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This study investigates the association between trade credit financing and stock price crash risk within China's context. We find that firms using more trade credit financing have significantly lower future stock price crash risk. This negative association is more pronounced for firms with greater information asymmetry and for firms located in less developed financial markets. This finding is robust to the endogeneity concern, alternative measures of stock price crash risk, and the inclusion of other factors identified in prior studies that might affect stock price crash risk. Further evidence suggests that both the monitoring mechanism and the disclosure mechanism drive the documented relation. Our study suggests that access to trade credit can significantly reduce the likelihood of crash risk in a country like China with less developed formal bank financing. Our study also suggests that investors can effectively avoid stock price crash risk by using the trade credit information disclosed in financial statements.

Previous studies on the choice of stock payment in M&A mainly focus on managerial private information. This study shows that managers also learn new firm-specific information from financial markets in making this decision. The acquirer's stock price firm-specific information increases the stock-payment-to-Q sensitivity. The target's stock price firm-specific information decreases the stock payment probability. Further analyses on deal and firm characteristics as well as shareholder wealth in stock mergers support the managerial learning argument. Overall, this study highlights a new set of information that affects the form of merger payment in mergers and acquisitions.

This paper examines the connection between oil price changes and size of firms listed in Indian stock market. A three‐factor Fama-French model along with oil price variables is estimated using data from a panel of 1535 firms. Results show that there is a positive relationship between growth in oil price and stock return. Similarly, the size of the firm is also positively related to stock return. However, oil price uncertainty shows a negative relationship with stock return. Overall, these results imply that targeted measures should be put in place by the policy makers to safeguard the interests of the small and medium size firms in India.

Indexing has experienced substantial growth over the last two decades because it is an effective way of holding a diversified portfolio while minimizing trading costs and taxes. In this article, we focus on one negative externality of indexing: the effect on the efficiency of stock prices. Based on a sample of large and liquid US stocks, we find that greater indexing leads to less efficient stock prices, as indicated by stronger post-earnings-announcement drift and greater deviations of stock prices from the random walk. We conjecture that reduced incentives for information acquisition and arbitrage induced by indexing and passive trading are probably the main causes for degradation in price efficiency.

Perfect farm-retail price transmission sometimes is taken to mean an elasticity of price transmission (EPT) equal to 1. We show that this definition is inconsistent with Gardner's (1975) model. We also show that the absolute marketing margin (defined as the difference between the retail price and farm price) responds differently to shifts in retail demand, input supply, and technical change in the marketers’ production function than does the relative marketing margin (defined as the ratio of the retail price to the farm price). The empirical implications of these results are discussed in some detail.

This paper examined the relationship between oil prices (international oil price and domestic oil price) and stock market price in Nigeria for the period spanning 1985:1 to 2010:4. The study utilised the Johansen's multivariate cointegration test and the vector error correction model (VECM). The Johansen's test showed that the variables are cointegrated, and the cointegration equation revealed that oil prices have significant relationship with stock market price in the long run. The VECM estimate only revealed a unidirectional causality from stock market price to international oil price in the long run. A unidirectional causality was also observed from domestic oil price to stock market price in the long run. The study recommended that policymakers, financial analyst and shareholders should into cognizance changes in international oil price and domestic oil price in their financial decisions given the significant impact of oil prices on stock market price in Nigeria.

We find that excessively high levels of press coverage can significantly exaggerate stock price deviation from fundamental value. We show that being “in the news” a lot is associated with both greater liquidity and more information risk. When we examine signed mispricing, we find that the effect of abnormal press coverage is significant only for stocks with high relative valuations, consistent with the concurrent existences of media‐induced sentiment and media bias. Indeed, we uncover that the sentiment effect is attenuated when firms with low valuations receive heavy coverage in the local press.

This paper examines the effect of short-sale constraints on the stock price manipulation of an insider, who is subject to mandatory disclosure rules. We show that the privately informed insider may manipulate by trading against his or her information when short selling is banned. We find that stock price movement is asymmetric in the sense that prices fall by a larger percentage than they rise. In addition, we prove that removing short-sale constraints increases price volatility. Finally, we explore the welfare implications of short-sale constraints.

