Abstracts of Volume 39, Number 3, August 2004
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The Puzzling Increase in the Underpricing of Seasoned
Equity Offerings
Kenneth A. Kim and Hyun-Han Shin
Mixed Messages: Open-Market Repurchases Following Stock
Acquisitions
Jann C. Howell and Janet D. Payne
Equity Ownership and Firm Value: Evidence from Targeted
Stock Repurchases
Saeyoung Chang and Michael Hertzel
Informed Trading Around Earnings Announcements: Another
Look
Dennis J. Whalen and Charles D. Collver
Joseph K. W. Fung, Henry M. K. Mok and Kenneth C. K.
Wong
The Effect of Demand on Stock Prices: Evidence from
Index Fund Rebalancing
Ernest N. Biktimirov
An International Investigation of the Factors that
Determine Conditional Gold Betas
Robert Faff and David Hillier
The Puzzling Increase in the Underpricing of Seasoned
Equity Offerings
Kenneth A. Kim and Hyun-Han Shin
Using a sample of over 3,000 seasoned equity offerings
(SEOs) from 1983 to 1998, we test the hypothesis that
the U.S. Securities and Exchange Commission’s Rule
10b-21, which disallows the covering of short positions
with newly issued SEOs, makes pre-offer stock prices
less informative, which, in turn, causes the new
seasoned equity to be priced at discounts. Consistent
with this hypothesis, we find that the year the rule
went into effect coincides with the year from which we
begin observing significant SEO discounts. Further, we
also find that ex ante uncertainty and SEO discounts are
positively related. We also conduct tests specifically
related to short selling, and we also consider an
exhaustive set of alternative explanations for the
discounts. Based on all of the evidence, we conclude
that it is the rule that makes issue discounts larger in
the 1990s.
Keywords: seasoned equity offerings, underpricing,
Rule10b-21, short sale
Mixed Messages: Open-Market Repurchases Following Stock
Acquisitions
Jann C. Howell and Janet D. Payne
Management decisions and market reactions to those
decisions do not occur in isolation. Despite this fact,
little or no research has examined two events when they
occur in a sequence, even when theory suggests that
those two events convey opposite signals. We examine
firms that do a stock-based acquisition then announce an
open-market repurchase program. These two actions,
according to signaling theory, signal conflicting
valuation errors. This paper is the first to examine a
sequence of events that convey seemingly conflicting
signals. Among other results, we find that repurchasers
who had previously made a stock-based acquisition have a
less positive market reaction than do otherwise
comparable repurchasers with no previous acquisition.
These results indicate that the market reactions to
events are tempered by previous information-releasing
events.
Keywords: repurchases, acquisitions, managerial decision
making
Equity Ownership and Firm Value: Evidence from Targeted
Stock Repurchases
Saeyoung Chang and Michael Hertzel
In contrast to the negative average abnormal return
associated with the announcement of a control-related
targeted repurchase (greenmail transaction), we find
that the announcement of a non-control-related targeted
repurchase is associated with a positive and significant
average abnormal return. Cross-sectional analysis
indicates that the change in firm value at the
announcement of a non-control-related targeted
repurchase is negatively related to the resulting
changes in both insider ownership and outside
blockholdings. We also find significant differences in
announcement-period stock price effects depending on the
identity of the selling shareholder.
Keywords: targeted stock repurchases, managerial
entrenchment, insider holdings, event study
Informed Trading Around Earnings Announcements: Another
Look
Dennis J. Whalen and Charles D. Collver
This study is an empirical test of the Easley, O’Hara,
and Srinivas (1998) multimarket sequential trade model
of stock and option markets. We employ two approaches to
determine the information content of signed stock and
option trades executed around quarterly earnings
announcements. The first approach expands the vector
autoregression (VAR) technique of Hasbrouck (1991a) to
include signed option trade volumes and inter-trade
durations. Estimates from the VAR models provide insight
into whether both equity and option trades are viewed as
informative by the equity specialist. The second
approach focuses on the information content of the
earnings releases to determine whether signed equity and
option trades executed prior to the announcements are
informed. Results indicate that although informed
traders prefer to transact in both markets around
earnings announcements, option market transactions
contain no incremental information.
Keywords: vector autoregression, lead-lag, informed
trading, earnings announcements
Joseph K. W. Fung, Henry M. K. Mok and Kenneth C. K.
Wong
Using a box spread arbitrage strategy, we examine the
pricing efficiency of the emerging, thinly traded Hang
Seng Index options market in Hong Kong, where market
makers operate under a competitive open outcry system.
In 20 months of tick-by-tick bid/ask quotes we find very
few arbitrage opportunities. Our examination of the
reporting time of quotes shows that in effect, all the
apparent mispricings are deceptive and could be
explained by stale quotes. The absence of real arbitrage
opportunities supports the pricing rationality
hypothesis in the Hong Kong options market.
Keywords: box spread; price rationality; thin market;
market makers; bid-ask quotes, limits to arbitrage
The Effect of Demand on Stock Prices: Evidence from
Index Fund Rebalancing
Ernest N. Biktimirov
I examine the effect of demand on stock prices by
analyzing the conversion of the TIPs 35 and TIPs 100
exchange-traded funds into the i60 Fund. This conversion
occurred at the Toronto Stock Exchange on March 6, 2000.
Forty stocks of the TIPs 100 Fund that were not members
of the new units of the i60 Fund were sold to complete
this conversion. I find that a decrease in demand
produced a permanent stock price decline, which was
accompanied by significant abnormal trading volume. The
results provide support for the downward-sloping demand
curve hypothesis.
Keywords: stock prices, trading volume, event study,
stock indexing, mutual funds
An International Investigation of the Factors that
Determine Conditional Gold Betas
Robert Faff and David Hillier
We investigate the unconditional and conditional gold betas of four country-based gold industry portfolios. First, we document the similarity of unconditional gold betas across countries. Second, we find that the factors affecting conditional gold betas are different in the Australian/South African gold sectors relative to their North American counterparts. Only the gold bullion return volatility shows a negative association with conditional gold betas in Australian and South African gold mining firms. Moreover, gold price does not appear to play a systematic role in determining Australian or South African conditional gold betas. We discuss possible explanations for these findings.
Keywords: Stock Price Exposures, Gold Beta,
International Evidence
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