Previous research shows that corporate insiders engage in profitable transactions by trading securities of their own firms around specific events. The objective of this study is to specifically analyse all the events that preceded insider trading transactions and their explicit trading gains. We contrast this hypothesis with the signalling of undervaluation. Using a large sample of UK companies, we test the proposition that corporate insiders time their trades and that the market impact of insiders' transactions varies based on the information on which they trade on. We find that (i) insiders buy (sell) shares prior to stock price decline (run up), (ii) the event date abnormal returns are positive for buy and negative for sell transactions, (iii) the post-event abnormal returns following [+1, +10] buy (sell) trades are positive (negative), suggesting that insiders convey information to the market and that other investors follow these trades, (iv) in the longer term [+2, +160] companies do not seem to regain their pre-trade valuation, (v) the pre- and post-event abnormal performance depends on the news that precedes the trades. Overall, our results suggest that insiders time their trades and they are capable to better assess the value of their firm. Outsiders, aware of that superior view, follow insiders' behaviour in the short-term and fortify the exceptional returns gained by directors. We also find evidence that insiders use this signalling effect to sometimes camouflage their trades and overcome regulators' monitoring.
{"title":"Why Do Corporate Insiders Trade? The UK Evidence","authors":"E. González Calvo, M. Lasfer","doi":"10.2139/ssrn.391982","DOIUrl":"https://doi.org/10.2139/ssrn.391982","url":null,"abstract":"Previous research shows that corporate insiders engage in profitable transactions by trading securities of their own firms around specific events. The objective of this study is to specifically analyse all the events that preceded insider trading transactions and their explicit trading gains. We contrast this hypothesis with the signalling of undervaluation. Using a large sample of UK companies, we test the proposition that corporate insiders time their trades and that the market impact of insiders' transactions varies based on the information on which they trade on. We find that (i) insiders buy (sell) shares prior to stock price decline (run up), (ii) the event date abnormal returns are positive for buy and negative for sell transactions, (iii) the post-event abnormal returns following [+1, +10] buy (sell) trades are positive (negative), suggesting that insiders convey information to the market and that other investors follow these trades, (iv) in the longer term [+2, +160] companies do not seem to regain their pre-trade valuation, (v) the pre- and post-event abnormal performance depends on the news that precedes the trades. Overall, our results suggest that insiders time their trades and they are capable to better assess the value of their firm. Outsiders, aware of that superior view, follow insiders' behaviour in the short-term and fortify the exceptional returns gained by directors. We also find evidence that insiders use this signalling effect to sometimes camouflage their trades and overcome regulators' monitoring.","PeriodicalId":183987,"journal":{"name":"EFMA 2003 Helsinki Meetings (Archive)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-11-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128859452","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We model the interactions between the trading activities of a large investor, the stock price and the market liquidity. Our framework generalizes the model of Frey (2000), where liquidity is constant by introducing a stochastic liquidity factor. This innovation has two implications. First, we can analyse trading strategies for the large investor that are affected by a changing market depth. Second, the sensitivity of stock process to the trading strategy of the large investor can vary due to changes in liquidity. Features of our model are demonstrated using Monte Carlo simulation for different scenarios. The flexibility of our framework is illustrated by an application that deals with the pricing of a liquidity derivative. The claim under consideration compensates a large investor who follows a stop loss strategy for the liquidity risk that is associated with a stop loss order. The derivative matures when the asset price falls below a stop loss limit for the first time and then pays the price difference between the asset price immediately before and after the execution of the stop loss order. The setup to price the liquidity derivative is calibrated for one example using real world limit order book data so that one gets an impression about the order of magnitude of the liquidity effect.
