Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the United States is that, under current U.S. reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (1AS or U.S. GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firmsnamely, the bid-ask spread and trading volume-behave in the predicted direction compared to firms employing the German reporting regime.

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The Economic Consequences of Increased Disclosure

In this article we compare three models of the stochastic behavior of commodity prices that take into account mean reversion, in terms of their ability to price existing futures contracts, and their implication with respect to the valuation of other financial and real assets. The first model is a simple one-factor model 'in which the logarithm of the spot price of the commodity is assumed to follow a mean reverting process. The second model takes into account a second stochastic factor, the convenience yield of the commodity, which is assumed to follow a mean reverting process. Finally, the third model also includes stochastic interest rates. The Kalman filter methodology is used to estimate the parameters of the three models for two commercial commodities, copper and oil, and one precious metal, gold. The analysis reveals strong mean reversion in the commercial commodity prices. Using the estimated parameters, we analyze the implications of the models for the term structure of futures prices and volatilities beyond the observed contracts, and for hedging contracts for future delivery. Finally, we analyze the implications of the models for capital budgeting decisions. THE STOCHASTIC BEHAVIOR OF commodity prices plays a central role in the models for valuing financial contingent claims on the commodity, and in the procedures for evaluating investments to extract or produce the commodity. Earlier studies, by assuming that interest rates and convenience yields are constant allowed for a straight forward extension of the procedures developed for common stock option pricing to the valuation of financial and real commodity contingent claims. The assumption, however, is clearly not very satisfactory since it implies that the volatility of future prices is equal to the volatility of spot prices, and that the distribution of future spot prices under the equivalent martingale measure has a variance that increases without bound as the horizon increases. In an equilibrium setting we would expect that when prices are relatively high, supply will increase since higher cost producers of the commodity will enter the market putting a downward pressure on prices. Conversely, when prices are relatively low, supply will decrease since some of

The stochastic behavior of commodity prices: Implications for valuation and hedging

Size, Value, and Momentum in International Stock Returns §

We propose a new and direct measure of investor attention using search frequency in Google (Search Volume Index (SVI)). In a sample of Russell 3000 stocks from 2004 to 2008, we find that SVI (1) is correlated with but different from existing proxies of investor attention; (2) captures investor attention in a more timely fashion and (3) likely measures the attention of retail investors. An increase in SVI predicts higher stock prices in the next 2 weeks and an eventual price reversal within the year. It also contributes to the large first-day return and long-run underperformance of IPO stocks.

In Search of Attention

Financial press reports claim that Internet stock message boards can move markets We study the effect of more than 15 million messages posted on Yahoo! Finance and Raging Bull about the 45 companies in the Dow Jones Industrial Average and the Dow Jones Internet Index Bullishness is measured using computational linguistics methods Wall Street Journal news stories are used as controls We find that stock messages help predict market volatility Their effect on stock returns is statistically significant but economically small Consistent with Harris and Raviv (1993), disagreement among the posted messages is associated with increased trading volume MANY PEOPLE ARE DEVOTING a considerable amount of time and effort creating and reading the messages posted on Internet stock message boards News stories report that the message boards are having a significant impact on financial markets The Securities and Exchange Commission has prosecuted people for Internet messages All this attention to Internet stock messages caused us to wonder whether these messages actually contain financially relevant information 1 We consider three specific issues Does the number of messages posted or the bullishness of these messages help to predict returns? Is disagreement among the messages associated with more trades? Does the level of message posting or the bullishness of the messages help to predict volatility? The first issue is, does the level of message activity or the bullishness of the messages successfully predict subsequent stock returns? This is the natural starting place because a very high proportion of the messages contain explicit assertions that the particular stock is either a good buy or a bad buy Of course, there are a great many previous empirical studies showing how hard it is to predict stock returns by enough to cover transactions costs We find that there is evidence of a small degree of negative predictability even after controlling for bid‐ask bounce When many messages are posted on a given day, there ∗ Both authors are at the Sauder School of Business, University of British Columbia We would

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Is All That Talk Just Noise? The Information Content of Internet Stock Message Boards

The relations between volume, volatility, and market depth in eight physical and financial futures markets are examined. Evidence suggests that linking volatility to total volume does not extract all information. When volume is partitioned into expected and unexpected components, the paper finds that unexpected volume shocks have a larger effect on volatility. Further, the relation is asymmetric; the impact of positive unexpected volume shocks on volatility is larger than the impact of negative shocks. Finally, consistent with theories of market depth, the study shows large open interest mitigates volatility.

Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets

Spot power prices are volatile and since electricity cannot be economically stored, familiar arbitrage-based methods are not applicable for pricing power derivative contracts. This paper presents an equilibrium model implying that the forward power price is a downward biased predictor of the future spot price if expected power demand is low and demand risk is moderate. However, the equilibrium forward premium increases when either expected demand or demand variance is high, because of positive skewness in the spot power price distribution. Preliminary empirical evidence indicates that the premium in forward power prices is greatest during the summer months. WHOLESALE POWER MARKETS, where producers trade electricity among themselves and with power-marketing and power-distribution companies, have grown rapidly in recent years. 1 The U.S. Department of Energy ~2000! reports that U.S. wholesale power transactions during 1999 amounted to approximately 2.6 billion megawatt hours ~MWh!, or about $85 billion. The U.S. wholesale power market is soon likely to comprise the world’s largest commodity market. Electricity as a commodity has many interesting characteristics, most of which stem from the fact that it cannot be economically stored. 2 Market

Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets

I examine the uniformity of risk pricing in futures and asset markets. Tests against a general alternative do not reject complete integration of futures and asset markets. As predicted, estimates of the "zero-beta" rate for futures are close to zero, and premiums for systematic risk do not differ significantly across assets and futures. There is, however, evidence consistent with a specific alternative model presented by Hirshleifer (1988). Returns in foreign currency and agricultural futures vary with the net holdings of hedgers, after controlling for systematic risk. These results imply a degree of market segmentation and support hedging pressure as a determinant of futures premiums. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets

This study assesses trade execution costs and market quality for NYSE and Nasdaq stocks before and after the 2001 change to decimal pricing. Several theoretical predictions are confirmed. Quoted bid-ask spreads declined substantially on each market, with the largest declines for heavily traded stocks. The percentage of shares receiving price improvement increased on the NYSE, but not on Nasdaq. However, those trades completed at prices within or outside the quotes were improved or disimproved by smaller amounts after decimalization, and trades completed outside the quotes saw the largest reductions in trade execution costs, as a class. Effective bid-ask spreads as a percentage of share price, arguably the most relevant measure of execution costs for smaller trades, averaged 0.33% on a volume-weighted basis after decimalization for both NYSE and Nasdaq stocks. There is no evidence of systematic intraday reversals of quote changes on either market, as would be expected if decimalization had damaged liquidity supply.

Trade Execution Costs and Market Quality after Decimalization

Corporate risk hedging with forward contracts increases value by reducing incentives to underinvest. This occurs because the hedge decreases the sensitivity of senior claim value to incremental investment, allowing equity holders to capture a larger portion of the incremental benefit from new investment. Hedging also allows the firm to credibly commit to meet obligations in states where it otherwise could not, which improves contract terms the firm can negotiate with customers, creditors, and managers. These benefits cannot be duplicated by individual hedging, and each result holds independent of agents' risk preferences.

Hendrik Bessembinder

Papers

Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets

Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets

Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets

Trade Execution Costs and Market Quality after Decimalization

Forward Contracts and Firm Value: Investment Incentive and Contracting Effects