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Abstract:
This study describes the Indian corporate governance system and examines how the system has both supported and held back India's ascent to the top ranks of the world's economies. While on paper the country's legal system provides some of the best investor protection in the world, the reality is different with slow, over-burdened courts and widespread corruption. Consequently, ownership remains highly concentrated and family business groups continue to be the dominant business model. There is significant pyramiding and tunneling among Indian business groups and, notwithstanding copious reporting requirements, widespread earnings management. However, most of India's corporate governance shortcomings are no worse than in other Asian countries, and its banking sector has one of the lowest proportions of non-performing assets, signifying that corporate fraud and tunneling are not out of control. The corporate governance scenario in the country has been changing fast over the past decade, particularly with the enactment of Sarbanes-Oxley type measures and legal changes to improve the enforceability of creditor's rights. If this trend is maintained, India should have the quality of institutions necessary to sustain its impressive current growth rates.

Corporate Governance, International Financial Markets, Government Policy and Regulation

Abstract:
On the basis of theoretical work of Kim and Verrecchia (1991a, 1997), this paper investigates the association between volatility around earnings and dividend announcements and the amount of pre-announcement information and the precision of the announced news for a sample of 212 firms drawn from the London Stock Exchange for the period January 1990 to December 1998. The aforementioned theory suggest that the variance of price change around announcement periods is decreasing in the amount of pre-announcement information but increasing in the precision of the disclosed news.

The volatility of stock returns in the event window, natural logarithm of the average market value of a firm over the sample period, and the surrogate of precision derived from analytical work of KV (1991a) are assumed to be the operational measures for the variance of price change around announcement periods, the amount of pre-announcement information, and the precision of the announced news respectively. Tests are conducted using both GJR-GARCH (1,1) and the absolute return measure of volatility. After controlling for the magnitude of the average change of earnings per share, the net change in the degree of leverage, and the level of stock market volatility around firm specific news, the following conclusions emerge. First, it is documented that the volatility of stock returns around announcement periods is negatively related to the amount of pre-announcement information. Consistent with Grant (1980), this finding suggests that (small) firms with relatively less pre-announcement information experience high levels of uncertainty before announcement. This high pre-release uncertainty causes analysts and market participants to disagree about the implications of the forthcoming earnings and dividends announcements. When the announcement becomes imminent it tends to contain a lot of surprises that are translated into higher announcement period volatility. Second, it is found that the precision of the disclosed news plays a significant and important role in explaining shifts in volatility around event windows. In more specific terms, the volatility of stock returns around announcement periods is found to be directly proportional to the precision of the information released. Thus, the precision of an announcement is likely to influence investors' trading decisions around future earnings and dividends announcement dates. The primary conclusions of this paper are robust to the announcement of good or bad news, and remain qualitatively unchanged under a number of alternative assumptions about the way we estimate announcement period volatility. To the extent that the surrogates used for the quality of the predisclosure information and the precision of the news disclosed are appropriate operational measures of the unobservable theoretical constructs of precision implied by Kim and Verrecchia (1991a, 1997) analytical work, the evidence presented here is consistent with their theoretical predictions.

Volatility, Earnings Announcements, Information Quality

Abstract:
This study empirically examines the impact of firm-specific and deal-specific factors on the change in industry-adjusted operating performance around corporate mergers and acquisitions. The factors investigated are offer size, bidder leverage, the size of bidder's cash resources, whether the bidder's and target's businesses are in the same industrial category, the method of payment selected for the merger, whether the merger was friendly or hostile, different aspects of the bidder's ownership structure, and different aspects of the bidder's governance arrangements. Most of these factors are being examined for the first time in this context. The empirical analysis is based on UK firms merging between 1985 and 1994, and hence the paper also reports on real gains in corporate mergers for a sample of mergers outside the U.S. Utilizing single equation models, our results indicate that the performance of merged firms improves significantly following their combination. However, the extent of improvement depends significantly on the method of payment selected for the merger, and whether the merger was friendly or hostile. Performance change is also shown to be related to director and officer ownership as well as the concentration of ownership in the hands of outside blockholders.

