Hemang Desai

An Investigation of the Informational Role of Short Interest in the Nasdaq Market

This paper examines the relationship between the level of short interest and stock returns in the Nasdaq market from June 1988 through December 1994. We find that heavily shorted firms experience significant negative abnormal returns ranging from - 0.76 to - 1.13 percent per month after controlling for the market, size, book-to-market, and momentum factors. These negative returns increase with the level of short interest, indicating that a higher level of short interest is a stronger bearish signal. We find that heavily shorted firms are more likely to be delisted compared to their size, book-to-market, and momentum matched control firms. Copyright The American Finance Association 2002.

Firm performance and focus: long-run stock market performance following spinoffs

Abstract We examine whether an increase in focus is an explanation for the stock market gains associated with spinoffs. For a sample of 155 spinoffs between the years 1975 and 1991, we find that the announcement period as well the long-run abnormal returns for the focus-increasing spinoffs are significantly larger than the corresponding abnormal returns for the non-focus-increasing spinoffs. The results for the change in operating performance are consistent with those for the stock market performance. Cross-sectionally, the stock market performance as well as the operating performance are positively associated with change in focus. An analysis of the non-focus-increasing spinoffs shows that the firms are likely to undertake these spinoffs to separate underperforming subsidiaries from the parents.

Long-Run Common Stock Returns following Stock Splits and Reverse Splits

The authors examine one-three-year performance of common stocks following 5,596 stock split and 76 reverse split announcements made during the period 1976-91. For stock splits, on average, the one- and three-year buy-and-hold abnormal returns after the announcement month are 7.05 percent and 11.87 percent, respectively. For reverse splits, the corresponding abnormal returns are -10.76 percent and -33.90 percent. The results suggest that the market underreacts to both the stock split and the reverse split announcements. The authors also find that the announcement period and the long-run abnormal returns are both positively associated with an increase in dividends. Copyright 1997 by University of Chicago Press.

Value-Glamour and Accruals Mispricing: One Anomaly or Two?

A feed and takeoff assembly particularly adapted for use in connection with a printing press to automatically transfer generally flat stock from a first position to a print position and to a delivery position, having a frame, a transfer carriage mounted for movement along the frame, a single elongated feed gripper mounted near one end of the transfer carriage and disposed transversely to the path of travel of the carriage along the frame, and a low profile delivery gripper mounted near the opposite end of the transfer carriage for movement therewith along the frame. The single elongated feed gripper is capable of repeated precisely registered movement along the frame through a spring-biased cam-operated guide means. The delivery gripper acts to remove an entire sheet of printed stock at a desired time by a cam-operated opening and closing of pivotally mounted upper and lower jaws. The operation of the transfer carriage and associated feed gripper and delivery gripper relative to the operation of the printing press is timed by a plurality of control cams which provide for feeding and delivery of stock and return of the carriage at optimum speeds without errors in registration.

Earnings Quality and Information Asymmetry: Evidence from Trading Costs

The adverse consequences of poor earnings quality have been the subject of significant debate among academics, practitioners and regulators. However, the empirical evidence on pricing implications of earnings quality is sparse and controversial. We examine one potential consequence of poor earnings quality - its impact on information asymmetry. We document that poor earnings quality increases the adverse selection risk as manifested in trading costs and lowers liquidity in financial markets. Both innate and discretionary components of earnings quality contribute significantly to information asymmetry. Further, poor earnings quality exacerbates information asymmetry around earnings announcements, especially for firms where earnings represent the principal source of information for market participants, suggesting that poor quality earnings offers a greater information advantage to informed traders. An important implication is that earnings quality can affect cost of capital via its impact on trading cost. Additionally, from a policy perspective, we show that earnings quality can lead to significant variation in information asymmetry even for firms within a uniform reporting regime.

