Ekkehart Boehmer

Event study methodology under conditions of event-induced variance

Abstract Many authors have identified the hazards of ignoring event-induced variance in event studies. To determine the practical extent of the problem, we simulate an event with stochastic effects. We find that when an event causes even minor increases in variance, the most commonly-used methods reject the null hypothesis of zero average abnormal return too frequently when it is true, although they are reasonably powerful when it is false. We demonstrate that a simple adjustment to the cross-sectional techniques produces appropriate rejection rates when the null is true and equally powerful tests when it is false.

Trading Your Neighbor's ETFs: Competition or Fragmentation?

On July 31, 2001, for the first time in its history, the New York Stock Exchange began trading three unlisted securities. The DIA, SPY, and QQQ are the most actively traded Exchange Traded Funds (ETFs) and are listed on the American Stock Exchange. On April 15, 2002 another 27 ETFs followed. These two events provide a unique experiment for studying the impact of a new entrant on market quality. In contrast to recently revived concerns about the adverse impact of market fragmentation, we document that the NYSE entry leads to a dramatic improvement in liquidity that we attribute to the elimination of market-maker rents.

International Evidence on Algorithmic Trading

We study the effect of algorithmic trading (AT) on market quality between 2001 and 2011 in 42 equity markets around the world. We use exchange co-location service that increases AT as an exogenous instrument to draw causal inference of AT on market quality. On average, AT improves liquidity and informational efficiency but increases short-term volatility. AT also lowers execution shortfalls for buy-side institutional investors. Our results are surprisingly consistent across markets and thus across a wide range of AT environments. We further document that the beneficial effect of AT is stronger in large stocks than in small stocks.

Bank Privatization in Developing and Developed Countries: Cross-Sectional Evidence on the Impact of Economic and Political Factors

We examine how political, institutional, and economic factors are related to a countrys decision to privatize state-owned banks. Using a comprehensive panel of 101 countries from 1982 to 2000, we find that the determinants of this decision differ markedly between OECD and non-OECD nations. Political factors significantly affect the likelihood of bank privatization only in developing countries. Specifically, in non-OECD countries, a bank privatization is more likely the more accountable the government is to its people. In contrast, none of our political variables affects the bank privatization decision in developed countries. Economic factors (such as the quality of the nations banking sector) are significant determinants of bank privatization in both OECD and non-OECD nations.

Do Institutions Receive Favorable Allocations in IPOs with Better Long-Run Returns?

We analyze allocations to institutional and retail investors in 441 initial public offerings (IPOs). In addition to the well-known favorable first-day returns, we show that institutions also obtain more allocations in IPOs with better long-term performance. We find that initial institutional flips help predict future returns, suggesting that at least some institutions retain valuable private information about IPO firms. Collectively, these findings illustrate the importance of aftermarket relations between underwriters and investors and that underwriters have discretionary means to compensate IPO investors beyond first-day returns and price stabilization.

Related Securities and Equity Market Quality: The Case of CDS

We document that the emergence of markets for single-name credit default swap (CDS) contracts adversely affects equity market quality. The finding that firms with traded CDS contracts on their debt have less liquid equity and less efficient stock prices is robust across a variety of market quality measures. We analyze the potential mechanisms driving this result and find evidence consistent with negative trader-driven information spillovers that result from the introduction of CDS. These spillovers greatly outweigh the potentially positive effects associated with completing markets (i.e., CDS markets increase hedging opportunities) when firms and their equity markets are “bad” states. In “good” states, we find some evidence that CDS markets can be beneficial.

Order Flow and Prices

We provide new evidence on the relation between order flow and prices, an issue that is central to asset pricing and market microstructure. We examine proprietary data on a broad panel of NYSE-listed stocks that reveal daily order imbalances by institutions, individuals, and market makers. We can further differentiate regular institutional trades from institutional program trades. Our results indicate that order imbalances from different trader types play distinctly different roles in price formation. Institutions and individuals are contrarians with respect to previous-day returns, but differ in the effect their order imbalances have on contemporaneous returns. Institutional imbalances are positively related to contemporaneous returns, and we provide cross-sectional evidence that this relation is likely to be the result of firm-specific information institutions have. Individuals, specialists, and other market makers appear to provide liquidity to these actively trading institutions. Our results also suggest a special role for institutional program trades, which tend to be uninformed and provide liquidity to more aggressively trading institutions. Finally, institutional non-program imbalances (information which is not available to market participants) have predictive power for next-day returns.

The informational content of initial public offerings: A critical analysis of the ownership-retention signalling model

Abstract In this paper, the relation between insiders equity ownership and corporate value for 1128 initial public offerings (1980–1984) is investigated. The evidence shown here is consistent with the hypothesis that corporate value is a function of the structure of equity ownership, but inconsistent with the view that there can be “too much” inside ownership. It is found that ownership retention can only conditionally be interpreted as a signal of firm value. Specifically, an evaluation of ownership retention must control for firm size and wealth-effect exposure.

Short Interest, Returns, and Fundamentals

We show that short interest predicts future bad news, negative earnings surprises, and downward revisions in analyst earnings forecasts. Moreover, short interest is a better predictor of changes in firm fundamentals for stocks that are harder to short and short sellers appear to have information about these events several months before they become public. Most importantly, the well-known cross-sectional relation between short interest and future stock returns vanishes after controlling for short sellers’ information about future fundamental news. Thus, short sellers contribute in a significant manner to price discovery about firm fundamentals.

Managerial bonding and stock liquidity: An analysis of dual-class firms

Given the decision to create a second class of stock through a dual-class structure, we propose that management is more (less) likely to create a liquid secondary market for both classes of shares the lower (higher) its willingness to tie its personal wealth to firm performance. If market makers recognize this relation, they should assign a higher likelihood to trades motivated by superior information in shares of firms that list both classes of stock and a lower likelihood for firms that list only one class of stock pursuant to recapitalization. Additionally, they should assign a lower likelihood to trades motivated by superior information in shares of IPOs that choose a dual-class structure and list only one class relative to IPOs that remain single-class. Our empirical tests based on IPOS and recaps between 1985 and 1988 provide support for these propositions.