Showing papers on "Stock exchange published in 1986"

Economic Forces and the Stock Market

Abstract: This paper tests whether innovations in macroeconomic variables are risks that are rewarded in the stock market. Financial theory suggests that the following macroeconomic variables should systematically affect stock market returns: the spread between long and short interest rates, expected and unexpected inflation, industrial production, and the spread between high- and low-grade bonds. We find that these sources of risk are significantly priced. Furthermore, neither the market portfolio nor aggregate consumption are priced separately. We also find that oil price risk is not separately rewarded in the stock market.

The information content of annual earnings releases : a trading volume approach

Abstract: This paper reports the results of an empirical examination of the relations between the volume of securities traded, the magnitude of "surprises" in annual earnings announcements, and firm size. Although early trading volume studies (e.g., Beaver [1968], Kiger [1972], and Foster [1973]) replicated basic information content studies, with findings similar to those based on security prices, we should not expect that security price and trading volume research will continue to yield identical results when more refined hypotheses are tested. Trading volume reflects investors' activity by summing all market trades, whereas security prices reflect an aggregation or averaging of investors' beliefs. As a result, we will on occasion observe differences between price and volume reactions to earnings announcements, as did Morse [1981]. This study extends the recent trend toward tests of more refined hypotheses by using a larger sample to examine the associations between unexpected earnings, firm size, and trading volume, and testing whether such associations can be generalized across fiscal year-end dates and stock exchange listing. My results show a continuous (positive) relationship between trading

Liquidity and Stock Returns

Abstract: (1986). Liquidity and Stock Returns. Financial Analysts Journal: Vol. 42, No. 3, pp. 43-48.

Stock Price Movements in Response to Stock Issues under Asymmetric Information

Abstract: This paper characterizes the function relating the number of new shares issued by a firm to the resulting change in the firm's stock price, when insiders are asymmetrically informed. We show that, in equilibrium, the stock price will be a decreasing function of the issue size; moreover, the rate of decrease can be so rapid to cause "equity rationing." We also show that there will be underinvestment relative to the symmetric information case. RECENT EMPIRICAL WORK HAS shown that the announcement of a stock issue is associated with a drop in the corresponding share price1, and Myers and Majluf [9] have explained why one would expect this result under asymmetric information. If management is acting in the interests of the current shareholders, it will be reluctant to issue new stock when it knows the value of the firm's existing assets is high. A stock issue, therefore, signals to the market that the firm's current assets are overvalued and drives down the share price. In this paper, we generalize the Myers-Majluf model by eliminating the assumption that the firm has a single all-or-nothing investment opportunity whose cash requirements are fixed and known by all investors, and by allowing the firm to choose not merely whether to issue stock, but also how much stock to issue2. This generalization allows us to analyze questions about the relationship between the stock price and the issue size, which do not arise in the Myers-Majluf model. Our principal results are, first, that the stock price following the announcement

Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets

Abstract: This paper employs a new approach to study the effects of option trading on the behavior of underlying stock prices. Extant research compares distributional properties of the stock price at two points in time divided by an event in the option market that might affect price behavior. As an alternative, we examine the stock price adjustment to the release of quarterly earnings using samples of firms with and without listed options. We find the two samples exhibit different adjustment processes, with the nonoption firms requiring substantially more time to adjust. SINCE THE ADVENT OF organized stock option trading, the investment community

Stock Exchange Listings, Firm Value, and Security Market Efficiency: The Impact of NASDAQ

Abstract: This paper is an event-time study of OTC stocks that listed on the New York Stock Ex? change (NYSE) over the period 1966-1977. This period was chosen because it spans the introduction of the National Association of Securities Dealers Automatic Quotation (NASDAQ) communications system in the OTC market. In the pre-NASDAQ period, stocks, on average, earn significant positive abnormal returns in response to listing an? nouncements. In the post-NASDAQ period, abnormal returns in response to listing an? nouncements are statistically significantly lower than those for the pre-NASDAQ period. These results are consistent with the hypothesis that NASDAQ has reduced the benefits associated with listing on a major stock exchange. Additionally, in both the pre- and post- NASDAQ periods, stocks, on average, earn significant positive abnormal returns follow? ing the initial announcement of listing before listing actually occurs, and they earn signifi? cant negative returns immediately after listing. These anomalies are explored and the re? sults are shown to be insensitive to variations in empirical methodology.