{"title":"Modeling Feedback Effects with Stochastic Liquidity","authors":"Angelika Esser, Burkart Mönch","doi":"10.2139/ssrn.394965","DOIUrl":"https://doi.org/10.2139/ssrn.394965","url":null,"abstract":"We model the interactions between the trading activities of a large investor, the stock price and the market liquidity. Our framework generalizes the model of Frey (2000), where liquidity is constant by introducing a stochastic liquidity factor. This innovation has two implications. First, we can analyse trading strategies for the large investor that are affected by a changing market depth. Second, the sensitivity of stock process to the trading strategy of the large investor can vary due to changes in liquidity. Features of our model are demonstrated using Monte Carlo simulation for different scenarios. The flexibility of our framework is illustrated by an application that deals with the pricing of a liquidity derivative. The claim under consideration compensates a large investor who follows a stop loss strategy for the liquidity risk that is associated with a stop loss order. The derivative matures when the asset price falls below a stop loss limit for the first time and then pays the price difference between the asset price immediately before and after the execution of the stop loss order. The setup to price the liquidity derivative is calibrated for one example using real world limit order book data so that one gets an impression about the order of magnitude of the liquidity effect.","PeriodicalId":183987,"journal":{"name":"EFMA 2003 Helsinki Meetings (Archive)","volume":"60 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115167172","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
There are a number of circumstances in finance where it is useful to estimate diffusion processes conditional on some event. In this paper, we develop the theoretical and numerical tools necessary to perform conditional estimation of diffusion processes within a generalized method of moments framework. We illustrate our method by estimating a univariate diffusion process for a standard time-series of interest rate data conditioned to remain between lower and upper boundaries. A test statistic fails to reject by a wide margin the linearity of the conditionally estimated drift coefficient.
{"title":"Conditional Estimation of Diffusion Processes","authors":"Minqiang Li, Neil D. Pearson, Allen M. Poteshman","doi":"10.2139/ssrn.410189","DOIUrl":"https://doi.org/10.2139/ssrn.410189","url":null,"abstract":"There are a number of circumstances in finance where it is useful to estimate diffusion processes conditional on some event. In this paper, we develop the theoretical and numerical tools necessary to perform conditional estimation of diffusion processes within a generalized method of moments framework. We illustrate our method by estimating a univariate diffusion process for a standard time-series of interest rate data conditioned to remain between lower and upper boundaries. A test statistic fails to reject by a wide margin the linearity of the conditionally estimated drift coefficient.","PeriodicalId":183987,"journal":{"name":"EFMA 2003 Helsinki Meetings (Archive)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-11-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127459512","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the simplest frictionless theory, an increase in interest rates causes a symmetric decline in investment for all firms because they discount new projects at a higher cost of capital. I develop and test a specific debt-market financing channel that predicts cross-sectional differences in the response of investment to interest rates. Firms with high levels of short-term debt suffer a decline in net worth, relative to firms financed with long-term debt, when nominal interest rates increase. When collateral constraints are binding, these firms reduce investment relative to the frictionless benchmark. In U.S. firm-level data between 1953 and 2001, the investment of firms with a high current portion of debt is more sensitive to interest rates when compared with firms that have little debt or only long-term debt. Consistent with my predictions, firms with high levels of short-term debt also display higher investment sensitivity to inflation.
{"title":"Evidence for a Debt Financing Channel in Corporate Investment","authors":"R. Greenwood","doi":"10.2139/ssrn.406704","DOIUrl":"https://doi.org/10.2139/ssrn.406704","url":null,"abstract":"In the simplest frictionless theory, an increase in interest rates causes a symmetric decline in investment for all firms because they discount new projects at a higher cost of capital. I develop and test a specific debt-market financing channel that predicts cross-sectional differences in the response of investment to interest rates. Firms with high levels of short-term debt suffer a decline in net worth, relative to firms financed with long-term debt, when nominal interest rates increase. When collateral constraints are binding, these firms reduce investment relative to the frictionless benchmark. In U.S. firm-level data between 1953 and 2001, the investment of firms with a high current portion of debt is more sensitive to interest rates when compared with firms that have little debt or only long-term debt. Consistent with my predictions, firms with high levels of short-term debt also display higher investment sensitivity to inflation.","PeriodicalId":183987,"journal":{"name":"EFMA 2003 Helsinki Meetings (Archive)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-01-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122008966","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The research is conducted when the first author was an Assistant Professor of Finance at Iowa State University and a Senior Visiting Financial Economist at the Shanghai Stock Exchange. The first author is grateful to the support and the generous funding from the Shanghai Stock Exchange. In particular, the authors thank Xinghai Fang, Ruyin Hu, Di Liu, Hao Fu, Zhanfeng Chen, Danian Sidu, and Xiaonan Lu for their helpful comments and research support. The comments and point of views expressed in the paper, however, are the authors own, and do not necessarily reflect the opinions of the New York Stock Exchange and the Shanghai Stock Exchange. Therefore, the authors are responsible for all remaining errors.
