This paper provides evidence on managerial motives for raising equity by examining long-run performance and insider trading around canceled and completed seasoned equity offerings (SEOs). Insider selling increases prior to competed and canceled SEOs, but declines afferward only for canceled offerings. For completed SEOs, pre-filing insider trading is related to long-run performance after completion. For Canceled sEOs, pre-filing insider trading is related to stock performance between filing and cancellation. Finally, changes in dence is consistent with insiders exploiting windows of opportunity by attempting to issue overvalued equity and by canceling the issue when the market reaction to the announcement eliminates the overvaluation.

When firms adjust their capital structures, they tendto move toward a target debt ratio that isconsistent with theories based on tradeoffs betweenthe costs and benefits of debt. In contrast toprevious empirical work, out tests explicitlyaccount for the fact that firms may face impedimentsto movements toward their target ratio, and that thetarget ratio may change over time as the firm'sprofitability and stock price change. A separateanalysis of the size of the issue and repurchasetransactions suggests that the deviation between theactual and the target ratios plays a more importantrole in the repurchase decision than in the issuancedecision.

Daily pricing of mutual funds provides liquidity to investors but is subject to valuation errors due to the inability to observe synchronous, fair security prices at the end of the trading day. This mayhurt fund investor if speculatior strategiclly seek to exploit mispricing or if the net flow of money into funds is correlated with these pricing eerrors. We show that mutual funds are exposed to speculative traders by using a simple day trading rule that yields large profits in a sample of 391 U.S.-based open-end international mutual funds. We propose a simple “fair pricing” mechanism that alleviated these concerns by correcting net asset values for stale prices. We argue that fund companies and regulatiors should look at alternatives that allow funds to offer fair prciing to investors, which, in turn, decreases the need to resort to monitoring for day traders and redemption penalties.

The leading explanation for the post-issue long-runstock return underperformace of seasoned equityoffering firms is that investors have optimisticexpectations regarding future earnings and theunderperformance occures as these expectations arecorrected over time. To directly test thishypothessis, we examine investors' reaction toquarterly earnings announcements over a five-yearperiod following the offering for a large sample ofseasoned equity issuing firms. In general, ourevidence suggests that investorsare not disappointedby earnings announcements that follow seasonedequity offerings. This result is not sensitive towidening the windown over which earningsannouncement returns are computed. This result alsoholds true for subsets of equity issuing firms. Thechoice fo these three subsets is predicated byextant evidence that these firms are likely toconvey relatively more unfavorable informationthroung their earnings announcements. Overall, ourfindings are inconsistent with the optimisticexpectations hypotgesis.

We examine the stock price reaction to earningsannouncements in the five years following seasonedequity offerings (SEOs). On average, post-SEOearnings announcements are met with a significantlynegative abnormal stock price reaction. Althoughthis negative reaction accounts for adisproportionately large portion of long-runpost-SEO abnormal stock returns, on average,abnormal stock price reactions to post-seo earningsannouncements are reliably negative only within thesmallest quartile of equity issuers. For smallfirms, therefore, these findings are broadlyconsistent with the hypothesis that firms issueequity when the market overestimates the firm'sfuture earnings perfomance.

Extending an empirical technique developed in Easley,Kiefer, and O'Hara (1996), (1997a), we examinedifferent hypotheses about stock splits. In linewith the trading range hypothesis, we find thatstock splits attract uninformed traders. However, wealso find that informed trading increases, resultingin no appreciable change in the information contentof trades. Therefore, we do not find evidenceconsistent with the hypothesis that stock splitsreduce information asymmetries. The optimal ticksize hypothesis predicts that stock splits attractlimit order trading and this enhances the executionquality of trades. While we find an increase in thenumber of executed limit orders, their effect isovershadowed by the increase in the costs ofexecuting market orders due to the larger percentagespreads. On balance, the uninformed investors'overall trading costs rise after stock splits.

Existing theory suggests that, in an unregulated market for corporate control, the level of takeovers is suboptimal because shareholders do not receive the full benefit from them. However, existing theory neglects that the threat of takeover may divert managerial effort from productive to defensive activities. This paper shows that, when this is considered, takeovers may, in fact, be excessive.

