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Article
Publication date: 30 March 2012

Liuqing Mai

The purpose of this paper is to examine trading costs of both acquiring firms and target firms differentiated by method of payment, mode of acquisition, and deal attitude…

Abstract

Purpose

The purpose of this paper is to examine trading costs of both acquiring firms and target firms differentiated by method of payment, mode of acquisition, and deal attitude around merger and acquisition (M&A) announcements. The author calculates four spread measures of trading costs: quoted spread, percentage quoted spread, effective spread, and percentage effective spread.

Design/methodology/approach

Differences in spreads differentiated by M&A characteristics are calculated and two‐sample t‐tests applied. A linear regression model is developed to test whether changes in trading costs are related to acquiring firm's post‐merger price performance. The regression is estimated by OLS method.

Findings

It is found that various methods of payment affect the spreads of target firm differently on certain days around M&A announcement. For acquiring firms, significant differences are found in spreads between cash offers and stock offers, and between stock offers and mix offers. Significant difference was not found in spreads between cash offers and mix offers. The mode of acquisition affects the bid‐ask spreads of target firms only, but not those of acquiring firms. Deal attitudes affect the spreads of target firms on and after M&A announcements. It was also found that all four spread measures are significantly linked to acquiring firms’ post‐merger daily returns.

Research limitations/implications

Further study can be done on mechanisms through which M&A characteristics impact trading costs.

Practical implications

This study suggests that M&A characteristics affect firms’ spreads and that changes in spreads need to be accounted for in explaining acquiring firms’ post‐merger daily returns.

Originality/value

The paper fills in an important gap in existing literature by examining trading costs of acquiring firms around M&A announcements. It provides additional evidence on the anomaly of acquiring firm's negative post‐merger returns. The paper is intended to help improve the understanding of trading costs and the behavior of the market participants in response to a major corporate event.

Details

International Journal of Managerial Finance, vol. 8 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 24 July 2009

Ali R. Almutairi, Kimberly A. Dunn and Terrance Skantz

The purpose of this paper is to examine the relation between a company's bid‐ask spread, a proxy for information asymmetry, and auditor tenure and specialization.

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Abstract

Purpose

The purpose of this paper is to examine the relation between a company's bid‐ask spread, a proxy for information asymmetry, and auditor tenure and specialization.

Design/methodology/approach

The tests use clustered regression for a sample of 31,689 company‐years from 1992 to 2001 and control for factors known to impact bid‐ask spread in cross‐section.

Findings

The findings suggest that the market's perception of disclosure quality is higher and private information search opportunities are fewer for companies engaging industry specialist auditors. In addition, the paper finds that information asymmetry has a U‐shaped relation to auditor tenure. This U‐shaped relation holds for both specialists and non‐specialists; however, the bid‐ask spread for specialists tends to fall below that of non‐specialists at all tenure intervals.

Research limitations/implications

The findings may directly result from auditor tenure and specialization or it may be that those auditor‐related characteristics are a subset of concurrent choices made by the company that impacts disclosure quality.

Practical implications

Companies have incentives to lower information asymmetry and the findings document that the choice of a specialist auditor and the length of the auditor relationship can potentially influence this objective.

Originality/value

The paper provides information to academics, regulators, companies, and auditors concerning the effect of auditor‐client relationships on the level of information asymmetry. In addition, it shows the importance of industry specialization and audit firm tenure on audit quality.

Details

Managerial Auditing Journal, vol. 24 no. 7
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 5 June 2009

Moorad Choudhry

Between 1996 and 1998, the Bank of England (BoE) undertook structural reforms of the UK gilt market designed to improve market liquidity and accessibility. The purpose of…

Abstract

Purpose

Between 1996 and 1998, the Bank of England (BoE) undertook structural reforms of the UK gilt market designed to improve market liquidity and accessibility. The purpose of this paper is to ascertain, through the use of a market survey, whether the broad aims of the reforms were achieved.

