Robin K. Chou

The Market Reaction Around Ex-Dates of Stock Splits Before and After Decimalization

This paper examines the stock price behavior around the ex-split dates both before and after the decimalization on the New York Stock Exchange (NYSE). We find that the abnormal ex-split day returns decrease and the abnormal trading volume increases in the 1/16th and decimal pricing eras, relative to the 1/8th pricing era. These findings are consistent with the microstructure-based explanations for the ex-day price movements. Our study also supports the hypothesis that short-term traders perform arbitrage activities during the ex-split dates when transaction costs become lower after the tick size is reduced.

The Effects of Margin Changes on the Composition of Traders and Market Liquidity: Evidence from the Taiwan Futures Exchange

We examine the effects of margin changes on futures trading activity, the composition of traders, and market liquidity using an account‐level data set from the Taiwan Futures Exchange. We find that margin increases reduce trading activity for all trader types, which indicates that higher margins increase trading costs. Institutional trading is more sensitive to changes in margin requirements than individual traders. This, in turn, leads to increases in market price volatility and decreases in market liquidity. These results imply that margin requirements are not an effective policy tool for limiting the trading activity of noise speculators to reduce market volatility.

Short-Sale Constraints and Option Trading: Evidence from Reg SHO

We examine the effects of a temporary suspension of short-sale price tests on the options market. Consistent with the notion that put option trading substitutes for short selling, we find a significant reduction in put option volume. In addition, pressure on put option prices significantly declines, violations of the put-call parity become significantly less frequent, and option volume becomes less informed. Our findings add clarity to a long-standing debate on whether investors use options to circumvent equity short-selling restrictions.

The Consistency of Size Effect: Time Periods, Regression Methods, and Database Selection

We try to reconcile the findings of prior size effect studies by re-examining the issue with different time periods, regression methods, and database selection. We test whether the size effect varies in relation to the time period, whether extreme observations cause the size effect, by experimenting with different regression methods, and whether the survivorship bias in the COMPUSTAT database induces the size effect. It is found that the size effect is highly significant for data from the earlier time period, but its significance is noticeably reduced for the later time period. Extreme returns cannot fully account for the size effect, because the effect remains strong in the earlier time period even when the extreme observations are trimmed. Finally, we do not find any evidence indicating that the survivorship bias in the COMPUSTAT database is responsible for the size effect.

Boom Baby, Career Experience and Risk Taking

We investigate whether CEOs’ experiences of macroeconomic boom affect risk taking. We use the unique setting of economic conditions changed from Central Planning to Market Economy in China, which is an exogenous shock to early-life experience, as a natural experiment to test the impact on CEOs’ risk preference. To establish causality, we identify two extraordinary events of China that are likely to be early-life experiences and career experiences of CEOs: Growth-up in the reform and open-up era, Original-and-persistent in business circles. Through these experiences, CEOs’ risk tolerance can be formed and lead to attitude changes in risk taking. First, we document that RO-CEOs, who experienced the Reform and Open-up in early adulthood tend to have higher likelihood of risk taking and more risk preference than CP-CEOs, who were grow-up in central planning era experienced economic recessions. Second, we examine whether growth experiences affect achievement of risk taking are dependent on the career experience over the course of profession. We find that RO-CEOs achieve greater risk-related performance only in OP-CEOs, who are original and persistent in business circle. Furthermore, our findings imply that there are significant career experience fixed effects in performance and these effects are significantly through the channel of risk taking in various ways.

Investor Sentiment, Market Timing and Seasoned Equity Offering

This paper studies the impact of investor sentiment on the probability of firms conducting seasoned equity offerings (SEOs) and on stock performance around and subsequent to SEOs. We first show that investor sentiment is positively related to SEO probability, and that small, high volatility, high R&D intensity, and non-dividend-paying firms are more likely to issue SEOs. The interaction effects between investor sentiment and firms’ mispricing-related characteristics further suggest that the impact of investor sentiment on SEO probability is stronger for small and young firms. Moreover, we find that firms conducting SEOs during high sentiment periods experience less severe short-run price drops around the issuances, yet more severe post-issue long-run underperformance, compared to firms conducting SEOs during low sentiment periods. The effect of investor sentiment on stock performance is stronger for small, young, and high market-to-book ratio firms.

