Abstracts of Volume 40, Number 1, February 2005
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Distinguishing Between Rationales for Short-Horizon
Predictability of Stock Returns
Avanidhar Subrahmanyam
Dividends, Corporate Monitors and Agency Costs
Kenneth A. Borokhovich, Kelly R. Brunarski, Yvette
Harman and James B. Kehr
Leverage and the Complexity of Takeovers
Tomas Jandik and Anil K. Makhija
Trade Duration: Information and Trade Disposition
Peter R. Locke and Zhan Onayev
FX Dynamics, Limited Participation, and the Forward Bias
Anomaly
O. Miguel Villanueva
Distinguishing Between Rationales for Short-Horizon
Predictability of Stock Returns
Avanidhar Subrahmanyam
In this paper, we shed light on short-horizon return
reversals. We show theoretically that a risk-based
rationale for reversals implies a relation between
returns and past order flow, whereas a reversion in
beliefs of biased agents does not do so. The empirical
results indicate that returns are more strongly related
to own-return lags than to lagged order imbalances.
Thus, the evidence suggests that monthly reversals are
not completely captured by inventory effects and may be
driven, in part, by belief reversion. We do find that
returns are cross-sectionally related to lagged
imbalance innovations at horizons longer than a month.
Dividends, Corporate Monitors and Agency Costs
Kenneth A. Borokhovich, Kelly R. Brunarski, Yvette
Harman and James B. Kehr
We report new evidence on the hypothesis that dividends
reduce agency costs. Consistent with dividends as a
mechanism to reduce agency costs, we find that, on
average, firms with a majority of strict outside
directors on their boards experience significantly lower
mean abnormal returns around the announcements of
sizeable dividend increases. Our results are robust to
multivariate controls for firm size, leverage,
ownership, growth options, and change in dividend yield.
However, we find no evidence that dividend increases
reduce agency costs as measured by poison pills or
outside blockholdings.
Leverage and the Complexity of Takeovers
Tomas Jandik and Anil K. Makhija
There is scant empirical evidence on how the leverage of
target firms affects gains to their shareholders,
although there are several widely-cited economic
theories offered in the literature. The limited
available evidence shows that shareholders of targets
with greater leverage experience higher returns.
However, even this observed effect of debt on takeovers
can not be distinguished from a mere mechanical pure
leveraging effect, leaving the economic explanations
untested. Consequently, we adopt an alternative approach
here to examine if targets’ debt truly matters in
takeovers. We report that acquisition processes
involving targets with higher leverage tend to be
significantly more complex in several ways. We find that
such acquisitions tend to take a longer time to consume,
are more likely to be associated with multiple bidder
auctions, and experience greater revisions in offer
prices. Finally, we find that factors that make
takeovers more complex also lead to greater target
gains.
Trade Duration: Information and Trade Disposition
Peter R. Locke and Zhan Onayev
We examine the relation between futures trade duration
and profitability, volatility, and volume. The duration
of unprofitable trades is longer than that for
profitable trades across the day, which is evidence of
the disposition effect. Our analysis of profitable and
unprofitable trades shows strong intraday volume
patterns. Greater proportions of profitable trades are
offset at the open and close. During high-volume periods
dealers may use a semi-fundamental informational
advantage, based on their access to order flow signals.
Dealers may be able to execute costly inventory-reducing
trades at the end of the day, when their informational
advantage is perhaps greatest.
FX Dynamics, Limited Participation, and the Forward Bias
Anomaly
O. Miguel Villanueva
Standard foreign exchange (FX) models with goods price
stickiness and instantaneous asset market adjustments
imply FX overshooting (Dornbusch, 1976), which can
explain the forward bias anomaly. Lyons (2001) explained
the anomaly via limited participation of FX speculators
due to Sharpe ratios lower than equity market
alternatives, which implies FX undershooting to interest
differential shocks. I derive the time-series
implications of over- and undershooting for the joint
forward-spot FX dynamics in a vector error correction
model. I use generalized impulse response analysis
(Pesaran and Shin, 1998) to test those implications. All
FX studied (pound, deutsch mark, French franc, yen, and
Canadian dollar) have dynamics consistent with
undershooting during the period from 1975 to 1998.
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