John Affleck-Graves

Earnings Predictability, Information Asymmetry, and Market Liquidity

We investigate the relation between earnings predictability, information asymmetry and the behavior of the adverse selection cost component of the bid-ask spread around quarterly earnings announcements for NASDAQ firms. While we find an increase in the adverse selection component of the bid-ask spread on the day of and the day prior to quarterly earnings announcements for firms with less predictable earnings, we find no evidence of such changes for firms with more predictable earnings. During a non-announcement period, we find that firms with relatively less predictable earnings have consistently higher total bid-ask spreads than firms with more predictable earnings. This finding suggests that firms with relatively less predictable earnings have a higher cost of equity capital than comparable firms with more predictable earning streams, ceteris paribus. Hence, earnings predictability may be a legitimate concern of managers who wish to minimize their cost of equity capital at least as it pertains to bid-ask spreads.

The relation between the Value Line enigma and post-earnings-announcement drift

Abstract We investigate the relation between the Value Line enigma and post-earnings-announcement drift. The ability of Value Lines ‘timeliness’ ranks to predict future abnormal returns is well-documented. However, we show that most rank changes occur within eight trading days of an earnings announcement. Once we control for post-earnings-announcement drift, differences in abnormal returns across Value Line timeliness ranks are no longer significant. Moreover, we find that timeliness ranks have no predictive power for firms with small earnings ‘surprises’. We conclude that the Value Line enigma is a manifestation of post-earnings-announcement drift.

Conditional Price Trends in the Aftermarket for Initial Public Offerings

We document that the risk-adjusted returns on initial public offerings (IPOs) in the short-term aftermarket are in the same direction as their initial mispricing. The initially underpriced issues earn 2.46% (6.40%) more, on average, than similar sized firms over the first month (first three months) of trading. In contrast, overpriced IPOs underperform size-matched firms, on average, by 4.42% (1.31%) over a similar period. Subsequently, both groups of IPOs earn similar negative abnormal returns, which is consistent with the long-term underperformance of IPOs reported in previous studies. Further scrutiny indicates that the observed condition price trends cannot be satisfactorily explained by underwriter price stabilization.

The Effect of the Trading System on the Underpricing of Initial Public Offerings

Several studies have documented significant average underpricing for initial public offerings (IPOs) of common stock on the NASDAQ system - that is, the closing price on the first day of trading is significantly higher on average than the offer price. In our paper, we examine whether IPOs on the exchanges (NYSE and AMEX) display similar underpricing. In addition, we test whether differences in the initial and continued listing standards imposed by the exchanges and NASDAQ impact the level of underpricing of IPOs.

The Information Content Of Calls Of Debt: Evidence From Long‐Run Stock Returns

We examine the long-run performance of the common stock of firms following calls of both straight and convertible debt from 1945 to 1995. Using a sample of 718 calls of straight debt, we find an average abnormal return in the five years following the call of between 0.16% and 0.34% per month, which compounds to an economically and statistically significant 11% to 22% over the five-year period. This evidence of overperformance following calls shows a distinct symmetry between the straight debt and equity markets. Issues of debt and equity are both followed by long-term underperformance, whereas stock repurchases and debt calls are both followed by long-run overperformance. For our sample of 713 calls of convertible debt, we find little systematic evidence of abnormal performance following the call. Some researchers suggest that calls of convertible debt provide negative signals to the market. Our results provide no support for this claim. In contrast, our evidence of marginal positive long-run returns provides weak support for the model that calls of convertible debt signal the realization of profitable investment options, and for the price pressure hypothesis. 2003 The Southern Finance Association and the Southwestern Finance Association.

Detecting Abnormal Bid-Ask Spread: A Comparison of Event Study Methods

This study examines empirical issues associated with the use of bid-ask spreads in event studies. The simulation results indicate that the distribution of average standardized abnormal spread shows little deviation from normality. Simulation results also indicate that the widely used percent spread metric results in test statistics with low power. In contrast, use of a standardized raw spread metric and a simple mean-adjusted expectation model results in well specified and reasonably powerful Patell and Brown-Warner type test statistics. As the abnormal spread series is characterized by high first order serial correlation, it is important to adjust for this serial correlation when using multi-day event windows.

The underpricing of initial public offerings: A theoretical and empirical reconsideration of the adverse selection hypothesis

In this paper we generalize Rocks theory regarding the underpricing of IPOs. In Rocks model, informed investors have a firm-specific informational advantage pertaining to a firms cash flow. We derive the new results that the level of beta and the size of the market risk premium positively affect underpricing. These implications extend the adverse selection theory and further distinguish this theory from the current state of signalling theories of underpricing. The results put the “hot and cold” issue markets phenomenon in a theoretical context. Empirical results are consistent with the theoretical propositions and provide support for Rocks theory of underpricing.

Quantitative methods in a developing country: Managers' perceptions and desires

The role of quantitative methods in business decision making has been a subject of much discussion in the literature. Most of this discussion has emanated from developed countries. In this paper, the current practice in a developing country is examined, as well as the desires and perceptions of management. It is evident that the current practice lags that of the developed countries. Moreover, while the practice in companies with international association is not markedly different from local companies, the management of these companies desire a situation closer to that found in the developed countries. It is suggested that adequately trained personnel are not currently available and that a career orientated masters programme in quantitative methods is necessary in developing countries.