Sanjiv Sabherwal

Cross‐Border Listings and Price Discovery: Evidence from U.S.‐Listed Canadian Stocks

We examine the contribution of cross-listings to price discovery for a sample of Canadian stocks listed on both the Toronto Stock Exchange (TSE) and a U.S. exchange. We find that prices on the TSE and U.S. exchange are cointegrated and mutually adjusting. The U.S. share of price discovery ranges from 0.2 percent to 98.2 percent, with an average of 38.1 percent. The U.S. share is directly related to the U.S. share of trading and to the ratio of proportions of informative trades on the U.S. exchange and the TSE, and inversely related to the ratio of bid-ask spreads.

Knowledge Management Using Information Technology: Determinants of Short‐Term Impact on Firm Value*

The importance of knowledge management (KM) processes for organizational performance is now well recognized. Seeking to better understand the short-term impact of KM on firm value, this article focuses on public announcements of information technology (IT)-based KM efforts, and uses cumulative abnormal return (CAR) associated with an announcement as the dependent variable. This article employs a contingency approach, arguing that the KM announcement would have a positive short-term impact on firm value in some conditions but not in others. Thus, it pursues the following research question: What are the effects of contextual factors on the CAR associated with the announcement of an IT-based KM effort? Specific hypotheses are proposed based on information-processing theory, organizational learning theory, the knowledge-based theory of the firm, and the theory of knowledge creation. These hypotheses link CARs to alignment between industry innovativeness and the KM process, alignment between firm efficiency and the KM process, firm-specific instability, and firm diversification. The empirical study utilizes secondary data on 89 KM announcements from 1995 to 2002. The results largely support the hypotheses. Overall, this article provides empirical support for the theory-based arguments, and helps develop a contingency framework of the effectiveness of KM efforts.

CEO Overconfidence and International Merger and Acquisition Activity

This study examines the role that chief executive officer (CEO) overconfidence plays in an explanation of international mergers and acquisitions during the period 2000–2006. Using a sample of CEOs of Fortune Global 500 firms over our sample period, we find that CEO overconfidence is related to a number of critical aspects of international merger activity. Overconfidence helps to explain the number of offers made by a CEO, the frequencies of nondiversifying and diversifying acquisitions, and the use of cash to finance a merger deal. Although overconfidence is an international phenomenon, it is most extensively observed in individuals heading firms headquartered in Christian countries that encourage individualism while de-emphasizing long-term orientation in their national cultures.

Do Internet Stock Message Boards Influence Trading? Evidence from Heavily Discussed Stocks with No Fundamental News

Abstract:  This study extends the literature on the information content of stock message boards. To better understand the effect of online postings on trading activities and reduce the error due to stocks with small message board followings, we examine stocks with no fundamental news and high message posting activity. Such stocks tend to be of small firms with weak financials. For those stocks, we find a two-day pump followed by a two-day dump manipulation pattern among online traders, which suggests that an online stock message board can be used as a herding device to temporarily drive up stock prices. We also find that online traders’ credit-weighted sentiment index, but not the number of postings, is positively associated with contemporaneous return and negatively predicts the return next day and two days later. Also, absolute sentiment is negatively related with contemporaneous and next days intraday volatility and positively related with the proportion of volume in small-sized trades. We conclude that message board sentiment is an important predictor of trading-related activities.

How Do Knowledge Management Announcements Affect Firm Value? A Study of Firms Pursuing Different Business Strategies

The importance of knowledge management (KM) efforts is well recognized in the popular and academic press. However, KM efforts do not always lead to improved firm performance. This paper argues that different kinds of KM efforts may be appropriate for firms pursuing different business strategies, and the impact of a KM effort on firm performance would depend on whether the effort is aligned with the firms business strategy. Prior literature on organizational learning, KM, and business strategy is used to develop these arguments, and also to identify the nature of KM efforts that would be most appropriate for firms pursuing Defender, Analyzer, and Prospector business strategies. An event study is used to evaluate the stock market reaction to a firms public announcement of the KM effort. The empirical results, based on 103 KM announcements from 1995 to 2002, are consistent with the theory-based expectations, showing alignment between the KM effort and business strategy to be positively associated with impact on firm value. Some of the implications of these results for practice and future research are examined.

Online talk: does it matter?

Purpose - The purpose of this paper is to examine stocks that are most actively discussed by online posters and see if the messages posted about these stocks have information or if they are just noise. Design/methodology/approach - This study uses messages posted on TheLion.com, which reports a real time list of the ten most actively discussed stocks. The stocks in this list at the daily market close during 2005-2006 are examined. An event study is performed to estimate the daily abnormal returns on these stocks. Contemporaneous and lead–lag regressions of abnormal returns against message posting activities are performed. Findings - Online posters prefer thinly traded micro-cap stocks. On average, there is an abnormal return of 19.4 per cent on a stock the day it is one of the ten most talked about stocks. The number of messages posted about a stock on a given day is not only positively related with the stocks abnormal return on that day but it also positively predicts the next days abnormal return. Research limitations/implications - It may be interesting to examine if the investor sentiment expressed in online messages has predictive power for micro-cap stocks. Practical implications - The results provide evidence to regulators that online talk affects stock prices. They show investors that there are inefficiencies in the stock market. They also suggest that corporate managers, especially of small firms, should monitor the stock message boards. Originality/value - This study focuses on the micro-cap stocks favored by online posters and finds that online talk has the power to predict the next-day returns.