Design/methodology/approach

The research technique used in the paper is direct qualitative survey evidence of the market. It is considered that part of the impact of any structural reform is how the market responds to it. Hence, the actual views of the market are relevant, and this highlights the value of conducting a market survey.

Findings

Survey evidence suggests that the reforms were welcomed by market practitioners, and that perceived levels of liquidity had increased in the period following the reforms. From the survey results, it cannot be concluded unequivocally that the reforms led to higher liquidity. Nevertheless, the responses to the critical questions of liquidity and price spread provided evidence that an improvement in market conditions was perceived to have occurred.

Practical implications

The survey results suggest that dealing and settlement efficiency in a government bond market is of value to investors. Therefore, BoE‐style reforms may be considered for implementation in other sovereign bond markets.

Originality/value

The paper is the first direct survey of the UK gilt market, and the first study into the impact of the BoE reforms on market liquidity. As such, it may be of value to sterling market investors as well as the central monetary authorities.

Details

Qualitative Research in Financial Markets, vol. 1 no. 2
Type: Research Article
ISSN: 1755-4179

Keywords

Article
Publication date: 20 February 2009

T. Shawn Strother, James W. Wansley and Phillip Daves

The purpose of this paper is to investigate how quotes originating via electronic communication networks (ECN)s affect trading costs.

Abstract

Purpose

The purpose of this paper is to investigate how quotes originating via electronic communication networks (ECN)s affect trading costs.

Design/methodology/approach

In order to investigate the relations between trading costs and quotation venue, the bid‐ask spread is decomposed into its theoretical cost components associated with adverse selection, inventory handling, and order processing.

Findings

Stoll's adverse selection costs of ECN‐originated quotes relate positively to effective spreads, while Lin et al.'s adverse selection costs relate negatively to effective spreads.

Originality/value

The paper shows how trading costs relate to trading venue choice by decomposing the bid‐ask spread.

Details

International Journal of Managerial Finance, vol. 5 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 14 August 2007

Frank Heflin, Kenneth W. Shaw and John J. Wild

The purpose of this paper is to study the relation between financial analysts’ ratings of firms’ disclosure policies and the intraday pattern in spreads between…

Abstract

Purpose

The purpose of this paper is to study the relation between financial analysts’ ratings of firms’ disclosure policies and the intraday pattern in spreads between specialists’ bid and ask price quotes.

Design/methodology/approach

Measure of the disclosure policy is based on financial analysts’ ratings of the quality of firms’ annual reports, quarterly and other information, and investor relations activities. The bid‐ask spread is the ask price minus the bid price. Time‐weighted bid‐ask spreads were measured over half‐hour trading intervals. Generalized method of moments is used to estimate regressions of bid‐ask spreads on disclosure policy ratings and controls for trading volume, price volatility, and share price.

Findings

It was found that spreads are uniformly lower for firms with higher‐rated disclosure policies in all half‐hour trading intervals during the day. In addition, increases in spreads in the first two half‐hours of trading are smaller for firms with higher‐rated disclosures. Finally, our evidence suggests spreads increase more in the last half‐hour of trading for firms with better disclosure policies, and subsequent tests suggest this is due to greater end‐of‐day liquidity trading.

Research limitations/implications

These results suggest that disclosure policy is a determinant of both the level and pattern of intraday bid‐ask spreads. Firms with higher‐rated disclosure policies have a more liquid market for their shares, which is theoretically linked to a lower cost of capital. In addition, better disclosure mitigates the decrease in market liquidity typically observed at the open of daily trading.

Practical implications

Better disclosures can help reduce market frictions.

Originality/value

This paper is the first to study the relation between disclosure policy and intraday spread patterns.

Details

Review of Accounting and Finance, vol. 6 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 28 August 2019

Fidelio Tata

Traditionally, full-service broker/dealers catering to institutional investors have bundled trade execution with investment research. Since 2018, new market regulation has…

Abstract

Purpose

Traditionally, full-service broker/dealers catering to institutional investors have bundled trade execution with investment research. Since 2018, new market regulation has forced broker/dealers to unbundle and to sell research separately. The purpose of this paper is to shed some light on the expected pricing of research.

