Dennis Y. Chung

Investor Protection and Firm Liquidity

The purpose of this study is to investigate the relation between investor protection and firm liquidity. We posit that less protective environments lead to wider bid-ask spreads and thinner depths because they fail to minimize information asymmetries. The Hong Kong equity market provides a unique opportunity to compare liquidity costs across distinct investor protection environments, but still within a common trading mechanism and currency. Our empirical findings verify that firm liquidity is significantly affected by investor protection. Regression and matched-sample results show that Hong Kong-based equities exhibit narrower spreads and thicker depths than their China-based counterparts.

Managerial Timing and Corporate Liquidity: Evidence from Actual Share Repurchases

The purpose of this paper is to investigate the timing of open market share repurchases and its resultant impact on corporate liquidity. We identify the exact implementation dates for over 5,000 equity buybacks on the Stock Exchange of Hong Kong between November 1991 and August 1999. A bootstrapping method is used to distinguish managerial timing ability from a naive accumulation plan. The results show that managers exhibit substantial timing ability. Consistent with the information-asymmetry hypothesis (Barclay and Smith (1988 Journal of Financial Economics 22, 61-82)), we find strong evidence that bid-ask spreads widen and depths narrow during repurchase periods. We further decompose bid-ask spreads and show that the adverse selection component increases substantially when market participants respond to the presence of informed managerial trading. Overall, our market timing, spread and depth, and decomposition results reveal a coherent picture of managerial buyback behavior and its impact on firm liquidity. Our results have significant implications for corporate payout and disclosure policies.

Commonality in liquidity: a global perspective

We conduct a comprehensive study of commonality in liquidity using intraday spread and depth data from 47 stock exchanges. We find that firm-level changes in liquidity are significantly influenced by exchange-level changes across most of the worlds stock exchanges. Emerging Asian exchanges have exceptionally strong commonality, while those of Latin America exhibit little if any commonality. After documenting the pervasive role of commonality within individual exchanges, we examine commonality across exchanges. We find evidence of a distinct, global component in bid-ask spreads and depths. Local (exchange-level) sources of commonality represent roughly 39% of the firms total commonality in liquidity, while global sources contribute an additional 19%. We also investigate potential sources of exchange-level and global commonality. We show that commonality is driven by both domestic and U.S. macroeconomic announcements.

An analysis of depth behavior in an electronic, order-driven environment

The use of electronic limit order books has been increasing rapidly in recent years. Many of the newly emerging as well as well-established exchanges have adopted electronic, order-driven systems or are in the process of initiating or broadening their order-driven trading. This study investigates inter-temporal and cross-sectional depth patterns on one of the world?s largest electronic, order-driven markets, the Stock Exchange of Hong Kong (SEHK). Results show an inverted U-shaped pattern that mirrors the commonly-reported U-shaped spread pattern. Further cross-sectional analysis demonstrates that depth is negatively related to information asymmetry. An important implication is that the adverse selection impact on corporate liquidity and cost of capital is stronger than previously believed since information costs are realized through the combined, magnifying effect of both spreads and depths.

Inter- and intra-day liquidity patterns on the Stock Exchange of Hong Kong

Abstract The purpose of this study is to investigate inter- and intra-day liquidity patterns in the Hong Kong equity market. The market making system of the Stock Exchange of Hong Kong (SEHK) is highly transparent and operates with minimal third party intervention. Liquidity is supplied solely by the submission of public limit orders through a fully-automated, order-driven trading system. The results reveal bid-ask spread patterns on the SEHK more similar to those of specialist systems than to those of multi-dealer systems, thereby providing useful evidence in distinguishing among competing market microstructure theories.

Cross‐listing and firm liquidity on the stock exchange of Hong Kong

Outlines the reasons why increasing numbers of firms list their shares on more than one stock exchange, previous research on the effects of cross‐listing and inter‐ and intra‐day liquidity patterns. Describes the market making system of the stock exchange of Hong Kong and compares 1996‐1997 data on a sample of 33 Hong Kong firms cross‐listed in London with a control sample. Finds the cross‐listed firms have lower trading volumes, higher absolute bid‐ask spreads but lower relative ones and higher average dollar depth. Uses regression techniques to investigate liquidity and presents the results which confirm that cross‐listed firms are more liquid with lower relative spreads and higher depths even after controlling for differences in price, volume, return variance and intertemporal patterns.

