Percy S. Poon

Market Reactions to Corporate Restructurings

This article examines the stock price reactions to restructuring announcements by the DJIA 30 corporations over the period 1988–1995 by employing the event study methodology and cross-sectional regression analyses. Corporate restructurings, historically regarded as highly unusual accounting events, became increasingly common after 1987. One probable cause is the discretionary power managers enjoy due to the flexibility allowed by the Accounting Principles and Financial Accounting Standards Boards. Our general findings are that, contrary to contemporary press comments, restructurings, especially those impose a charge against the firms earnings, are typically associated with negative excess returns. This evidence seems to be consistent with the notion that restructurings reveal unfavorable information of the firms future performance. Furthermore, the larger the size of the restructuring amount announced in the Wall Street Journal, the more negative the stock price reaction is.

The Effect of Option Listing on Bid-Ask Spreads, Price Volatility, and Trading Activity of the Underlying OTC Stocks

This paper examines the changes in spreads, price volatility, and trading activity surrounding option listing for a sample of 144 OTC stocks. For this sample, both price volatility and volume increase, but the evidence on spreads is mixed. The increase in price volatility is attributed primarily to an increase in residual return variances. Furthermore, price volatility increases even after controlling for volume, insider trading, and spreads. Although these variables do not fully explain the causes for the increase in price volatility after option listing, the results suggest that liquidity trading or volume has a stronger effect on price volatility than insider trading. This study also finds that both the number of trades and institutional holdings show substantial increases, which are supportive of the notion that listing of options on OTC stocks attracts more attention.

Portfolio Risk, Portfolio Performance, and the Indvidual Investor

D iversification through building a portfolio of several stocks reduces the volatility of the portfolio because the ups and downs in the individual stocks offset each other. This reduction in risk can occur even if a portfolio increases from one stock to two stocks, and it continues as more stocks are added to the portfolio. There is obviously also an impact on portfolio return, as stock winners combine with stock losers. These “laws” apply to mutual funds, to other professionally managed funds, and to every individual investor’s own portfolio. Given that individual investors have limited resources, the question arises as to the minimum number of stocks in a personal portfolio to produce a satisfactory level of risk reduction with a given impact upon portfolio return. If this minimum number of stocks exceeds the investor’s resources, the investor should lean toward investing in mutual funds. Academic research has tended to concentrate upon the risk reduction aspect of portfolio diversification. This research has produced recommendations of from eight to twenty as the desirable minimum number of stocks. We argue that these recommendations are incorrect. There is less commentary in textbooks and elsewhere on the performance aspect of portfolios, but we try to deal with performance as an integral part of the same question. Individual investors face an enormous range of portfolio risk if they follow the standard recommendations. We explore performance of the portfolio as the number of stocks in the portfolio changes. Our analyses of risk and performance support new recommendations for the minimum sizes of portfolios.

Trespass, nuisance, and spam: 11th century common law meets the internet

Even in the instantaneous world of cyberspace, common law still provides a protective shield over many Internet problems.