This paper explores the effect of exclusionary ethical investing on corporate behavior in a risk-averse, equilibrium setting. While arguments exist that ethical investing can influence a firm's cost of capital, and so affect investment, no equilibrium model has been presented to do so. We show that exclusionary ethical investing leads to polluting firms being held by fewer investors since green investors eschew polluting firms' stock. This lack of risk sharing among non-green investors leads to lower stock prices for polluting firms, thus raising their cost of capital. If the higher cost of capital more than overcomes a cost of reforming (i.e., a polluting firm cleaning up its activities), then polluting firms will become socially responsible because of exclusionary ethical investing. A key determinant of the incentive for polluting firms to reform is the fraction of funds controlled by green investors. In our model, empirically reasonable parameter estimates indicate, that more than 20 % green investors are required to induce any polluting firmss to reform. Existing empirical evidence indicates that at most 10% of funds are invested by green investors.

We examine whether the market demand curve for equitiesis dawnward sloping. Unlike previous studies thatexamine individual stocks' demand curves, we look atthe aggregate demand curve. As a proxy for aggregatedemand, we employ equity mutual fund flows. Unlikeprevious studies that focus on events that areunlikely to convey new information to the market, wedevise an empirical framework that disentangles theprice-pressure effect and the information effect. Wedo not find evidence for the price-pressure effectthat equity fund flows directly affect stock marketprices in the presence of fundamentals of firms.Instead, we find that equity fund flows seem to beinfluenced by the performance of the stock marketand that investors try to forecast fundamentals offirms and change their demand for stocksaccordingly. Overall, these findings are with ahorizontal market demand curve for equities.

Daily retutns are used to examine how mutual fundsactively alter the risk of their portfolios inresponse to past performance. Compared to monthlydata, daily returns produce much more efficientestimates of fund volatility, which give vastlydifferent inferences about the behavior of fundmanagers. In particular, monthly results consistentwith under-performers increasing their risk relativeto better performing funds disappear with dailydata. The differences in the monthly and dailyresults arise from biases in the monthly volatilityestimates attributable to daily returnautocorrelation.

We examine an impartant aspect of emprical estimation of term structure models; the role of conditioning information in dynamic term structure models. The use of both real world or simulated data implicitly incorporates conditioning information. We examine the bias created in estimating the drift by a specific form of conditioning, namely truncation. Using the theory of enlargement of filtrations we provide estimates of the extent of this truncation bias for commonly used short rate models. We find that this truncation bias causes the drift of these models to have a nonlinear structure.

Early studies find that option introductions tend to raise the price of underlying stocks. More recent research indicates that post-1980 option introductions are associated with negative abnormal returns in underlying stocks. Other studies document increased short sale activities following option listing. This paper provides evidence that the documented abnormal returns and changes in short interest around option listings are consistent with the mitigation of short sale constraints resulting from the option introduction, and that both the abnormal returns and short interest changes around listing dates can be predicted using ex ante characteristics of the underlying stock.

This paper shows how to decompose the dollar profitearned from an option into two basic components: i)mispricing of the option relative to the asset atthe time of purchase; and ii) profit from subsequentfortuitous changes or mispricing of the underlyingasset. This separation hinges on measuring the “truerelative value” of the option from its realizedpayoff. The payoff from any one option has a hugestandard error about this value that can be reducedby averaging the payoff from several independentoption positions. Simulations indicate that 95%reductions in standard errors can be furtherachieved by using the payoff of a dynamicreplicating porfolio as a Monte Carlo controlvariate. In addition, the paper shows that these lowstandard errors are robust to discrete rather thancontinuous dynamic replication and to the likelydegree of misspecification of the benchmark formulaused to implement the replication.