A First Look at Mutual Funds that Use Short Sales

We provide a first look at short selling by mutual funds, a phenomenon not examined by prior research. Mutual funds that short do so frequently and in significant amounts, averaging about 16% of fund assets. These funds outperform benchmarks by 1.5% per year. An analysis of portfolio holdings shows that these funds generate abnormal performance from their short (4.1% per year) and long (1.5% per year) positions. Managers of short-selling mutual funds also exhibit superior performance in other funds they manage that do not use short sales. These findings suggest that managers of short-selling mutual funds are skilled.

Did Information Intermediaries See the Warning Signals of the Banking Crisis from Leading Indicators in Banks’ Financial Statements?

In this paper we address two important questions that emerged in the aftermath of the recent banking crisis. First, did the financial statements of the bank holding companies provide an early warning of their impending distress? Second, whether the actions of four key financial intermediaries (short sellers, equity analysts, Standard Poor’s credit ratings and auditors) were sensitive to the information in the banks’ financial statements about their increasing risk and their approaching distress? We find a significant cross-sectional association between the banks’ 2006 4Q financials and bank failures over 2008-2010 suggesting that the financial statements reflected at least some of the increased risk of bank distress in advance. The mean abnormal short interest in our sample of banks spikes from 0.66% in March 2005 to 2.4% in March 2007. This increase in short interest is also accompanied by a sharp increase over time in the cross-sectional association between short interest and leading financial statement indicators. In contrast, we observe neither a meaningful change in analysts’ recommendations, Standard and Poor’s credit ratings and audit fees nor an increased sensitivity of these actions to financial indicators of bank distress over this time period. Overall, our results suggest that actions of short sellers likely provided an early warning of banks’ upcoming distress prior to 2008 crisis.

Bank Capital Structure and Loan Monitoring

This paper empirically examines the association between bank capital and banks’ monitoring effort. We use four proxies to measure the unobservable monitoring effort. Two of the proxies are based on loan quality (ex-post outcomes of monitoring effort). The other two proxies are based on salary expense (ex-ante proxies intended to capture the quality and quantity of labor input into monitoring effort). Using a bank and time fixed effects estimation, we find a positive association between bank capital and each of our measures of monitoring effort. We find that this association is more pronounced for smaller banks and banks that engage in higher levels of relationship lending. Numerous additional tests and robustness checks including matched sample analysis and instrumental variable approach to address endogeneity confirm our main findings. Overall, our evidence is consistent with the prediction in Mehran and Thakor (2011) that banks that keep higher capital monitor more.

Bank Capital and Loan Monitoring

This paper empirically examines the association between bank capital and banks’ monitoring effort. We use four proxies to measure the unobservable monitoring effort. Two of the proxies are based on loan quality (ex-post outcomes of monitoring effort). The other two proxies are based on salary expense (ex-ante proxies intended to capture the quality and quantity of labor input into monitoring effort). Using a bank and time fixed effects estimation, we find a positive association between bank capital and each of our measures of monitoring effort. We find that this association is more pronounced for smaller banks and banks that engage in higher levels of relationship lending. Numerous additional tests and robustness checks including matched sample analysis and instrumental variable approach to address endogeneity confirm our main findings. Overall, our evidence is consistent with the prediction in Mehran and Thakor (2011) that banks that keep higher capital monitor more.

Bank Capital and Monitoring: Evidence from Loan Quality

This paper empirically examines the association between bank capital and banks’ monitoring effort. We use four proxies to measure the unobservable monitoring effort. Two of the proxies are based on loan quality (ex-post outcomes of monitoring effort). The other two proxies are based on salary expense (ex-ante proxies intended to capture the quality and quantity of labor input into monitoring effort). Using a bank and time fixed effects estimation, we find a positive association between bank capital and each of our measures of monitoring effort. We find that this association is more pronounced for smaller banks and banks that engage in higher levels of relationship lending. Numerous additional tests and robustness checks including matched sample analysis and instrumental variable approach to address endogeneity confirm our main findings. Overall, our evidence is consistent with the prediction in Mehran and Thakor (2011) that banks that keep higher capital monitor more.