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Abstract:
The January anomaly has attracted much academic interest and has been explained in different ways. However, the multitude of explanations has created confusion about the validity and relative importance of those explanations. In some cases, the hypotheses are examined individually though the evidence may be consistent with more than one hypothesis. Furthermore, prior work has not adequately controlled for the bid-ask bounce. Therefore, the results leave the reader somewhat confused regarding the January effect: is it caused by tax-loss selling, window-dressing, information, bid-ask bounce, or a combination of these causes? In this paper, we try to disentangle different explanations of the January effect and identify its primary cause. We find that past losers are more likely to be sold in December than in January to realize the tax advantage of capital losses. Past winners are more likely to be sold in January than in December to postpone payment of taxes. The selling is accompanied by changes in volume around turn of the year consistent with the tax-related selling hypotheses. The results are not materially affected when we use the midpoint of quotes instead of actual prices: the bid-ask bounce accounts for about 20-25% of the observed returns.
To verify the window-dressing hypothesis, we examine stock returns around June-July, the period of semi-annual reporting by institutional managers that is not contaminated by tax-related trading. We do not find an economically meaningful difference between the 5-day return at the end of June and the 5-day return at the beginning of July, which is not consistent with window dressing.
If the January effect occurs due to release of new information in January that affects the information-poor firms more than the information-rich firms then the returns in January should be related to availability of information (for example, with the number of analysts as a proxy). We do not find a correlation consistent with the information hypothesis. There is no information-related effect in June-July. The evidence here supports the tax-related selling hypotheses as the drivers of January effect.

January Effect, Seasonality, Window-Dressing, Tax Loss Selling, Tax Gain Selling

Abstract:
The multitude of explanations for the January effect leaves the reader confused about its primary cause(s): is it tax-loss selling, window-dressing, information, bid-ask bounce, or a combination of these causes? The confusion arises, in part, because evidence has been presented in support of a particular hypothesis though the same evidence may be consistent with more than one hypothesis.

Furthermore, prior work has not adequately controlled for the bid-ask bounce. In this paper, we try to disentangle different explanations of the January effect and identify its primary cause. We find that tax-related selling is the most important cause, overshadowing other possible explanations.

Abstract:
Changes in exchange rates are expected to affect the competitiveness of companies: a strong dollar is bad for American exporters and a weak dollar is good. Yet empirical research has not found much evidence of the expected contemporaneous correlation between exchange rate changes and stock returns even for a carefully selected set of exporting firms. Authors have attributed this apparent anomaly to market inefficiency, investor naivete, sample selection, etc. In this paper, we propose a simple extension by looking at a different implication of currency valuation. If a stronger currency signals a stronger economy then the weakness that exporting firms experience in the foreign markets is partially or fully offset by the strength in the domestic economy. We find that positive surprises in GDP announcements are typically associated with a stronger dollar supporting the dual effect of currency changes. The above result implies that a better sample to capture the impact of currency changes would likely be importing firms because an importer is helped by a stronger currency on both dimensions: lower import prices and a stronger domestic economy. Our results are consistent with this explanation. Alternate explanations for the results such as pass-through and hedging are considered.

Abstract:
We claim that speculative short sellers are partly responsible for the weekend effect. Concerned with their inability to trade over the weekend and in an attempt to reduce their risk exposure, short sellers close their speculative positions on Fridays and re-establish new short positions on Mondays, causing higher returns on Friday than on Monday. We find evidence consistent with this claim. Stocks with higher short interest exhibit greater weekend effect than stocks with lower short interest. Examination of the weekend effect for IPOs, short-interest stocks, and highly volatile stocks lend additional support for our hypothesis. Although it is difficult for investors to directly trade individual stocks to profit from the weekend effect, they can protect themselves against the weekend effect by not selling stocks on Mondays and not buying on Fridays.

short sales, Monday, Friday, seasonality, day-of-the-week, anomaly, mispricing, short selling, weekend effect

Abstract:
We claim that speculative short sellers are partly responsible for the weekend effect. Concerned with their inability to trade over the weekend and in an attempt to reduce their risk exposure, short sellers close their speculative positions on Fridays and re-establish new short positions on Mondays, causing higher returns on Friday than on Monday. We find evidence consistent with this claim. Stocks with higher short interest exhibit greater weekend effect than stocks with lower short interest. Examination of the weekend effect for IPOs, short-interest stocks, and highly volatile stocks lend additional support for our hypothesis. Although it is difficult for investors to directly trade individual stocks to profit from the weekend effect, they can protect themselves against the weekend effect by not selling stocks on Mondays and not buying on Fridays.

short sales, Monday, Friday, seasonality, day-of-the-week, anomaly, mispricing, short selling, weekend effect

Abstract:
Several studies have found that stock price changes resulting from firms added to the S&P 500 index can be best exp lained by a downward sloping demand curve. In this paper, we study price effects around both additions and deletions and find that the price effect of index changes is consistent with Merton's (1987) investor-awareness and market segmentation hypothesis. We find that the reduction in shadow cost of incomplete diversification that follows additions is correlated with abnormal returns accruing to the added stocks. We also find that the asymmetric price effects of additions and deletions that have not been explained by empirical studies thus far are consistent with market segmentation.

