Niranjan Tripathy

Dividend policy and regulatory risk: A test of the Smith hypothesis

Abstract This article explores reasons for high observed dividend payout ratios and dividend yields in regulated electric utilities. We argue that monitoring of the capital markets, forced by high dividend payout rates, substitute for the agency control mechanisms that are largely absent for utility firms. We have tested the Smith hypothesis that utility firms use dividend policy as a mechanism for controlling or responding to regulatory risk. Our results are consistent with the Smith hypothesis and suggest that the dividend policies of regulated utilities are influenced significantly by policies adopted by various regulatory commissions.

The Relative Importance of Teaching, Research and Service in Performance Evaluation of Marketing Faculty

This paper analyzes mail survey data from chairs as well as members ofperformance evaluation committees of marketing departments with and without doctoral programs at US business schools. Specifically, it looks at perceived and desired weights for teaching, research, and service activities used during merit evaluation and promotion and tenure decisions. The following results are documented: (1) while the respondents, in general, perceive and desire that research play the most important role in promotion and tenure as well as merit evaluation procedures, schools with doctoral programs in marketing place more emphasis on research and less on teaching; (2) all schools place higher weights on research (and lower weight on teaching and service) for promotion and tenure decisions than for merit evaluation decisions; (3) the level of resources an institute commits to research increases the perceived importance of research in the evaluation process; (4) there is a uniform desire for more emphasis on teaching and ...

Insider Trading When an Underlying Option Is Present

We argue that increased leverage, lower litigation risk, and reduced trading costs in the options market result in lower incentives for informed market participants to trade in stocks that have options listed than in stocks without traded options. We also hypothesize that the underlying market for optioned stocks is informationally more efficient than that for nonoptioned stocks. Our cross-sectional tests of U.S. market data show that the level of insider trading is significantly lower, as a percentage of total trading volume, for optioned stocks than for nonoptioned stocks during months when insider trading is intense. When we compare the magnitude of stock price adjustments to insider trades, our results indicate that the price reaction to insider trading events is less pronounced for optioned stocks. Both pieces of evidence are consistent with the view that informed trading is less likely to occur and its price effect is better anticipated in the underlying market for optioned stocks than for nonoptioned stocks. Previous research has shown that in the U.S. markets, the market for a particular stock benefits in several ways when options on that stock are listed on the exchange. These benefits in the market for the underlying stock include significant price appreciation, increased trading volume, and reduced price volatility. The effects of insider trading in the underlying stock because of options listing, however, have not been examined. We analyze cross-sectional differences in insider trading patterns and stock price reactions to insider trades in optioned and nonoptioned stocks. Options markets provide several practical advantages to informed traders. First, options investment allows higher leverage than trading in the underlying stock. Second, option traders enjoy the borrowing and lending rates implied in option prices, which are comparable to rates available only to institutional traders. Third, short-sale restrictions can be circumvented in the options market. Fourth, informed traders may incur lower legal risks because of the lack of explicit disclosure laws in the options market. Furthermore, existing insider trading laws are not as strictly enforced in the options market as they are in the stock market. All these reasons suggest that, given a choice, an insider would rather trade in the options market than in the market for the underlying stock. Because insiders in nonoptioned stocks do not have the same choices, we tested whether insider trading in this market is higher than in the market for optioned stocks. We used insider trading data on optioned and nonoptioned stocks from the U.S. SECs Ownership Reporting System summary files. To ensure that the trades were driven by material nonpublic information, we used months we defined as “intensive insider trading months” (months in which three or more insider trades occurred in the same direction and none occurred in the opposite direction) in both samples. Our results indicate that, as a percentage of total trading volume, the average level of insider trading is lower in optioned stocks than in nonoptioned stocks. These results persisted even after differences in size and trading volume between the two samples had been accounted for. We propose that the incentive to gather information is greater for optioned companies because returns in the options market can be considerably higher than returns in the stock market. Arbitrage opportunities arise if the underlying stock market does not reflect that information. Such opportunities should translate into improved price discovery in the market for the underlying stock. Previous research shows that earnings announcements, which are public information, are more rapidly reflected in optioned-stock prices than in nonoptioned-stock prices. We tested the extent to which optioned stock prices reflect private information. We examined insider trading because it is not public until after the fact. Compared with a public event, such as an earnings release, the information content of an insider trade is difficult to anticipate for several reasons. First, knowledge about most insider trades is not available to the public until after the trade has been reported to the SEC. Second, information-based insider transactions are not predictable. Third, the securities analysis industry has invested considerable physical and human capital in collecting, processing, and interpreting earnings-related data. Therefore, when we tested whether the information underlying an insider trade is better anticipated in the market for optioned stocks, we were actually subjecting the information hypothesis to a stronger test than testing the information effect of a public event. We estimated and compared for optioned and nonoptioned stocks the excess returns in and after months with intensive insider trading. Our results show that, whereas insiders investing in nonoptioned companies earn significantly positive excess returns over a one- to six-month interval following their stock transactions, insiders in optioned companies receive zero excess returns over the corresponding periods. The excess returns for nonoptioned stocks are significantly higher, even after control for market capitalization and the level of insider trading. These results thus imply that the insider trades in nonoptioned stocks have higher information content than those in optioned stocks. From a practical standpoint, caution should be used in tracking insider trading data. Insider trades may be information or liquidity motivated. Insider trades in optioned stocks may be primarily liquidity motivated, whereas those in nonoptioned stocks may be liquidity as well as information motivated. Options, if available, may be a better vehicle for informed trading.