This study uses equilibrium arguments to derive closed-form solutions for the price of European call and put options written on an individual stock when shareholders might lose all their claims on the firm. The stock price accounts for both a random probability of bankruptcy and a random probability of remaining a going concern. With a random probability of bankruptcy, shareholders lose all their claims in the firm. With a random probability of remaining a going concern, the stock price is lognormal as in the Black–Scholes model. The bankruptcy probability is correlated with aggregated wealth if the bankruptcy risk is systematic. The model is consistent with a bankruptcy probability negatively correlated with the firm's stock price. If the bankruptcy probability of a given firm increases then its stock price decreases which leads to the value of the call options written on that stock to decrease. This result is not obtainable under Merton's (1976) ruin model where the stock price and the bankruptcy probability are independent. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:637–657, 2014

This paper explains the BEA methodology for computing historical cost and replacement (current) cost measures of the net stock of capital in the U.S. economy. Historical cost profit rates are counter-clockwise (clockwise) rotated versions of replacement cost profit rates during periods of inflation (disinflation) in the price of capital goods. Hence, during periods when the price index for capital goods is flat, the two profit rates move together; an example of such a period for the U.S economy is the whole postwar period 1946‐2010. Moreover, trends in both replacement cost and historical cost profit rates display very similar movements over long periods, making the choice of capital stock valuation irrelevant for empirical analysis of profitability trends.

This study adopts causality in mean and variance approach to investigate dynamic relationship between stock market in an oil-exporting country (Iran) and the international oil market. The empirical results imply that in view of underlying data-generating process of the series, the variance of oil price fluctuations does not cause the variance of Iran stock returns. This means that there is no volatility spillover effect between Iran stock market and international oil market.

This study examines the stock price reaction to the internal control reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 for three distinct groups of firms. After controlling for general stock price movements, we find that stock returns are most negative for firms that delay filing of their internal control reports, continue to be negative for firms with ineffective internal controls, and are positive for firms with effective internal controls. The decrease in stock prices of the first two groups is more pronounced for those with a lower return on assets, higher growth rate in sales, and no prior disclosure of their internal controls weaknesses. Our results indicate that market participants value the reliability of financial information ensuing from Section 404 compliance, irrespective of firm size and debt proportion. Thus, regulators and policymakers worldwide should consider mandating comparable SOX 404 compliance for all publicly held companies to improve the accuracy and reliability of financial reports.

The speed of price adjustment hypothesis suggests that some stocks tend to adjust faster to market wide information than others. This paper uses the speed of price adjustment hypothesis to identify firm level characteristics that determine the information assimilation pace of individual stocks in the Indian markets. The research sample consists of 64 stocks with yearly data for 10 years, a total of 640 firm-year observations. Panel data analysis was used to study the effects of firm specific characteristics upon the speed of adjustment proxy DELAY. It was found that parameters such as firm size, trading volume and turnover had a significant influence on information assimilation. Large firms, as well as those firms with high turnover and trading volume, assimilated the market wide news faster, when compared with others. Stocks with high firm value and share price volatility were also found to adjust to market information faster. Firms with higher financial leverage take a longer time for price adjustments. The stock price adjustments were found to be much slower during the world financial crisis period of 2008–2010. While firm size remains a significant feature even during the crisis period, the volume and value traded were not found to be influencing factors for stock price movements during this time.

The price discount on privately placed stock is large and can vary substantially among firms. While earlier studies attribute price discounts on privately placed stock to illiquidity and costs of gathering information, we offer a more complete explanation. We find that firms exhibiting higher overvaluation have significantly larger price discounts in private stock sales. We also find that higher levels of asymmetric information about the issuing firm and about the stock market environment at the time of the private placement cause more pronounced discounts in the offer price. Our analysis also shows that post-issue abnormal returns following private placements are higher when discounts are less pronounced.

