Replicating Anomalies Hou, Kewei; Xue, Chen; Zhang, Lu
The Review of financial studies,
05/2020, Letnik:
33, Številka:
5
Journal Article
Recenzirano
Most anomalies fail to hold up to currently acceptable standards for empirical finance. With microcaps mitigated via NYSE breakpoints and value-weighted returns, 65% of the 452 anomalies in our ...extensive data library, including 96% of the trading frictions category, cannot clear the single test hurdle of the absolute t-value of 1.96. Imposing the higher multiple test hurdle of 2.78 at the 5% significance level raises the failure rate to 82%. Even for replicated anomalies, their economic magnitudes are much smaller than originally reported. In all, capital markets are more efficient than previously recognized.
We show that opportunistic insiders can be identified through the profitability of their trades prior to quarterly earnings announcements (QEAs) and that opportunistic trading is associated with ...various kinds of firm or managerial misconduct. A value-weighted trading strategy based on (not necessarily pre-QEA) trades of opportunistic insiders earns monthly four-factor alphas of over 1%, which is much higher than in past insider trading literature and substantial and significant even on the short side. Firms with opportunistic insiders have higher levels of earnings management, restatements, US Securities and Exchange Commission enforcement actions, shareholder litigation, and executive compensation. These findings suggest that opportunism is a domain-general trait.
Legal Risk and Insider Trading KACPERCZYK, MARCIN; PAGNOTTA, EMILIANO S.
The Journal of finance (New York),
February 2024, Letnik:
79, Številka:
1
Journal Article
Recenzirano
Odprti dostop
ABSTRACT
Do illegal insiders internalize legal risk? We address this question with hand‐collected data from 530 SEC (the U.S. Securities and Exchange Commission) investigations. Using two plausibly ...exogenous shocks to expected penalties, we show that insiders trade less aggressively and earlier and concentrate on tips of greater value when facing a higher risk. The results match the predictions of a model where an insider internalizes the impact of trades on prices and the likelihood of prosecution and anticipates penalties in proportion to trade profits. Our findings lend support to the effectiveness of U.S. regulations' deterrence and the long‐standing hypothesis that insider trading enforcement can hamper price informativeness.
Decoding Inside Information COHEN, LAUREN; MALLOY, CHRISTOPHER; POMORSKI, LUKASZ
The Journal of finance (New York),
June 2012, Letnik:
67, Številka:
3
Journal Article
Recenzirano
Odprti dostop
Exploiting the fact that insiders trade for a variety of reasons, we show that there is predictable, identifiable "routine" insider trading that is not informative about firms' futures. A portfolio ...strategy that focuses solely on the remaining "opportunistic" traders yields value-weighted abnormal returns of 82 basis points per month, while abnormal returns associated with routine traders are essentially zero. The most informed opportunistic traders are local, nonexecutive insiders from geographically concentrated, poorly governed firms. Opportunistic traders are significantly more likely to have SEC enforcement action taken against them, and reduce trading following waves of SEC insider trading enforcement.
Bank CEO incentives and the credit crisis Fahlenbrach, Rüdiger; Stulz, René M.
Journal of financial economics,
2011, 2011-1-00, 20110101, Letnik:
99, Številka:
1
Journal Article
Recenzirano
We investigate whether bank performance during the recent credit crisis is related to chief executive officer (CEO) incentives before the crisis. We find some evidence that banks with CEOs whose ...incentives were better aligned with the interests of shareholders performed worse and no evidence that they performed better. Banks with higher option compensation and a larger fraction of compensation in cash bonuses for their CEOs did not perform worse during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.