Ownership Structure and Trading Volume Reaction to Earnings Announcements: Evidence from Japan

We investigate the impact of ownership structure on trading volume reaction to earnings announcements using a sample of Japanese companies. Our primary tests focus on differential trading activities carried out by three types of shareholders in response to earnings announcements: corporate stockholders, foreign investors, and ordinary domestic investors. We find that trading volume is negatively associated with the level of interlocking ownership which is designed to provide long-term stable relationships among members of Japanese corporate (keiretsu) groups. Furthermore, foreign investors are more responsive to earnings announcements than their domestic counterparts, and are sophisticated in selecting their investment targets. Our overall findings are consistent with the argument of Lev (1988) that disclosures of accounting information may not necessarily have the same value to various classes of investors.

Industry classification and the efficiency of intra-industry information transfers

Purpose - – Motivated by recent studies that demonstrate the superiority of the Global Industry Classification System (GICS) relative to the Standard Industry Classification (SIC) system in capital market research, the authors revisit the stock market anomaly documented by Thomas and Zhang (TZ) (“Overreaction to intra-industry information transfers?” Design/methodology/approach - – The authors first replicate TZ and test whether stock prices of late announcers in response to earnings reported by early announcers in the same SIC industry are significantly related to subsequent price responses of late announcers to their own earnings reports. In the multivariate setting, the authors then evaluate whether the magnitude and significance of the overreaction anomaly changes under the more comprehensive GICS and across different time periods. Findings - – The authors first confirm the over-reaction anomaly based on SIC as documented by TZ. Utilizing a larger sample of firms based on the GICS and extending TZ for a new time period, the authors then demonstrate that the overreaction anomaly disappears during recent years, a period that is characterized by markedly higher trading activity. Research limitations/implications - – The findings provide new insights and contributions to the debate on whether or not market significantly misprices information transfers. Originality/value - – The authors are first to utilize the GICS in evaluating intra-industry information transfers.

Disclosure quantity and the efficiency of price discovery: Evidence from the Toronto Stock Exchange

Purpose - We investigate the effect of the information disclosure quantity on the pricing efficiency of stocks. Design/methodology/approach - Using a sample of large and actively traded Canadian companies listed on the Toronto Stock Exchange, we utilize annual reports filed on SEDAR between 2003 and 2013 to estimate the amount of publicly available information and find that the length and size of annual reports are important determinants of short-horizon return predictability from historical order flows, which is an inverse indicator of market efficiency. Findings - Our results show that longer and larger annual reports are associated with reduced information asymmetry, lower cost of immediacy, higher trading activity, and an overall improvement in the efficiency of price discovery. The results are robust to the inclusion of controls for various determinants of short-horizon return predictability, such as trading costs, volatility, informational effects, and other firm-specific characteristics. Research limitations/implications - Collectively, our findings provide empirical support for the benefits of detailed corporate disclosure in Canada. Originality/value - We are the first study to utilize the short-horizon return predictability approach to evaluate the efficiency of price discovery in relation to the amount of information disclosure.

Speed of convergence to market efficiency in the ETFs market

Purpose - The aim of this paper is to examine the informational efficiency of prices of all exchange traded funds (ETFs) that are actively traded on the NYSE Arca, based on methodology developed by Chordia Design/methodology/approach - The authors estimate the speed of convergence to market efficiency based on short-horizon return predictability from past order flows of 273 ETFs that were traded every day on the NYSE Arca during the first six months of 2008, and compare the resulting price formation process to that of shares traded on the NYSE and NYSE Arca. Findings - Despite the significant differences in trading costs, volatility, and informational effects between ETFs and regular stocks, the paper documents that price adjustments to new information for ETFs occur in about 30?minutes, which is comparable to price adjustments for traditional stocks traded on Arca. In multivariate setting, the paper further shows that the speed of convergence to market efficiency of ETFs is not only significantly driven by volume, but also by the probability of informed trading. Research limitations/implications - The findings provide direct answers and insights to questions posed in a recent SEC concept release document. The analysis of the speed of convergence provides a feasible measure to assess how efficiently prices of ETFs respond to new information. Originality/value - The authors are first to utilize the short-horizon return predictability from historical order flow approach to evaluate the price formation process of ETFs and to provide evidence on the determinants of its efficiency.