Mergers, Operating Performance

Abstract:
This paper investigates the trading behavior of major market participants - both dealers and customers - during the six-month period of a well-publicized market manipulation episode: an attempted delivery squeeze in a bond futures contract traded in London. The analyses are based on a rich dataset on the spot and futures trades and inventories reported to the chief governmental regulator by different individual dealers and the Exchange. This simultaneous investigation of price distortions and trading positions of participants are of significant interest to both academics and market regulators. From an academic perspective, this paper provides, inter-alia, empirical evidence on how learning takes place in the market place and on the strategic behavior of major market participants, both dealers and public traders, in a market manipulation setting. It also shows that prices respond selectively to the trading actions of only the group of selected market participants that are relevant at that time. From a regulatory perspective, this paper has several messages. First, regulators and exchanges need to be very concerned about ensuring that squeezes do not take place since they are accompanied by severe price distortions and significant erosion of market depth. Second, exchanges should "mark to market" the specifications of their contracts more frequently, so that the term structure which underlies the calculation of conversion factors does not become dramatically different from the prevailing term structure. Third, regulatory reporting should ask for flagging of possession oriented trades like forward term repos: these trades can currently go un-noticed since they require virtually no regulatory capital. Fourth, and very importantly, delivery non-performance penalties in bond futures markets should be changed to conform to the cash market and the repo market conventions for settlement nonperformance.

Price manipulation, Futures markets, Squeeze

Abstract:
Using a comprehensive data-set from the Bank of England containing the close-of-business positions of individual UK government bond dealers in each bond issue and in all related futures contracts, we examine how the dealers use futures markets to manage the risk of their spot portfolio. We find that the size of dealers' positions in futures contracts is comparable in magnitude to their positions in the spot market, and that the dealers take on significant directional risks often by holding futures that are in the same direction as the spot. Although, in general, the dealers do not seem to use futures to reduce the level of their spot risk, we so find that they actively use futures to offset the changes in the levels of their spot risk. However, this offset is partial in most cases. They use futures to offset changes in their spot exposure to a greater extent when the bonds they hold in their portfolio are more efficiently hedgeable with futures contracts, and on days when the cost of offsetting (as measured by the predictable change in futures mispricing) is lower. They also offset more when the level of their spot risk is high and when recent changes in the spot risk are in a direction that exacerbates their spot risk exposure (i.e., when the potential costs of regulatory distress are high). Finally, we observe that dealers offset changes in their spot exposure to a greater extent immediately prior to important macroeconomic announcements and to a lesser extent immediately thereafter.

Abstract:
This paper examines how bond dealers use futures markets to manage the hedgeable market risk component of their core business risk exposure, and whether market quality is adversely affected by their selective risk taking activity. It also investigates the efficiency of market risk sharing within a decentralized semi-transparent market structure. We find that dealers engage in duration targeting, behaving as if they have a comparative advantage in bearing interest rate risk. They make significant directional bets often by holding futures that are in the same direction as the spot. They actively use futures to hedge changes in the spot exposure. They hedge changes in their spot exposure more when the potential costs of regulatory distress are high, when the cost of such hedging is low, and during periods of greater uncertainty. We find that duration targeting by dealers has adverse price effects due to capital constraints as predicted by Froot and Stein (1998). Finally, we find that trades in the spot market are not executed by dealers with extreme exposures. In this context, we recommend market reforms such as introduction of central quote posting or limit order book that will enable more efficient matching of liquidity demanders and suppliers, reduce trading costs, and improve the quality of risk sharing.

Abstract:
This paper examines how bond dealers use futures markets to manage the hedgeable market risk component of their core business risk exposure, and whether market quality isadversely affected by their selective risk taking activity. It also investigates the efficiency of market risk sharing within a decentralized semi-transparent market structure. We find that dealers engage in duration targeting, behaving as if they have a comparative advantage in bearing interest rate risk. They make significant directional bets often by holding futures that are in the same direction as the spot. They actively use futures to hedge changes in the spot exposure. They hedge changes in their spot exposure more when the potential costs ofregulatory distress are high, when the cost of such hedging is low, and during periods ofgreater uncertainty. We find that duration targeting by dealers has adverse price effects due to capital constraints as predicted by Froot and Stein (1998). Finally, we find that trades in the spot market are not executed by dealers with extreme exposures. In this context, we recommend market reforms such as introduction of central quote posting or limit order bookthat will enable more efficient matching of liquidity demanders and suppliers, reduce trading costs, and improve the quality of risk sharing.

