-636

This paper empirically examines differences in credit union risk profiles based on membership type and membership expansion via select employee groups (SEGs). We find that (1) occupational credit unions have a greater exposure to concentration risk, which they hedge by holding greater proportions of capital, (2) the presence of SEGs is negatively related to credit union capital ratios and positively related to loan-to-share ratios, and (3) the number of SEGs and the proportion of loan delinquencies are positively related. We conclude that credit union membership expansion results in reduced concentration risk and expanded investment opportunities, but also dilutes the informational advantages associated with tight common bonds.

Keywords: credit unions, common bond, concentration risk

The University of Mississippi: School of Business Administration