Kathleen P. Fuller

The impact of informed trading on dividend signaling: a theoretical and empirical examination

This paper examines how the trading behavior of various investors impacts a firms need to employ dividend changes to signal private information to the market. The dividend signaling model incorporates asymmetric information among traders as well as between firm insiders and the market. The model explains why, in the cross-section of firms, not all dividend increases are viewed by the market as good news. The model generates the following testable predictions. First, the model predicts a post-signal price increase (on average) for firms increasing their dividends. Second, the markets reaction to an announced dividend increase is inversely related to the measure of informed traders active in a firms stock. Third, the price reaction to the unexpected dividend change, is conditional upon the disparity between the buy and sell demand; the greater the buy demand relative to the sell demand, the smaller the price reaction. Fourth, the larger the measure of informed traders, the larger the unexpected dividend increase. Finally, these predictions are confronted and supported by the data.

Corporate Cash Holdings and Political Connections

We examine the relation between corporate liquidity and political connections measured via lobbying expenditures. This is an interesting question as many of the motives for holding cash should be diminished by political connections. Results indicate a significant and inverse relation between cash levels and lobby expenses and that the marginal value of cash decreases with lobbying. Taken together, these findings suggest firms react optimally to the reduced benefits of cash linked to political connections and that the market recognizes the weakened benefits of cash. Overall, our research shows another way political connections can shape corporate policy.

Signaling, Free Cash Flow and "Nonmonotonic" Dividends

Many argue that dividends signal future earnings or dispose of excess cash. Empirical support is inconclusive, potentially because no model combines both rationales. This paper does. Higher quality firms pay dividends to eliminate the free cash-flow problem, while firms that outsiders perceive as lower quality pay dividends to signal future earnings and reduce the free cash-flow problem. In equilibrium, dividends are nonmonotonic with respect to the signal observed by outsiders; the highest quality firms pay smaller dividends than lower perceived quality firms. The model reconciles the existing literature and generates new empirical predictions that are tested and supported.

ETF Competition and Market Quality

Our paper investigates competition between ETFs that hold nearly identical baskets of securities. We provide strong evidence that incumbent-fund market quality is negatively affected when a new fund is added to an asset class. The degradation in liquidity is even more severe whenever both funds follow the same benchmark. Furthermore, increasing the number of ETFs in an asset class does not put downward pressure on expense ratios. Thus, decreasing market quality, enumerated by increasing bid-ask spreads and price impacts, is not offset by decreasing costs of fund ownership – resulting in a loss of surplus for investors and incumbent ETF providers.

Changes in information environment and merger announcements

Purpose The purpose of this paper is to examine the impact of regulatory changes by the US Securities and Exchange Commission in 2000 on private information leakage prior to merger announcements. Design/methodology/approach Using a sample of 5,045 merger announcements between 1990 and 2008, the authors examine differences in information leakage between the pre- and post-regulation period merger announcements for acquirers using regression analysis. Findings The results suggest that regulatory changes have been effective in preventing private information leakage in merger announcements for large- and medium-sized firms, for high-tech firms, and for stock deals. The authors find that abnormal trading volume due to differences in information quality is reduced post-regulation for stock deals, high-tech firms, large- and medium-sized bidders, indicating less leakage of information after the new regulations. The authors find higher announcement returns post-regulation for the entire sample and for all subsamples except stock deals, small firms, and public targets. Higher announcement returns indicate that merger announcements are a greater surprise to the market due to a reduction in leaked private information after the regulatory changes. Practical implications The results have implications on future rule changes, on refinements of insider trading rules, regulation fair disclosure, and regulation M-A. The authors leave for future research why certain types of firms or deals are not impacted by regulatory changes. Originality/value Examine the effect of changes in information environment on merger announcements for acquirers because the impact likely has greater significance on acquirers than that on targets. Past studies have examined only targets.

Return and Liquidity Response to SEC Investigation Announcements

This study measures the impact government enforcement actions have on investor confidence by examining changes in market quality in the firms investigated by the Securities and Exchange Commission for fraud. The market quality measures we test include returns, price volatility, spreads, and Amihud’s (2002) illiquidity measure. We find that returns improve and price volatility reduces during an SEC investigation. However, spreads widen and illiquidity significantly increases after controlling for the known determinants of liquidity. Our work highlights some of the benefits and costs of having an active regulator of the US securities market.

Short Sales, Informed Trading, and Merger Announcements

Research argues that short sellers are informed investors as current short selling relates inversely with future returns. However, empirical results have yet to determine whether short sellers trade on private information before, say, an upcoming negative new. This paper takes a step in this direction by examining both shorting activity and the information contained in shorting activity around merger announcements. Results in this study do not show evidence of abnormal short selling in acquiring firms’ stocks prior the announcement of mergers. While we show a surge in shorting activity after the announcement, we find that the common negative relation between current shorting activity and future returns is weaker than normal during the post-announcement period. Further, we do not find evidence that the reaction to the announcement by short sellers is driven by factors that drive the post-announcement underperformance in acquiring firms. We are left to conclude that short sellers are neither privately informed nor superior in their ability to process information around merger announcements.