Stock Market Reaction to Regulatory Action in the Continental Illinois Crisis

Abstract: Continental Illinois Corporation is a bank holding company whose principal subsidiary is Continental Illinois National Bank, a wholesale unit bank.' In December 1983, it was the eighth largest bank in the United States and the largest in the Midwest. It had assets of $42.1 billion, 75% of which were financed by rate sensitive liabilities.2 Restricted by Illinois law from branching, Continental relied heavily on large deposits from other domestic banks (about 16%) and on foreign deposits (40%). These were liquid short-term deposits, and their withdrawal was the precipitating factor in the virtual collapse of the bank in May 1984. Moreover, insured deposits amounted to only $3 billion (Isaac 1984, p. 3). Thus Continental Illinois was bearing high liquidity risk and interest rate risk, relative to other money center banks. This study examines the stock market reaction to the Continental Illinois crisis and the regulatory action taken in response to that crisis. Through the use of stock market data, this study reveals that there was significant market response to the crisis in terms of both negative abnormal returns and positive abnormal volume of trading. The most significant effect was found in those banks that had a large amount of Latin American debt and other nonperforming assets. But while there was a clear market reaction to information revealed in the crisis about banks' asset quality and regulatory policy, depositors apparently did not withdraw funds in the massive way that regulators anticipated. * I am grateful for the comments and suggestions of Joseph Aharony, Gabriel Hawawini, Barbara Paul, Ramon Rabinovitch, Anthony Saunders, Henny Sender, and the referees of this Journal. 1. The distinction between the holding company and the bank is an important regulatory issue in the Continental Illinois crisis and is discussed later (see Black, Miller, and Posner 1978; Swary 1983). The terms "bank" and "holding company" are used interchangeably. 2. For various measures of these risks and an industry comparison, see Bank Analysts' Quarterly Handbook (1984).

Evidence on Stock Market Overreaction

Abstract: (1986). Evidence on Stock Market Overreaction. Financial Analysts Journal: Vol. 42, No. 4, pp. 74-77.

Does Delisting from the S&P 500 Affect Stock Price?

Abstract: On November 30, 1983, seven stocks were dropped from the Standard & Poor's 500 index to make room for the stocks of the seven new telephone companies. This event offers an unusual opportunity to study the effects of delisting, independent of changes in investor expectations of future performance. Efficient market theory suggests that the market prices of the delisted securities should not have changed, because the delisting would have no effect on their expected future returns. However, the evidence indicates an apparently significant and long-term drop in the prices of the delisted stocks, suggesting a possible measurable negative price effect is associated with delisting from the S&P 500. The Evidence The break-up of AT&T, and the concurrent public offering of securities of the spin-off companies, was expected for about a year prior to the event. The exact nature of the change in the S&P 500, however, was kept confidential until the close of the New York Stock Exchange on November 30, 1983. At that time, subscribers to S&P's telephone notification service were contacted simultaneously and told of the changes in the index. Although some trading on the Pacific Stock Exchange was possible, most of the trading in these stocks occurred on December 1. The following companies were dropped from the S&P 500: * Continental Telecommunications (CTC), * Centel Communications (CNT), * Wisconsin Electric Power Company (WPC), * El Paso Company (ELP), * Brooklyn Union Gas Company (BU),

Studying Firm-Specific Effects of Regulation with Stock Market Data: An Application to Oil Price Regulation

