Edward A. Dyl

Price Reversals, Bid-Ask Spreads, and Market Efficiency

We examine the behavior of common stock prices after a large change in price occurs during a single trading day and find evidence that the stock market appears to have overreacted, especially in the case of price declines; however, the magnitude of the overreaction is small compared to the bid-ask spreads observed for the individual stocks in the sample. We interpret this finding as being consistent with a market that is efficient after transactions costs are considered.

Odd-Lot Transactions around the Turn of the Year and the January Effect

Assuming that individual investors account for most odd-lot transactions, we examine oddlot purchases and sales around the turn of the year and find a pattern that is related to the well-known January effect in stock returns. A significant change in the ratio of odd-lot sales to odd-lot purchases occurs at the turn of the year, which supports the hypothesis that the January effect results from trading by individual investors. The trading patterns that we find are not due entirely to tax considerations.

The information content of dividend initiations: Additional evidence

We hypothesize that the initiation of cash dividends indicates that a firm?s earnings and cash flows have become fundamentally less risky. We present evidence to support this hypothesis. A sample of firms initiating dividends displays a precipitous decrease in risk immediately following the dividend announcement. Although these firms? earnings do not subsequently increase, earnings volatility is significantly lower following the dividend decision. We also find that the decrease in risk is related to the excess return observed around the dividend announcement.

Predicting Outcomes of Cash Tender Offers

this question. Recent research suggests that the cash tender offer is an important element in the marketplace for corporate control and that tender offers promote the efficient utilization of corporate resources (Kummer and Hoffmeister [9] and Bradley [5]). That is, successful takeovers using cash tender offers have generally led to increased wealth for shareholders of both the bidding firm and the target firm. Much of the published research to date is written

Trading Volume: NASDAQ and the NYSE

Historically, reported trading volume has been overstated for NASDAQ stocks relative to NYSE stocks. Because NASDAQ volume may be overcounted, many researchers use an adjustment factor to make it comparable to NYSE volumes. Today, electronic communication networks account for about 75 percent of the trading volume for NASDAQ stocks. Many believe that the increased level of trading on ECNs and changes to the order-handling rules have lessened the discrepancy between the exchanges. To investigate, this study examined the relationship between reported trading volume to shares outstanding for a matched sample of NYSE and NASDAQ companies. The evidence indicates that the discrepancy has not diminished but widened. Historically, reported trading volume has been overstated for stocks on NASDAQ (a dealer market) vis-à-vis stocks on the NYSE (an auction market). Market practitioners know that NASDAQ volume may be double-counted, so they frequently use an adjustment factor of 50 percent or so to make it comparable to NYSE volumes. Electronic communications networks (ECNs), however, now account for about 75 percent of the trading in NASDAQ stocks, which should make the NASDAQ resemble an auction market. Reported trading volume matters for two reasons. First, various U.S. securities regulations are based on trading volume. For example, U.S. SEC Rule 144 limits an individual’s sales of restricted common stock during a three-month period to either the average weekly trading volume in the stock during the preceding four weeks or 1 percent of the shares outstanding. Second, reported trading volume matters because trading volume is an important measure, for portfolio managers and other practitioners, of a stock’s liquidity. Practitioners need to know when trading volume is “real” and when it is overcounted as a result of dealer trades and, therefore, misleading. Moreover, some firms, deciding that reported volume figures in the two markets are now roughly equivalent, have already stopped adjusting for the historical difference in reported volume. We looked for evidence that the way volume is reported has indeed become equivalent in the two markets. Thus, we examined the structure of reported trading volumes on the NYSE and NASDAQ before and after the changes that occurred from 1997 to 2002. Specifically, we compared trading during 1990–1996 with trading during 2003–2005 to determine whether any meaningful change has occurred in the relationship between reported trading volume in the two markets from the former period to the latter period. We related reported trading volume on the NYSE and NASDAQ to the number of shares outstanding for a group of comparable companies trading on the two exchanges; we controlled for nonlinearity, stock price level, and volatility. We used the regression model to investigate the proposition that the widely acknowledged discrepancy between reported trading volumes for NYSE and NASDAQ stocks that existed before 1997 has diminished or vanished because of such recent developments as the change in order-handling rules for NASDAQ stocks and the increasing role of electronic order books in trading NASDAQ stocks. Surprisingly, we found no evidence that the discrepancy has either narrowed or vanished. On the contrary, our results suggest that the discrepancy may have widened, perhaps because of increased interdealer trading. We also found that the association between volatility and reported trading volume has increased dramatically in recent years for both NYSE and NASDAQ stocks. The absence of any basic change in the relative structure of reported trading volume between NASDAQ and the NYSE is a major puzzle in view of the fact that the majority of the trading in NASDAQ-listed securities has been via electronic order books in recent years. One auction market should look much like another, but we see no signs of convergence between NASDAQ and the NYSE with regard to the structure of trading volume.

