Ian Tonks

Momentum in the UK stock market

This paper investigates the presence of abnormal returns through the use of trading strategies that exploit the predictability of short run stock price movements. Based on historical returns of the largest set of individual securities in the UK stock market examined to date, this paper identifies profitable momentum trading strategies as investment tools over the period 1955-96. Our results show that returns on trading strategies cannot be accounted for by a simple adjustment for beta-risk. Also, although we find some evidence of a size effect in the UK stock market, this phenomenon cannot explain the momentum profits. The paper finds that these profitable investment strategies are apparent in the sub-sample 1977-96, in line with Liu, Strong and Xu (1999). However, they are not present in the earlier 1955-76 period. The implication is that momentum is not a general feature of the UK stock market, but is only apparent over certain time periods.

Performance persistence of pension fund managers

This paper examines persistence over time in the performance of fund managers responsible for making the investment decisions of UK pension funds. Previous work on UK pension funds found little evidence of fund manager persistence, but we argue that this may have been due to survivorship bias in the construction of these data samples, which may have disguised true persistence. Using a large sample of pension funds over the period 1983-97 in which there is less survivorship bias, we find strong evidence of persistence in abnormal returns generated by fund managers over one year time horizons.

Re‐assessing the long‐term underperformance of UK Initial Public Offerings

Previous work has identified that IPOs underperform a market index, and the purpose of this paper is to examine the robustness of this finding. We re-examine the evidence on the long-term returns of IPOs in the UK using a new data set of firms over the period 1985-92, in which we compare abnormal performance based on a number of alternative methods including a calendar-time approach. We find that, using an event-time approach, there are substantial negative abnormal returns to an IPO after the first three years irrespective of the benchmark used. However, over the five years after an IPO, abnormal returns exhibit less dramatic underperformance, and the conclusion on negative abnormal returns depends on the benchmark applied. Further if these returns are measured in calendar time, we find that the (statistical) significance of underperformance is even less marked.

Detecting Information from Directors' Trades: Signal Definition and Variable Size Effects

There have been three empirical studies examining the share price reaction following trades by directors of UK companies (King and Poell, 1988; Pope, Morris and Peel, 1990; and Gregory, Matatko, Tonks and Pukiss, 1994). All three of these UK studies used different definitions of ‘buy’ and ‘sell’ signals resulting from the transactions of directors and employ different controls to detect the presence of any ‘size effects’. We investigate whether the signal definition explains the different conclusions drawn by these earlier studies, and examine whether or not any observed abnormal returns are explicable by the small companies effect. We also investigate trading strategies based on holding a long portfolio of shares purchased or a short portfolio of shares sold by directors held until the end of the study period or until a ‘reserving event’ (e.g. a sale following a purchase by director[s] is observed).

Executive Pay and Performance: Did Bankers’ Bonuses Cause the Crisis?

This paper examines the pay-performance relationship between executive cash compensation (including bonuses) and company performance for a sample of large UK companies, focusing particularly on the financial services industry, since incentive misalignment has been blamed as one of the factors causing the global financial crisis of 2007–2008. Although we find that pay in the financial services sector is high, the cash-plus-bonus pay-performance sensitivity of financial firms is not significantly higher than in other sectors. Consequently, we conclude that it unlikely that incentive structures could be held responsible for inducing bank executives to focus on short-term results.

Are U.K. Stock Prices Excessively Volatile? Trading Rules and Variance Bounds Tests

The authors apply the original variance bounds tests to the present value model for the U.K. stock market and amend these tests to take account of revisions in the models parameters. They show that variance bounds tests that correct for this are no longer violated. However, they claim there is excess volatility if agents, restricted to using only current information to compute a trading rule, could make excess profits. They show that a trading rule exists which yields, in the long run, more than twice the wealth from buying than holding a representative market portfolio. Copyright 1989 by Royal Economic Society.

Post-IPO Directors' Sales and Reissuing Activity: An Empirical Test of IPO Signalling Models

Signalling models of IPO underpricing argue that owners of high-quality firms signal firm quality by underpricing shares sold at the IPO and retaining a large equity stake because they benefit from IPO signalling by selling further shares in the aftermarket at a higher share price. This hypothesis is tested by examining whether the probabilities and volumes of subsequent share issues or insider sales are related to the proposed IPO signals. There is evidence that post-IPO share issuance is related to initial returns, but the same is not true for insider selling. Moreover, little evidence is found to support the view that the proportion of equity retained by initial owners is an IPO signal. Therefore, the signalling hypothesis is rejected. Copyright Blackwell Publishers Ltd 1998.

Determinants of Price Quote Revisions on the London Stock Exchange

This paper investigates the determinants of price quote revisions on the London Stock Exchange for a sample of highly liquid stocks over a two-week settlement period in September 1990. In our theoretical model the level of optimal price quotes set by market makers are a function of the expected fundamental price, the expected number of liquidity trades and the lagged level of inventories. The model is used to test for the existence of adverse selection, inventory control and anticipated liquidity trade effects on quote revisions. Our findings are that while there seems to be some evidence of asymmetric information in our sample, market makers clearly take into account their inventory positions in the stocks in which they make a market, but there is little evidence that market makers exploit liquidity traders. Copyright 1995 by Royal Economic Society.

Bayesian Learning and the Optimal Investment Decision of the Firm

This paper is about learning. It illustrates how in a two period allocation problem with uncertainty in each period, an economic agents decisions are influenced by the knowledge that he is able to learn about the uncertainty. The time periods are linked through the learning process of the economic agent. The problem to be analysed is that faced by a firm deciding whether or not to invest in a new technology or production process, whose returns are not known with certainty. Because of the two period environment, the firm is able to experiment with the new process in the first period, and observe the results before making another investment decision at the beginning of the second. Goven the opportunity for learning, how will this affect the decision of the firm in the first period?

Testing for asymmetric information and inventory control effects in market maker behaviour on the London Stock Exchange

This paper examines the empirical relationship between 20 minute trading volume and price quotes announced by market makers for a sample of liquid stocks on the London Stock Exchange, over a settlement period in 1990. We outline a simple model which highlights three key players in the market: market makers, informed traders and liquidity traders. We determine the optimal prices that a market maker will quote as a function of the expected fundamental price, the expected number of liquidity trades and the lagged level of inventories. We then go on to analyse the empirical implications of this model, estimate the models parameters using data provided by the London Stock Exchange and test the restrictions implied by our theory. The analysis yields tests for the existence of asymmetric information, stock control and liquidity trade effects on price quote revisions. We find little evidence of asymmetric information for our sample, but strong inventory control effects.