Gwendolyn P. Webb

The Information Content of Stock Split Announcements: Do Options Matter?

We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.

The impact of listing Latin American ADRs on the risks and returns of the underlying shares

This paper examines the risks and returns of Latin American stocks following American depository receipt (ADR) listings in U.S. equity markets and finds no systematic change in their volatility. This finding differs from previous results for ADR introduction on European and Asian stocks, although it is consistent with several prior findings on international stock listings. Importantly, it supports the predictions of Domowitz, Glen, and Madhavan’s 1998 model of international cross-listings. This model predicts that the effects of such listings will differ across stocks because the net effect is indicative of the specific trade-off for each individual stock between benefits of enhanced intermarket competition and costs stemming from the diversion of information-linked orders out of the domestic market.

Removing Biases in Computed Returns

This paper presents a straightforward method for asymptotically removing the well-known upward bias in observed returns of equally-weighted portfolios. Our method removes all of the bias due to any random transient errors such as bid-ask bounce and allows for the estimation of short horizon returns. We apply our method to the CRSP equally-weighted monthly return indexes for the NYSE, Amex, and NASDAQ and show that the bias is cumulative. In particular, a NASDAQ index (with a base of 100 in 1973) grows to the level of 17,975 by 2006, but nearly half of the increase is due to cumulative bias. We also conduct a simulation in which we simulate true prices and set spreads according to a discrete pricing grid. True prices are then not necessarily at the midpoint of the spread. In the simulation we compare our method to calculating returns based on observed closing quote midpoints and find that the returns from our method are statistically indistinguishable from the (simulated) true returns. While the mid-quote method results in an improvement over using closing transaction prices, it still results in a statistically significant amount of upward bias. We demonstrate that applying our methodology results in a reversal of the relative performance of NASDAQ stocks versus NYSE stocks over a 25 year window.

A Regression Analysis of the Effects of Options Introduction on Stock Variances

We recruited 275 full term and preterm infants into a prospective evaluation of continuous four channel electroencephalographic (EEG) monitoring in the diagnosis and prognosis of neonatal seizures. EEG seizure activity was found in 55 infants; clinical signs were completely simultaneous in only 12 of these, they were present but limited in another 20, and were completely absent in the remaining 23. EEG seizure activity, with or without clinical signs, were equally associated with serious cerebral lesions and with adverse clinical outcome. The four channel EEG recording provided sufficient data on abnormality to be prognostically specific in 79% of the 43 infants who either died or had serious neurological impairment.

The effects of ETF splits on returns, liquidity, and individual investors

Purpose - The purpose of this paper is to extend the literature on the effects of stock splits from mutual funds splits and the QQQ split to 20 exchange traded funds (ETFs) that span a wide variety of indexes. The split sample is compared to a non-split control sample with similar characteristics between 2000 and 2006. The objectives of this study are to investigate whether the results are different between the split sample and the control sample; and whether these results are similar to other investment vehicles in the existing literature. Design/methodology/approach - The paper examines stock excess returns, total capital, several measures of liquidity, and the premium or discount relative to net present value around the split. It also tests for increases in smaller trades after the split. Findings - The results support the hypothesis that two key management objectives of splitting an ETF stock are to increase demand from retail investors and to increase the total capital under management. Support is also found for the existence of momentum in stock price indexes. Research limitations/implications - The effects of splits are examined in a larger group of ETFs that includes less-heavily traded stocks than the QQQ. These smaller ETFs potentially have more to gain in terms of increased investor interest than the QQQ. Originality/value - Positive excess returns were found in the split ETFs before and after the split. This is consistent with the tendency for stocks to be split following a large price run-up, and with momentum theory. Also, significant increases were found in total capital under management and shares outstanding after the splits for the splitting stocks. This is consistent with the hypothesis that a key goal of managers is to increase their compensation via higher total capital under management. Finally, significant increases were found in the number of small trades and dollar values of trades as a percentage of all trades (and of total dollar volumes) in the split sample. These results support the hypothesis that a primary objective (and result) of ETF stock splits is to make the shares more attractive to individual investors – despite possible deterioration of liquidity as evidenced by wider bid/ask spreads.

The information content of dividend initiation announcements: The case of information technology firms

Purpose - The purpose of this paper is to examine the dividend initiation announcements made by firms in the information technology sector as defined in a modern system of industrial classification. Design/methodology/approach - On the basis of a modern classification of the information technology industry, the authors examine a wide range of corporate performance and management measures to discriminate between the two theories of the information revealed by the announcement of dividend initiations, the signaling, and life cycle theories. Findings - The empirical results are more consistent with the corporate life cycle theory of dividends than with the information signaling hypothesis. This finding helps clarify the nature of the information revealed by the announcement. Originality/value - The paper has clear implications for investors who are interested in the growth prospects of technology firms, or for others interested in their prospective stability and degree of maturity.

Market Adaptation to Regulation Fair Disclosure: The Use of Industry Information to Enhance the Informational Environment

Our fundamental research interest is in exploring the ways in which the financial markets have adapted to Reg FD, and our particular focus is on how market participants use industry information embedded in firms’ earnings announcements. We find that announcements of quarterly earnings made by companies that are the first in their industry to report in a given quarter have significant effects on the stock returns of other firms in the same industry as well as on their own stock returns. We then test the implications of these findings for their effects on the information environment. Overall, our empirical findings support the conclusion that the implementation of Reg FD has led to increased use of industry information that is revealed in earnings announcements. This is one way, among others, in which analysts and other market participants have adapted to the requirements of Reg FD. In this case, they have made the adaptation by developing new uses of public information to enhance the informational environment.

What happens when a stock is added to the Nasdaq-100 index? What doesn’t happen?

Additions to the Nasdaq-100 Index are based primarily on market capitalization rather than on judgments about a firm’s stature in its industry. We analyze abnormal returns upon announcement that a stock will be added to the Nasdaq-100 Index in a multivariate analysis that incorporates several possible alternative factors. We find that only liquidity variables are significant, but that factors representing feedback effects on the firm’s operations and level of managerial effort are not. This evidence suggests that additions to the Nasdaq-100 Index are associated with liquidity benefits but not with certification effects of the type associated with additions to the S&P indexes.