Empirical evidence on the effects of delisting from the National Market System

This study analyzes empirical evidence related to changes in market value and liquidity characteristics of stocks, which are delisted from the National Market System (NMS) due to an elevation of NMS listing standards. Our results are thus relatively independent of the financial conditions of the firms prior to delisting. We document significant increase in bid-ask spreads and decrease in trading volume after delisting. A significant negative stock price reaction around the delisting announcement period is also observed. Both sets of findings suggest that delisting from NMS increases a firm’s cost of capital by adversely affecting the liquidity of its stock. (JEL: G14)

Seasoned equity offerings: stock market liquidity and duration of the completion cycle

Short-term cash needs play a critical role in equity issuance decisions. Consequently, the ease with which an offering is completed can have a direct effect of the cost of raising equity. Extending the work of Butler, Gullon, and Weston (2005), we examine the relation between equity market liquidity and the ease with which an offering is completed, as proxied by the duration of the completion cycle. Using a sample of 3,844 seasoned equity offerings over the period 1984-2008, we find that firms with greater pre-SEO liquidity are more likely to complete an offering sooner. Our results hold across different liquidity measures and alternative regression specifications.

An empirical analysis of the impact of stock index futures trading on securities dealers' inventory risk in the NASDAQ market

Abstract Stock index futures contracts (SIFCs) were developed in part to allow equity investors to conveniently hedge portfolio risks. Therefore, we may expect to observe smaller bid/ask spreads among NASDAQ equities following the introduction of trading in SIFCs. The potential transactions cost reduction results from the enhanced ability of dealers to hedge their inventory risk. Accordingly, we analyze the daily returns and bid/ask spreads of all CRSP-listed NASDAQ stocks for a 10-year period surrounding the introduction of three SIFCs in order to determine whether the introduction of these contracts has affected transactions costs in the NASDAQ equity market. Our results indicate that bid/ask spreads narrowed significantly following the introduction of stock index futures trading. Moreover, the behavior of the spreads leads us to the conclusion that risk reduction through cost-effective hedging via stock index futures trading may have been the cause.

The Evaluation of Faculty Performance in Research and Service: Some Practical Benchmarks

This paper attempts to provide practical benchmarks for resolving four issues that are often contentious during the typically annual merit evaluation of marketing fuculty at US business schools. These are: (1) realistic weights for teaching, research and service, (2) consistency in the evaluation of research and service performance, (3) the issue of single versus multiple authorship and, (4) the importance given to various service activities. Specifically, the paper presents and analyzes mail survey data from chairs as well as members of performance evaluation committees of marketing departments at US business schools with and without a doctoral program. Similar data, obtained from finance faculty of the same schools, are also presented for comparison purposes.

Seasonals, price adjustment delays and estimated systematic risk

This article analyzed potential interactions between seasonals and price adjustment delays on estimated systematic risk. It was shown that seasonals in unobservable true security returns can induce inconsistencies into the generalized Scholes and Williams estimator of systematic risk. An alternative estimator was proposed that is consistent in the presence of seasonals in the unobservable true returns. The direction of induced bias is unpredictable a priori, thereby representing a potentially important research consideration in market efficiency tests using abnormal returns. NASDAQ and Dow Jones 30 Industrial return data for the period 1983–87 were used to evaluate the proposed estimator against the OLS and generalized Scholes and Williams (GSW) alternatives. The absolute difference between the GSW and our estimator, that is the seasonal-induced bias, for NASDAQ stocks was negatively correlated with market capitalization. Moreover, seasonal-induced bias was larger for NASDAQ stocks than more highly capitalized Dow stocks. These empirical findings indicate that seasonals and price adjustment delays can interact to bias estimated systematic risk, where price adjustment delays would be projected to be more acute for smaller capitalization stocks.