Design/methodology/approach

A stylized model is presented in this study in which a monopolist fixed income, currencies and commodities (FICC) research provider faces a linear demand function and picks an appropriate price schedule.

Findings

It is shown that it is important to initiate the price discovery process using a low price and that some broker/dealers will not be able to identify a regulatory compliant price/quantity solution because their research-production fixed cost is very high compared to the research demand function they face.

Practical implications

There are three main findings from our model: pricing research at cost is not always possible; if there is a unique solution, an iterative approach only works when starting off with a low-enough initial price; and if there are two solutions, only the low-cost/high-volume solution can be discovered in an iterative process.

Originality/value

The results presented are important to broker/dealers about to discover the market demand for their FICC research publications on the back of the implementation of MiFID II. Having distributed FICC research for free in the past, they have no knowledge about the demand function (other than what is demanded at a price of zero). Because research publications are highly differentiated products, observing the pricing of competitors is insufficient. Iteratively gaining knowledge about the demand function using price adjustments and customer questionnaires becomes the most likely mean for discovering the demand function. It is important to initiate the price discovery process with a low price. Some broker/dealers will not be able to identify a regulatory compliant price/quantity solution because their research-production fixed cost is too high compared to the research demand function they face. Finally, it is shown that these broker/dealers with two possible equilibriums face difficulty in identifying the high-price/low-volume research equilibrium because of the non-converging nature of the iterative process.

Details

Journal of Financial Regulation and Compliance, vol. 28 no. 1
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 2 November 2010

Roy Clemons

The purpose of this paper is to examine whether focused attention on a firm by an external organization, group, or influential analyst generates greater investor awareness…

Abstract

Purpose

The purpose of this paper is to examine whether focused attention on a firm by an external organization, group, or influential analyst generates greater investor awareness that can affect a firm's value and cost of capital. This study is motivated by contemporary research that provides support for the hypothesis that investors have limited attention. Prior studies have focused on how investors' limited attention has influenced their analysis of firm‐specific financial data. The studies have shown that investors may have limited attention and hence pay more attention to the more salient financial statement items. This paper extends this stream of research by empirically testing to determine if external sources attract investors' limited attention to a firm.

Design/methodology/approach

The paper examines the published monthly Center for Financial Research and Analysis (CFRA) research reports from 1998 through 2004 that identify firms experiencing operational problems and/or using unusual or aggressive accounting practices. To provide evidence that information appearing in CFRA research reports has not already been impounded into a firm's stock price prior to the publication of the CFRA research report, the paper tests for abnormal returns around the publication of the CFRA research reports. Second, to provide evidence that the firms' cost of capital decreases after the publication date of the CFRA research reports, the paper tests for a decrease in the bid‐ask spreads after firms appear on the CFRA research reports.

Findings

Support was found for the hypothesis that firms experience a significant decline in their market value in the days surrounding their appearance on the CFRA research reports. For a sample of 892 firms, the cumulative abnormal returns (CARs) for a two‐day window around a firm's appearance on a CFRA research report is −1.89 percent, and the CARs for a seven‐day window around a firm's appearance on a CFRA research report is −3.50 percent.

Originality/value

The paper's findings suggest that the information from the fundamental analysis conducted by the Center for Financial Research and Analysis has not already been impounded into a firm's stock price before its appearance on a CFRA research report. Although the paper found a decrease in the mean difference in the bid‐ask spread change, it cannot provide statistically significant support for the hypothesis that a firm's cost of capital decreases after appearing on a CFRA research report.

Details

Review of Accounting and Finance, vol. 9 no. 4
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 2 March 2010

Faten Hakim and Mohamed Ali Omri

The purpose of this paper is to examine the relationship between information asymmetry and the quality of the external audit in the Tunisian capital market.

2842

Abstract

Purpose

The purpose of this paper is to examine the relationship between information asymmetry and the quality of the external audit in the Tunisian capital market.