In this study we examine whether executives manage accounting earnings to maximize their own gains around stock option exercises. In particular, this study analyzes the effects of two factors, the value of exercised executive stock options and the change in the value of exercised executive stock options for a 1% change in the underlying stock price on the propensity of managers to engage in earnings management. Furthermore, the present paper investigates whether the relations between both the value and the price incentive of exercised stock options and earnings management are more affected by the level of information asymmetry and the length of the stock disposition period after exercising stock options. The sample for this study consists of 93 observations from 51 companies listed on the Korea Stock Exchange and Korean Securities Dealers Automated Quotations. Managers exercised their stock options from the fourth quarter of 2002 to the fourth quarter of 2005. The empirical findings are as follows. First, higher values and price incentives for executive stock options were associated with higher earnings management. These results imply that executives manage firms’ reported earnings to maximize their own gains around stock option exercises. Second, information asymmetry reinforces the association between both the values and price incentives of exercised executive stock options and earnings management. Finally, the values and price incentives of exercised executive stock options provide greater incentives for executives to manage earnings when executives sell the acquired stocks after exercising the stock options.

manc_2223 237..261 In this paper, we investigate the effects of oil price fluctuations on stock markets. Unlike previous works, which have focused largely on broad market indices (national and/or regional indices), we examine short-term links in both mean and variance in the aggregate as well as sector by sector levels in Europe. Our findings show strong significant effects of oil price changes on European sector stock market returns and volatilities. Moreover, we show some evidence of asymmetry in the oil-stock price relationships. However, the nature and sensitivity of the reaction of stock returns to oil price shocks change considerably across sectors. 1I ntroduction Investigating the behaviour of stock prices and identifying the factors that affect their dynamics is a question that has a decisive impact on portfolio management, asset and firm valuations, investment decisions, and other issues addressed by finance literature. Although an abundance of theoretical and empirical works has focused on asset pricing, there is no consensus about the nature and number of factors that affect stock prices. Furthermore, as oil price has changed with sequences of very large increases and decreases over recent years, it is naturally opportune to extend the existing research by investigating its impacts on stock market returns. Various transmission chan- nels exist through which oil price fluctuations may affect stock prices. Indeed, the value of a stock in theory is equal to the sum of discounted expected future cash-flows. These discounted cash-flows reflect economic conditions (inflation, interest rates, production costs, income, economic growth, and investors and consumers confidence, etc.) and then they are affected by macroeconomic events that possibly can be influenced by oil shocks. Thus, oil price changes may impact stock prices. In the literature, there has been a large volume of works on the effects of oil price fluctuations on economic variables. Most of these studies have shown significant links between oil prices and economic activity for several developed and emerging countries (Hamilton (2003), Cunado and Perez de Garcia (2005), Balaz and Londarev (2006), Gronwald (2008), Cologni and Manera (2008) and Kilian (2008)). In contrast, there have been relatively a few attempts to study the relationship between oil price variations and stock markets. Jones and Kaul (1996) study the reaction of international stock

I investigate the impact of daily oil price changes on the stock returns of a wide array of industries. I find that in addition to the stock returns of industries that depend heavily on oil, stock returns of some industries that use little oil also are sensitive to oil prices perhaps because their main customers are impacted by oil price changes. In addition, I present robust estimates of industries’ cost-side and demand-side dependence on oil. These measures can serve as reliable benchmarks when classifying industries into oil-intensive and non–oil-intensive groups, a distinction widely used in studies and media without any quantitative justification so far. Further, I find that the sensitivity of industries’ returns to oil price changes depends on both the cost-side and demand-side dependence on oil and that the relative effects of these factors vary across industries.

Our evidence indicates that insiders’ trades provide significant new information to market participants and they are incorporated more fully in stock prices as compared to noninsiders’ trades. We find that market professionals do not front-run insiders’ trades. Both insiders’ purchases and sales result in significant contemporaneous and subsequent price impact, while sales by large shareholders result in a contemporaneous stock price decline that is subsequently reversed. The arrival of insider purchases reverse the prevailing negative order imbalances from third party trades and lead to piggy-backing by market professionals resulting in subsequent market purchase orders as well as stock price increases. How market participants react to the presence of informed traders has important implications for the determination of security prices and bid-ask quotes. In some models of price formation, security prices fully and immediately reveal the information possessed by informed traders (Grossman, 1976), while in other models, security prices react gradually through subsequent informed buying and selling activity (Bagehot, 1971; Grossman and Stiglitz, 1980; Glosten and Milgrom, 1985; Kyle, 1985; Glosten, 1989; Foster and Viswanathan, 1994). If the presence of informed traders is not discovered directly, then market makers need to protect themselves from informed traders by setting a sufficiently high bid-ask spread. Market participants also attempt to infer the presence of informed traders indirectly from trade size, firm size, urgency of trade, time of day, and price variability (Kraus and Stoll, 1972; French and Roll, 1986; Holthausen, Leftwich, and Mayers, 1987, 1990; Admati and Pfleiderer, 1988; Barclay, Litzenberger, and Warner, 1990; Hasbrouck, 1991a, 1991b; Barclay and Warner, 1993; Keim and Madhavan, 1996; Koski and Michaely, 2000; Chakravarty, 2001). In this paper, we document the intraday reaction of market professionals to the presence of corporate insiders. Our evidence indicates large initial stock price adjustments on insiders, followed by persistent piggy-backing of insiders’ trades and continued price reactions for the rest

