Stocks--Prices

In Essay 1, I investigate the Equity Duration Hypothesis, which adapts Macaulay’s fixed income analysis to equity securities, finding evidence that dividend payers are less volatile than nonpayers and that dividend yield is negatively associated with volatility for the all-firms sample. Within the payer sample, however, I find unexpected evidence of a positive association when yield includes all dividends but a conflicting negative association when yield includes only quarterly dividends. This ambiguous evidence is corroborated by a one-year portfolio approach, as a previously strengthening negative relationship has transitioned to a strengthening positive one, with results demonstrably trending against the EDH in recent decades. I further find that high-yield stocks that have experienced negative price shocks are highly volatile and strong support for the EDH using firm-level earnings and cash flows as a proxy for dividends, allowing extension of the analysis to nonpaying firms. Unfortunately, I find abundant evidence supporting the assertions of many researchers who suggest that ED is not a unique asset pricing factor, but rather represents a composite of a firm’s characteristics and is redundant with other factors known to be associated with volatility.

In Essay 1, I investigate the association between CEOs’ social capital and stock price informativeness in a sample of US firms. After accounting for the fact that larger networks attract more analysts following, I find that firms with larger CEO social capital exhibit higher private information incorporation and hence more informative stock prices. Results are consistent for five different proxies for stock price informativeness. Furthermore, the positive association between social capital and informativeness is driven by more diverse networks, as measured by gender, nationality, education, or professional diversity. Overall, results suggest that private information existing in networks may result in markets that are more informationally efficient.
In Essay 2, I show that CEOs’ social capital has a positive impact on stock price informativeness in an international sample. Different robustness and endogeneity tests confirm those results. Moreover, I find that factors present at the country level can mitigate or reinforce social capital’s impact on informativeness. I consider characteristics not observable within one country that can influence such relation around the world including legal, cultural, and developmental. I uncover that for more developed countries and those with a higher quality of institutions a positive impact of social connectedness is more pronounced. In addition, I show the importance of CEOs’ connections characteristics for their impact on stock price informativeness. I find that if CEOs’ connections come from developed countries or countries that have better formal and informal institutions which affect information transparency, CEOs’ social capital becomes more important for informativeness.

Major financial newspapers and financial news programs in the United States, such as the Wall Street Journal and the Financial News Network, often mention macroeconomic data in attempting to predict a potential adjustment in the level of stock market prices. The presentation ofthis data is particularly prevalent when the level of stock market prices is in record territory. However, many believe that there exists no relationship, correlation or causal relationship between the level of stock market prices and macroeconomic indicators, especially in technologically advanced nations. The purpose ofthis paper is to test the efficiency of three international stock markets. If a stock market is efficient, all current information is instantaneously reflected in its price level. Since stock prices in an efficient market reflect all of the available information instantaneously, investors cannot profit by analyzing macroeconomic indicators. Thus, the implication is that there are no immediate profit-making opportunities in efficient markets and there are profit-making opportunities in less efficient markets. If the stock market ofthe United States is proven to be efficient, then the news media is incorrect in its presentation of macroeconomic data in order to predict an adjustment in the stock market.

This study empirically investigates the market reaction to acquisitions of thrift institutions and banks occurring since the passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. The study tests several hypotheses related to characteristics of the acquiring firm, the target firm, and the acquisition. The overall market reaction to the acquisitions is negative. The study also reveals that there are cross-sectional factors which influence the share price response. The results of the empirical tests are relevant to depository institutions contemplating acquisitions, to the Resolution Trust Corporation, and to taxpayers.

For a stock market to allocate funds efficiently, stock prices should immediately incorporate all of the information available. If we find that there is a lag between changes in variables that might affect the price of stocks, and the reflection of that change in its price, the market for stocks will be inefficient. This thesis tests the stock markets in six of the largest developed economies for informational efficiency. It tests the stock markets in Canada, France, Germany, Japan, The United Kingdom, and The United States, for the existence of a causal relationship between changes in the money supply and changes in stock prices, and applies the Granger-causality test to perform it. A stock market is informationally inefficient if a causal relationship between changes in the money supply and changes in stock prices is found. In this case, money supply changes could be used to predict movements in the prices of stocks, create profitable trading rules, and help us earn above-normal returns, thus casting doubts on the ability of the stock market to allocate funds efficiently.

This thesis examines the significance of the real interest rate and stock prices as explanatory variables in the aggregate consumption function. This study applies the methodologies of OLS regression analysis and tests of cointegration to examine the relationship between stock prices and consumption. The empirical results suggest that stock prices are a significant factor in the modified aggregate consumption function. Consumers, perceiving stock prices to be an indicator of their wealth, are making more expenditures on durable goods as they perceive increases in stock values to be permanent. Finally, the results of the tests for cointegration suggest that there is no long-run equilibrium relationship between stock prices and consumption.

In finance, the term 'duration' means the effective length of a financial obligation which is discharged in installments. This concept has a number of applications in finance like calculating the change in the price of bonds due to the change in interest rates, immunizing the value of bonds, etc. Common stocks are also financial obligations and are considered to have durations. For bonds and similar strong contractual obligations, duration and its applications are clear cut and are used widely. For common stocks duration evaluation is difficult and its practical applications hardly exist. Moreover, there are no publications of numerical results where duration was applied to common stocks. These facts make it doubtful whether duration can be applied to common stocks. The results of the empirical research here, with numerical results, make it doubtful that duration can be applied to common stocks or to explain price fluctuations of common stocks.