Abstract:
This paper investigates how bond dealers manage core business risk with interest rate futures and the extent to which market quality is affected by their selective risk taking. We observe that dealers use futures to take directional bets and hedge changes in their spot exposure. We find that, cross-sectionally, a dealer with longer (shorter) risk exposure sells (buys) a larger amount of exposure the next day. However, this risk control takes place via the futures market and not the spot market. Finally, we find strong support for the price effects of capital constraints.

Abstract:
This paper examines how bond dealers use futures markets to manage the hedgeable market risk component of their core business risk exposure, and whether market quality is adversely affected by their selective risk taking activity. It also investigates risk sharing among bond dealers in the presence of the futures market. We find that dealers engage in duration targeting, behaving as if they have a comparative advantage in bearing interest rate risk. They make significant directional bets often by holding futures that are in the same direction as the spot. They actively use futures to hedge changes in the spot exposure. They hedge changes in their spot exposure more when the potential costs of regulatory distress are high, when the cost of such hedging is low, and during periods of greater uncertainty. We find that duration targeting by dealers has adverse price effects due to capital constraints as predicted by Froot and Stein (1998). Finally, we find that risk-reduction is undertaken entirely through futures, which implies that spot-market trades are not executed by dealers with extreme exposures. This has important implications for regulators. While a well-functioning bond futures market is a useful risk management tool for all market participants, it also reduces incentives for bond dealers to offer price improvement to move their own spot market inventory, thereby potentially increasing inside spreads, unless the spot market trading structure can be reformed to directly achieve a better matching between public investors and dealers with divergent exposure through, for example, high pre-trade transparency.

Abstract:
In October 1997, the London Stock Exchange removed the obligation of dealers to quote firm two-way prices for FTSE 100 index stocks, and allowed the public to compete directly with dealers in these stocks through the submission of limit orders. This article examines the effects of these market reforms on the trading costs of "public" investors, the targeted beneficiary of the reforms, and documents several interesting results. First, the duly signed average effective half-spread of public investors has decreased much more than the corresponding decrease in the absolute effective half-spread documented by Barclay et. al. (1998) for NASDAQ. This is because a sub-set of public investors trade through limit orders, and thereby earn the spread rather than pay it. Second, consistent with the change from obligatory to voluntary market making, there is a significant increase in the "positioning revenue" earned by dealers from a change in the price of a stock while they are carrying the stock in their inventory. As a result, the overall gain of public investors in terms of the realised half-spread is not significantly different from zero. Third, the cross-subsidisation across trade sizes has disappeared, leading to a significant decline in the average execution costs of small public trades and an increase for large public trades. Fourth, the market reforms have caused negative externalities for stocks not going through the new trading system. Finally, in the absence of the price stabilisation provided earlier by dealers, the inside half-spread has increased very sharply in the first hour of trading - a finding which highlights the need for special opening procedures for electronic order books.

Abstract:
We investigate and test hypotheses on how informed trading varies with market-wide factors and the structural and trading characteristics of a firm. We find strong evidence of commonality in informed trading, and a systematic dependence of informed trading on firm characteristics that is largely consistent with intuition and earlier theory and empirical evidence, wherever available. We accordingly decompose informed trading into two components: one that reflects information asymmetry with respect to skilled information processors with potentially private information on systematic factors or who generate a private informational advantage using public data; and another unpredictable component that reflects truly private information, potentially of traditional insiders. We test the pricing relevance of both these components and find that it is only the npredictable component reflecting truly private information that is priced, and is priced more strongly and in a manner more robust than total informed trading. Our pricing-relevance results strongly support Easley and O’Hara (2004) and do not support Hughes, et al. (2007).

