Susana Yu

The Information Content of Stock Split Announcements: Do Options Matter?

We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.

Trading Strategy on EVA and MVA: Are They Reliable Indicators of Future Stock Performance?

The positive risk-adjusted return of the winner group is found when adjusted-MVA is designated as the ranking variable. This return is higher than the one in the loser group. However, both returns are at an insignificant level. The p-values for each factor loading as well as the F-values are all significant, while the adjusted R-squares range between 0.5578–0.8801. Hence, the authors suspect that the adjusted-MVA variable may be a weak alternative indicator of earnings momentum. At the same time, the authors conclude that the Fama-French model successfully captures the return components.

The effects of ETF splits on returns, liquidity, and individual investors

Purpose - The purpose of this paper is to extend the literature on the effects of stock splits from mutual funds splits and the QQQ split to 20 exchange traded funds (ETFs) that span a wide variety of indexes. The split sample is compared to a non-split control sample with similar characteristics between 2000 and 2006. The objectives of this study are to investigate whether the results are different between the split sample and the control sample; and whether these results are similar to other investment vehicles in the existing literature. Design/methodology/approach - The paper examines stock excess returns, total capital, several measures of liquidity, and the premium or discount relative to net present value around the split. It also tests for increases in smaller trades after the split. Findings - The results support the hypothesis that two key management objectives of splitting an ETF stock are to increase demand from retail investors and to increase the total capital under management. Support is also found for the existence of momentum in stock price indexes. Research limitations/implications - The effects of splits are examined in a larger group of ETFs that includes less-heavily traded stocks than the QQQ. These smaller ETFs potentially have more to gain in terms of increased investor interest than the QQQ. Originality/value - Positive excess returns were found in the split ETFs before and after the split. This is consistent with the tendency for stocks to be split following a large price run-up, and with momentum theory. Also, significant increases were found in total capital under management and shares outstanding after the splits for the splitting stocks. This is consistent with the hypothesis that a key goal of managers is to increase their compensation via higher total capital under management. Finally, significant increases were found in the number of small trades and dollar values of trades as a percentage of all trades (and of total dollar volumes) in the split sample. These results support the hypothesis that a primary objective (and result) of ETF stock splits is to make the shares more attractive to individual investors – despite possible deterioration of liquidity as evidenced by wider bid/ask spreads.

The Effect of Value Estimation Errors on Portfolio Growth Rates

This article analyzes the impact of value estimation errors on portfolios’ growth rates and relative growth rates for several portfolio weighting methods. In contrast to previous articles, this one addresses the effect of estimation errors on portfolio growth rates due to increased return volatility. The portfolio weighting methods examined include capitalization weights, estimation error independent weights, Fundamental weights, and Diversity weights. The article provides theoretical support, in the context of estimation error, for the empirical findings that many non-capitalization weighted portfolios’ returns beat the market’s capitalization-weighted portfolio return over time. It also provides a theory for the size effect.

The information content of dividend initiation announcements: The case of information technology firms

Purpose - The purpose of this paper is to examine the dividend initiation announcements made by firms in the information technology sector as defined in a modern system of industrial classification. Design/methodology/approach - On the basis of a modern classification of the information technology industry, the authors examine a wide range of corporate performance and management measures to discriminate between the two theories of the information revealed by the announcement of dividend initiations, the signaling, and life cycle theories. Findings - The empirical results are more consistent with the corporate life cycle theory of dividends than with the information signaling hypothesis. This finding helps clarify the nature of the information revealed by the announcement. Originality/value - The paper has clear implications for investors who are interested in the growth prospects of technology firms, or for others interested in their prospective stability and degree of maturity.

