Robert Jennings

Unsystematic Security Price Movements, Management Earnings Forecasts, And Revisions In Consensus Analyst Earnings Forecasts

Empirical evidence suggests that information about a firms future earnings prospects is important to investors. Griffin [1976], Givoly and Lakonishok [1979; 1980], and Imhoff and Lobo [1984] reported statistically significant abnormal stock returns before, at, and after announcements of analyst earnings forecast revisions. In addition, Imhoff and Lobo documented positive correlation between the magnitudes of the forecast revisions and the abnormal returns. These findings are consistent with the hypothesis that investors find analyst forecast revisions informative. Another source of information about future earnings is projections from corporate officials. Several studies have found unsystematic stock price changes prior to and/or immediately surrounding the public release of management earnings forecasts (e.g., Foster [1973], Nichols and Tsay [1979], Patell [1976], Jaggi [1978], Penman [1980], and Waymire [1984]). The conclusion from this research is that management forecasts also convey information to investors.

Information and Diversity of Analyst Opinion

This paper examines problems in the use of divergence of analyst opinion as a proxy for estimation risk in empirical studies of security returns and asset pricing models. We demonstrate that diversity of opinion can increase even though the amount of private information increases, and we show that diversity of opinion may overstate estimation risk if the capital market aggregates the information held by investors. We produce empirical results consistent with our conclusions. Specifically, we find that divergence of opinion can produce measures of estimation risk that are inconsistent with a received proxy for estimation risk and with observed common stock returns.

Information Dissemination and Portfolio Choice

The process of security price adjustment to the release of new information has long held the interest of the finance profession, both in academics and in practice. The efficiency of financial markets in reflecting new information significantly impacts the allocation of capital and income within the markets1 and, consequently, can affect social welfare. Thus, public, business, and investment policies are all related to an understanding of the functioning of security markets and their utilization of information. As a result, a significant body of economic research has considered the impact of information upon security markets under a number of alternative market structures. In this paper, we attempt to contribute to this literature by extending previous research in the two related areas of speculation and information dissemination.

Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange

Abstract We use NYSE system order data to conduct a controlled experiment examining changes in trader behavior, displayed liquidity supply, and execution quality around the reduction in the minimum price variation to

SOES Trading and Market Volatility

0.01. Although traders do not substantially reduce their use of traditional limit orders in favor of market orders or non-displayed orders, they do decrease limit order size and cancel limit orders more frequently after decimals than before. These changes in order submission strategy appear to result in less displayed liquidity throughout the limit order book more than 15 cents from the quote midpoint. This reduction in displayed liquidity, however, does not manifest itself in poor execution quality. Even for large system orders, traditional execution quality is not worse with decimals than with fractions.

All else equal?: a multidimensional analysis of retail, market order execution quality ☆

The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We document bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one-minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over longer periods, however, intense maximum-sized SOES trading causes lower volatility. Interpreted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.

Depth improvement and adjusted price improvement on the New York stock exchange

Abstract The extant execution quality literature generally suggests that brokers routing orders away from the NYSE might not fulfill their fiduciary best execution responsibility. This conclusion is drawn by comparing execution prices across trading venues and presumes that other execution-quality characteristics are equivalent. Using order audit-trail data, we find evidence that retail market orders obtain better trade prices on the NYSE but faster executions, more depth improvement, and order-flow payment at Trimark Securities, a Nasdaq dealer. Thus, non-price dimensions of execution quality are not equivalent across trading venues. Furthermore, considering order flow payments, brokers obtain better net prices with Trimark. If brokers pass enough of these payments through to investors in the form of lower commissions and/or better services, then investors also obtain better net prices with Trimark. Our results suggest that it may be misleading to evaluate execution quality or to base policy decisions on comparisons focusing on only execution prices.

On guidance and volatility

Abstract Traditional price improvement improperly assesses large orders’ execution quality by ignoring additional liquidity depth-exceeding orders receive at the quoted price and viewing orders that “walk the book” as “disimproved”. Ignoring this additional liquidity is particularly problematic when assessing execution quality in markets with significant non-displayed liquidity. To correct this deficiency, we modify the price benchmark used to determine whether an order is price improved by making the benchmark a function of the orders size relative to the quoted depth. We document that the differences between conventional price improvement and our measure, adjusted price improvement, can be dramatic and show that the difference depends on trading volume, stock price, and volatility.

The potential for clientele pricing when making markets in financial securities

In contrast to theoretical and empirical evidence linking disclosure to information environment benefits, recent research concludes that guidance increases volatility, but leaves open the question of whether volatility plays a role in prompting the issuance of guidance. Consistent with the notion that managers react to rising volatility by providing guidance, we document a link between abnormal run-ups in volatility and the decision to issue a forecast after controlling for the market’s ability to anticipate the guidance. Upon disentangling pre-guidance volatility changes from post-guidance volatility changes, we find no evidence that guidance increases volatility. Indeed, our evidence consistently supports the view that managers seek to and do mitigate share price volatility with guidance.

Wall street week with Louis Rukheyser recommendations:Trading activity and performance

Abstract Benveniste et al. J. Financial Econom. 32 (1992) 61–86 argue that repeatedly dealing with the same brokers allows market makers to know when brokers exploit private information. This suggests that broker identity may allow market makers to differentiate between customers when pricing market-making services even when market makers can provide separate quoted prices for each order size. Estimates of a major Nasdaq dealers gross trading revenue vary substantively among routing brokers after controlling for order size. Furthermore, these differences exhibit a degree of stability over time. This suggests that market makers may effectively enforce clientele pricing schedules in a world where security prices are quoted without a minimum price variation and the limit order book is available to all market participants.