Market microstructure, common factors, risk factors, asymmetric information

Abstract:
We use a rich dataset of trades of London equity dealers across all stocks to investigate the importance of portfolio considerations in risk management by financial intermediaries. We examine how the trading and pricing decisions of these dealers in individual stocks are conditioned by their ordinary and "equivalent" inventories in that stock, where the "equivalent" inventory is the dealer's ordinary inventory in that stock corrected for any reinforcing or offsetting effects arising from her inventory positions in other correlated stocks. We examine two types of equivalent inventories: the first based on correlations in total returns (as in Ho and Stoll (1983)), and the other based only on correlations in the unhedgeable component of returns (as in Froot and Stein (1998)). In addition to the mean reversion in ordinary inventory documented in earlier studies, we find strong mean reversion in both total and unhedgeable equivalent inventories indicating that portfolio considerations do influence dealers' overall risk management. However, we find that portfolio considerations are not important in determining whether, and at what price, a dealer executes a particular trade. Dealers with divergent ordinary (rather than equivalent) inventories execute large public and inter-dealer trades; and dealers offer significantly higher price improvement, and charge significantly lower effective spread, for large public trades that reduce the divergence of ordinary inventories rather than the those that reduce the divergence of equivalent inventories. We also find that portfolio considerations at the individual trade level are neither significant for small dealer firms nor for large dealer firms, and also neither significant at the level of industry desks, nor for the dealer firm as a whole. Cross-sectionally across stocks, we find that the intensity of mean reversion in individual stock inventories depends only on the specific risk of the stock and not on its "market beta" or its "industry beta". Our findings are contrary to the expectation that a dealer firm would actively manage their inventory risk exposure by taking off-setting positions in different individual stocks based on correlations between pairs of individual stocks. Instead, these findings are consistent with the decentralization of the market making function within securities firms to individual dealers. In this context, our results appear to be driven by the policy of evaluating and rewarding individual dealers according to the trading profits they generate in the stocks assigned to them, rather than by the difficulties of coordinating and sharing information instantaneously across different individual dealers.

Abstract:
The volatility information content of stock options for individual firms is measured using option prices for 149 U.S. firms during the period from January 1996 to December 1999. Volatility forecasts defined by historical stock returns, at-the-money (ATM) implied volatilities and model-free (MF) volatility expectations are compared for each firm. The recently developed model-free volatility expectation incorporates information across all strike prices, and it does not require the specification of an option pricing model. Our analysis of ARCH models shows that, for one-day-ahead estimation, historical estimates of conditional variances outperform both the ATM and the MF volatility estimates extracted from option prices for more than one-third of the firms. This result contrasts with the consensus about the informational efficiency of options written on stock indices; several recent studies find that option prices are more informative than daily stock returns when estimating and predicting index volatility. However, for the firms with the most actively traded options, we do find that the option forecasts are nearly always more informative than historical stock returns. When the prediction horizon extends until the expiry date of the options, our regression results show that the option forecasts are more informative than forecasts defined by historical returns for a substantial majority (86%) of the firms. Although the model-free (MF) volatility expectation is theoretically more appealing than alternative volatility estimates and has been demonstrated to be the most accurate predictor of realized volatility by Jiang and Tian (2005) for the S&P 500 index, the results for our firms show that the MF expectation only outperforms both the ATM implied volatility and the historical volatility for about one-third of the firms. The firms for which the MF expectation is best are not associated with a relatively high level of trading in away-from-the-money options.

Stock options, Implied volatility, Model-free volatility expectation, Information content, ARCH models

Abstract:
The seminal literature on liquidity (Garbade (1982), Kyle (1985), and Harris (1990)) identifies three main dimensions of liquidity: spread, depth and resiliency. While there has been extensive research focussing on spread and depth, there has been little empirical investigation on resiliency, even though resiliency addresses an important question: when trades, especially those resulting from relatively large and uninformative orders, change market prices and lead to temporary pricing errors, how fast are these pricing errors eliminated through the competitive actions of value traders, dealers and others market participants. This paper investigates, for the first time, the main features of resiliency as a dimension of liquidity, and its effect on stock returns. Using minute-by-minute data for a sample of 100 NYSE stocks, resiliency is empirically estimated for each day for each stock as the observed mean-reversion parameter in the stock's pricing-error process based on Kalman-filter estimation techniques. These estimated resiliencies are utilized to document several interesting results. First, the micro-structural time-series and stock-specific factors that affect resiliency are analyzed and it is found that trading activity, tick size, information asymmetry, and the stock's unexpected intra-day volatility are all significant determinants of resiliency, and in the expected direction. Second, although these determinants are also related with spread and depth, resiliency is only weakly related with these two other price and quantity dimensions of liquidity, and provides significant new information on market quality as the time dimension of liquidity. Third, there is strong evidence of commonality in time-varying resiliency across the market, in the same manner as other is in the other dimensions of liquidity. Finally, and importantly, we find strong evidence that resiliency is priced in the stock's required rate of return.

