Evidence of Informed Trading Prior to Earnings Announcements

This study examines transactions in stocks during the thirty trading days prior to earnings announcements. Using two methodologies, we find evidence of informed trading for initiators of large transactions (presumably institutions) but not for initiators of small transactions (presumably individuals). Specifically, we find that, relative to a control period, initiators of large transactions tend to buy (sell) stocks prior to earnings announcements that exceed (fall short of) analyst’ forecasts. In addition, the fraction of total stock price movement that occurs on large transactions is substantially higher during the pre-announcement period than during the control period. Results of both tests suggest, contrary to previous research, that some large traders have and use superior private information prior to large earnings surprises

Nonnormalities and Tests of Asset Pricing Theories.

The robustness of the multivariate tests of Michael R. Gibbons, Stephen A. Ross, and Jay Shanken (1986) to nonnormalities in the residual covariance matrix is examined. After considering the relative performance of various tests of normality, simulation techniques are used to determine the effects of nonnormalities on the multivariate tests. It is found that, where the sample nonnormalities are severe, the size and/or power of the test can be seriously misstated. However, it is also shown that these extreme sample values may overestimate the population parameters. Hence, they conclude that the multivariate test is reasonably robust with respect to typical levels of nonnormality. Copyright 1989 by American Finance Association.

Quantitative methods in a developing country: Managers' perceptions and desires

The role of quantitative methods in business decision making has been a subject of much discussion in the literature. Most of this discussion has emanated from developed countries. In this paper, the current practice in a developing country is examined, as well as the desires and perceptions of management. It is evident that the current practice lags that of the developed countries. Moreover, while the practice in companies with international association is not markedly different from local companies, the management of these companies desire a situation closer to that found in the developed countries. It is suggested that adequately trained personnel are not currently available and that a career orientated masters programme in quantitative methods is necessary in developing countries.

Trading Mechanisms and the Components of the Bid-Ask Spread.

The authors compare the relative magnitudes of the components of the bid-ask spread for New York Stock Exchange (NYSE)/American Stock Exchange (AMEX) stocks to those of National Association of Securities Dealers Automated Quotations (NASDAQ)/National Market System (NMS) stocks. They find that the order-processing cost component is smaller, and the adverse selection component is greater, on the NYSE/AMEX trading systems than on the NASDAQ/NMS system. The inventory holding component is also greater for exchange-traded stocks than for NASDAQ/NMS stocks, but this may be attributable to differences in the characteristics of the firms whose stocks trade on the respective systems. Copyright 1994 by American Finance Association.