Three Essays on Price Volatility and Trading Volume in Financial Markets.

The objective of this dissertation is to examine the stock price volatility-volume relationship. The dissertation begins with an estimation of the time deformation market model in which stock contemporaneous trading volume is utilized as a proxy for the rate of information arrival. This local time market model is economically appealing because it is capable of explaining the observed heteroskedasticity and leptokurtosis in daily return data. With a sample of firms which have stock splits, it is shown that the inferences drawn from a modified event study which incorporates the local time market model are similar to those drawn from a typical event study which uses the simple OLS market model. In other words, a typical event study which employs daily stock return data and the OLS market model yields robust inferences in spite of the violation of the normality assumption in daily return data. The time deformation market model is also able to show that the increase in price volatility induced by stock splits is due to a structural change in the relationship between economic time and calendar time. The impact of option introduction on the stock price volatility-volume relationship is investigated. The asymmetric price change-volume relationship is affected by option trading because option trading is capable of reducing the short selling constraints. Although exactly how option trading can affect the asymmetry is a complex matter, the empirical findings do give mild support to the hypothesis that option trading can attenuate the asymmetric price change-volume relationship. Option trading also influences the local time market model. Empirical evidence is supportive of a structural shift in the model. These findings are consistent with the notion that information flows to both the stock and the options markets when option trading is viable. Also, one-day-lagged option volume is important in explaining the conditional return variance

Is the Hospitality Industry Ready for the New Lease Accounting Standards?

The days where companies can use off-balance sheet leases are coming to an end. The new lease accounting standards, ASU 842 and IFRS 16, released in early 2016, will be effective, respectively, on December 15, 2018, and January 1, 2019. Under the new standards, virtually all leases will be recognized on a lessee’s balance sheet. Hence, financial statements and ratios of companies that heavily use off-balance sheet leases will be considerably impacted. Our analysis of the off-balance sheet leases by the hospitality industry indicates that hospitality companies do extensively use these operating leases, which amounted to 51% of their assets in 2015. The expected widespread unfavorable impact on a lessee’s debt ratios and interest coverages could also affect a hospitality company’s borrowing rates and debt covenants. Given that the implementation is most likely time consuming, not just costly, the earlier the hospitality companies are prepared for the new standards the better

An analysis of the liquidity benefits provided by secondary markets

Listing shares in liquid secondary markets either to facilitate acquisitions or to diversify owner's personal wealth are among the most important reasons for firms to go public [Brau, J.C., Fawcett, S.E., 2006. Initial public offerings: An analysis of theory and practice. Journal of Finance 61, 399-436]. We contend that the expected benefits derived from the liquidity provided by secondary markets are relevant for understanding important decisions made in preparation for an IPO. We hypothesize that the potential losses caused by an IPO failure induce firms that benefit more from going public to hire more reputable underwriters and to adopt more conservative pricing policies. We use several proxies for the benefits firms derive from post-IPO liquidity. The results indicate that firms that benefited more from liquidity were taken public by more prestigious underwriters and exhibited substantially larger levels of price revisions and underpricing. Post-IPO liquidity is also important for understanding the decision to retain the lead underwriter in subsequent SEOs.IPO Liquidity

The Market Reaction to Stock Splits.

In this paper, a model of market reaction to stock splits is presented and tested. The auth ors argue that the announcement of a split sets off the following cha in of events: the market recognizes that subsequent to the (reverse) split ex-day, the daily number of transactions along with the raw vol ume of shares traded will increase (decrease); this increase in volum e results in an increase in the noisiness of the security's return pr ocess; the increase in noise raises the tax-option value of the stock -and it is this value that generates the announcement effect of stock splits. Copyright 1987 by American Finance Association.