J. Chris Leach

Intertemporal price discovery by market makers: Active versus passive learning

Abstract This paper demonstrates that market makers have the ability and incentive to facilitate price discovery in securities markets. Market makers can expedite the process of intertemporal price formation by setting prices to induce statistically more informative order flow. Such actions constitute an investment in the production of information. Under certain conditions, market makers can recoup the cost of this investment by making better pricing decisions in the future with more precise information. These conditions are analyzed in a general model and several examples that illustrate the complex nature of price discovery are presented.

Supply Contraction and Trading Protocol: An Examination of Recent Changes in the U.S. Treasury Market

We investigate liquidity and trader behavior in the U.S. Treasury market during recent supply contractions. As in the precontraction period, dealers employ expandable order strategies to achieve greater-than-posted depth at the posted price and use expandable orders more often when expected information asymmetry is greater. Overall, however, dealers are less likely to discover greater-than-quoted depth during the supply contraction regimes. We find that, even after substantial losses in their market share of coupon Treasury trading, brokers reporting voice-brokered trading through GovPX provide an important protocol for depth discovery.We investigate liquidity and trader behavior in the U.S. Treasury market during recent supply contractions. As in the precontraction period, dealers employ expandable order strategies to achieve greater-than-posted depth at the posted price and use expandable orders more often when expected information asymmetry is greater. Overall, however, dealers are less likely to discover greater-than-quoted depth during the supply contraction regimes. We find that, even after substantial losses in their market share of coupon Treasury trading, brokers reporting voice-brokered trading through GovPX provide an important protocol for depth discovery.

Dark Pool Exclusivity Matters

Recent dark pool proliferation has magnified regulatory and academic concerns about equal access and market quality implications. Some dark pools, hoping to create an environment more amenable to buy-side institutional investors, craft their rules to discourage – or even exclude – brokers, high frequency traders and order-flow-information traders. We examine the role participation constraints play in large trade execution and find that a dark pool targeting buy-side counterparties experiences less serial correlation in returns, less volume and volatility increase pre-trade, and more trade clustering within and across days. Exclusivity influences execution quality. Not all dark pools are created equal.

The Relevance of Fiduciary Conflict-of-Interests in Control versus Issue Proxy Contests

The role of fiduciaries with conflicting interests has received considerable attention recently. The purpose of this paper is to analyze the role of a fiduciary casting votes under conflicting interests in proxy contests that seek to control the corporation and those waged solely for the purpose of deciding an issue. By deriving comparisons across types of contests, we provide implications concerning differences in success probabilities and resolution effects for the two types of contests. The empirical verification (refutation) of such effects would provide insight regarding the (ir)relevance of fiduciary conflict-of-interests in proxy contests.

Bribes, power, and managerial control in corporate voting games

Proxy fights have received comparatively little attention relative to the more popular methods for corporate control transfer: merger and tender offers. This paper presents an analytic model of the proxy contest as a cooperative game with four players: management, passive shareholders, insurgent shareholders and a trust fund. The power of the players and the effectiveness of certain managerial actions is discussed.

Generational Asset Pricing, Equity Puzzles, and Cyclicality

To examine the potential role cohort preferences play in asset pricing cycles and puzzles, we consider a model with stochastic generational variation in preferences. In our structure, the pricing kernel reflects an investing generations consumption growth from mid-life to retirement rather than aggregate consumptions growth over the same time period. Generational domination of the pricing kernel provides insight into rationalizing three widely-recognized asset pricing puzzles and suggests one potential contributor to boom-bust patterns in stock market returns. (Copyright: Elsevier)

Why Expertise Is Important for the Detection of Abnormal Performance The Hot Hand Strikes Back

The Sarbanes–Oxley Act emphasizes auditor and analyst independence as defining characteristics of quality financial reporting. We argue that this focus on independence may have adverse effects on auditor expertise. In particular, an independent auditor will lack firsthand knowledge regarding the construction of a client’s financial statements, knowledge that is obtained through the provision of a variety of non-audit services. This lack of firm-specific expertise introduces the potential for a bias analogous to that alleged in sports fans’ belief in the “hot hand” in athletic performance. In studies of professional sports, little evidence of serially abnormal performance has been documented by empirical researchers. As a result, many assert the absence of a hot hand in sports and conclude that athletic spectators’ beliefs and assertions thereof are not rational. We demonstrate that commonly used tests lack power specifically in the detection of abnormally elevated streaks in performance, even for large sample sizes. Importantly, in contrast to the usual non-structural (and non-parametric) approach, incorporating a structural-data-generating process dramatically enhances an observer’s ability to make the correct inference concerning the existence of a hot hand even if only a few observations are available. Of relevance to the debate regarding the (dis)advantages of independent auditors, we argue that auditor expertise regarding the underlying structure of the data-generating processes is paramount in increasing statistical power in (a) an auditor’s detection of anomalous corporate behavior and (b) inquiries by the Public Company Accounting Oversight Board (PCAOB) regarding auditor inference and potential corruption.