Numerous stock market regulators around the world impose daily price limits on individual stock price movements. We derive a simple model that shows that price limits may deter stock market manipulators. Based on our model's implications, we predict that regulators impose price limit rules for markets where the likelihood of manipulation is high. We present empirical evidence consistent with this hypothesis. Our study is the first to formally propose a manipulation-based rationale for the existence of price limits in stock markets.

Despite the increase in institutional ownership, decreased trading costs, and increased real personal savings, we find that the average stock price is lower today than it was in the 1920s. In the aggregate, the propensity to split is a function of recent market performance, personal savings, and the desirability of appearing to be a small firm. Our results indicate that, after decades of inflation and the average stock price falling, splitting stocks to return to an “affordable” trading range must be rejected as an explanation. This suggests that other economic forces are behind splits, whether traditional or behavioral in nature.

While there is a strong presumption in the financial press that oil prices drive the stock market, the empirical evidence on the impact of oil price shocks on stock prices has been mixed. This paper shows that the response of aggregate stock returns may differ greatly depending on whether the increase in the price of crude oil is driven by demand or supply shocks in the crude oil market. The conventional wisdom that higher oil prices necessarily cause lower returns is shown to apply only to oil-market specific demand shocks such as increases in the precautionary demand for crude oil that reflect fears about the availability of future oil supplies. In contrast, positive shocks to the global aggregate demand for industrial commodities are shown to cause both higher real oil prices and higher stock prices. Shocks to the global production of crude oil, while not trivial, are far less important for understanding changes in stock prices than shocks to global aggregate demand and shocks to the precautionary demand for oil. Further insights can be gained from the responses of industry-specific stock returns to demand and supply shocks in the crude oil market. We identify the sectors most sensitive to these shocks and study the opportunities for adjusting one’s portfolio in response to oil market disturbances.

In this paper, we investigate whether a firm can enhance the effect of its R&D spending on its current market value and future profitability through technology-oriented M&As. Our results show that when a technology firm acquirers another technology firm, the magnitude of the stock price response to the R&D spending of an acquirer increases by 85 percent in the year of the M&A. However, we find no such increase in the stock price response to the R&D spending of a non-technology acquirer. We also find that technology acquirers are more successful in converting their current R&D spending into positive future profitability than are non-technology acquirers. Finally, our results show that analysts revise their forecasts of technology acquirers' one-year-ahead and two-years-ahead earnings upwards during the year of the M&A, but do not do so in the case of non-technology acquirers. Our results are robust for different alternative specifications of our empirical models and when various firm differences are controlled for.

The original article to which this Erratum refers was published in Journal of Applied Econometrics 2009.

This paper analyses the effects of oil price shocks on stock returns in Norway, an oil-exporting country, highlighting the transmission channels of oil prices for macroeconomic behaviour. To capture the interaction between the different variables, stock returns are incorporated into a structural VAR model. I find that following a 10% increase in oil prices, stock returns increase by 2.5%, after which the effect gradually dies out. The results are robust to different (linear and non-linear) transformations of oil prices. The effects on the other variables are more modest. However, all variables indicate that the Norwegian economy responds to higher oil prices by increasing aggregate wealth and demand. The results also emphasize the role of other shocks; monetary policy shocks in particular, as important driving forces behind stock price variability in the short term.

Using the Korea Stock Exchange's transaction data and limit order book, we document the accelerating patterns of market activity before limit hits. We confirm the existence of the magnet effect from several key market microstructure variables, using a parsimonious quadratic function of the time until the price limit hit. In addition, this paper is the first to isolate the intraday momentum effect from the magnet effect during the period before stock prices hit daily price limits.