Abstract:
We study the price effects of firms added to and deleted from the S&P 500 index and document an asymmetric price response: there is a permanent increase in the price of added firms but no similar decline for deleted firms. These results are at odds with extant explanations of the effects of S&P 500 index changes which imply a symmetric price response to additions and deletions. A possible explanation for asymmetric price effects arises from changes in investor awareness. Results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of S&P 500 index additions and deletions.

index changes, S&P 500, index additions, index deletions, price pressure, investor awareness, downward sloping demand curves

Abstract:
The existing literature reports insignificant 'total' exposure for multinational or exporting firms, where total exposure incorporates both firm specific and macroeconomic effects. We propose a dual-effect hypothesis to explain this result which seemingly contradicts conventional wisdom. According to our proposed hypothesis, firms are affected by both the domestic economy and foreign markets. These effects are at least partially offsetting for exporters and additive for importers. The resulting predictions of insignificant total exposure for exporters and positive total exposure for importers are borne out in our tests. The literature also reports insignificant 'residual' exposure for multinationals or exporting firms, where residual exposure estimates the firm-specific exposure. This result is explained by biases in the residual exposure estimates introduced by the choice of the value-weighted market index as the control portfolio. We propose an equally weighted portfolio of purely domestic firms as an alternative portfolio to reduce such biases and report significantly negative exposure for exporters and significantly positive exposure for importers, as predicted by theory.

Currency risk, Multinationals, Hedging, exchange rates, stock prices

Abstract:
The existing literature reports insignificant 'total' exposure for multinational or exporting firms, where total exposure incorporates both firm specific and macroeconomic effects. We propose a dual-effect hypothesis to explain this result which seemingly contradicts conventional wisdom. According to our proposed hypothesis, firms are affected by both the domestic economy and foreign markets. These effects are at least partially offsetting for exporters and additive for importers. The resulting predictions of insignificant total exposure for exporters and positive total exposure for importers are borne out in our tests. The literature also reports insignificant 'residual' exposure for multinationals or exporting firms, where residual exposure estimates the firm-specific exposure. This result is explained by biases in the residual exposure estimates introduced by the choice of the value-weighted market index as the control portfolio. We propose an equally weighted portfolio of purely domestic firms as an alternative portfolio to reduce such biases and report significantly negative exposure for exporters and significantly positive exposure for importers, as predicted by theory.

Currency risk, Multinationals, Hedging, exchange rates, stock prices

Abstract:
In this paper, we argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: the inability to trade over the weekend is likely to cause these short sellers to close many of their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays.

We find evidence in support of this hypothesis: the weekend effect is significantly larger for high short-interest stocks than for low short-interest stocks. Further, we find that the likely substitution of speculative short sales by put options results in the weekend effect to diminish for stocks with actively traded options, but to continue for other stocks. An analysis of several special types of stocks, viz. IPOs, zero short-interest stocks, and highly volatile stocks, reveals support for the hypothesis.

Abstract:
Prior research has generally found that stocks with a high level of short interest perform poorly suggesting that short sellers have superior information. However, it is known that stock prices can affect corporate performance due to resource allocation: that is, a low stock price can negatively affect firm performance by denying the company capital or other resources needed for efficient operation (Subrahmanyam and Titman, 2001). Thus, it is not clear whether the excess returns to short sellers are a result of superior information or resource constraints imposed by a depressed stock price.

We examine the informativeness of short sales following introduction of Rule 10b-21 that limited the ability of market participants to short sell prior to an SEO. Using recent research, we are able to categorize SEO-issuing firms into short sale constrained and short sale unconstrained stocks. We find that the underpricing of SEOs by firms that are short sale constrained increases after the rule. We believe that the higher cost of short selling reduces the level of short selling that makes the prices less informative and increases underpricing. On the other hand, there is no change in the level of underpricing for SEOs by firms where short sales are unconstrained. The underpricing does not decline which is consistent with absence of manipulative short selling. Thus, our evidence is consistent with the notion that short sellers possess superior information. Finally, we find that the post-issue underperformance occurs only for SEOs where short sales are constrained.

Short sales, seasoned equity offerings, rule 10b-21, short sellers, information

Abstract:
We find that, due to arbitrage around index changes, investors in S&P 500-linked funds lose between 0.03% and 0.12% annually, while investors in Russell 2000-linked funds lose between 1.30% and 1.84%. In dollar terms, the losses range from $3.75 billion to $6 billion a year for the two indexes together.

