Financial Review

Publisher:: Wiley
Publication date:: 2021-02-01

ISBN:: 0732-8516

Issue Number

Latest documents

Does increased hedging lead to decreased price efficiency? The case of VIX ETPs and VIX futures
We examine the impact of the introduction of VIX exchange‐traded products (ETPs) on the information content and pricing efficiency of VIX futures. We document that trades in VIX futures have become less informative and that pricing errors exhibit more persistence after the introduction of VIX ETPs. In addition, we observe that the price process of the VIX futures has become noisier over time. These findings suggest that the introduction of the VIX ETPs had a prominent effect on the properties and dynamics of the VIX futures.
Issue Information
Asymmetric news responses of high‐frequency and non‐high‐frequency traders
Using NASDAQ trade and Reuters news data, I show that the response of aggressive non‐high‐frequency traders (nHFTs) to news is stronger than that of aggressive high‐frequency traders (HFTs). Classifying news into quantitative (“hard”) and less quantitative (“softer”) news, the trading response of aggressive nHFTs to softer news exceeds HFTs’ response. Positive news elicits greater return and nHFT responses than negative news during the 2008 financial crisis period. As this phenomenon persists even after excluding the 2008 short‐sale ban, the results support the hypothesis of nHFTs exhibiting stronger asymmetric responses during crisis periods.
Increasing the Tick: Examining the Impact of the Tick Size Change on Maker‐Taker and Taker‐Maker Market Models
We investigate the effects of an increase in tick size on order and trading flow across market fee models. Using the pilot firms in the U.S. Securities and Exchange Commission's Tick Size Pilot Program, we document that trade and order volume declines on maker‐taker fee models after the tick size implementation. We find that the inverted fee models (taker‐maker) experience an increase in both trade and order volume. Additionally, we find that a tick size adjustment has a substantial influence on market participation in maker‐taker fee models. We also find that measures of both hidden and algorithmic trading decline with an increasing tick size, which is strongly moderated by the differences in the maker‐taker and taker‐maker fee models.
How Firms Use Director Networks in Setting CEO Pay
We examine how firms use the network of overlapping directorships to determine chief executive officer (CEO) compensation. We contribute to related work by empirically exploring two competing hypotheses. In the first hypothesis, networks propagate relevant information used to establish good pay practices. In the second hypothesis, director networks are used opportunistically to benefit the CEO. The empirical findings are generally consistent with the first hypothesis. Yet, the importance of director networks is reduced when the CEO is entrenched and when management hires a compensation consultant. The latter finding is especially pronounced when director networks predict a reduction in CEO pay.
Heterogeneity in the Effect of Managerial Equity Incentives on Firm Value
We document significant heterogeneity in the relation between chief executive officer (CEO) equity incentives and firm value using quantile regression. We show that CEO delta is more effective in the presence of ample investment opportunities, while CEO vega is more beneficial for firms lacking investment opportunities. Further, Tobin's Q increases in CEO delta for more risk‐tolerant firms but increases in CEO vega for more risk‐averse firms. We also observe that higher monitoring intensity after the Sarbanes‐Oxley Act reduces CEO delta's role in compensation. Risk aversion alters the optimal incentive‐value relation, and the nature of this relation also depends on the level of Tobin's Q.
Tiered Information Disclosure: An Empirical Analysis of the Advance Peek into the Michigan Index of Consumer Sentiment
This paper studies market microstructure implications of informed high‐frequency traders (HFTs) from two seconds of advance peek into the Michigan Index of Consumer Sentiment (ICS), provided by Thomson Reuters to its elite customers. Using individual stocks in the NASDAQ data set, we show how HFTs trade around ICS events. We find that liquidity demanders during two seconds of advance peek earn substantive profits, which are consistent with the notion that HFTs’ informational advantages may increase adverse selection costs for other market participants. This evidence elucidates the debate on regulatory oversight and its role in circumventing the potentially adverse effects from an advance peek into ICS.
The Endogeneity of Trading Volume in Stock and Bond Returns: An Instrumental Variable Approach
This paper investigates the joint determination of trading volume and returns. Our approach follows from the argument that trading activity depends on security returns, thus resulting in a reverse causality from returns to trading activity. Using exogenous instruments for security trading activity, we estimate a system of two‐stage simultaneous equations to better model the return‐volume relationship. Our results confirm that returns and trading volume are determined simultaneously in both stock and corporate bond markets and that conclusions about the direction and significance of causality between volume and returns can be reversed once one corrects for the endogeneity of volume.
Early Movers Advantage? Evidence from Short Selling during After‐Hours on Earnings Announcement Days
We examine short sellers’ after‐hours trading (AHT) following quarterly earnings announcements released outside of the normal trading hours. Our innovation is to use the actual short trades immediately after the announcements. We find that on these earnings announcement days, there is significant shorting activity in AHT relative to shorting activity both during AHT on nonannouncements days and during regular trading sessions around announcements. Short sellers who trade after‐hours on announcement days earn an excess return of 0.82% and 1.40% during before‐market‐open (BMO) and after‐market‐close (AMC)sessions, respectively. The magnitude of these returns increases to 1.48 (3.92%) for BMO (AMC) earnings announcements with negative surprise. We find that the reactive short selling during AHT has information in predicting future returns. Short sellers’ trades have no predictive power if they wait for the market to open to trade during regular hours. In addition, we find that the weighted price contribution during AHT increases with an increase in after‐hours short selling. Overall, our results suggest that short sellers in AHT are informed. Our findings remain robust using alternative holding periods and after controlling for macroeconomic news announcements during BMO sessions.
Is Financial Flexibility a Priced Factor in the Stock Market?
This paper develops a factor analysis–based measure for shifts in corporate financial flexibility (FFLEX) that can be observed from public accounting information. Companies that experience positive shifts in FFLEX are associated with higher future investment growth opportunities. We show that FFLEX is a robust determinant of future stock returns. Firms that have increased their financial flexibility are associated with lower stock returns in the subsequent period. A zero‐cost return portfolio produces a significant positive monthly premium of 0.69%, which is driven by covariance (risk). Risk inherent in the flexibility factor is not explained away by either prominent pricing characteristics or factors.