{"title":"Is Penny Trading Optimal for Closed-End Funds in China","authors":"Li Wei, Donghui Shi","doi":"10.2139/ssrn.392596","DOIUrl":"https://doi.org/10.2139/ssrn.392596","url":null,"abstract":"The research is conducted when the first author was an Assistant Professor of Finance at Iowa State University and a Senior Visiting Financial Economist at the Shanghai Stock Exchange. The first author is grateful to the support and the generous funding from the Shanghai Stock Exchange. In particular, the authors thank Xinghai Fang, Ruyin Hu, Di Liu, Hao Fu, Zhanfeng Chen, Danian Sidu, and Xiaonan Lu for their helpful comments and research support. The comments and point of views expressed in the paper, however, are the authors own, and do not necessarily reflect the opinions of the New York Stock Exchange and the Shanghai Stock Exchange. Therefore, the authors are responsible for all remaining errors.","PeriodicalId":183987,"journal":{"name":"EFMA 2003 Helsinki Meetings (Archive)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115005939","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper investigates the impact of venture capitalists on the operating and market performance of firms going public by using a hand-collected international dataset of venture- and non venture-backed IPOs at the German Neuer Markt, the French Nouveau Marche, and the British techMARK. The study focuses on differences in the issuer and offering characteristics as well as in balance sheet data. Moreover, the influence of venture capitalists is assessed via a number of variables reflecting the quality of venture-backing, such as the pre- and post-issue shareholdings, board membership, age, syndication, organizational form, and overall participation in IPOs of the sample. Using the international dimension of the investigation, the involvement of venture capitalists in IPOs across countries is considered as an additional proxy for the experience of investors. The overall findings suggest that venture-backed firms do not generally outperform those without venture-backing. Instead, merely a subgroup of internationally operating venture capitalists has positive effects on both the operating and market performance of portfolio firms. The outcome is interpreted as evidence for the heterogeneity of venture capitalists in the European market that is currently undergoing a consolidation process.
{"title":"Venture Capitalist Participation and the Performance of IPO Firms: Empirical Evidence from France, Germany, and the UK","authors":"G. Rindermann","doi":"10.2139/ssrn.425080","DOIUrl":"https://doi.org/10.2139/ssrn.425080","url":null,"abstract":"The paper investigates the impact of venture capitalists on the operating and market performance of firms going public by using a hand-collected international dataset of venture- and non venture-backed IPOs at the German Neuer Markt, the French Nouveau Marche, and the British techMARK. The study focuses on differences in the issuer and offering characteristics as well as in balance sheet data. Moreover, the influence of venture capitalists is assessed via a number of variables reflecting the quality of venture-backing, such as the pre- and post-issue shareholdings, board membership, age, syndication, organizational form, and overall participation in IPOs of the sample. Using the international dimension of the investigation, the involvement of venture capitalists in IPOs across countries is considered as an additional proxy for the experience of investors. The overall findings suggest that venture-backed firms do not generally outperform those without venture-backing. Instead, merely a subgroup of internationally operating venture capitalists has positive effects on both the operating and market performance of portfolio firms. The outcome is interpreted as evidence for the heterogeneity of venture capitalists in the European market that is currently undergoing a consolidation process.","PeriodicalId":183987,"journal":{"name":"EFMA 2003 Helsinki Meetings (Archive)","volume":"74 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126271528","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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