Abstract: Regulations are often introduced and reformed in response to unanticipated changes in market forces. In late 1973, for example, OPEC quadrupled the world price of oil and U.S. policy makers responded by imposing oil price regulation. Such events pose a fundamental problem of interpretation for studies that use stock prices to identify the economic effects of regulation. What portion of the capital gains or losses experienced by investors in regulated firms is due to regulation and what portion is due to unanticipated economic events? To answer these questions we use microeconomic theory to derive hypotheses about how the capital gains and losses created by OPEC pricing and U.S. regulatory policies are related to the underlying characteristics of petroleum firms. We test the hypotheses by including a model of firm-specific abnormal returns in the standard market models of common stock returns earned by investors in petroleum firms. The results indicate the U.S. oil production and refiner access to price-controlled crude oil were sources of capital gains and that U.S. and foreign refining were sources of capital losses.

Efficiency Tests of the Foreign Currency Options Market

Abstract: Based on a new options transactions data base from the Philadelphia Stock Exchange Foreign Currency Options Market, this paper examines the importance of the effect of nonsynchronous prices and transaction costs on the usual option market efficiency tests. The tests conducted are based on the transaction cost adjusted early exercise and put-call parity pricing boundaries applicable to the American foreign currency options market. The test results show that the put-call parity boundary tests are sensitive to both nonsynchronous prices and transaction costs. The early exercise boundary tests are sensitive to transaction costs but are not very sensitive to simultaneity of the option price and the underlying spot price. Under the no-transaction costs scenario, a large number of early exercise boundary violations is found even when simultaneous spot and option prices are used. These violations disappear when actual transaction costs are taken into account.

Market reaction to nyse listings: tests of the marketability gains hypothesis

Abstract: This study examines the market reaction to listing on the New York Stock Exchange (NYSE). The marketability gains hypothesis states that investors expect liquidity gains for the less liquid over-the-counter (OTC) stocks but not for their liquid counterparts after their listing on the NYSE. The hypothesis is supported even after accounting for other firm-specific news releases. Stocks with low liquidity on the OTC exhibit a positive reaction, whereas stocks with high liquidity show a non-positive market reaction around the announcement of the listing application. The findings imply that the two different marketplaces, NYSE and OTC, are suitable for stocks with different liquidity characteristics.

The informational value of listing on the new york stock exchange

Abstract: In this paper, the authors test market reaction to the listing of a stock on the New York Stock Exchange independently from other attendant news and test the hypothesis that listing has different informational value for stocks that have performed differently in the prelisting period. Their findings support the argument that listing conveys positive information. Listing is observed to be of most value for firms with ambiguous earnings performance.

London's Big Bang in international context

Abstract: The Big Bang on the Stock Exchange in London is a convenient shorthand for two significant acts of deregulation: the abolition of monopolistic fixed commissions on securities transactions, and the removal of barriers to foreign entry into an exchange that was constituted as a private club. While the discussion of the resulting upheaval in London's markets has tended to focus on domestic considerations, the move was a deliberate response by the Bank of England, the British Department of Trade and Industry and the Stock Exchange authorities to a threat posed by changes in the structure of the international securities markets. It is best understood within the context of a wider pattern of liberalization in the world's capital markets. For in the course of the present economic cycle governments in the main developed countries have busily scrapped an elaborate network of exchange controls, withholding taxes, barriers to foreign entry, restrictions on novel forms of financial instruments and direct controls on overseas investment. This article looks at some of the political and economic forces at work in the global trend towards unrestricted capital flows. More specifically, it will look at the implications for the City of London as an international financial centre.