Market Microstructure, Liquidity, Resiliency

Abstract:
Regulatory and media concern has focused heavily on the potentially manipulative distortion of market prices associated with naked short selling. However, naked shorting can also have beneficial effects for liquidity and pricing efficiency. We empirically investigate the impact of naked short-selling on market quality, and find that naked shorting leads to significant reduction in positive pricing errors, the volatility of stock price returns, bid-ask spreads, and pricing error volatility. We study naked shorting surrounding the demise of financial institutions hardest hit by the financial crisis in 2008 and find no evidence that stock price declines were caused by naked shorting. We also find that naked short-selling intensifies after rather than before credit downgrade announcements during the 2008 financial crisis. In general, we find that naked short sellers respond to public news and intensify their activity after price declines rather than triggering these price declines. We study the impact of the SEC ban on naked short selling of financial securities during July and August 2008, and find that the ban did not slow the price decline of those securities and had a negative impact on liquidity and pricing efficiency. Finally, after examining the speeds of mean reversion of pricing errors and order imbalances, we infer that Regulation SHO was successful in curbing the impact of manipulative naked short selling, and this reduction in the impact of manipulative naked shorting has continued through the 2008 financial crisis. Overall, our empirical results are in sharp contrast with the extremely negative pre-conceptions that appear to exist among media commentators and market regulators in relation to naked short-selling.

Naked short selling, short selling, pricing efficiency

Abstract:
This paper examines the impact of insider trading activity on the trading behaviour of dealers and on market quality. Specifically, the activity we investigate is the trading of London Stock Exchange listed equities by incumbent company directors. We find that dealers adjust their inventory control strategies during periods of such insider activity. In the ten day period subsequent to an insider trade, dealers tighten their inventory control resulting in stronger mean reversion in inventories. However, there is no evidence that the depth of the market is affected by the insider trade or that dealers feel the need to utilise the inter-dealer market to share inventory risks to a greater extent. However, when price changes due to temporary inventory considerations are taken into account, the large price changes reported in many insider-trading studies disappear. The paper also investigates if the dealer participating in the insider trade acts as a quasi-insider.

Market Quality, Inventory Control, Insider Trading

Abstract:
This study empirically examines the impact of firm-specific and deal-specific factors on the change in industry-adjusted operating performance around corporate mergers and acquisitions. The factors investigated are offer size, bidder leverage, the size of bidder's cash resources, whether the bidder's and target's businesses are in the same industrial category, the method of payment selected for the merger, whether the merger was friendly or hostile, different aspects of the bidder's ownership structure, and different aspects of the bidder's governance arrangements. Most of these factors are being examined for the first time in this context. The empirical analysis is based on UK firms merging between 1985 and 1994, and hence the paper also reports on real gains in corporate mergers for a sample of mergers outside the U.S. Our results indicate that the performance of merged firms improves significantly following their combination. However, the extent of improvement depends significantly on the method of payment selected for the merger, and whether the merger was friendly or hostile. The change in performance is also related to director and officer ownership as well as the concentration of ownership in the hands of outside blockholders.

Mergers, Operating Performance

Abstract:
We investigate the information content of the call (put) Early Exercise Premium, or EEP, defined as the normalized difference in prices between otherwise comparable American and European call (put) options. The call EEP specifically captures investors' expectations about future lump sum dividend payments as well as other state variables such as conditional volatility and interest rates. From that perspective, the EEP should also be related to future returns of the underlying security. Little is known about the EEP, largely because it is usually unobservable for most underlying securities. The FTSE 100 index is an exception in that regard, because it has both American and European options contracts that are traded in large volumes. We use data of the FTSE 100 index, and its American and European options contracts, from which we compute a time series of the EEP. Interestingly, we find that the EEP is a good forecaster of returns at daily horizons. This forecastability is not due to time-variation in market risk premia or liquidity. Importantly, we find that the predictability stems primarily from the ability of the EEP to forecast innovations in dividend growth, rather than other components of unexpected returns. Overall, we use several empirical and simulations methods to establish predictability of the underlying with an options market variable, link this predictability to information about cash flow fundamentals, and thereby provide clear support for Black's (1975) conjecture that informed investors prefer to trade on their superior information about fundamentals in the options market relative to the underlying.