This study examines the competition in price discovery among stock index, index futures, and index options in Taiwan. The price-discovery ability of the Taiwan Top 50 Tracker Fund, an exchange-traded fund based on the Taiwan 50 index is examined. The authors find that, after the minimum tick size in the stock market decreases, the bid–ask spreads of the component stocks of the stock index and the Taiwan Top 50 Tracker Fund get lower, and the contribution of the spot market to price discovery increases. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:74–93, 2009

According to theory, comovement in stock prices reflects comovement in the fundamental factors underlying the values of stocks. Recent theory contends that stock price comovement can be driven by information markets or the informational opacity of the firm. To the extent that voluntary disclosure reduces information acquisition cost and enhances firm transparency, we predict that enhanced voluntary disclosure reduces stock price comovement. We provide evidence in support of this prediction using analyst evaluation of firm disclosure policy. Overall, our evidence supports the effectiveness of firm disclosure policy in increasing the amount of firm-specific information contained in stock returns.

This study used a sample of 1035 Taiwanese firms to examine the impact of dividend protected employee stock options on stock repurchase and cash dividend policies from 2000 to 2005. This study finds a positive relationship between cash dividends and executive options, implying that executives holding stock options might prefer to distribute cash dividends to boost the stock price. This result, unlike in earlier studies, arises from the dividend protected characteristic of Taiwanese employee stock options. Finally, free cash flow, firm profitability, level of debt, investment opportunities and firm size are found to considerably influence payout decisions.

This paper empirically examines whether operational slack, business diversification, geographic diversification, and vertical relatedness influence the stock market reaction to supply chain disruptions. The results are based on a sample of 307 supply chain disruptions announced by publicly traded firms during 1987–1998. Our analysis shows that firms with more slack in their supply chain experience less negative stock market reaction. The extent of business diversification has no significant effect on the stock market reaction. Firms that are more geographically diversified experience a more negative stock market reaction. We find that firms with a high degree of vertical relatedness experience a less negative stock market reaction. These results have important implications on how firms design and operate their supply chains to mitigate the negative effect of supply chain disruptions.

This paper presents summary results from an analysis of the institutional subscription prices for journals in biomedical and social sciences, for a selection of eleven publishers. Overall price, price per page and price per point of impact factor have been examined between 2000 and 2006. Considerable variation was found between publishers both in their overall levels of price and in the rates of increase observed over the period. There is some evidence that not-for- profit publishers may, on average, offer better value for money in terms of price per page and price per point of impact factor, but this is far from conclusive.

This study examines the momentum and contrarian effects on stock returns in one of the leading emerging markets, which has a unique market structure, with record-high inflation, high volatility, high turnover, low correlation of returns with other exchanges and myopic investors: the Istanbul Stock Exchange (ISE). It also investigates the weak-form efficiency of the stock market by examining the profitability of a number of contrarian strategies based on past returns, size, price, book-to-market and earnings-to-price ratios of stocks in various lengths of formation and holding periods. Our findings show that a self-financing trading strategy, buying past loser stocks and selling past winner stocks generate significant abnormal returns (approximately 15% annually) in ISE. However, these large contrarian profits are for bearing the extra risk of loser stocks similar to the US results. We also find significant price, size, and B/M effects in stock returns. Finally, our results show the continous profitability of contrarian strategies both in very short (starting from 1 month) and in long holding periods (up to 36 months), which appears to be related to country-specific factors.

This paper builds on prior research by analysing the impact of cultural factors on both price clustering and price resistance in China's stock markets. The results support the presence of cultural factors impacting on price clustering with the digit 8 showing a higher propensity for clustering and the digits 4 and 7 showing a lower propensity in the A-share market, where stock is denominated in renminbi and traded by mainland Chinese. These results are further supported by an analysis of the B-share market, where cultural factors have no (or less) impact on the price of Chinese stocks traded by foreign investors in US dollars (or in Hong Kong dollars). A range of measures for price resistance show the digits 0 and 5 to be significant resistance points in the A-share market. Although digit 8 cannot be considered as a resistance point, its resistance level is highest among the remaining numbers. In conclusion, cultural factors help to explain not only price clustering in the Chinese stock markets but price resistance levels as well, albeit at a weak level.