Option mispricing profit can be futher decomposed intoprofit due to superior estimation of the volatility(volatility profit) and profitfrom using a superior option valuation formula(formula profit). To make thisdecomposition reiably, the benchmark formula usedfor the attribution needs to be similar to theformula implicitly used by the market to priceoptions. If so, then simulation indicates that thisfurther decomposition can be achieved with lowstandard errors. Basic component ii) can be furtherdecomposed into profit from a forward contract ofthe underlying asset (asset profit)and what I term pure option profit. The asset profitindicates whether the investor was skillful bybuying or selling options on mispriced underlyingassets. However, asset profit could also simply bejust compensation for bearing risk—a distinctionbeyond the scope of this paper. Although simulationindicates that the attrivution procedure gives anunbiased allocation of the option profit to thissource, its standard error is large—a feature commonwith others' attempts to measure performance ofasssets.

Zero-cost collars and equity swaps provide insiders with the opportunity to hedge the risk associated with their personal holdings in the company's equity. Consequently, their use has important implications for incentive-based contracting and for understanding insider trading behavior. Our analysis indicates that these transactions generally involve high-ranking insiders and effectively reduce their ownership by about 25%, on average. Given the potential of these financial instruments to substantially alter the incentive alignment between managers and shareholders, we suggest that increasing the transparency of these transactions may provide valuable information to investors.

This paper demonstrates a tradeoff between therisk-shifting and hedging incentives of firms andidentifies conditions under which each dominates. Afirm may have the incentive to hedge in amulti-period context, even if no such incentiveexists in a single-period one. Unrestricted accessto swaps in the presence of asymmetric informationabout firm type and the swapping motive would leadto unbounded speculation resulting in breakdowns inswap and debt markets. Price-based methods areunable to control this and market makers have torely upon additional exposure information or creditenhancement devices to preserve equilibrium.

This study investigates the extent of information-motivated trading conditional on trade size in the options and stock markets. We find envidence that the options market is the primary venue for information trading only for small investors, whereas large ivestors do not necessarily trade options rather than stocks when they are informed. With different trading mechanisms in the stock and options markets, this finding implies that investors, when facing different impediments to information-related trading, select different vehicles to exploit their information. We also show that the adverse selection component of the bid-ask spread decreases with option delta, implying that options with greater finanical leverage attract more informed investors. Overall, our results reinforce the notion that the options market is a venue for information-motivated trading.

We propose a link between market structure and the resulting market characteristics—tick size, bid-ask spreads, quote clustering, and market depth. We analyze transactions data of stocks traded on the London Stock Exchange, a dealer market. We conclude that market charateristics are endogenous to the market structure. The London dealer market does not have a mandated tick size, and it exhibits higher spreads, higher quote clusterings, and higher market depth than the NYSE auction market. Clustering of trade prices is similar in London and New York.

Public discussion about corporate use of derivativesfocuses on whether firms use derivatives to reduceor increase firm risk. In contrast, empiricalacademic studies of corporate dervatives use take itfor granted that firms hedge with derivatives. Usingdata from financial statements of 425 large U.S.corporations, we investigate whether firmssystematically reduce or increase their riskinesswith derivatives. We find that many firms managetheir exposures with large derivatives positions.Nonetheless, compared to firms that do not usefinancial derivatives, firms that use derivativesdisplay few, if any, measurable differences in riskthat are associated with the use of derivatives.

I examine the impact of mutual fund manager replacement on subsequent fund performance. Using a sample of 393 domestic equity and bond fund managers that were replaced over the 1979–1991 period, for the underperformers, I document significant improvements in post-replacement performance relative to the past performance of the fund. On the other hand, the replacement of overperforming managers results in deterioration in post-replacement performance. I find evidence supporting the presence of strategic risk shifting in the fund portfolios prior to replacement. Futhermore, consistent with the notion of window dressing, I document that the level of portfolio turnover activity decreases significantly in the post-replacement period. Lastly, the replacement of poor performers is preceded by significant decreases in net new inflows in the fund.

The chain of events that led to the disagreementbetween the White House and Congrees over theincrease of the federal debt limit from mid-October1995 to March 1996 caused a default potential forTreasury securities. We examine the effect of thisevent chain on the yield spread between commercialpaper and Treasury bills and find that both thethree-and six-month yield spreads were reducedduring the event period. The results suggest thatthe market charged a default risk premium to theTreasury securities. There is no evidence that theseevents had a sustained effect on T-bill rates sincethe yield spread during the post-event periodresumed its pre-event level.