Design/methodology/approach

The paper uses panel data methodology.

Findings

The results show that the bid‐ask, a market‐based measure of information asymmetry, is negatively related to the employment of an industry specialist and big auditors; and positively related to audit firm tenure. However, further tests refine those conclusions, in that the positive association between tenure and bids‐ask spread differs between specialist and non‐specialist auditors and between Big 4 and non‐Big 4 auditors. Specifically, the paper finds that bid‐ask spreads is increasing in tenure for clients of non‐specialist and clients of non‐Big 4.

Research limitations/implications

The difficulties in specifying correct models for determining the audit quality, the research analyze the auditor's quality such as big auditor, tenure, and specialist. The paper leaves this and other issues for future research.

Originality/value

Analyzing the effect of auditor's quality on information asymmetry and bid‐ask spreads is an emerging economy such as Tunisia is very appealing because earnings quality is the most important quality investors look for. And this research makes a link between two important areas of auditing and finance.

Details

International Journal of Accounting & Information Management, vol. 18 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 19 January 2010

Pia Bandyopadhyay, James Hackard and Yiuman Tse

The purpose of this paper is to examine the pre‐ and post‐split behavior for trades and quotes of iShare exchange‐traded funds (ETFs) that split in June 2005. The…

2069

Abstract

Purpose

The purpose of this paper is to examine the pre‐ and post‐split behavior for trades and quotes of iShare exchange‐traded funds (ETFs) that split in June 2005. The objective is to determine whether post‐split changes in the bid‐ask spread, trade turnover, average dollar‐size trade, frequency of small trades, trade price location, and order imbalance support either or both of the two widely examined hypotheses for the motivation for share splits.

Design/methodology/approach

The impact of the iShares split around the split date was studied, using the measures above to examine the support, if any, for each of two hypotheses, broker promotion and/or the trading inconvenience, with regard to the sample and time period under study.

Findings

Bid‐ask spread, average dollar order size, and frequency of small trades were found to fail to reject the broker‐promotion hypothesis, while the increase in post‐split turnover fails to reject the trading‐inconvenience hypothesis. Changes in the trade‐price‐location parameter and in order imbalance fail to support either hypothesis.

Practical implications

Because of the importance of basket securities in the determination of the prices for listed securities, issuers of these securities, investors and regulators should be interested whether the price behavior of splitting iShares is similar to that experienced in other securities.

Originality/value

Numerous studies in the literature have investigated the effects of stock splits on individual securities, but it is believed, none has yet appeared studying the recent splits in iShares.

Details

Managerial Finance, vol. 36 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 25 September 2019

Matt Brigida and William R. Pratt

This paper aims to investigate the quickness, and test the accuracy, of liquidity taking high-frequency traders (HFT). This gives us important insights into a class of…

Abstract

Purpose

This paper aims to investigate the quickness, and test the accuracy, of liquidity taking high-frequency traders (HFT). This gives us important insights into a class of market participant who has come to be very influential in present markets.

Design/methodology/approach

The authors use the weekly natural gas (NG) storage report for the test because the information contained in the release often has a large effect on prices. Moreover, the NG market is heavily traded and liquid, and prone to high volatility. These factors make trading in this market attractive to HFT. The authors test for the profitability of those who trade in the first milliseconds after the report’s release; and for information leakage prior to the report.

Findings

The authors find those who trade within the first 50 ms accurately incorporate the information contained in the storage report into prices, and earn the majority of profits. In fact, HFT profits are decreasing in the time it takes them to trade after the announcement (measured to 200 ms). Further tests find no evidence of informed trading prior to the release of the report, and so the HFT reaction to the report incorporates the information contained therein into prices.

Originality/value

This is one of the few analyzes of the profitability of liquidity-taking HFT, and the only analysis that uses millisecond NG data. The data used is the exchanges original FIX/FAST messages.

Details

Studies in Economics and Finance, vol. 36 no. 3
Type: Research Article
ISSN: 1086-7376

Keywords

1 – 10 of over 4000