Market Efficiency and Foreign Institutional Trading: Evidence from the Taiwan Futures Market

The literature frequently views foreign institution investors in emerging markets as informed traders with an information advantage that likely increases market efficiency. Using a unique data set from the Taiwan Futures Exchange (TAIFEX), we directly investigate the informational role played by foreign institution investors. Interestingly, we find that, despite a significant increase in foreign institution trading over the past few years, liquidity costs increased significantly and the informational efficiency of market price actually deteriorated. We find direct evidence showing that the increase in foreign institutional trading is associated with the deterioration of market efficiency. We reconcile this unexpected finding by showing that foreign institution investors are more likely to act as market makers on the TAIFEX by submitting passive limit orders.

Career Experiences, Managerial Overconfidence and Investment Efficiency: A Natural Experiment from Chinese CEO Growth Path

We show that managerial career experiences have significant explanatory power for corporate investment decisions. We use the setting of economic conditions changed from Central Planning to Market Economy, which is an exogenous shock to managerial characteristic, as a natural experiment to test the impact on corporate investment. To establish causality, we use a unique dataset from China and identify two extraordinary events of China that are likely to be formative experiences of CEOs early in life: growth after the Reform and Open-up era and original-and-persistent in business circles. Through these experiences, managerial characteristics can be formed and lead to attitude changes in investment activity. Chinese Reform and Open-up policy initiate a unique experiment environment in which corporatization and entrepreneur growth are synchronous from a new beginning. First, we document that RO-CEOs who experienced the Reform and Open-up in early adulthood tend to have higher likelihood of overinvestment and more confidence than CP-CEOs who were grow-up in central planning era experienced economic shocks and recessions. Second, OP-CEOs who are original and persistent in business circle choose more aggressive capital investments and more confidence than PB-CEOs who have long-term public administration experience before acting as executive. Furthermore, OP-CEOs and RO-CEOs are overconfident relative to PB-CEOs and CP-CEOs, respectively, and have more likelihood of underinvestment in financial constraint firms.

The Diversification Effects of Real Estate Investment Trusts: A Global Perspective

We examine whether investors can improve their investment opportunity sets by incorporating real estate investment trusts (REITs) into their equity portfolios for the United States and six other countries. The result indicates that the addition of a REIT portfolio leads to a statistically significant increase in the investment opportunity sets available to domestic investors in all countries. We further show that U.S. investors who include international REITs in their equity portfolios experience significant diversification benefits, which come from both an improved Sharpe ratio and an overall reduction in risk. Our study not only fills a gap in the academic literature but also provides implications to the practitioners.

The role of institutions in price correction: evidence from intraday noise trading in Taiwan

This article investigates the role of institutional investors in the Taiwanese equity markets in the resolution of noise trading, which we define as the deviation of a stocks price from its fundamental value within a trading day. We use a sample of stocks traded on the Taiwan Stock Exchange (TWSE) that experience extreme price movements characterized by price limit hits between March 2003 and March 2007, and assess the noise trading component of the price movements. Specifically, we examine whether overreaction occurs in the Taiwanese equity markets, and whether noise trading disrupts the price discovery process. We shed light on whether the unique features of the retail trading segment of the market slows the speed of correction following an overreaction, and relate these findings to those from studies of the US market. Our results show that noise trading in the Taiwanese equity markets is prevalent, and that a protracted correction process takes place. Further, we document a disruptive role of institutional investors, namely, that in contrast to the US equity markets, they appear to move the market away from equilibrium, and slow the speed of correction following an overreaction.