Raymond P. H. Fishe

How Stock Flippers Affect IPO Pricing and Stabilization

Stock flippers pose a problem for underwriters of initial public offerings (IPOs). They subscribe to the issue, but immediately resell their shares, which may depress the aftermarket price. This paper presents a model of how stock flippers affect IPO pricing. The model shows that the underwriter chooses whether to price the issue as a cold, weak, or hot IPO. Stock flippers have the greatest effect on pricing in weak IPOs and provide an explanation for underwriter stabilization. In contrast to existing models of stabilization, the underwriter gains from after-market purchases, particularly if the contract with the issuer includes an over-allotment option. The over-allotment option encourages a lower offer price, which may lead to under-pricing. These results correspond to recent findings on IPO returns and underwriter stabilization activities.

The Impact of Illegal Insider Trading in Dealer and Specialist Markets: Evidence from a Natural Experiment

We examine insider trading in specialist and dealer markets, using the trades of stock brokers who had advance copies of a stock analysis column in Business Week magazine. We find that increases in price and volume occur after informed trades. During informed trading, market makers decrease depth. Depth falls more on the NYSE and Amex than on the Nasdaq. Spreads increase on the NYSE and Amex, but not on the Nasdaq. We find none of these pre-release changes in a nontraded control sample of stocks mentioned in the column. Our results show that insider trading has a negative impact on market liquidity; depth is an important tool to manage asymmetric information risk; and specialist markets are better at detecting informed trades.

Do Institutions Receive Favorable Allocations in IPOs with Better Long-Run Returns?

We analyze allocations to institutional and retail investors in 441 initial public offerings (IPOs). In addition to the well-known favorable first-day returns, we show that institutions also obtain more allocations in IPOs with better long-term performance. We find that initial institutional flips help predict future returns, suggesting that at least some institutions retain valuable private information about IPO firms. Collectively, these findings illustrate the importance of aftermarket relations between underwriters and investors and that underwriters have discretionary means to compensate IPO investors beyond first-day returns and price stabilization.

Identifying Informed Traders in Futures Markets

We use daily positions of futures market participants to identify informed traders. These data cover the period from 2000 to mid-2009 and contain 8,921 unique traders. We identify between 94 and 230 traders as overnight informed and 91 as intraday informed with little overlap between these two groups. Floor brokers/traders are over-represented in the overnight informed group, suggesting that ability to process order flow information creates success at this horizon. The intraday informed group is dominated by managed money traders/hedge funds and swap dealers, with commercial hedgers significantly under-represented in this group. Also, we find that trader characteristics such as experience, average position size, amount of trading activity, and type of positions held offer significant predictive power for who is informed. An analysis of daily trader profits confirms that our methods select highly profitable traders.

Nonlinear Contracts, Zero Profits and Moral Hazard

Contracts that base payments on an ex post variable are examined. It is shown that a quadratic contract form may elicit truthful responses from auction participants and offer zero expected profits to the winning bidder, but not eliminate adverse incentives ex post. A general impossibility theorem is proven. This theorem establishes that, regardless of functional form, no contract can offer zero expected profits and resolve the ex post moral hazard problem. Copyright 1987 by The Review of Economic Studies Limited.

Seasonal Money Movements and the January Effect

Many possible explanations have been suggested for the January effect, with tax considerations receiving the most attention. This analysis suggests a new explanation. The data show that money supply announcements during January contribute at least as much as tax considerations to explaining stock returns during the first five trading days in January. The seasonal behavior of money during December and January appears to be responsible for the money-supply-announcement effect. In addition, the end-of-year seasonal pattern of the money supply is present in other countries and was present before the adoption of personal taxes, so money supply announcements may offer a more consistent explanation of the January effect than tax considerations.

Anticipatory Traders and Trading Speed

We investigate a class of market participants who follow strategies that anticipate local price trends. These anticipatory traders can correctly process information prior to the overall market and systematically act before other participants. They use manual and automated order entry methods and exhibit varying processing speeds, but most are not fast enough to be high frequency traders. In certain cases, other participants are shown to gain by detecting such trading and reacting to avoid adverse selection costs. To identify these traders, we devise methods to isolate local price paths using order book data from the WTI crude oil futures market.

Words that Matter for Asset Pricing: The Case of IPOs

We examine how useful the popular Loughran and McDonald (2011, LM) tonal word lists are for extracting information in IPO prospectuses about first-day returns. We find that there is much more information in word use than captured by the LM tonal lists. We show that the connection between LM lists and returns is nuanced and inconsistent; it belies simple tonal narratives. Specifically, we assess frequency of use, predictive content, comprehensiveness, and consistency of predictive impact for the LM lists. Words in the negative, positive, uncertainty, and weak-modal lists occur in IPO prospectuses more frequently than random, but only the negative and uncertainty words collectively predict first-day returns. We develop a new method based on the False Discovery Rate (FDR) to identify words that affect IPO tail returns. We measure the amount of information in the LM lists compared to these FDR words and find that the LM lists are not comprehensive because they capture only a small fraction of the information in words associated with returns. We also find that the impact of LM words on first-day returns is a fraction of the impact of FDR words. We show that the LM word lists send inconsistent signals on pricing to investors: some LM words on the same lists are positively correlated with first-day IPO returns, whereas others are negatively correlated.

The Impact of Illegal Insider Trading in Dealer and Specialist Markets

This paper provides direct evidence on the reaction of market makers to informed trading in both specialist and dealer markets. We examine the illegal trades of five stockbrokers who purchased securities based on stock-specific information obtained from advance, non-public copies of Business Weeks Inside Wall Street column. We find that these trades are associated with substantial pre-release volume and price increases, especially for Nasdaq stocks. Transactions based on this inside information yielded significant abnormal returns, provided stocks were promptly resold. Yet, in contrast to theoretical predictions, we find that both quoted and effective bid-ask spreads are unaffected by these informed trades. Instead, for both Nasdaq and Exchange listed stocks, market makers adjust the depth at the ask quotes. Ask depth falls once insider trading begins, then rebounds, generally above its initial level after it ends. We document that specialists decrease quoted depth relatively more than Nasdaq dealers, suggesting that specialist markets more readily detect informed trading. Overall, our results indicate that market makers use depth as the tool to manage asymmetric information risk during insider trading episodes.

On the Use of Bonus Payments in an Experimental Study of Electricity Demand

Results of an analysis show that the use of bonus payments in an experimental study of electricity demand is directly related to the income effects in the Slutsky equation. As with the income effect, it is not possible to predetermine the sign of the bonus effect. Theoretical results predict that if the relationship between the bonus payment and consumption of electricity is severed, then households would unambiguously increase consumption. The authors conclude that bonus plans will reduce electricity consumption and could be an alternative approach to promoting conservation. 10 references, 1 table.