Return Predictability, Early Exercise Premium, Dividend Growth

Abstract:
This paper investigates whether dealer firms' trading and pricing decisions are governed by their equivalent inventories, based on total returns as in Ho and Stoll (1983) or on unhedgeable returns as in Froot and Stein (1998), or by their ordinary inventories, as would be the case in a decentralized market-making organisational structure. It finds that ordinary inventories, and not equivalent inventories best explain dealer firms' quote placement strategy, which dealer firm executes trades and the quality of execution offered to the trades. This finding is consistent with decentralized market making where, due to information sharing difficulties or the nature of compensation contracts, individual dealers care only about risk of stocks managed by them, and not the positions of other dealers within the firm.

Dealer firm, equivalent inventory, correlated risk exposure, unhedgeable risk, effective spreads

Abstract:
In 1997, the London Stock Exchange, like NASDAQ, allowed the public to compete directly with dealers in a subset of stocks through the submission of limit orders. However, unlike NASDAQ, for these stocks, London also removed the obligation of dealers to quote firm two-way prices, and became a voluntary dealer network competing with a centralized limit order book. In the context of the important differences between the reforms on London and NASDAQ, this London based study addresses several important questions of academic, regulatory and practitioner interest that could not hitherto be examined through U.S. based studies. First, we investigate how the change from obligatory to voluntary market-making affects the provision of financial intermediation services. In particular, we examine the effect of binding market maker obligations on price-stabilisation, and the effect of binding market maker obligations on the adverse selection losses that market makers make in dealing with informed investors. In this context, we also examine the effect of competition and the contestability of markets in competing and non-competing segments, and analyse how the lack of pre-trade quote-transparency, and the resultant increased search costs, affect trading costs. Second, since a major benefit of the London and NASDAQ reforms was the opportunity afforded to "public" investors to earn the spread by posting limit orders, instead of always paying the spread by demanding liquidity, we analyse how the premium charged by individual or institutional "public" investors for supplying liquidity, and the adverse selection losses they face, are different from those of market intermediaries.

Abstract:
We present new empirical evidence on the agency costs which emerge from the vertical (ownership versus control) and horizontal (majority versus minority) agency problems. Using a cross-section of 57,784 public and private firms, we document that agency costs increase as firms move from a single owner/single manager ownership structure to more complicated ownership structures. Within each ownership structure, agency costs are significantly higher when firms are not managed by owners. We also show that agency costs are lower in firms with shared control of ownership. Further, we find that horizontal agency costs are lower in firms where control is contestable.

Agency problems, agency costs, ownership, control

Abstract:
The volatility information content of stock options for individual firms is measured using option prices for 149 U.S. firms during the period from January 1996 to December 1999. Volatility forecasts defined by historical stock returns, at-the-money (ATM) implied volatilities and model-free (MF) volatility expectations are compared for each firm. The recently developed model-free volatility expectation incorporates information across all strike prices, and it does not require the specification of an option pricing model.

Our analysis of ARCH models shows that, for one-day-ahead estimation, historical estimates of conditional variances outperform both the ATM and the MF volatility estimates extracted from option prices for more than one-third of the firms. This result contrasts with the consensus about the informational efficiency of options written on stock indices; several recent studies find that option prices are more informative than daily stock returns when estimating and predicting index volatility. However, for the firms with the most actively traded options, we do find that the option forecasts are nearly always more informative than historical stock returns.

When the prediction horizon extends until the expiry date of the options, our regression results show that the option forecasts are more informative than forecasts defined by historical returns for a substantial majority (86%) of the firms. Although the model-free (MF) volatility expectation is theoretically more appealing than alternative volatility estimates and has been demonstrated to be the most accurate predictor of realized volatility by Jiang and Tian (2005) for the S&P 500 index, the results for our firms show that the MF expectation only outperforms both the ATM implied volatility and the historical volatility for about one-third of the firms. The firms for which the MF expectation is best are not associated with a relatively high level of trading in away-from-the-money options.