Political insider trading has brought substantial attention to ethical considerations in the academic literature. While the Stop Trading on Congressional Knowledge (STOCK) Act prohibits members of ...Congress and their staff from leveraging non-public information to make investment decisions, political insider trading still prevails. We discuss political ethics and social contract theory to re-engage the debate on whether political insider trading is
unethical
and raises the issues of conflict of interest and social distrust. Empirically, using a novel measure of information risk, we find that senator trades are associated with substantially high levels of information asymmetry. Moreover, based on inside political information, senators earn significant market-adjusted returns (4.9% over 3 months). Thus, our results do not support the prediction made by social contract theory and thereby provide a potential resolution to the ongoing debate on banning stock trading for members of Congress.
•US Industry-level market reactions to COVID-19.•Abnormal returns from COVID-19.•Key US dates for COVID-19 that impacted markets.•Google searches and financial markets.
During the ongoing COVID-19 ...pandemic in the US, there has been considerable media attention regarding several US legislators who traded stocks in late January through February 2020. The concern is that these legislators traded in anticipation of COVID-19 having a major impact on the financial markets, while publicly suggesting otherwise. We consider whether these legislator trades were in a time window, and of a nature, that would be consistent with trading ahead of the market. Towards this end, we assess the reactions of US industries to sudden COVID-related news announcements, concomitantly with an analysis of levels of investor attention to COVID. Results suggest that, at an industry-level, for legislator trading to be “ahead of the market” it needed to have been done prior to February 26, and involving the 15 industries we identify as having abnormal returns, especially medical and pharmaceutical products (positive); restaurants, hotels, and motels (negative); as well as services and utilities. These criteria are met by many of the legislator trades. Our results help to both parameterize concerns about this case of legislator trading; as well as provide insight into the reactions and expectations of investors toward COVID-19.
Corporate transparency reduces information asymmetries between firms and capital markets but increases the costs associated with information leakage to competitors. We explore how a country’s ...information environment affects innovation, an activity characterized by high information asymmetries and potentially severe proprietary costs. Studying both long-run cross-country differences in the availability of firm-specific information to corporate outsiders, as well as quasi-experimental shocks to the information environment following transparency-enhancing security market reforms, we document significantly higher rates of R&D and patenting in richer information environments. The effects of transparency are strongest in industries that rely on external equity rather than bank debt, indicating that transparency facilitates innovation by reducing the information costs associated with arm’s-length financing. In contrast, transparency has no impact on physical capital accumulation, consistent with fewer information asymmetries in tangible assets. An economy’s information environment has important but heterogeneous effects on the nature and extent of real economic activity.
This paper was accepted by Shiva Rajgopal, accounting.
We investigate if prior professional legal education either restrains or increases the extent to which the insider trades of company executives and directors are informed. We show that executives and ...directors with legal expertise (lawyer-insiders) earn significantly lower abnormal returns than non-lawyer-insiders when they purchase their own company's shares. Purchases by lawyer-insiders are associated with lower future earnings surprises and firm profitability than those made by non-lawyer-insiders, and are more muted following months with high levels of SEC enforcement activity. Our results suggest that insiders with legal education may be more conservative in exploiting private information when making insider trades.
Economic theory indicates that financial markets play a prominent role to the efficient allocation of resources in the modern world. Financial markets can fulfil this role if they enjoy the ...confidence of investors and are free of abuse. The financial frauds associated with the collapse of Enron and the major crises in world leading corporations such as WorldCom, Adelphia, Tyco, and the 'Wall Street financial scandals' have shown that fraud, manipulation, and insider dealing retain a catastrophic presence in modern financial markets. Proper deterrence of market abuse is necessary not only for the effective operation of modern financial markets, but also for regaining investor confidence. This book analyses the mechanics and regulation of two of the most harmful market practices in the modern financial world: insider dealing and market manipulation, which together comprise the offence of market abuse. Avgouleas examines the UK and EC regimes from an interdisciplinary perspective, also making extensive and critical use of US case law. He emphasizes the economic analysis of anti-fraud manipulation regulations and their effects upon market welfare and explores the possible deterrent benefits of civil law remedies. Available in OSO: http://www.oxfordscholarship.com/oso/public/content/law/9780199244522/toc.html
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