These losses are an unexpected consequence of index fund investors evaluating index fund managers based on tracking error in an effort to control agency costs. Minimization of tracking error coupled with the predictability and/or pre-announcement of index changes creates the opportunity for a wealth transfer from index fund investors to arbitrageurs, particularly for Russell 2000-linked funds where the index changes are predictable. We propose solutions aimed at resolving the problem that can be implemented by indexing companies, index fund managers, or fund investors.

Index funds, Index changes, Agency costs

Abstract:
Theoretical models suggest that firms may pursue riskier strategies in times of financial distress. For example, financially weak firms may compromise safety and quality to maximize current period profits. If the riskier strategy fails, then the stockholders are content to hand over the bankrupt firm to the debt holders. Despite much interest, there is little, if any, empirical evidence that relates financial health to the risk-taking behavior of firms. We explore this relationship for the airline industry. Using bond ratings to proxy for financial health and airline mishaps to measure safety, we find a significant correlation: airlines with higher quality bond ratings are less likely to experience mishaps than airlines with lower quality ratings. On average, an airline with an investment grade bond rating has a 25% lower probability of a mishap than an airline with a below investment grade bond rating. The findings imply that the Federal Aviation Administration (FAA) should shift part of its inspection and surveillance resources from financially strong airlines to financially weak airlines. Further, reliance on readily available bond ratings makes it easy to implement these recommendations.

Abstract:
We present evidence on the December effect. When investors do not sell winner stocks in December but postpone their sale to January so that capital gains will not be realized in the current fiscal year, the "winners" appreciate in December. The December effect is relatively easy to arbitrage. We also present evidence regarding the persistence of the January effect and note that the January effect continues because it is difficult to exploit profitably.

Abstract:
We present evidence on the December effect. When investors do not sell winner stocks in December but postpone their sale to January so that capital gains will not be realized in the current fiscal year, the "winners" appreciate in December. The December effect is relatively easy to arbitrage. We also present evidence regarding the persistence of the January effect and note that the January effect continues because it is difficult to exploit profitably.

Abstract:
We examine whether U.S. equity mutual funds exhibit a disposition bias, the tendency to sell winners and hold losers, and how this influences performance, investor flows and fund survival. About 30% of all funds exhibit some degree of disposition behavior. Funds with a disposition bias underperform funds that are not disposition prone by 4-6% per year. Moreover, even after controlling for performance, tax overhang and other factors that potentially affect flows, funds with a disposition bias attract significantly smaller flows than other funds. These results suggest that performance and tax efficiency are all important to mutual fund investors.

Rational explanations for a disposition bias are not supported by the evidence. However, we find that mutual fund investors are smart enough to minimize investment in disposition-prone funds. As a result, these funds have significantly higher rates of failure than other funds, thereby potentially reducing the impact of irrational trading behavior on security prices.

disposition-prone, fund flows, mutual funds

Abstract:
Because of arbitrage around the time of index changes, investors in funds linked to the S&P 500 Index and the Russell 2000 Index lose between $1.0 billion and $2.1 billion a year for the two indices combined. The losses can be higher if benchmarked assets are considered, the pre-reconstitution period is lengthened, or involuntary deletions are taken into account. The losses are an unexpected consequence of the evaluation of index fund managers on the basis of tracking error. Minimization of tracking error, coupled with the predictability and/or pre-announcement of index changes, creates the opportunity for a wealth transfer from index fund investors to arbitrageurs.

Portfolio Management, Equity Strategies, Asset Allocation, Performance Measurement and Evaluation, Performance Measurement, Private Wealth Management, Mutual Fund Studies, Investment Industry, Other

Abstract:
We find that, on average, firms added to the S&P 500 index experience a permanent price increase, while those deleted from it suffer only a temporary price decline. Existing theories, such as a downward sloping demand curve, liquidity, and information, fail to explain the asymmetric response. We propose a new explanation for the observed price patterns: changes in investor awareness. Investors become more aware of a stock upon its addition to the S&P 500 index but do not become similarly unaware of a stock following its deletion. This results in a significant price increase after an addition but not an equivalent decline after a deletion. Consistent with our hypothesis, we find that Merton's (1987) measure of awareness improves after an addition but remains essentially unchanged after a deletion. The price reaction is related to changes in the measure of awareness.

From a practical standpoint, our results suggest that index fund managers who are not constrained by tracking error minimization are better off not trading on the effective date. Rather, they may be able to benefit their shareholders by executing purchases of additions upon announcement, but waiting to sell deleted firms until well after the effective date.