This dissertation examines the effect of variables specific to different industries on initial public offerings (IPOs). It has been widely accepted that IPOs perform well in the immediate aftermarket and perform poorly in the subsequent months. The uncertainty surrounding IPOs has been a frequently cited reason for the initial underpricing. The size of the offering, underwriter prestige, the number of uses of gross proceeds, and the level of inside ownership are a few of the variables that have been found to measure the uncertainty of IPOs across industries. The uncertainty of IPOs in different industries may also be affected by variables that are unique to that industry. The level of interest rates and the amount of regulation may affect the performance of existing financial service firms. The uncertainty of IPOs in the financial services industry may also be affected by these variables. This study finds that some financial service firm IPOs are affected by the level of interest rates. Some regulatory changes increase the uncertainty, and therefore the initial returns, of IPOs of financial service firms. The type of ownership structure affects the management of a firm due to differing agency costs. A mutual holding company (MHC) is a mutual company that issues a minority stake to the public. The MHC structure has been common among savings banks and is growing in popularity in the life insurance industry. The lack of takeover possibilities and stockholder control diminishes the risk taking behavior of MHCs in the thrift industry. Savings banks that choose the MHC structure experience lower initial returns without significant long run differences than savings banks that choose to convert to a completely stockholder owned bank. The operating characteristics may also affect the uncertainty of the firm. The internet allows firms to enter into an industry while having completely different operating structure than many of the other competitors. This study finds that firms that have an internet focus have higher initial returns than a matching set of IPOs. The changing environment, due to technology and low barriers to entry, increases the uncertainty of internet firms.

This dissertation extends previous research on bubbles by investigating whether changes in the financial asset prices of the S&P500 reflect changes in fundamentals. We propose that if this is not the case the volatility is due to a bubble. Hence, this is the general hypothesis from which several testable hypotheses are developed. A key issue in bubble research is the definition of fundamentals. In this work we assume that, in the long-run, operating revenues are the only source from which any payments can be made, including dividend payments. Therefore, if expectations are formulated correctly, on average, there has to be a relationship between changes in prices and changes in corporate revenues. Thus, we use different accounting variables as proxies for fundamentals. In addition, since the literature points to contagion of opinion as one of the causes for the creation of bubbles, we also examine the contemporaneous relationship between prices and several proxies for herding behavior. OLS, panel data analysis, and quantile regression are used to analyze the contemporaneous relationship between prices and fundamentals or contagion proxies; while cointegration (reconciled to be used with panel data) and the Bonferroni inequality are used to investigate the long-run equilibrium between prices and fundamentals. The results indicate that, overall, company earnings are not explanatory of prices. These findings hold both in the short-run and in the long-run equilibrium scenarios. In addition, we find that investors do not reward an increase of the debt in the capital structure of corporations. In reference to our contagion variables, changes in money flow, volume, and volatility are found explanatory of changes in prices. Nevertheless, the effect of these variables is not homogeneous across price changes. Specifically, Money Flow is significant across all quantiles except for the 30% lowest price changes, Volume is explanatory of the 35% highest price changes, while volatility is explanatory across all the distribution of price changes. An interesting observation is that the three independent variables become increasingly explanatory as we move up to higher quantiles. Taken together our findings are supportive of the bubble and contagion hypotheses.

This dissertation examines the pricing behavior of exchange traded funds (ETFs) in three essays. (1) The Overreaction of International ETFs, (2) Fragmentation of Night Markets, and (3) The Impact of the Creation of the QQQ on the Underlying Securities. The overreaction study examines the role of information in global overreaction. Univariate analysis reveals that overreaction associated with informed events is less pronounced than with uninformed events following extreme price decreases. Further, positive firm-specific announcements are met with investor overreaction while negative firm-specific announcements are not. Finally, significant reversals of winners during bull markets relative to bear markets support the hypothesis that bull markets contribute to investor overconfidence and overreaction. The fragmentation study examines the cost of market fragmentation across day and night trading sessions. Using a sample of intraday transaction data for three ETFs, I show that night markets do not impound information available in net order flow to the same degree as day markets. Bid-ask spreads are wider at night and these costs are due to higher order processing costs, market maker rents and higher inventory holding costs. Furthermore, market concentration costs at night are associated with significantly higher spreads. The QQQ creation study investigates whether the creation of tradable baskets of securities affects the pricing efficiency and risk of the underlying securities. The results show that extreme price movements in the post-QQQ period are met with less pronounced corrections than in the pre-QQQ period, and that this pricing pattern does not hold true for the control sample. A decomposition of spreads finds that quoted spreads widen and effective spreads tighten in the post-QQQ period. Furthermore, though more heavily weighted components of the QQQ experience tighter spreads, this benefit is less pronounced in the post-QQQ period implying relative benefits to the less heavily weighted components. Cross-sectional analysis reveals that liquidity is directly related to pricing efficiency, but this relationship lessens in the post-QQQ period. The results also show that systematic risk for the underlying securities declines while total risk rises, though the control sample experiences a similar rise in total risk.