Hole in the wall: informed short selling ahead of private placements

Companies planning a private placement typically gauge the interest of potential buyers before the offering is publicly announced. Regulators are concerned with this practice, called wall-crossing, as it might invite insider trading, especially when the potential investors are hedge funds. We examine privately placed common stock and convertible offerings and find evidence of widespread pre-announcement short selling. We show that pre-announcement short sellers are able to predict announcement day returns. The effects are especially strong when hedge funds are involved and when the number of buyers is high. We also observe pre-announcement trading in the options market

Insiders\u27 Profits in the Australian Equities Market

In this paper we investigate if directors of Australian companies earn persistent profits on their reported trades, if these abnormal profits are significant enough to be mimicked by outsiders, and if these insider trades have an effect on returns of other investors. We find that insiders take advantage of their private information in stocks of larger corporations, but generally do not in medium and small capitalization firms, indicating that they insiders are attracted to the liquidity and a greater presence of uninformed traders in large stocks. Insiders appear able to determine the value of their information in by trading larger volume and larger portion of their holdings when they have access to valuable information. We find that outsiders can make profitable trades by following insider\u27s trades in large firms, but abnormal returns mimicking insiders in small and medium size firms are limited to insiders\u27 sell trades only, and otherwise result in losses for outsiders. Implications on market fairness and integrity are discussed and conclude that market quality can be improved with public access to good quality aggregated data on reported director insider trades

Digital Insiders and Informed Trading before Earnings Announcements

We use firm-specific measures of cybersecurity risk mitigation based on textual analysis of 10-Ks to proxy for the probability of trading with digital insiders – hackers who target corporations to obtain non-public corporate information for illegal trading. We find that prior to earnings announcements, a larger share of new earnings information is already incorporated into prices for firms with low cybersecurity risk mitigation scores. We also find that pre-announcement trading by short sellers is more predictive of earnings surprises for firms with low cybersecurity risk mitigation. Further, on days closer to earnings announcements, firms with relatively low cybersecurity risk mitigation scores experience a larger increase in bid-ask spreads, particularly the adverse selection component. These results suggest that weak cybersecurity risk mitigation provides opportunities for acquisition of private information and that trading by privately informed traders is more likely in stocks of firms with higher exposure to cybercrimes

Internet chat, disagreement, retail trading, and stock returns around earnings announcements

This study tests the Miller (1977) hypothesis as an explanation for stock price behavior around technology firms’ earnings announcements during the late 1990s. Specifically, we examine whether the anomalous tendency for stock prices to increase (decrease) before (after) earnings announcements during this period is associated with an increase (decrease) in investor disagreement before (after) the announcement. For a sample of high-tech stocks in 1998, we use the daily number of messages posted on a firm’s Internet message board (chat room) as a measure of the level of investor disagreement about the firm’s prospects. Consistent with Miller, we find that stocks with a larger increase in the level of disagreement before the announcement tend to have a larger pre-announcement price increase, and a larger price reversal after the earnings announcement. We also find that both small and large investors buy before the announcement and sell afterward, although large investors begin selling sooner than retail investors. In addition, we find our disagreement measure is directly related to net initiated order flow from retail investors, but not institutional investors. Finally, we find that the relative amount of retail versus institutional trading in a stock is positively related to the pre-announcement price runup and negatively related to the post-announcement reversal, and that disagreement is significantly associated with these return patterns only for the subsample of stocks with the highest proportion of retail trading. These results are consistent with the view that retail investors are less willing or less able to (short) sell than institutional investors, and they suggest the Miller hypothesis applies more to retail investors than to institutional investors in this setting

Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open

This is the publisher's version, also found here: http://dx.doi.org/10.1017/S0022109012000270We find a strong tendency for positive returns during the overnight period followed by reversals during the trading day. This behavior is driven by an opening price that is high relative to intraday prices. It is concentrated among stocks that have recently attracted the attention of retail investors, it is more pronounced for stocks that are difficult to value and costly to arbitrage, and it is greater during periods of high overall retail investor sentiment. The additional implicit transaction costs for retail traders who buy high-attention stocks near the open frequently exceed the effective half spread

Improving corporate governance where the State is the controlling block holder: Evidence from China