Forecasting exchange rates: Do banks know better?

Abstract We first evaluate the performance of major commercial banks in forecasting future spot exchange rates, using the random-walk model as the benchmark. We then investigate the sources of forecast errors, and the forecasting tendencies of banks. Our analysis is based on the forecasts made for the US dollar exchange rates of the British pound (BP), German mark (DM), Swiss franc (SF), and Japanese yen (JY), over 3-, 6-, 9-, and 12-month forecast horizons. Key findings include: first, a majority of banks shows some evidence of outperforming the random-walk model for the three currencies other than the JY. Second, the imperfect correlation between predicted and actual exchange rate changes is the dominant source of prediction errors of banks. Third, the home-country bank generally forecasts the countrys currency rate more accurately than the other banks, suggesting a degree of information asymmetry. Fourth, the forecasts of a majority of banks exhibit a bandwagon type effect. That is, most banks are momentum forecasters, tending to extrapolate the recent currency changes. Interestingly, a “contrarian” bank is found to outperform the other banks.

Concentrated Shareholders as Substitutes for Outside Analysts

We contend that there is a governance substitution effect, with concentrated shareholders substituting for the monitoring activities of analysts. Our results are consistent with the opinion that regulators need not fear large shareholders. This is especially applicable to large outside shareholders as we find that the economic effect of concentrated outsider shareholdings is quite strong and greater than that of concentrated insider shareholdings. Our results support the argument that an outsider with a larger stake in a firm is more likely to produce its own in-house information for the monitoring of the firms managers and avoid both the cost and moral hazard problems associated with analysts. The results also support the argument that if senior managers hold large stakes in the firm, there is a greater likelihood that managerial incentives will be aligned with those of other shareholders. Using a clean ownership dataset with a sample of 3,115 firm-year observations for U.S. firms and regression techniques that address any potential endogeneity, we find that analyst following is negatively related to the concentration of outsider and insider shareholdings. We find similar relations for changes in analyst following and changes in ownership concentration. We examine the relationship of concentration of shareholdings with the number of financial analysts following a firm to see if concentrated shareholders substitute for the monitoring activities of analysts. We examine the relationship of concentration of shareholdings with the number of financial analysts following a firm to see if concentrated shareholders substitute for the monitoring activities of analysts. Using a clean ownership dataset with a sample of 3,115 firm-year observations for U.S. firms and regression techniques that address any potential endogeneity, we find that analyst following is negatively related to the concentration of outsider and insider shareholdings. We find similar relations for changes in analyst following and changes in ownership concentration. Our results support the argument that an outsider with a larger stake in a firm is more likely to produce its own in-house information for the monitoring of the firms managers and avoid both the cost and moral hazard problems associated with analysts. The results also support the argument that if senior managers hold large stakes in the firm, there is a greater likelihood that managerial incentives will be aligned with those of other shareholders. We contend that there is a governance substitution effect, with concentrated shareholders substituting for the monitoring activities of analysts. Our results are consistent with the opinion that regulators need not fear large shareholders. This is especially applicable to large outside shareholders as we find that the economic effect of concentrated outsider shareholdings is quite strong and greater than that of concentrated insider shareholdings.

Do Country Specific Bankruptcy Codes Determine Long-term Financial Performance? The Case of Metallgesellschaft AG and Columbia Gas System

In this paper, we examine the impact of financial distress, the bankruptcy code, and related procedures on the long-term performance of two companies engaged in similar businesses across two countries. Both the companies were driven into bankruptcy as a result of unanticipated changes in energy prices. Though the resolution of bankruptcy of the US firm took a longer time, the post-reorganization performance of the firm has been excellent. In contrast, the post-reorganization performance of the German firm, which emerged out of bankruptcy in 2 weeks, has been poor. These results are consistent with the view that one of the important determinants of post-bankruptcy performance of a firm is more likely to be the underlying economic fundamentals rather than the country specific bankruptcy code through which the firm reorganizes.

The competitive effects of US decimalization: Evidence from the US-listed Canadian stocks

Abstract This paper analyzes the impact of US decimalization on the Canadian stocks listed on the Toronto Stock Exchange (TSE) and either the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotation System (Nasdaq) in the US. Using a sample of 126 firms, we find that the US trading of these stocks increases after decimalization, but this increase is not at the expense of TSE volume. Indeed, the TSE volume increases substantially for those securities that are traded on Nasdaq and increases marginally for those securities that are traded on the NYSE. Most of the increase in volume is in retail-sized trades. The bid–ask spreads and the quote depths decline on all exchanges, but by a greater amount in the US than in Canada. The depths on the NYSE decline from being above the TSE depths to well below the TSE depths. We also find that the decline in the TSE spread is directly related to the size of the firm and to the decline in the US spread, and is inversely related to the pre-decimalization ratio of spreads on the US exchange and the TSE. Overall, our results indicate that the US decimalization had the desired positive impact on trading in both the US and Canada, with a decrease in spreads and an increase in retail-sized trading.