Mir A. Zaman

Market Efficiency and Insider Trading: New Evidence

That corporate insiders earn profits from stock trading does not surprise most financial economists, but that outsiders can earn abnormal returns by using pub licly-available, insider-trading data constitutes a serious exception to stock-market efficiency. The authors show that this anomaly conti nues to exist despite the publication of studies attesting to its exi stence. They suggest that the anomalous profits to outsiders are a ma nifestation of the size and earnings/price ratio effects. Controlling for these factors reduces outsider profits by half: the additional a ssumption of a 2 percent transactions cost makes outsider profits zer o or negative. Insider profits, after an assumed 2 percent transactio ns cost, are a moderate 3 percent per annum for annual holding period s. Copyright 1988 by the University of Chicago.

Overreaction and Insider Trading: Evidence from Growth and Value Portfolios

Insider transactions are not random across growth and value stocks. We find that insider buying climbs as stocks change from growth to value categories. Insider buying also is greater after low stock returns, and lower after high stock returns. These findings are consistent with a version of overreaction which says that prices of value stocks tend to lie below fundamental values, and prices of growth stocks tend to lie above fundamental values. Copyright The American Finance Association 1998.

Aftermarket support and underpricing of initial public offerings

Abstract We study the aftermarket for 72 initial public offerings (IPOs) using comprehensive trade and quote-change data from every market maker for the first three days of trading. Underwriters quote higher bid prices than other market makers for issues that commence trading at or below the offer price. Underwriters repurchase large quantities of stock in the aftermarket without risk by overselling the issue by the amount of the overallotment option. If the IPO is hot, the overallotment option is exercised. If not, the short position is covered with aftermarket selling. We discuss several reasons for underwriter support.

Market reaction to Business Week ‘Inside Wall Street’ column: A self-fulfilling prophecy

Abstract This study focuses on stocks mentioned in a Business Week (BW) column in which over half the stories quote an analyst as a source. The results of the study show that stocks with a favorable report in BW earn positive abnormal returns at the time of the distribution of the weekly. However, this is true only for stocks followed by less than twenty analysts. Within this group, the market response increases as the number of analysts decreases. Stocks followed by more than twenty analysts do not respond at the time of their mention in BW. We further document that trading volume increases at the time of the publication of the story. The six-month size-adjusted post-BW performance of the less closely followed stocks with favorable stories is negative and offsets the abnormal return at the time of the BW story. We conclude that the evidence is consistent with the self-fulfilling-prophecy hypothesis, i.e., traders react to BW stories and influence the prices of stocks, only to lose in the long run (six months). The results also show that information obtained from non-analyst sources has a greater impact on stock prices than the information from analyst sources, indicating that some of analysts information is already reflected in prices through their clients trading. The return reversion over six months is observed for BW stories with both analyst as well as non-analyst sources.

The Pricing of Real Estate Investment Trust Initial Public Offerings

This paper examines the pricing of Initial Public Offerings (IPOs) of Real Estate Investment Trusts (REITs). Unlike standard corporations, evidence suggests that REIT IPOs are correctly priced in the initial market. Significant negative initial-day return for mortgage REITs is found to be a function of using the bid price to calculate returns for those securities, which trade initially over the counter (OTC). If the bid-ask average or the ask price is used in calculating returns, any apparent overpricing disappears. Additionally, we find that once transactions costs are considered, an investor is better off purchasing a REIT on the offering.

What Motivates CEO and CFO Trading – Contrarian Beliefs or Superior Information?

This paper examines whether trading by CEOs and CFOs is motivated by contrarian beliefs or superior information about future cash flow realizations. Although both CEOs and CFOs earn significant abnormal returns following their trades, we find that CFO trades are associated with higher abnormal returns than CEO trades. Initial analysis suggests that these abnormal returns are related to both contrarian beliefs and superior information about future cash flow realizations. However, when we analyze the trading behavior in terms of routine trading and opportunistic trading, we find that both CEOs and CFOs earn abnormal returns from opportunistic trading and these trades are motivated solely by contrarian beliefs. Our results have important implications for insider trading in the US.