The momentum effect on the London Stock Exchange

This study intends to investigate the momentum effect, which states that shares which performed the best (worst) over the previous three to twelve months continue to perform well (poorly) over the subsequent three to twelve months. Evidence suggests that a strategy that buys previous winner shares and sells short past loser stocks can generate abnormal profitability of about 1 per cent per month (Jegadeesh and Titman, 1993). Although momentum payoffs tend to persist when share returns in international markets are employed (e. g., Griffin et al., 2003, Rouwenhorst, 1998), a significant number of studies have debated the potential explanation of the momentum effect without reaching a consensus. Using data from the London Stock Exchange from January 1975 to October 2001, this thesis investigates some factors that influence the magnitude of continuation gains that have not been previously identified. I examine the relationship between momentum profitability and the stock market trading mechanism and is motivated by recent changes to the trading systems that have taken place on the London Stock Exchange. Since 1975 the London stock market has employed three different trading systems: a floor based system, a computerised dealer system called SEAQ and the automated auction system SETS. I find that after the introduction of the computerised dealer system SEAQ momentum profits are higher than when the floor based system operated. I also document that companies trading on the SETS auction system display greater momentum profitability than shares trading on SEAQ. Results are robust to the use of different samples and alternative risk adjustments. I investigate the role of volatility in influencing momentum profits. Shares with high volatility display wide spread out returns and therefore, potential higher magnitude momentum profitability. Given that shares displayed higher volatility traded on the post-Big Bang period (Tonks and Webb, 1991) and on the SETS system (Chelley-Steeley, 2003), I examine whether the different levels of momentum profitability achieved in alternative stock market structures arises from volatility. I find that momentum profits are strongly influenced by volatility, but the finding that the organisation of a stock market influences the momentum profits holds even after considering differences in volatility. I examine whether the magnitude of momentum profitability varies following bull and bear markets. Momentum profits stem from the winner shares in bull markets and from the loser stocks in bear markets. I report that momentum profits are stronger following bear markets, showing a sign of mean reversion in the UK stock market. Overall, this study contradicts the model of Hong and Stein (1999) that the momentum effect arises from the gradual expansion of information among investors and the model of Daniel et al, (1998) that the momentum effect stems from the investors' overconfidence that increases following the arrival of confirming news. This study also indicates that a significant portion of momentum profits stem from the magnitude of volatility

Trump’s fake news and stock market returns

We use a novel database that identifies allegedly Donald Trump’s fake news during his presidency. We find that the number of daily fake news is positively related to contemporaneous US stock market returns. Fake news is typically positively biased in our context, increasing stock returns in the short term. We invalidate alternate explanations of the main relation, such as the notion that newly arrived information drives the relation. The mechanism of the relationship is the source used and the reliability of the fake news. Fake news matters to the extent that participants believe it is true. This positive relation reverses over the following days, indicating some evidence of correction. Overall, we find that a politician’s fake news influences financial markets temporaril

Climate theory & managerial decisions on cross-border mergers

We explore the significance of climate theory concerning managerial decisions in cross-border mergers. We report that temperature offers a good familiarity proxy showing that country pairs that experience little (large) distance in temperature experience relatively more (less) acquisitions. A one-unit decrease in the difference of the temperature in a country pair is linked with an increase in the number of cross-border mergers by 1.09%. We then highlight the significance of relatively warm temperatures on managerial decisions: We find that (i) the relationship is driven by the Summer months; during June-August for country pairs in the Northern hemisphere and December-February for pairs in the Southern hemisphere, (ii) relatively more cross-border mergers occur towards countries with modestly warmer temperatures showing evidence of managerial affinity towards warmer places, and (iii) country pairs with relatively high temperatures exhibit more acquisitions. Overall, this study highlights a new perspective in the field of climate finance

Information leakage prior to market switches and the importance of Nominated Advisers

This study tests the information leakage hypothesis prior to the public announcement of firms switching between the Alternative Investment Market (AIM) and the Main Market (MM) in the UK. We find significant abnormal stock returns 60 trading days prior to the announcement of these switches. The results are robust after controlling for switching anticipation, rumors, other major corporate announcements, and firm performance a year prior to the switch. We also show that having a reputable Nominated Adviser (Nomad) significantly moderates the abnormal stock returns prior to market switches. However, this effect does not hold when Nomads also act as brokers in firms that switch markets. Overall, these findings provide novel evidence about abnormal stock returns prior to the announcement of market switches in the UK and the role of Nomads. As such, we shed light on the significance and the limits of decentralized regulation on informed trading activity

Why Do Financially Unconstrained Firms Borrow to Repurchase Shares?

The authors are grateful to Seth Armitage, Vidhan Goyal, Yulia Merkoulova, Patrick Verwijmeren, and Betty Wu for helpful comments and suggestions. Special thanks go to two anonymous referees and to Alan Lowe and Nathan Joseph, the editors, for their very helpful comments.Preprin

International Music Preferences as a Measure of Culture: Evidence from Cross-Border Mergers

This paper introduces the significance of international music preferences as a determinant of cross-border mergers. We argue that international music preferences capture the distance in culture between nations. We find that country pairs whose citizens experience relatively small distance in their music preferences (listen to each other’s music) exhibit more cross-border mergers. Overall, this study highlights that music preferences can measure international similarities in culture

Firm-level pollution and membership of emission trading schemes

Several firms have joined emission trading schemes in response to the call for corporate climate action. Using a comprehensive international data set on corporate membership of emission trading schemes (ETSs), we find that members of the scheme emit more CO2 than non-participants. This result also holds when exploring the corporate discharge of sulphur and volatile organic compounds (VOCs). The magnitude of this relationship persists even in the long run showing little evidence of a reduction from the firms in polluting the environment. We also find that firms that select to exit the scheme continue to pollute at a higher rate in the following years. Firms that enter the scheme for the first time increase their pollution in the following years. Although we identify significant differences at a country and continental level on the effectiveness of ETSs, our results raise some concerns about ETSs’ role

Bank regulation, financial crisis and the announcement effects of seasoned equity offerings of US commercial banks

This paper studies the differences in the announcement effects of seasoned equity offerings (SEOs) of commercial banks and non-banks, and explores the influence of bank regulation and the financial crisis on such differences. We find that abnormal stock returns on SEO announcements for US commercial banks are significantly higher than those of non-banks, consistent with the hypothesis that bank regulations reduce the likelihood that bank SEOs signal overpriced equity. The propensity score matching-based difference-in-difference analysis indicates that the differences in stock returns between banks and non-banks decreased during the 2007–2009 financial crisis period and increased after the passage of the Dodd-Frank Act in 2010

I only fear when I hear: How media affects insider trading in takeover targets

We study how target firm insiders respond to Wall Street Journal articles referring to illegal insider trading in past mergers. Such articles lead to target insider share purchases before bid announcement to drop by 75%. This effect is stronger nearer the bid announcement and increases with article visibility. It remains significant after controlling for public enforcement intensity, but is weakened by the greater potential for profitable trading. Our results suggest insider trading articles temporarily heighten the perception of litigation and reputation risks. Overall, our study indicates that such articles have a meaningful short-term deterrence effect on opportunistic insider trading, and highlights the disciplinary role of the media