The Pricing of Futures and Options Contracts on the Value Line Index

Abstract: This paper considers the problems peculiar to the Value Line Index, because of its use of geometric averaging, as regards the pricing of options and futures on that index. The Value Line Composite Index (VLCI) is an equally weighted geometric average index of nearly 1700 stocks. The VLCI futures market has existed since 1982 while the VLCI options market was established in 1985. This paper provides valuation formulas and analyzes the economic properties of these contracts. Because of the geometric averaging in the VLCI, its contingent claims have special properties. For example, the futures price may fall short of the spot price and the value of a VLCI call option may decline when the volatility of the index is increased. VLCI futures are shown to provide a direct means for duplicating an equally weighted portfolio of the underlying stocks. THE VALUE LINE COMPOSITE Index (VLCI) is an unweighted geometric average of stock prices expressed in index form. The index on June 30, 1961, was set at 100, and subsequent values are compared against it. Futures contracts on the VLCI are traded on the Kansas City Board of Trade (KCBT). They were the first stock index futures to be traded in the United States, starting on February 24, 1982. Unlike commodity futures contracts, no delivery ever takes place. Instead, any open contracts on expiration day are settled in cash according to the actual VLCI value.1 More recent market innovations are options on the VLCI that have been traded on the Philadelphia Stock Exchange (PSE) since January

Stock splits and implied stock price volatility

Abstract: T his study addresses the issue of stock splits, their effect on the volatility of stock prices, and the prospect of using this change in volatility to make trading profits in the market. We ask the questions: Do option prices following a stock split reflect higher stock volatilities? Can an option trader use this information to make profits in the market? Our findings show that post-split option prices do imply higher stock volatilities, but that the increase is insufficient to allow option traders to profit after considering transactions costs. Our analysis proceeds from earlier research into the price behavior of lower-priced securities. Studies of returns on these securities usually examine stocks of companies that fall into one of two areas: 1) small-capitalization companies whose stocks are lowpriced and generally riskier than higher-priced stocks, and 2) companies whose stocks are lower-priced because the company has recently had a stock split. Studies in the first group' generally show that returns are greater for the lower-priced stocks, even after adjusting for the higher levels of risk of lower-priced stocks. Studies falling into the second group' generally conclude that the volatility of stock returns (risk) appears to increase after the split, although there is no significant change in the level of stock returns after a split. In their study of the possibility of profits from stock splits, Reilly and Drzycimski [14] found that the

The Evolution of Consolidated Financial Reporting in Australia

Abstract: Summary This paper reviews the history of financial reporting by corporate groups in Australia, and in particular, the States of New South Wales and Victoria. Changes in Statutory and Stock Exchange rules governing consolidated reporting are described and the financial reporting practices of Australian holding companies between 1930 and 1962 are surveyed. The evidence indicates that (a) while the practice was not widespread, some Australian holding companies supplemented their financial statements with consolidated financial statements prior to the incorporation of such a requirement in either legislation or Stock Exchange listing requirements; (b) the influence of Stock Exchanges on the evolution of this practice is somewhat less than that previously attributed to it; and (c) the rapid spread of this form of reporting in an essentially unregulated environment (N.S. W.) coincided with the development of a market for public debt securities.

The stock exchanges of Ireland

Abstract: The Stock Exchanges of Ireland traces the evolution of the markets which have operated in Ireland from their emergence (Dublin at the end of the eighteenth century, and later Belfast and Cork in the nineteenth) to the mid-1980s when this book was published. It starts with the historical circumstances - the beginnings of the Irish National Debt in the mid-eighteenth century and the problems of government borrowing in time of peace and war - which preceded the formation, in 1799, of the Dublin Stock Exchange. Later chapters examine many aspects of the market's development during the nineteenth century: changes in its practices and customs; the origins of some of the oldest surviving broking firms; the important trade in government securities between London and Dublin; the Irish railways; and the formation of joint stock companies in Ireland. Finally, the role of the Stock Exchange in the finance of government and industry since Irish independence is fully covered. Throughout, The Stock Exchanges of Ireland is soundly based on the surviving records (to which the author was granted full access) of the three Irish markets - Dublin, Cork and Belfast. Important new material was also obtained from the Irish Record Office, the National Library of Ireland, the archives of the Bank of Ireland and the Record Office of the Bank of England. The book makes a comprehensive and significant contribution to Irish and financial history, and will prove an essential work of reference. It is also a lively, readable account of growth, change and development in the Irish markets, which should interest all concerned with banking, finance, investment and stockbroking. Among W. A. Thomas's other publications on the history of financial institutions are The Stock Exchange: Its History and Functions (with E. Victor Morgan) (1962), The Provincial Stock Exchanges (1973) and The Finance of British Industry 1918-1966 (1980) .