Arithmetic and Continuous Return Mean-Variance Efficient Frontiers

The arithmetic mean-variance frontier shows that taking more risk is always rewarded with higher expected arithmetic return. This article shows that there is a danger from being too aggressive that is not reflected in the arithmetic return mean-variance frontier because expected arithmetic return is a poor indicator of long-term arithmetic return. Since long-term arithmetic return is equivalent to long-term average continuous return, the relevant mean-variance frontier replaces expected arithmetic return with expected continuous return. The article shows that, for the continuous return mean-variance frontier, expected return initially rises, then declines and becomes negative as risk increases.

Reinganum's Trading Strategies Revisited: Structuring Profitable Strategies Based on Updated Filters

Purpose - The purpose of this paper is to reexamine the value, momentum and size factors employed in the trading strategy originally proposed by Reinganum. Also to enhance our understanding of the impact of these factors over time; to evaluate the effectiveness of these factors; to develop new strategies through a framework presented by Chan Design/methodology/approach - Using data from 1970 to 1983, Reinganum developed a profitable trading strategy based on four (or nine) variables to select stocks. First this paper shows why it is increasingly difficult to implement his original trading strategy, then tests his strategy on 23 additional years of data through 2006, and compares it to similar strategies that incorporate straightforward modifications to his filters. The analysis is further extended to a long/short trading strategy similar to that of Chan Findings - Using the Capital Asset Pricing Model, Fama-Frenchs three-factor model and Carharts four-factor model to evaluate returns following portfolio formation, significant and consistent alphas and portfolio sizes were found. Research limitations/implications - It is concluded that strategies that mix value, momentum and size filter rules can be developed to produce consistently negative or non-positive (vs solely positive) alphas. Originality/value - The paper shows that it is possible to form profitable short-only and long/short strategies and to increase the number of eligible stocks in the sample despite our modifications to Reinganums variables. By creating strategies based on mixed filter rules to produce either consistently positive (or negative) risk-adjusted returns, it can be concluded that slightly different versions of a given filter rule – often much simpler versions – not only enhance return performance but also increase its effectiveness in terms of portfolio size.

Market Adaptation to Regulation Fair Disclosure: The Use of Industry Information to Enhance the Informational Environment

Our fundamental research interest is in exploring the ways in which the financial markets have adapted to Reg FD, and our particular focus is on how market participants use industry information embedded in firms’ earnings announcements. We find that announcements of quarterly earnings made by companies that are the first in their industry to report in a given quarter have significant effects on the stock returns of other firms in the same industry as well as on their own stock returns. We then test the implications of these findings for their effects on the information environment. Overall, our empirical findings support the conclusion that the implementation of Reg FD has led to increased use of industry information that is revealed in earnings announcements. This is one way, among others, in which analysts and other market participants have adapted to the requirements of Reg FD. In this case, they have made the adaptation by developing new uses of public information to enhance the informational environment.

What happens when a stock is added to the Nasdaq-100 index? What doesn’t happen?

Additions to the Nasdaq-100 Index are based primarily on market capitalization rather than on judgments about a firm’s stature in its industry. We analyze abnormal returns upon announcement that a stock will be added to the Nasdaq-100 Index in a multivariate analysis that incorporates several possible alternative factors. We find that only liquidity variables are significant, but that factors representing feedback effects on the firm’s operations and level of managerial effort are not. This evidence suggests that additions to the Nasdaq-100 Index are associated with liquidity benefits but not with certification effects of the type associated with additions to the S&P indexes.

Long-Short Strategies May Not Be Factor-Neutral

This is an examination of three long-short investment strategies that may be used by investment managers. The factor strategy is long in small size and high book-equity/market equity (BE/ME) stocks and short in large size and low BE/ME stocks. The relative return strategy is long in stocks with the highest past returns and short in stocks with the lowest past returns. The relative earnings surprise strategy is long in stocks with the greatest (positive) earnings surprise and short in stocks with the worst earnings surprise. Only the relative return and relative earnings surprise strategies provide significant risk-adjusted returns; none of the three strategies is size and BE/ME-neutral. This suggests that other simple long-short strategies probably are not size and BE/ME-neutral. Investors should not equate long/short portfolios with the absence of systematic risk.