Huu Nhan Duong

Investor protection and market liquidity revisited

Purpose – This paper aims to establish the relation between corporate governance – as represented by investor protection at both the legal and firm levels – and stock market liquidity. Design/methodology/approach – This paper avails of the unique features of Hong Kong- and China-based stocks that are traded on the Hong Kong Stock Exchange so as to test whether differences between “common law” and “civil law” legal environments contribute to differences in stock liquidity. In addition, by constructing an internal corporate governance index score for each firm based on board size, board independence and information on the audit and remuneration committee, we document whether firms with better corporate governance scores have narrower spreads, greater depth and higher trading volumes. Findings – Overall, results provide support for a linkage between corporate governance issues – as investor rights protection at both the environment and firm protection levels – and stock market liquidity. Research limitations...

Information Asymmetry, Trade Size, and the Dynamic Volume‐Return Relation: Evidence from the Australian Securities Exchange

This paper investigates the influence of information asymmetry on the cross-sectional variation of volume-return relation. We find that the dynamic volume-return relation within medium-size trades has the most significant response to the degree of information asymmetry. We also show that the effect of information asymmetry on the volume-return dynamics migrates to small-size trades in recent years, especially in larger stocks. These results are consistent with the notion that informed traders prefer medium-size trades and this preference has shifted to small-size trades. Our findings highlight the importance of incorporating informed traders’ trade-size decision in the examination of the dynamic volume-return relation.

Implicit Trading Costs, Divergence of Opinion, and Short-Selling Constraints in the Limit Book Order Market

This article investigates whether the divergence of opinion among investors affects the implicit trading costs in a limit order book market. The authors propose a new unbiased measure of divergence of opinion among investors. Examining order submissions and transaction data from the Australian Stock Exchange (ASX), they document that divergence of opinion has negative impacts on implicit trading costs. The intensity of this relationship depends on the level of short-selling constraints in each stock. The authors find that divergence of opinion has a smaller impact on implicit costs when short-selling constraints are the smallest.

Measuring Immediate Price Impact Using Nonparametric Models

As a consequence of recent technological advances and the proliferation of high-frequency trading and other forms of algorithmic trading, the cost of trading in financial markets has irrevocably changed. One important change relates to how trading affects prices; this is known as price impact. Understanding price impact is vital as it helps in evaluating different trading strategies and hence leads to optimal execution strategies that minimize trading costs. Besides evaluating established parametric price impact models in the literature, this paper proposes a novel nonparametric approach, known as Generalized Additive Models, to estimate price impact. This paper provides the first empirical analysis of the performance of different immediate price impact models for individual trades using out-of-sample predictions. The study finds that the nonparametric model outperforms all other models both in- and out-of-sample. The outperformance comes from (1) the appropriate price-impact normalization, (2) the greater data-fitting flexibility inherent in nonparametric frameworks, and (3) the incorporation of new explanatory variables which cannot easily be accommodated analytically.

Individual and Institutional Informed Trading in Competing Firms Around Earnings Announcements

This study investigates individual and institutional trading in competing firms around earnings announcements. We find individual and institutional informed trading in competing firms, which is dominant prior to earnings announcements. Magnitude of institutional (individual) net order flow coefficient decreases (increases) with lag length, suggesting that institutional trading captures information faster than individual trading. Individual net order flow transmit information cross-stock when competitor is a small firm while institutional net order flow conveys information cross-stock irrespective of firm size. Our results are informative for regulators regarding insider trading laws and provide insights for market participants in understanding individual and institutional trading impact on cross-stock price discovery process.

The Impact of Timing of the Release of Firm-Specific Announcements on Trade Initiation

This paper investigates trade initiation activities ‘immediately’ before and after earnings and takeover ‘day’ announcements. We find that investors’ initiate buy and sell (buy or sell) trades immediately before (after) earnings and takeover day announcements. High volatility and more prominent effective spread before ‘overnight’ announcements indicate active informed trading, showing evidence of information leakage. Similarly, high volatility and less prominent effective spread before day announcements exhibit more active uninformed trading. Overall, private information (Differential information) is the likely motive for trade initiation before overnight announcements (day announcements). We suggest that day announcements are more effective than overnight announcements in controlling information leakage. Our results complement prior literature on effectiveness of continuous disclosure on the ASX.

Powerful CEOs and Stock Price Crash Risk

We find that firms with powerful CEOs lead to stock price crash. The effects of earnings management, tax avoidance, CFO option incentives and CEO overconfidence on crash are more pronounced for firms with powerful CEOs. The effect of CEO pay slice on crash risk is more pronounced for firms with powerful founder CEOs. The takeover index, a proxy for corporate governance, mitigates stock price crash for firms with non-powerful CEOs. Product market competition does not attenuate the impact of CEO power on crash. Our findings provide new insights on the importance of CEO power in driving stock price crash risk.

Individual and Institutional Trading Volume Around Firm-Specific Announcements

We investigate the immediate impact of firm-specific announcements on the trading volume of individual and institutional investors on the Australian Securities Exchange (ASX). Institutional investors exhibit abnormal trading volume before and after announcements. However, individual investors indicate abnormal trading volume only after announcements. Consistent with outcomes expected from a dividend washing strategy, abnormal trading volume around dividend announcements is statistically insignificant. Both individual and institutional investors’ buy volumes are higher than sell volumes before and after scheduled and unscheduled announcements. Our results add to the understanding of individual and institutional investors’ trading behaviour around firm-specific announcements in a securities market with continuous disclosure.

Dividend Initiations, Information Content and Informed Trading in the Options Market

We find that informed trading in the option market prior to dividend initiation is negatively related to announcement period price reactions. This relation is more prevalent among firms with abnormal trading in call options, higher stock price runup, and higher option liquidity. We also find improvements in stock liquidity following dividend initiation. The improvement in stock liquidity is positively related to the increase in institutional investors’ holdings, and negatively related to the relative size of the dividend initiation payment and preannouncement option trading. We further find positive abnormal earnings following dividend initiation. Overall, these findings indicate that dividend initiation conveys information regarding sustainable future earnings and improvements in liquidity, and informed traders are active in the option market prior to dividend initiation.

Individual investors' trading activities and price volatility

We investigate the volume-volatility relation and the effect of the num- ber of trades and average trade size, institutional and individual trading, and order imbalance on price volatility. We document a positive relation between trading volume and volatility for stocks traded on the Australian Securities Exchange (ASX). We further show that the number of trades has a more significant effect on price volatility than average trade size. When the number of trades is decomposed into the number of trades of different sizes, the number of trades in the medium size category often has the most significant impact on volatility. The trading activity of both institutions and individuals are positively related to vola- tility, with individual trading has a more significant role in explaining price volatility than institutional trading. Finally, we document that on the ASX (a pure limit order book market) order imbalance—however it is important in explaining the volume-volatility dynamics—it is not the main factor driving this relation.