We examine changes in market values and accounting returns for a sample of publicly traded Chinese firms around announcements of block-share transfers among government agencies (“State Bureaucrats”), market-oriented State-owned enterprises (“MOSOEs”) and private investors (“Private Entities”). We provide evidence that transfers from State Bureaucrats to Private Entities result in larger increases in market value and accounting returns than transfers to MOSOEs. We also find that CEO turnover occurs more quickly when shares are transferred to Private Entities. Moreover, we find that the changes in firm value and accounting returns, as well as the likelihood of CEO turnover, are all functions of the incentives and managerial expertise of the new block holder. We conclude that corporate governance can be improved at State-controlled firms by improving the incentives and managerial expertise of controlling block holders, and that this is better accomplished by transferring ownership to private investors rather than by shuffling ownership among Statecontrolled entities

Agency Conflicts, Expropriation and Firm Value: Evidence from Securities-Market Regulation in China

In this study, we examine the wealth effects of regulatory changes intended to improve corporate governance by protecting minority shareholders from expropriation by controlling shareholders. Using data from publicly traded Chinese firms, we find that these new regulations significantly increased firm value, and that firms with weak governance disproportionately benefited relative to firms with strong governance. Our evidence provides new support for the theory of La Porta et al. (2002) that better investor protection results in higher firm valuations. It also is supportive of the theory of Glaeser, Johnson and Shleifer (2001) that securities-market regulation can create substantial value for minority shareholders in a country with weak judicial enforcement. Finally, it is consistent with Black and Kraakman (1996), who argue that, in rule-based civil-law countries, regulation in the form of simple “bright-line rules” is more effective than in the form of “broad standards.

Insiders’ profits in the Australian Equities Market

In this paper we investigate if directors of Australian companies earn persistent profits on their reported trades, if these abnormal profits are significant enough to be mimicked by outsiders, and if these insider trades have an effect on returns of other investors. We find that insiders take advantage of their private information in stocks of larger corporations, but generally do not in medium and small capitalization firms, indicating that they insiders are attracted to the liquidity and a greater presence of uninformed traders in large stocks. Insiders appear able to determine the value of their information in by trading larger volume and larger portion of their holdings when they have access to valuable information. We find that outsiders can make profitable trades by following insider’s trades in large firms, but abnormal returns mimicking insiders in small and medium size firms are limited to insiders’ sell trades only, and otherwise result in losses for outsiders. Implications on market fairness and integrity are discussed and conclude that market quality can be improved with public access to good quality aggregated data on reported director insider trade

Improving corporate governance where the State is the controlling block holder: Evidence from China

We examine changes in market values and accounting returns for a sample of publicly traded Chinese firms around announcements of large block-share transfers among government agencies (“State Bureaucrats”), market-oriented State-owned enterprises (“MOSOEs”) and private investors (“Private Entities”). We find evidence that these large block transfers are true control transactions for all types of block holders, resulting in positive abnormal returns around the transfer announcements. Moreover, we provide evidence that transfers from State Bureaucrats and MOSOEs result in larger increases in market value and accounting returns than transfers from Private Entities—consistent with their superior incentives and expertise relative to State block holders. We also find that CEO turnover occurs more quickly when shares are transferred to Private Entities. We conclude that corporate governance can be improved at State-controlled firms by improving the incentives and managerial expertise of controlling block holders, and that this is better accomplished by transferring ownership to private investors rather than by shuffling ownership among State-controlled entities

Agency Conflicts, Expropriation and Firm Value: Evidence from Securities-Market Regulation in China

In this study, we examine the wealth effects of regulatory changes intended to improve corporate governance by protecting minority shareholders from expropriation by controlling shareholders. Using data from publicly traded Chinese firms, we find that these new regulations significantly increased firm value, and that firms with weak governance disproportionately benefited relative to firms with strong governance. Our evidence provides new support for the theory of La Porta et al. (2002) that better investor protection results in higher firm valuations. It also is supportive of the theory of Glaeser, Johnson and Shleifer (2001) that securities-market regulation can create substantial value for minority shareholders in a country with weak judicial enforcement. Finally, it is consistent with Black and Kraakman (1996), who argue that, in rule-based civil-law countries, regulation in the form of simple “bright-line rules” is more effective than in the form of “broad standards.