Option Investor Rationality Revisited

Do option investors rationally exercise their options? Numerous studies report evidence of irrational behavior. In this paper, we pay careful attention to intraday option quotes and reach the opposite conclusion. An exercise boundary violation (EBV) occurs when the best bid price for an American option is below the option’s intrinsic value. Far from being unusual, we show that EBVs occur very frequently. Under these conditions, the rational response of an investor liquidating an option is to exercise the option rather than sell it. Empirically, we find that the likelihood of early exercise is strongly influenced by the existence and duration of EBVs. Not only do these results reverse standard theory on American option valuation and optimal exercise strategy, but they also suggest that the ability to avoid selling at an EBV price creates an additional source of value for American options that is unrelated, and in addition to, dividend payments. This additional value may help explain why American options appear overpriced relative to European options

Who, if Anyone, Reacts to Accrual Information?

We confirm and extend prior research that suggests accrual levels predict future returns, even after controlling for earnings surprise. We then document abnormal buying behavior around 10-K/Q filing dates that correlates with accrual level. Specifically, we extend Collins and Hribar (2000) by showing that the accrual anomaly persists for a sample of firms followed by analysts after controlling for analyst earnings forecast errors and using exact 10-K/Q filing dates. We then show that large traders, those who initiate trades of at least 5,000 shares, tend to trade in the correct direction in response to accrual information released in SEC filings after preliminary earnings. This tendency is limited, however, to cases where earnings conveyed favorable news initially. Investors who use accrual information apparently ignore stocks whose earnings convey unfavorable news or believe that accrual level is not informative for these firms. We also provide some evidence that the smallest traders react to accrual information, but in the wrong direction

Earnings expectations and investor clienteles

Abstract: Prior research suggests that the earnings expectations of some investors are systematically biased toward seasonal random walk (SRW) predictions. We provide clear and direct evidence that the net buying activity of small (large) traders around earnings announcements is significantly positively associated with SRW (analyst) forecast errors. Further, the interpretations of earnings news by the smallest and largest investors appear to be completely unrelated. Finally, small trades at the time of earnings announcements run counter to stock-price movements suggesting that small traders may impede stock prices from reflecting earnings-related information and may, therefore, play a role in post-earnings-announcement drift. Earnings Expectations and Investor Clienteles Abstract: Prior research suggests that the earnings expectations of some investors are systematically biased toward seasonal random walk (SRW) predictions. We provide clear and direct evidence that the net buying activity of small (large) traders around earnings announcements is significantly positively associated with SRW (analyst) forecast errors. Further, the interpretations of earnings news by the smallest and largest investors appear to be completely unrelated. Finally, small trades at the time of earnings announcements run counter to stock-price movements suggesting that small traders may impede stock prices from reflecting earnings-related information and may, therefore, play a role in post-earnings-announcement drift

Qualitative assessment of innovations in healthcare provision

<p>Abstract</p> <p>Background</p> <p>The triad of quality, innovation and economic restraint is as important in health care as it is in the business world. There are many proposals for the assessment of quality and of economic restraints in health care but only a few address assessment of innovations. We propose a strategy and new structures to standardize the description of health care innovations and to quantify them.</p> <p>Discussion</p> <p>Strategy and structure are based on the assumption that in the early phase of an innovation only data on the feasibility and possibly on the efficacy or effectiveness of an innovation can be expected. From the patient's perspective, benefit resulting from an innovation can be confirmed only in a later phase of development. Early indicators of patient's benefit will be surrogate parameters which correlate only weakly with the desired endpoints. After the innovation has been in use, there will be more evidence on correlations between surrogate parameters and the desired endpoints to provide evidence of the patient benefit. From an administrative perspective, this evidence can be considered in decisions about public financing. Different criteria are proposed for the assessment of innovations in prevention, diagnosis and therapy. For decisions on public financing a public fund for innovations may be helpful. Depending on the phase of innovation risk sharing models are proposed between manufacturers, private insurers and public funding.</p> <p>Summary</p> <p>Potential for patient benefit is always uncertain during early stages of innovations. This uncertainty decreases with increasing information on the effects of the innovation. Information about an innovation can be quantified, categorized and integrated into rational economic decisions.</p

Third Market Broker-Dealers: Cost Competitors or Cream Skimmers?

This article compares the bid-ask spread for New York Stock Exchange-NYSE listed securities before and after a major third market broker-dealer, Bernard L. Madoff Investment Securities, begins to selectively purchase and execute orders in those securities. Tests reveal the quoted bid-ask spread tightens when Madoff enters the market. Furthermore, trading costs as measured by the difference between the transaction price and the midpoint of the contemporaneous bid-ask spread do not increase. Together, these results suggest that the adverse selection problem associated with allowing agents to selectively execute orders in exchange-listed securities may be economically insignificant. Copyright 1997 by American Finance Association.

Does Payment For Order Flow To Your Broker Help Or Hurt You?

Payment for order flow, Madoff, Broker execution, Internalization,