Stock options, Information conten, Implied volatility, Model-free volatility expectations, ARCH models

Abstract:
This paper investigates whether dealers' trading and pricing decisions are governed by their equivalent inventories, based on total returns as in Ho and Stoll (1983) or on unhedgeable returns as in Froot and Stein (1998), or by their ordinary inventories, as would be the case in a decentralized market-making organisational structure. It finds that ordinary inventories, and not equivalent inventories best explain dealers' quote placement strategy, which dealer executes trades and the quality of execution offered to the trades. This finding is consistent with decentralized market making where, due to information sharing difficulties or the nature of compensation contracts, individual dealers care only about risk of stocks managed by them, and not the positions of other dealers within the firm.

Dealer firm, equivalent inventory, correlated risk exposure, unhedgeable risk, effective spreads

Abstract:
Announcement and Call for Papers for the annual EFA meetings, to be held on August 20-23, 2003 in Glasgow, Scotland.

Abstract:
This paper investigates the information environment during and after a corporate break-up utilizing direct measures of information asymmetry developed in the market microstructure literature. The analysis is based on all corporate break-ups in the United States in the period 1995-2005. The results document that information asymmetry declines significantly as a result of a break-up. However, this reduction takes place not at the time of its announcement or its completion, but after it has been fully consummated. At the same time, not all investors are equally affected, but informed investors who generate private information by skilled analysis of public information come to play a more important role compared to traditional corporate insiders. This might explain why financial advisers promote break-ups among their corporate clients, as they are likely beneficiaries. The positive stock-market reaction to break-up announcements is significantly related to reductions in insider-related information asymmetry, indicating that the advantage of skilled in-formation analysts does not offset the overall improvement in the information environment due to a break-up.

Abstract:
This paper investigates the information environment during and after a corporate break-up utilizing direct measures of information asymmetry developed in the market microstructure literature. The analysis is based on all corporate break-ups in the United States in the period 1995-2005. The results document that information asymmetry declines significantly as a result of a break-up. However, this reduction takes place not at the time of its announcement or its completion, but after it has been fully consummated. At the same time, not all investors are equally affected, but informed investors who generate private information by skilled analysis of public information come to play a more important role compared to traditional corporate insiders. This might explain why financial advisers promote break-ups among their corporate clients, as they are likely beneficiaries. The positive stock-market reaction to break-up announcements is significantly related to reductions in insider-related information asymmetry, indicating that the advantage of skilled in-formation analysts does not offset the overall improvement in the information environment due to a break-up.

Spin-off, Divestiture, Information asymmetry

Abstract:
While theoretical models strongly suggest that short-sales are mainly driven by private information, recent empirical evidence of has been rather mixed. This paper contributes to the discussion by looking at various potential motives to sell short and compares these with regular buys and sales with regards to variation in the information contents and timing of short-sales. We find that short-sellers have different private information than regular buyers and sellers, which seems to have a longer life-time, being related to previous buying pressure. The information advantage of short-sellers seems originating from skilled analysis of publicly available data rather than corporate insider information. Short-sales provide an important stabilizing role by providing liquidity in periods of uninformed buying pressure. Overall, we find that short-sales are driven by multiple trade motives, which sets short-sellers apart from regular buyers and sellers.

Short-selling, Information asymmetry, Microstructure

Abstract:
This paper looks at the relationship between privatization and market microstructure measures using a sample of privatized and privately-owned firms from the European Union. We juxtapose the levels of information asymmetry between privatized firms and their privately-owned counterparts by employing the adverse selection component of the bid-ask spread, as well as the probability of informed trading (PIN) following EKOP (1996), to measure information asymmetry. The main finding of the study is that partially privatized firms, i.e. firms in which the government still retains a stake, exhibit lower levels of information asymmetry and PINs, after controlling for firm characteristics. Additionally, an event-study methodology based on the earnings announcement date reveals that partially privatized firms have consistently lower levels of asymmetry on the day of the event, five days before, and five days after, relative to privately-owned firms.

Privatization, Information Asymmetry, Microstructure, PIN

Abstract:
The major contribution of this paper is to utilise the direct measures of informed trading and information asymmetry developed in the market microstructure literature to provide rich insights into how the information environment changes during and after a corporate break-up. The paper analyses all corporate break-ups over the eleven-year period 1995-2005. We find that the information asymmetry faced by investors reduces significantly as a result of the break-up. However, this reduction takes place not at the time of the announcement or its "completion", but after it has been fully consummated. We also find that not all informed investors are equally affected. In particular, informed investors who generate their information advantage by skilled processing of market-wide information, become more important relative to the traditional insider with private firm-specific information. This potentially explains why financial advisors promote break-ups among their corporate clients as they are likely beneficiaries. Finally, we find that the positive stock-market reaction to break-up announcements is significantly related to reductions in information asymmetry. Given the extant evidence of information asymmetry being a priced risk factor, this finding helps to reconcile some of the existing explanations for corporate break-ups.