Index changes, index funds, S&P 500 index, investor awareness, downward sloping demand curve

Abstract:
The multitude of explanations for the January effect leaves the reader confused about its primary cause(s): is it tax-loss selling, window dressing, information, bid-ask bounce, or a combination of these causes? The confusion arises, in part, because evidence has generally been presented in support of a particular hypothesis though the same evidence may be consistent with another hypothesis. Furthermore, prior work does not adequately control for the bid-ask bounce. In this paper, we try to disentangle different explanations of the January effect and identify its primary cause. We find that tax-related selling is the most important cause, overshadowing other explanations.

Abstract:
We study the price effects of firms added to and deleted from the S&P 500 index and document an asymmetric price response: there is a permanent increase in the price of added firms but no similar decline for deleted firms. These results are at odds with extant explanations of the effects of S&P 500 index changes which imply a symmetric price response to additions and deletions. A possible explanation for asymmetric price effects arises from changes in investor awareness. Results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of S&P 500 index additions and deletions.

index changes, S&P 500, index additions, index deletions, price pressure, investor awareness, downward sloping demand curves

Abstract:
We examine the relationship between financial health and product safety in the airline industry. Theoretical models predict that agency problems are exacerbated when a firm is in or near financial distress and lead to increased risk-taking behavior by such firms. We document support for this prediction. Our empirical model, which uses mishaps to proxy for airline safety, and lagged bond ratings to proxy for financial well-being, shows a significant correlation between the two measures: airlines with highly-rated bonds are less likely to be involved in accidents. We find that, on average, a whole higher letter grade for the bond rating is associated with a ten percent lower probability of accident. Our results remain robust in the presence of other variables that could affect the number of airline mishaps.

financial health, airlines, accidents, reputation, distress, bond ratings, mishaps, incidents

Abstract:
We argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: the inability to trade over the weekend is likely to cause these short sellers to close their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays. We find evidence in support of this hypothesis based on a comparison of high short-interest stocks and low short-interest stocks, stocks with and without actively traded options, IPOs, zero short-interest stocks, and highly volatile stocks.

short sellers, short sales, weekend, options, seasonality

Abstract:
This article is an exploratory examination of the benefits and risks associated with opening of stock markets. Specifically, we estimate changes in the level and volatility of stock returns, inflation, and exchange rates around market openings. We find that stock returns increase immediately after market opening without a concomitant increase in volatility. Stock markets become more efficient as determined by testing the random walk hypothesis. We find no evidence of an increase in inflation or an appreciation of exchange rates. If anything, inflation seems to decrease after market opening as do the volatility of inflation and volatility of exchange rates.

Abstract:
Previous studies evaluating the effect of privatization have relied on accounting data. While this approach has provided significant results, the accounting data are vulnerable to manipulation especially by the new management. In this paper, we examine the effect of privatization on i) the product prices in the markets where the privatized firms provided service, and the effect on ii) the stock prices of competing firms. We believe that the product prices and stock prices will present a truer picture of privatization. For our analysis, we choose the privatization of British Airways and Air Canada. We find that i) airfares in both the British Airways and Air Canada markets fell significantly when the control passed from government to private ownership - reflecting (expected) improvements in economic efficiency and keener competition. Simultaneously, we also find that ii) stock prices of competitors (the US airlines) fell significantly upon announcement. The abnormal stock returns to the privatized airlines' competitors are related to their exposure in the markets served British Airways and Air Canada. The results imply that change to private ownership improves economic efficiency; and privatization benefits consumers through lower prices.

Abstract:
This paper examines the benefits and risks of market internationalization by analyzing the effect of recent market openings in developing countries. We estimate changes in the return and volatility of stock prices, portfolio flows, and the volatility of portfolio flows around market openings. We find that stock prices, on average, increase upon market opening without a significant change in volatility. Furthermore, portfolio inflows to these countries are significantly positive following market openings, but without a concurrent increase in the volatility of portfolio flows; hence, the concern about "hot money" appears to be unwarranted.

Abstract:
For the period 1971-1991, we find that firms issue bonds when a significant long-term upturn in performance levels off. The performance is significantly above normal for the five-year pre-issuance period but quickly falls to normal in the issuance year and remains so for the next five years. This is quite a different picture of performance than prior studies suggest. Besides a shorter observation period in the previous studies, we suggest that this difference is due to rebalancing bias in prior studies. Cross-sectional tests show a positive relationship between bond risk and pre-period abnormal performance, consistent with the adverse-selection model of financing decisions. However, our results also suggest that issuers realize significant pre-period abnormal performance, after accounting for bond risk.

Abstract:
While research using stock prices has rejected the hypothesis that market power is important in motivating horizontal mergers, studies of airfares find evidence consistent with a dominant role of market power in airline mergers. I integrate the two lines of research by examining the same set of airline mergers from a capital market viewpoint. Further, I link changes in the stock market to changes in the product market, presenting a dual market perspective. I conclude that airline mergers result in both increased market power and more efficient operations. This article has implications for antitrust policy.