Abstracts of Volume 42, Number 2, May 2007
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Are the Insider Trades of a Large Institutional Investor
Informed?
Joseph Golec
Hedging, Financing and Investment Decisions
Chen-Miao Lin, Stephen D. Smith
Cash Flows and Discount Rates, Industry and Country
Effects and Co-Movement in Stock Returns
John Ammer, Jon Wongswan
The Agency Structure of Loan Syndicates
Pascal François,
Franck Missonier-Piera
Discounting Mean Reverting Cash Flows with the Capital
Asset Pricing Model
Carmelo Giaccotto
Convertible Securities, Employee Stock Options and the
Cost of Equity
Phillip R. Daves, Michael C.
Ehrhardt
Price Clustering on the Tokyo Stock Exchange
Aslı Aşçıoğlu, Carole
Comerton-Forde, Thomas H. McInish
A
New Variance Ratio Test of Random Walk in Emerging
Markets: A Revisit
Osamah M. Al-Khazali, David K.
Ding, Chong Soo Pyun
Are the Insider Trades of a Large Institutional Investor
Informed?
Joseph Golec
We use a unique data set to consider whether a large
institution’s (Fidelity Funds) insider trades are
informed. Theoretical studies of large informed traders
suggest that their information advantage could be
greater for buy trades than sell trades, be short- or
long-lived, and be exploited by varying the pace of
trade execution. Although there is evidence of each of
these, Fidelity seems to be informed only for quickly
executed buy trades. Other trades outperform a stock
market index but not a four-factor return model. This
performance profile is consistent with Fidelity’s fees,
which depend on performance compared to an index.
Keywords: institutional insider,
informed trades, Fidelity, mutual fund, incentive fees
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Hedging, Financing and Investment Decisions
Chen-Miao Lin, Stephen D. Smith
We empirically investigate the interactions among hedging,
financing and investment decisions. We argue that the
way in which hedging affects a firm’s financing and
investing decisions differs for firms with different
growth opportunities. We find that high growth firms
increase their investment, but not leverage, by hedging.
However, we also find that firms with few investment
opportunities use derivatives to increase their
leverage.
Keywords: Hedging, risk
management, capital expenditures, capital structure
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Cash Flows and Discount Rates, Industry and Country Effects
and Co-Movement in Stock Returns
John Ammer, Jon Wongswan
We apply the Campbell (1991) decomposition to
industry-by-country, national, global industry, and
world stock index returns, using 1995-2003 data. World,
global industry, and country factors are all important
for each of the two key components of stock returns:
news about future dividends and news about future
discount rates. Furthermore, the world component of
future discount rates is more important than the
idiosyncratic component, while the reverse is true for
news about future dividends. Our results are broadly
consistent with co-movement in future discount rates
arising from perceptions of common elements of risk in
international equity markets.
Keywords: International stock
market integration, financial globalization
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The Agency Structure of Loan Syndicates
Pascal François,
Franck Missonier-Piera
Leaders of loan syndicates often delegate some administrative
tasks to banks known as co-agents. One reason is that
co-agents are specialized banks that help split the
costs of managing the syndicate. Another reason is that
co-agents monitor the leader on behalf of syndicate
members to mitigate informational asymmetry problems.
Large sample tests on the Dealscan database provide
support for both arguments. Evidence of repeated
contracting between the same banks explains the moderate
magnitude of monitoring effects.
Keywords: Loan syndication;
Monitoring; Bank specialization; Co-agents
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Discounting Mean Reverting Cash Flows with the Capital Asset
Pricing Model
Carmelo Giaccotto
Discounting cash flows requires an equilibrium model to
determine the cost of capital. The CAPM of Sharpe (1964)
and the intertemporal asset pricing model of Merton
(1973) offer a theoretical justification for discounting
at a constant risk adjusted rate. Two problems arise
with this application. First, for mean reverting
cash-flows the risk adjustment is unknown, and second,
if the present value is compounded forward then the
distribution of future wealth is likely right skewed. I
develop equilibrium discount rates for cash flows whose
level or growth rate is mean reverting. Serial
correlation also largely eliminates the skewness
problem.
Keywords: CAPM, equilibrium cost
of capital, capital Budgeting, Gibbs sampling, Monte
Carlo Markov chain
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Convertible Securities, Employee Stock Options and the Cost
of Equity
Phillip R. Daves, Michael C.
Ehrhardt
We provide a method for calculating the cost of equity and
the cost of capital in the presence of convertible
securities and employee stock options. We demonstrate
how this approach can be applied if a company already
has issued convertible claims or if it is considering
doing so for the first time. We provide several
numerical examples illustrating the significance of
errors in estimating the cost of capital that can result
when (1) employee stock options are ignored or (2) the
observable stock price is used as a proxy for the
unobservable underlying asset.
Keywords: Convertible bonds,
executive stock options, cost of equity, cost of
capital, dilution, warrants
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Price Clustering on the Tokyo Stock Exchange
Aslı Aşçıoğlu, Carole
Comerton-Forde, Thomas H. McInish
This paper examines price clustering on the Tokyo Stock
Exchange. Regardless of tick and lot size, prices ending
in zero and five are the most popular. The TSE has no
market makers or direct negotiation between traders;
therefore, clustering is not explained by collusion or
negotiation. Our evidence supports the attraction
hypothesis. Clustering also extends to order book depth.
There is evidence of strategic trading behavior as
traders place orders one price tick better than zero and
five to avoid queuing orders at prices ending in these
digits. Strategic trading behavior declined and
clustering increased when the market became anonymous.
Keywords: Price clustering, depth
clustering, limit order market, Tokyo Stock Exchange,
anonymity
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A New Variance Ratio Test of Random Walk in Emerging Markets:
A Revisit
Osamah M. Al-Khazali, David K.
Ding, Chong Soo Pyun
Using Wright’s (2000) nonparametric variance-ratio (VR) test,
we revisit the empirical validity of the random walk
hypothesis in eight emerging markets in the Middle East
and North Africa (MENA). After correcting for
measurement biases caused by thin and infrequent trading
prevalent in nascent and small stock markets, we cannot
reject the random walk hypothesis for the MENA markets.
We conclude that Wright’s nonparametric VR test is
appropriate for emerging stock markets, and argue that
our findings can reconcile previously contradictory
results regarding the efficiency of MENA markets.
Keywords: Emerging stock markets,
random walk hypothesis, Middle East and North Africa
(MENA) stock markets, market efficiency, nonparametric
variance ratio tests, thin trading
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