Mark Fedenia

Options Trading and the Bid-Ask Spread of the Underlying Stocks

This study shows that options listing significantly affects the spreads on the underlying stock. The authors identify a trade-off between the benefits of increased liquidity and the cost of informational externalities. Highly liquid stocks tend to have spread increases, while illiquid stocks experience spread decreases. The effect occurs in concert with nonlisting volatility changes. The spread changes do not appear to be caused by shifts in liquidity between the stock and options market. Often, spread changes are large enough to affect significantly the cost of equity capital. Copyright 1992 by University of Chicago Press.

Effects of Competition on Bidder Returns

This study offers several new perspectives on the effects of competition in takeover contests on bidder returns. Using a more extensive database than existing studies and employing several different measures of success in a takeover, we find that success in competitive acquisitions decreases shareholder wealth relative to failure and also relative to success in observed single-bidder takeovers. Further, we consider and test a number of hypotheses regarding bidder returns, including hypotheses suggested by the preemptive bidding theory. In general, our results indicate lack of support for the predictions of preemptive bidding theory and for the hypotheses linking the method of payment and the observed level of competition. We also test hypotheses relating to returns across the multiple events in a multiple-bid contest that competition among bidders generates. The results of these tests underscore the importance of timing as well as success of a bid to the bidders subsequent performance.

Risk premia and the ex-dividend stock price behavior: Empirical evidence

Abstract It has been suggested that the positive abnormal return on ex-dividend days may be due, in part, to the existence of a risk premium. The evidence is consistent with the hypothesis that on ex-dividend days trading in low dividend yield stocks is dominated by ordinary investors who demand a tax premium for their higher tax liability on ordinary dividends relative to capital gains. Trading in high dividend yield stocks appears to be dominated by short-term traders who obtain a positive unsystematic risk premium. Finally, the structural relationship between rates of return, on the one side, and dividend yield and risk premia, on the other, is quite different on ex-dividend and other days as well as through time.

Information Acquisition, International Under-Diversification and Portfolio Performance of Institutional Investors

We test whether 1) institutional investors with concentrated international holdings outperform internationally diversified investors, and 2) foreign investors with information advantage, measured by cultural and geographic proximity to the target market, outperform other foreign investors. Using the United States as a target market, we document that investors concentrated in US securities do not outperform other investors. This result contradicts the idea that internationally under-diversified portfolios are mean-variance efficient due to the benefits of economies of scale and specialization. However, cultural similarity and geographic proximity to the US enhance investors’ performance in US securities.

On the necessity of solving the free rider problem in takeover bids

Previous analysis of the free rider problem in takeover bids has concluded that complex takeover strategies, nonprice taking behavior, taxes, or exogenous exclusion of minority shareholders are necessary for the bidder to profit from a takeover bid. In contrast, in this study, costs of disclosure and the fungible nature of the bidders information mitigates the detrimental consequences of the free rider problem. The absence of the free rider problem in takeover bids has important implications for optimal bidding strategies, the interpretation of mechanisms posed as solutions to the free rider problem, and the analysis of regulation of takeover activity.

Ownership structure and profitability

Following the inevitable growth in the size and scope of the modern corporation over time, Berle and Means (1932) predict that managers with little direct ownership interest, and thus having “own” rather than stockholder interests in mind, would come to run the bulk of U.S. business enterprise by the latter part of the 20th century. While empirical research documents the fact that modern corporations tend to be run by managers with relatively little direct ownership interest (Larner, 1966), substantial disagreement exists as to the resulting economic implications, if any.

Information Advantage and Institutional Investors’ Performance in Foreign Markets

Traditional portfolio theory predicts that investors’ portfolios should be diversified across international markets. In contrast, empirical studies document that investors are more likely to invest in their home country and in familiar foreign markets. These findings imply that investors do not take advantage of international diversification opportunities. This study focuses specifically on foreign market asset allocations and examines empirically whether the familiarity driven foreign portfolio investment is a rational choice attributed to information advantage. Using a sample of over 46,000 institutional investors from 46 countries, we show that investors overweight foreign markets that are familiar but also earn higher risk-adjusted returns in those markets. Furthermore, we document that more skilled investors benefit the most from familiarity based allocations.