Spin-off, Divestiture, Information asymmetry

Abstract:
Among more recent changes, the enactment of Sarbanes Oxley type measures in 2004 which includes protections for minority shareholders in family- or promoter-led businesses has contributed to recent increases in institutional and foreign stock ownership. And while family- and government-controlled business groups continue to be the rule, India has also seen the rise of successful companies like Infosys that are free of the influence of a dominant family or group and have made the individual shareholder their central governance focus. But for all its shortcomings, Indian corporate governance has taken major steps toward becoming a system capable of inspiring confidence among institutional and, increasingly, foreign investors. The Securities and Exchanges Board of India (SEBI), which was established as part of the comprehensive economic reforms launched in 1991, has made considerable progress in becoming a rigorous regulatory regime that helps ensure transparency and fair practice. And the National Stock Exchange of India, also established as part of the reforms, now functions with enough efficiency and transparency to be generating the third-largest number of trades in the world, just behind the NASDAQ and NYSE. The Indian corporate governance system has both supported and held back India's ascent to the top ranks of the world's economies. While on paper the country's legal system provides some of the best investor protection in the world, enforcement is a major problem, with overburdened courts and significant corruption. Ownership remains concentrated and family business groups continue to be the dominant business model, with significant pyramiding and evidence of tunneling activity that transfers cash flow and value from minority to controlling shareholders. But for all its shortcomings, Indian corporate governance has taken major steps toward becoming a system capable of inspiring confidence among institutional and, increasingly, foreign investors. The Securities and Exchanges Board of India (SEBI), which was established as part of the comprehensive economic reforms launched in 1991, has made considerable progress in becoming a rigorous regulatory regime that helps ensure transparency and fair practice. And the National Stock Exchange of India, also established as part of the reforms, now functions with enough efficiency and transparency to be generating the third-largest number of trades in the world, just behind the NASDAQ and NYSE. Among more recent changes, the enactment of Sarbanes Oxley type measures in 2004which includes protections for minority shareholders in family- or promoter-led businesses has contributed to recent increases in institutional and foreign stock ownership. And while family and government-controlled business groups continue to be the rule, India has also seen the rise of successful companies like Infosys that are free of the influence of a dominant family or group and have made the individual shareholder their central governance focus.

Abstract:
This paper investigates whether dealers trading and pricing decisions are governed by their equivalent inventories (based on total returns as in Ho and Stoll, 1983 or on unhedgeable returns as in Froot and Stein, 1998) or by their ordinary inventories, as would be the case in a decentralized market-making organizational structure. It finds that ordinary inventories, and not equivalent inventories best explain dealers quote placement strategy, which dealer executes trades and the quality of execution offered to the trades. This finding is consistent with decentralized market making where, due to information sharing difficulties or the nature of compensation contracts, individual dealers care only about risk of stocks managed by them, and not the positions of other dealers within the firm.

Dealer firm, equivalent inventory, correlated risk exposure, unhedgeable risk, effective spreads

Abstract:
The London stock options market trades both European and American style options on the same underlying asset--the FT- SE 100 stock index. This paper exploits this special feature to provide direct empirical evidence on the value of early exercise in American option prices. Significant early exercise premium is found in both calls and puts. The premium is significantly higher than that predicted analytically by the binomial option valuation model. The magnitude of this premium for in-the-money options is also considerably higher than that documented for the U.S. market on the basis of an imperfect proxy. Consistent with theoretical expectations, the premium of calls increases with the degree to which the option is in the money and with the dividends on the last ex-dividend date before option maturity; and the premium for puts is positively related to the degree to which the option is in the money and to the time to maturity, and negatively related to the dividends on the last ex-dividend date prior to expiration. The early exercise premium for calls is sometimes economically significant even when there is no possibility of dividends before maturity. At the same time, the American option often trades at a discount to its European counterpart greater in magnitude than the median bid-ask spread, though this does not necessarily signal economically significant pricing inefficiency.