Robert A. Wood

Corporate Social Responsibility and Financial Performance

The relationship between corporate social responsibility and financial performance is reexamined using a new methodology, improved technique, and industry-specific control groups. Average age of corporate assets is found to be highly correlated with social responsibility ranking. After controlling for this factor, there still is some correlation between corporate social responsibility andfinancial performance.

Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets

Using synchronous transactions data for IBM from the New York, Pacific, and Midwest Stock Exchanges, we estimate an error correction model to investigate whether each of the exchanges is contributing to price discovery. Johansens test yields two cointegrating vectors, which together verify the expected long-run equilibrium of equal prices across the three exchanges. Two error correction terms specified as the differences from IBM prices on the NYSE indicate that adjustments maintaining the long-run cointegration equilibrium take place on all three exchanges. That is, IBM prices on the NYSE adjust toward IBM prices on the Midwest and Pacific Exchanges, just as Midwest and Pacific prices adjust to the NYSE.

Security price adjustment across exchanges: an investigation of common factor components for Dow stocks

Abstract VECMs can detect trades that permanently move the markets in cross-listed stocks. We employ Gonzalo and Grangers (J. Business Econom. Stat. 13 (1995) 1) reduced-rank regressions and QGG test statistic to analyze the common factor weight attributable to three informationally-linked exchanges for DJIA stocks over 1988–1995. We distinguish this error correction approach to trading price adjustment from the information shares approach to quote price leadership. In 1988, a 72.2% mean common factor weight (fNYSE) approximated the NYSEs 86% share of the trades. However, by 1992 fNYSE had declined precipitously for 27 Dow stocks, averaging only 49.6%, despite an unchanged 86% share of the trades. By 1995, the NYSEs common factor weight had recovered, averaging 62.9% on 84% of the trades. We discuss three alternative microstructure-theoretic hypotheses that can confront this evidence.

The Composition of Boards of Directors and Incidence of Golden Parachutes

Golden parachutes are a new and controversial management perquisite that allow covered managers to voluntarily resign and collect substantial remuneration—in some cases several million dollars—afte...

Liquidity and the 1987 stock market crash

T he Crash of October 1987 was a puzzling event puzzling not only for what happened on October 19, but also for what subsequently did not happen. In spite of the magnitude and momentum of the crash, its effect was limited primarily to the financial markets, while the economy as a whole did not change its course. And, although the ”bad news” that was supposed to be predicted by the crash has apparently not materialized, the market suffered a lasting decline after October of 1987. This article advances a liquidity theory of the crash, proposing that the price decline in October 1987 reflects, at least in part, a revision of investors’ expectations about the liquidity of the equity markets. Amihud and Mendelson [1986a, 1986b, 19891 have shown that the market price of stocks is positively associated with their liquidity (after controlling for risk). Given this relationship, when the liquidity of assets turns out to be less than had been expected, their price should decline. We suggest that the main news that caused the prolonged decline in stock prices was the crash itself that is, the realization that financial markets are not as liquid as previously assumed. Investors recognized that stock prices should reflect a larger discount for the costs of illiquidity, which turned out to be much higher than had been expected before the crash. Partial recovery following the crash reflects an upward reevaluation of the liquidity of the markets -that is, investors recognized that while the markets are not as liquid as had been assumed prior to the crash, they are also not as illiquid as when there was the possibility of closing the markets altogether. These illiquidity problems, reflected in wider spreads between the quoted bid and ask prices, have persisted long after the crash, and market impact estimates have stayed significantly larger than they had been prior to the crash.’ Thus, the crash and subsequent events have produced new information about the markets themselves rather than fundamental news about the economy. Part of the liquidity-related price decline on October 19, 1987, was temporary. Unexpected sale pressure, even absent any negative information, can generate a temporary negative price impact, as we sometimes observe in block sales. But much of the effect was permanent. Investors realized that they may well have to pay a larger discount when they wish to sell stocks in a hurry. These illiquidity costs result in a stream of future cash outflows that translate into a loss of value.2 In general, illiquidity reflects the difficulty of converting cash into assets and assets into cash, or the costs of trading an asset in the market. Some of the costs of illiquidity are explicit and easy to measure, while others are more subtle. These costs include the bid-ask spread, market-impact costs, delay and search costs, and brokerage commissions and fees. These components of illiquidity cost are highly correlated: Stocks that have high bid-ask spreads also have high transaction fees and high search and market-impact costs, and are thinly traded (McInish and Wood [1989]). When the bid-ask spread widens, it signals that immediacy of execution is more costly,

