Abstracts of Volume 40, Number 2, May 2005
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Asymmetric Information in the IPO Aftermarket
Mingsheng Li, Thomas H. McInish and Udomsak Wongchoti
Who’s Monitoring the Monitor? Do Outside Directors
Protect Shareholders’ Interests?
Eric Helland and Michael Sykuta
Imperfect Information and Stock Market Volatility
Jeffrey R. Gerlach
Price Movement Effects on the State of the Electronic
Limit-order Book
Yue-cheong Chan
Specialist Risk Attitudes and the Bid-Ask Spread
Brian Prucyk
Director Quality and Firm Performance
Lisa Fairchild and Joanne Li
Asymmetric Information in the IPO Aftermarket
Mingsheng Li, Thomas H. McInish and Udomsak Wongchoti
Using the adverse selection component of the spread as a
measure of asymmetric information, we investigate how
asymmetric information evolves after firms go public. We
find that the level of asymmetric information is lower
immediately after the initial public offering (IPO)
compared with its level after a period of seasoning. In
addition, we test the hypothesis that the greater the
underpricing of an IPO, the more information is produced
in its aftermarket, and the lower the aggregate level of
asymmetric information. Our results are consistent with
the hypothesis and are robust after controlling for
other factors.
Who’s Monitoring the Monitor? Do Outside Directors
Protect Shareholders’ Interests?
Eric Helland and Michael Sykuta
The corporate governance literature is rich with
empirical tests of the relation between board
composition and firm performance. We consider the effect
of board composition on a different measure of
performance, the probability a firm will be sued by
shareholders. We find firms that are defendants in
securities litigation have higher proportions of
insiders and of gray directors and have smaller boards
than a matched group of firms that are not sued, even
when controlling for firm value and industry. The
results suggest that boards with higher proportions of
outside directors do a better job of monitoring
management
Imperfect Information and Stock Market Volatility
Jeffrey R. Gerlach
The purpose of this paper is to (a) develop a model to
show how imperfect information can create excess
volatility in asset returns and (b) provide empirical
evidence consistent with the model. In this framework,
variations in information quality cause the market
prices to fluctuate more than the corresponding economic
fundamentals. Using high-frequency data from 1988 to
2002, the empirical evidence supports the predictions of
the model by showing that economic volatility, defined
as squared deviations of the quarterly gross domestic
product growth rate from its long-run trend, can explain
about half of the variation in S&P 500-stock index
quarterly volatility.
Price Movement Effects on the State of the Electronic
Limit-order Book
Yue-cheong Chan
This paper investigates public-trader order-placement
strategies by examining the relations between the state
of the limit-order book and previous price movements.
There is support for an information effect, as traders
become more aggressive in buying and more patient in
selling after previous positive stock returns. The
widening of the bid-ask spread also causes traders to
place less aggressive orders. However, there is no
evidence of the options effect on limit-order trading.
This study also reveals that orders at the best quotes
react faster and complete the adjustment earlier than
orders that are far away from the best quotes.
Specialist Risk Attitudes and the Bid-Ask Spread
Brian Prucyk
This paper examines the relation between the bid-ask
spread and the risk of the underlying stock. It provides
evidence that the specialist is not only sensitive to
the absolute level of volatility, but also to changes in
the level of volatility. This sensitivity arises because
of increased inventory risk for the specialist when
volatility is changing. For the sample of very liquid
stocks in this paper, the quoted spread and the
inventory cost component of the spread are shown to
increase significantly during trading periods when
volatility is both increasing and decreasing.
Director
Quality and Firm Performance
Lisa Fairchild and Joanne Li
Many financial economists argue that the board of
directors’ efficacy in the monitoring of managerial
behavior depends upon the quality of the directors.
Assuming that there is a link between the stock
performance of target firms and the quality of their
directors, we empirically categorize directors receiving
additional directorships following a takeover as “above
average” and “below average.” We then follow the stock
performance of firms hiring new directors for three
years after their hiring. We match the two categories of
directors with the performance of hiring firms after a
director’s appointment. Accounting for other
contemporaneous effects, we regress the hiring firms’
post-performance on director quality and other
attributes. The results indicate that directors of
“above average” quality are related to hiring firms with
“above average” post-performance.
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