An investigation into the small firm effect on the Johannesburg Stock Exchange

Abstract: Recent studies on the New York Stock Exchange have provided empirical evidence which suggests that small market capitalization firms outperform large market capitalization firms in terms of share price performance. This appears valid even after adjusting for the additional risk borne by the small firms. This has become known as the 'small firm effect' and questions the validity of many traditional pricing models such as the Capital Asset Pricing Model. In this paper, the small firm effect is examined on the Johannesburg Stock Exchange. The risk-adjusted performance of portfolios comprising large firms is contrasted with that of small firms. Three measures of size are used, namely market capitalization, asset base and traded volume. In all three cases, no evidence of a small firm effect is apparent. Indeed, if anything, the large firms appear to provide superior investment performance on the JSE.

Empirical testing of the Arbitrage Pricing Theory using data from the Johannesburg Stock Exchange

Abstract: In 1976 Stephen A. Ross developed a new theory of securities pricing called the Arbitrage Pricing Theory (APT). According to the APT the return an investor can expect from a share is related to the risk-free rate and numerous other factors rather than just the return on the market as predicted by the Capital Asset Pricing Model (CAPM). Although a considerable amount of empirical research has been carried out into the APT in the United States of America, little appears to have been done in South Africa In this article empirical research is carried out into the APT using data from the JSE. The research involves both attempting to establish the number of 'priced' factors influencing risky security returns on the JSE and comparing the explanatory ability of the APT and CAPM. Factor analysis is used to establish the number of 'priced' APT factors and regression analysis is used to assess the explanatory ability of the models. The findings suggest that at least two factors determine security returns, rather than just the return on the market as predicted by the CAPM, and that a two-factor APT model has significantly better explanatory powers than the CAPM in an ex-post sense. Finally, it is apparent that considerably more empirical research needs to be done if the factors are to be conclusively identified and checked for stability through time.

The Gulf Stock Exchange Crash: The Rise and Fall of the Souq Al-Manakh

Abstract: The collapse of Souq Al-Manakh in Kuwait in August 1982 was the most spectacular financial crash of recent years. The market had developed as a parallel stock exchange dealing in the shares of Gulf companies not resident in Kuwait. Fuelled by manic speculation, the market grew at a phenomenal rate throughout 1981 and early 1982. Inexperienced investors gambled huge sums on the shares of shell companies promoted largely for share speculation. At the height of the market US$92 billion was outstanding on nearly 30,000 postdated cheques, the usual form of payment used in the market. The financial crisis created by the collapse of the Souq Al-Manakh threatened the stability of Kuwait. The government was forced to intervene and absorb the major part of the loss. This book, first published in 1986, traces the growth of the stock market and analyses its collapse. It also discusses in detail the wider impact of this debacle on the economic life of the Gulf.

Pricing of new equity issues in Singapore

Abstract: This paper analyzes the pricing performance of new equity issues by companies which came to the new issue market and sought a listing on the Stock Exchange of Singapore during the period 1975–84. We find that the new equity issues in Singapore are more underpriced than those in the U.S., the U.K. and Australia. It appears that the greater underpricing is due largely to more conservative pricing policies followed by underwriters in Singapore. This results in greater losses suffered by the existing shareholders of the issuing companies.

The Failure of Strategic Planning

Abstract: Several years after he had installed an elaborate strategic planning system, the chairman of a diversified New York Stock Exchange company began wondering if it was worth the effort. When he took a closer look, he found that the plan's only real function was to serve as a model for preparing the next one a year later. So he scrapped the whole procedure, instructing each division manager to do whatever planning he felt was appropriate for his own unit.