An analysis of transactions data for the Toronto Stock Exchange : Return patterns and end-of-the-day effect

Abstract Using transactions data for all stocks traded on the Toronto Stock Exchange, this study shows that returns and number of shares traded have a U-shaped pattern when plotted against time of the trading day. These results confirm that the findings of Wood, Mclnish and Ord (1985), Harris (1986), Mclnish and Wood (1988) and Jain and Joh (1989) for the New York Stock Exchange (NYSE) also hold for both another exchange and another country and are not due to peculiarities of United States securities markets. Further, evidence is provided to support the view of Harris (1989) and Terry (1986) that these relatively high end-of-day returns are due, at least in part, to an increase in the proportion of trades at the ask relative to trades at the bid.

A transactions data analysis of the variability of common stock returns during 1980-1984

Abstract Using transactions data for a large sample of NYSE stocks for six months in 1971–1972 and calendar year 1982, Wood, McInish and Ord (1985) (WMO) show that the graph of the variability of index returns across days against time of day has a crude U-shaped pattern. This study demonstrates that relatively high variability of returns at the beginning and end of the trading day also occurs during calendar years 1980, 1981, 1983 and 1984. In addition, the variability of intra-minute returns across stocks is shown to have a crude U-shaped pattern when plotted against time of day. A model is developed and tested that explains this pattern of variability of intra-minute returns in terms of variability of market returns over the trading day. The empirical results are consistent with this explanation.

Production of information, information asymmetry, and the bid-ask spread: Empirical evidence from analysts' forecasts

In this paper we suggest that market makers deduce the extent of the adverse selection problem associated with a stock (and set up the bid-ask spread accordingly) by observing how many financial analysts are following that stock. Market makers do this based on the belief that more financial analysts would follow a stock with a greater extent of information asymmetry since the value of private information increases with informational asymmetry. Similarly, financial analysts deduce the profit potential of a stock from the size of the spread set up by market makers (based on the expectation that market makers would set up a greater spread for the stock with a greater information asymmetry). This structural view of the process determining the bid-ask spread and analyst following is empirically tested using a simultaneous equations regression analysis. The empirical results are generally consistent with this view. Hence, our study supports the notion that the decisions of two major players in the financial markets (i.e.. market makers and financial analysts) are made interactively.

Common factor components versus information shares: a reply ☆

Common factor components and information shares provide competing approaches to estimating the parameters of price discovery in cointegrated security markets or trading channels. Using simulated data on Hasbrouck’s (J. Financial Markets 5(3) (2002)) parameterized model of the stylized facts in satellite and centralized markets, we show that Gonzalo and Granger’s (J. Business Econom. Statist. 13 (1995) 1) procedure for estimating and testing common factor components recovers the true information structure in a wide range of financial market microstructure models. In addition, we investigate the role of stochastic process assumptions in estimating price discovery parameters by generalizing the sources of volatility in the implicit efficient price and the level of the signal to noise ratio. r 2002 Published by Elsevier Science B.V. JEL classification: G12

Hidden Limit Orders on the NYSE

department of finance, insurance and real estate at Fogelman College of Business and Economics of Memphis State University in Memphis (TN 38111). creen-based trading systems such as the exchanges in Frankfurt, London, Paris, Singapore, Toronto, Vancouver, and on Globex S and Instinet, allow traders to submit limit orders that are displayed to interested traders. These exchanges and trading systems display not only the best bid and ask, with the associated sizes, but also a montage of the next levels of bids and asks with their associated sizes. The New York Stock Exchange system, by contrast, permits the display of only one quote each (and its size) on the bid and ask side. Given these limitations, what should the specialist display? Suppose there is a bid at