Leonard Rosenthal

An empirical test of the efficiency of the ADR market

Abstract This study examines the weak form efficiency of foreign equities — American Depository Receipts — traded in the U.S. The results of serial correlation and runs tests on a sample of listed and NASDAQ ADRs for the years 1974–1978 were consistent with weak form efficiency.

Effect of Regulation FD on Asymmetric Information

On 23 October 2000, the U.S. SEC put Regulation Fair Disclosure into effect. It requires companies to disseminate releases of material information to all investors, not selectively. Proponents of Regulation FD argued that the flow of information would improve; critics of the regulation asserted that Regulation FD would increase volatility and reduce the quantity of information being released into the market, resulting in an increase in asymmetric information. We examined components of the bid–ask spread surrounding news releases and trading activity by retail versus institutional investors before and after the institution of Regulation FD. Our results indicate no significant increase in volatility after Regulation FD, and we found little or no increase in the adverse-selection component of bid–ask spreads. Overall, our results do not support critics of Regulation FD. On 23 October 2000, the U.S. SEC put Regulation Fair Disclosure into effect. It requires companies to disseminate releases of material company information to all investors rather than to select investors. The idea was to create a level playing field for all market participants. For example, prior to Regulation FD, companies could restrict who could be part of a conference call. The exclusion of retail investors, some institutional analysts and investors, and in particular, the media, was a significant catalyst in bringing about Regulation FD. Regulation FD requires that companies release material, market-moving information to all investors simultaneously through a press release or an 8-K filing with the SEC. If a company holds a press conference, it must provide adequate time for investors to learn of the conference before it is held, and the conference must be made available to the widest audience possible—by allowing anyone to dial into a conference call or by making a webcast available in real time over the Internet. Regulation FD also provides a mechanism for dealing with the unintentional disclosure of material nonpublic information. Proponents of Regulation FD argued that it would improve the flow of information. Critics asserted that the regulation would decrease information coming out of companies, which was expected to increase volatility and reduce the quantity of information being released into the market, resulting in an increase in asymmetric information. When asymmetric information increases, market makers widen their bid–ask spreads to compensate for the increased risk of trading against an informed investor. To analyze the effects of Regulation FD, we examined—before and after Regulation FD—volatility, trading activity by retail versus institutional investors, and bid–ask spreads (and the spread’s components) to determine whether the regulation has increased the cost of trading to investors. Among the components of the spread, we focused on adverse selection because it should be the most sensitive to the impact of changes in information flows from companies. If Regulation FD reduced the amount and quality of information put out by companies, the adverse-selection component should have increased. If Regulation FD has not affected the information flow, the adverse-selection component should not have changed. We analyzed 4,278 conference calls made prior to Regulation FD and 3,322 calls made after Regulation FD. The total period covered is 1 January 1999 through 27 February 2001. We broke down the full sample of calls by the subject of the call and focused analysis on the largest group, namely, calls to make earnings announcements. We also broke out from the sample calls that were closed before Regulation FD. We found for the post-FD period an increase in the number of conference calls per day and in the number of companies per day making calls. Tests on volatility in the pre- and post-FD periods indicate that volatility did not increase after implementation. Indeed, it is more likely that Regulation FD contributed to lower volatility. When we examined bid–ask spreads and their components before and after Regulation FD, we found that both absolute (in dollar terms) and relative (in percentage terms) mean and median spreads increased significantly after Regulation FD. The adverse-selection component of the bid–ask spread, however, has had no significant change since Regulation FD in either absolute or relative terms. These results are contrary to the expectations of critics of Regulation FD. Overall, our results indicate that Regulation FD has not been detrimental to investors.

International interest rates and inflationary expectations

Abstract Famas hypothesis that short term interest rates are efficient predictors of inflation has been criticized on the grounds that his test depends critically on the constancy of the short term expected real rate of interest. This paper uses an international framework where the time invariance assumption of the real rate is replaced by the assumption that short term expected real rates are identical, at a point in time, across countries with well developed capital markets. Results support Famas contention that short term nominal rates of interest reflect inflationary expectations.