Executive Stock Option Exercises and the Predictive Ability of Transaction Value

This paper investigates the predictive ability of executives’ stock option exercises by categorising all exercises by the overall value of the transaction. This measure incorporates the cost to the executive of exercising the option, together with the income generated by the associated sale of stock at the time of exercise. As a result, we show that, in contrast to the existing literature, executive stock option exercises do have predictive ability for future stock returns. This is, however, limited to transactions that generate net revenue for the executive, a finding that is the reverse of the evidence relating to standard executive transactions

Inside Information and Public News: R-Squared and Beyond

This paper finds that the majority of stock price movements remain unexplained after controlling for both public and private information. This suggests that economists’ inability to explain asset price movements is the result of either noise or naive asset pricing models.asset pricing; news; private information

Do UK Institutional Shareholders Monitor their Investee Firms?

As institutional investors are the largest shareholders in most listed UK firms, one expects them to monitor the firms they invest in. However, there is mounting empirical evidence which suggests that they do not perform any monitoring. This paper provides a new test on whether UK institutional investors engage in monitoring. The test consists of an event study on directors’ trades. If institutional shareholders act as monitors, their monitoring activities convey new information about a firm’s future value to other outside shareholders and reduce the informational asymmetry between the managers and the market. As a result, directors’ trades convey less information to the market, and the stock price reaction is weaker. However, our results show that institutional shareholders do not have any significant impact on the stock price reaction which stands in marked contrast with the impact that families, individuals and other firms have on stock prices.Insider trading;institutional investor monitoring;shareholder activism;corporate governance;ownership and control

New thoughts on efficient markets

The globally widespread economic crisis that burst in 2007 has been a central topic of recent papers. Economists and researchers have been pointing out that the crisis underpins the downfall of the efficient market hypothesis (EMH), as part of a search for the roots of the crisis. This undermined the belief in the traditional asset-pricing theories and models. Several papers have surfaced that highlight the role of the EMH in the economic crisis, and have therefore doomed the theory governing market mechanism as dead. This paper presents the current debate and takes the side of proponents of the EMH who argue that that this assertion is flawed, and the EMH remains the most appropriate proxy for understanding market forces. It is the only quantifiable approach to model market prices that is still in use by analysts and investors today.efficient market hypothesis, asset pricing models, sub-prime credit crisis

The Information Contained in The Exercise of Executive Stock Options

This paper investigates the use by insiders of private information in their decision to exercise executive stock options. It is the first to categorise the exercise of an executive stock option by the proportion of stock sold at exercise. Consistent with existing research, exercises overall do not yield subsequent abnormal returns. However, we find a marked and significant difference in subsequent performance between exercises categorised as ‘high’ and ‘low’ sale proportion respectively. Therefore, while the exercise decision may appear uninformed, this study demonstrates that executives do use private information in their exercise and corresponding sale decisions. Further, near-the-money exercises produce negative abnormal returns, consistent with such exercises being relatively expensive. These results need to be reflected in the valuation of executive stock options, and hence the compensation executives derive from them

Discovering the best: Informational efficiency and liquidity of alternative trading mechanisms in experimental asset markets

This paper reports the results of 18 experimental asset markets with 262 subjects that explore the effects of liquidity and aggregation of information. The main focus lies on the comparison of different trading mechanisms of stock exchanges. Compared to most of financial markets experiments, reality is met by introducing long-living assets and integrating all subjects in a multi-period decision-making process. In accordance with the evidence from the empirical research in real financial markets, our results show that the continuous auction achieves the highest informational efficiency. Dealer markets do the worst; call markets (batch trading) reach an intermediate position. A comparable result is achieved regarding the liquidity of the trading mechanisms. For both success factors of real stock exchanges our results show a strong tendency that continuous trading outperforms the other market structures, at least in the framework of the present measurement and on the chosen abstraction level. This does not exclude for the practice to offer a combination with call markets in certain titles and at certain times, particularly, if the here met assumptions of an open market access and information symmetry between the investors do not apply in full extent. --Market Microstructure,Experimental Asset Markets,Market Efficiency,Informational Efficiency,Liquidity,Call Markets,Continuous Auction

Insider trading in Germany: Do corporate insiders exploit inside information?

Our study analyzes a large sample of transactions carried out by corporate insiders reported to the German regulatory authority BaFin in the period July 1, 2002 to April 30, 2005 employing event study methodology. In particular, we focus on the question whether corporate insiders exploit inside information while trading in their company's stock. Therefore we use a distinct property of German law, i.e. company's obligation to reveal inside information through ad-hoc news disclosures, to link trading of insiders to their foreknowledge of important corporate news. We find strong evidence that insiders exploit inside information as they earn above average profits by front-running on subsequent news disclosures. Furthermore, looking at the type of insider, we find that members of the supervisory board (directors) and the group of other insiders (basically family members of senior managers and directors) profit substantially from exploiting inside information. In contrast, members of the executive board (senior managers) can be largely exculpated from exploiting inside information as they realize below average returns with their rare front-running transactions. --insider trading,inside information,§15a WpHG,German stock market,regulation of financial markets

Are internet firms different? : evidence from insider trading

This study investigates whether the information content of insider transactions, with a focus on sell transactions, is different for high growth, high volatility Internet-based firms. Prior research on more “traditional” firms has found a small, but significant negative abnormal return with insider sells, which points to an association of insider sells with negative information about the firm by outsiders. We employ several models to examine over 1,000 inside transactions for more than 100 NETDEX firms to find that for Internet firms, insider sells are not followed by a significant negative abnormal return. Firm size effects differ between the different methods employed. In conclusion, it appears that while insider sales in traditional firms are motivated by information asymmetry reason, insider sales in Internet firms are not. We conclude that Internet firms are different indeed.

When an event is not an event : the curious case of an emerging market

Shares trading in the Bolsa mexicana de Valores do not seem to react to company news. Using a sample of Mexican corporate news announcements from the period July 1994 through June 1996, this paper finds that there is nothing unusual about returns, volatility of returns, volume of trade or bid-ask spreads in the event window. This suggests one of five possibilities: our sample size is small; or markets are inefficient; or markets are efficient but the corporate news announcements are not value-relevant; or markets are efficient and corporate news announcements are value-relevant, but they have been fully anticipated; or markets are efficient and corporate news announcements are value-relevant, but unrestricted insider trading has caused prices to fully incorporate the information. The evidence supports the last hypothesis. The paper thus points towards a methodology for ranking emerging stock markets in terms of their market integrity, an approach that can be used with the limited data available in such markets

Sooner or later: delays in trade reporting by corporate insiders

Until October 2004 corporate insiders in Germany were required to report trades in the shares of their firm 'without delay'. In practice substantial reporting delays were common. We show that the delays are systematically related to the characteristics of the firm. Delays are longer in widely-held firms and in firms using German accounting standards. This suggests that managers of these firms are less responsive to the informational requirements of the capital market. We further find that abnormal returns after the reporting date of an insider trade are independent of the reporting delay. This implies that prices are distorted in the period between the trading and the reporting date. This is a strong point in favor of regulation requiring and enforcing immediate disclosure of insider trades. --insider trading,directors' dealings,accounting standards