Estimating Economic Damages in Class Action Securities Fraud Litigation

This paper examines issues that an expert witness must resolve in estimating economic damages in class action lawsuits involving publicly traded common stock. These issues include measuring the extent to which misleading information distorted the price of the stock, determining the actual volume of purchases by public investors, and adjusting for in-and-out trading during the Class Period.

Valuing Illiquid Common Stock

Illiquid common stock is worth less than stock that can be readily sold because the investor incurs an opportunity cost by being locked into the investment. Quantifying the amount of this illiquidity discount is an important issue in valuing certain common stock, especially for estate valuations. We examine whether a previously developed analytical model for valuing the lost “option to sell” when a stock is illiquid is a useful, practical tool for valuing illiquid common stock. The value of an illiquid asset is generally lower than that of a similar asset that is readily marketable. Investors value liquidity because its absence limits the owner’s option to convert the asset to cash; thus, illiquidity increases potential opportunity costs. Investors locked into a holding of nonmarketable stock are subject to losses resulting from changing stock prices. Valuations of illiquid stock are required for estate valuations for tax purposes, merger and acquisition transactions, divorce settlements and other forms of partnership dissolutions, and situations in which the valuation has important financial consequences for the parties involved. Therefore, valuing illiquid stock can be a contentious issue, and it frequently involves large amounts of money. We examine the usefulness of an options-based framework developed in 1995 to estimate the value of the marketability (i.e., liquidity) of a particular common stock for a particular investor at a particular time. This model explicitly takes into account the put option inherent in a liquid asset. It requires two inputs—namely, the volatility of the shares’ returns and the length of time for which the shares are illiquid. We first report cross-sectional variations in volatility for NYSE and NASDAQ stocks. We then apply the model in an actual case study to assess the extent to which the illiquidity discount for a specific stock holding depends on the volatility of the company’s stock and on other characteristics of the case. We conclude that the model provides a more analytical approach to determining discounts than do current practices but that there is still a role for judgment in determining the appropriate discount in a specific case.

Governance and Funds Allocation in United States Medical Research Charities

We examine boards of directors of medical research charities and find that medical charities spend less on program activities and more on fund-raising when the executive director of the charity serves on the board of directors, especially when the board is small. Executive salaries are also higher at charities where management is represented on the board. Management and general expenses and fund balances are, however, unrelated either to the presence of an insider on the board or to the size of the board.

A State Preference Model of Capital Gains Taxation

Economists generally agree that a basic characteristic of a good tax is economic neutrality. That is, a tax should not influence economic behavior unless it was intentionally designed to produce a specific effect. In this context, the economic effects of the current system of capital gains taxation in the United States have been the subject of considerable concern. Most researchers have concluded that the current system of capital gains taxation has an undesirable and destabilizing effect on the securities markets because the practices of taxing capital gains only when they are realized and, correspondingly, allowing tax deductions for capital losses only upon realization, presumably cause investors to defer the realization of capital gains and to accelerate the realization of capital losses. Based upon this behavioral assumption, many economists infer an effect on the securities markets.

Do share prices matter

This paper examines whether the cross sectional variation in Australian share prices is partially explained by measures of firm size and ownership characteristics in a manner that is consistent with firms behaving in accordance with Merton’s (1987) model of capital market equilibrium with incomplete information. Based on a sample of firms whose shares were traded on the ASX during 1995, we show that firms largely owned by less wealthy shareholders tend to have low stock prices, although this relation is not linear. In addition, larger, better–known, firms tend to have higher stock prices. These findings are consistent with prior evidence from US markets, and suggest the existence of a shareholder clientele effect in Australia that is related to the share price of the underlying firm.