Abstracts of Volume 41, Number 2, May 2006
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abstracts
The Effect of Information Quality
on Optimal Portfolio Choice
Frederik Lundtofte
Geetanjali Bali, Frank S. Skinner
The Subjective Valuation of Indexed Stock Options and
their Incentive Effects
A. Louis Calvet, Abdul H. Rahman
Unpublished Appendix
Valuation and Performance of Reacquisitions Following
Equity Carve-outs
Kimberly Gleason, Jeff Madura,
Anita K. Pennathur
Block Trade Price Asymmetry and Changes in Depth:
Evidence from the Australian Stock Exchange
Hamish D. Anderson, Sapphire
Cooper, Andrew K. Prevost
The Impact of Pennies on the Market Quality of The
Toronto Stock Exchange
Brian F. Smith, D. Alasdair S.
Turnbull, Robert W. White
The
Asymmetric Impact of Monetary Policy on Currency Markets
Bento J. Lobo, Ali F. Darrat,
Sanjay Ramchander
The Effect of Information Quality on Optimal Portfolio
Choice
Frederik Lundtofte
Three types of agents acting on different information sets
are considered: fully informed agents, insiders, and
outsiders. Differences in information quality are shown
to affect the properties of their optimal portfolios.
For an outsider, the share of wealth invested in the
stock is decreasing in the variance of the stock.
However, for an insider, the effect of an increasing
stock variance on the optimal portfolio weight is
ambiguous. In a calibration to U.S. data, the confidence
intervals of the insider’s demand for the stock
converge, whereas the outsider’s confidence intervals
become wider.
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Geetanjali Bali, Frank S. Skinner
We examine the determinants of the new issue maturity of
corporate bonds. As credit rating decreases, new bond
issues have longer maturities but substantial variation
in maturity within each rating class remains. We seek to
explain the variation of new issue maturity within
credit classes. We find that asset maturity, security
covenants, and macroeconomic conditions influence the
new issue maturity of bonds within rating categories.
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The Subjective Valuation of Indexed Stock Options and their
Incentive Effects
A. Louis Calvet, Abdul H. Rahman
Unpublished Appendix
We analyze the potential role of indexed stock options in
future pay-for-performance executive compensation
contracts. We present a unified framework for
index-linked stock options, discuss their incentive
effects, argue that indexation schemes based on the
capital-asset pricing model (CAPM) are the most suitable
for executive compensation, and derive a subjective
pricing model for the class of CAPM-based indexed stock
options. Contrary to earlier work, executives would not
be motivated to take on investment projects with high
idiosyncratic risk once their lack of wealth
diversification and degree of risk aversion are factored
into the analysis.
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Valuation and Performance of Reacquisitions Following Equity
Carve-outs
Kimberly Gleason, Jeff Madura,
Anita K. Pennathur
While previous literature reports a positive market reaction
to parent companies conducting carve-outs, we find that
the response to carve-outs that are ultimately
reacquired is negative or insignificant. Reacquired
units perform considerably worse than those that are not
reacquired. Thus, parents may perceive that the market
does not recognize the potential of these poorly
performing units, and reacquires them to capitalize on
the parents’ private information. The reacquisition
announcement results in a favorable market reaction for
the parents and the units. However, parents experience
negative long-term buy-and-hold abnormal returns when
they reacquire less than 100% of units’ shares.
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Block Trade Price Asymmetry and Changes in Depth: Evidence
from the Australian Stock Exchange
Hamish D. Anderson, Sapphire
Cooper, Andrew K. Prevost
This paper examines the price response to large block
transactions on the Australian Stock Exchange during the
1999 sample period. We find asymmetry in the price
reaction between buyer- and seller-initiated trades with
respect to size and resiliency following the trade. We
extend previous research by examining order book changes
surrounding block trades and relating price effects to
changes in book depth. Purchases are associated with
persistent order book imbalance, while the sales
imbalance is insignificant. Cross-sectional analysis
demonstrates that price resiliency following a trade is
related to the speed at which limit orders arrive to
replenish book depth.
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The Impact of Pennies on the Market Quality of The Toronto
Stock Exchange
Brian F. Smith, D. Alasdair S.
Turnbull, Robert W. White
Using detailed order flow data from The Toronto Stock
Exchange, this paper finds no evidence that a smaller
tick size lessens market liquidity for either small or
large traders. Rather, there is evidence of lower
trading costs, faster time to order execution, and
greater price continuity. Consistent with a penny tick
allowing a finer pricing grid search, there is an
increase in the number of Change Former Orders and
cancellations.
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The Asymmetric Impact of Monetary Policy on Currency Markets
Bento J. Lobo, Ali F. Darrat,
Sanjay Ramchander
This study examines whether tightening and easing actions of
the Federal Reserve symmetrically influence currency
markets. Using daily data on four exchange rates from
1989 to 2001, we find that changes in the Fed’s interest
rate target are positively related to changes in the
value of the dollar. Surprises associated with monetary
tightening have a larger announcement effect compared to
monetary easing for the British pound, German mark and
Canadian dollar whereas the opposite is true for the
Japanese yen. The results appear to be driven by the
reactions of foreign central banks to Fed actions, the
Fed's credibility as a policy maker and by the change in
the Fed's disclosure policy beginning in 1994.
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