This paper develops a model in which investors who are prohibited from short selling agree to disagree on the precision of a publicly observed signal. The model implies that the equilibrium price is a convex function of the public signal. The model predicts that (1) the stock price reacts more to good news than to bad news; (2) the skewness of stock returns is positively correlated with contemporaneous returns, but negatively correlated with lagged returns; (3) short sale constraints increase rather than decrease skewness; and (4) disagreement about information precision increases skewness. Empirical tests conducted find supportive evidence for all these predictions.

Short-sales practices in the Hong Kong stock market are unique in that only stocks on a list of designated securities can be sold short. By analyzing the price effects following the addition of individual stocks to the list, we find that short-sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists. These findings are consistent with Miller's (1977) intuition and other optimism models. We also document higher volatility and less positive skewness of individual stock returns when short sales are allowed. THE QUESTION OF HOW SHORT SALES IMPACT capital markets is highly controversial, with short-sale regulations varying widely across countries and capital markets.1 Although short selling has been carried out for years in major financial markets around the world, its effects on market efficiency, especially on pricing efficiency, remain of interest to financial researchers. Miller (1977) theorizes that in the presence of short-sales constraints, security prices tend to reflect a more optimistic valuation than the average opinion of potential investors and thus tend to be upward biased. This overvaluation argument is based on two conditions: (1) A security's short sales are either prohibited or costly, and (2) investors have heterogeneous beliefs or information about the security's value. The underlying intuition is quite straightforward. Pessimistic investors are forced to sit out of the market when short sales are not available, and thus some negative information is not reflected in prices, enabling enthusiastic buyers to bid prices above the level that average investors perceive as fair. This argument has significant implications for market efficiency theories, since one of the major functions of capital markets is price discovery. Indeed, an efficient market should be "a market in which prices always

We provide a method for calculating the cost of equity and the cost of capital in the presence of convertible securities and employee stock options. We demonstrate how this approach can be applied if a company already has issued convertible claims or if it is considering doing so for the first time. We provide several numerical examples illustrating the significance of errors in estimating the cost of capital that can result when (1) employee stock options are ignored or (2) the observable stock price is used as a proxy for the unobservable underlying asset.

This article extends previous literature which examines the determinants of the price impact of block trades on the Australian Stock Exchange. As previous literature suggests that liquidity exhibits intraday patterns, we introduce time of day dummy variables to explore time dependencies in price impact. Following theoretical developments in previous literature, the explanatory power of the bid–ask spread, a lagged cumulative stock return variable and a refined measure of market returns are also examined. The model estimated explains approximately 29 per cent of the variation in price impact. Block trades executed in the first hour of trading experience the greatest price impact, while market conditions, lagged stock returns and bid–ask spreads are positively related to price impact. The bid–ask spread provides most of the explanatory power. This suggests that liquidity is the main driver of price impact.

We examine the announcement stock returns and long-run performance of 352 targeted repurchases from 1979 to 1998. For those repurchases of blocks that are non-control related we find a positive announcement stock price response and positive long-run stock performance indicating that these repurchases are timed to occur when the company's shares are undervalued and that the market underreacts to this signal. In contrast, for those repurchases of blocks that are control related we find a negative announcement stock price response and insignificant long-run stock performance indicating that these repurchases occur for a different reason. We conclude that control related repurchases are utilized solely to dismiss potential takeover bids and are not timed when the stock is undervalued.

We evaluate forecasting models of US business fixed investment spending growth over the recent 1995:1–2004:2 out-of-sample period. The forecasting models are based on the conventional Accelerator, Neoclassical, Average Q, and Cash-Flow models of investment spending, as well as real stock prices and excess stock return predictors. The real stock price model typically generates the most accurate forecasts, and forecast-encompassing tests indicate that this model contains most of the information useful for forecasting investment spending growth relative to the other models at longer horizons. In a robustness check, we also evaluate the forecasting performance of the models over two alternative out-of-sample periods: 1975:1–1984:4 and 1985:1–1994:4. A number of different models produce the most accurate forecasts over these alternative out-of-sample periods, indicating that while the real stock price model appears particularly useful for forecasting the recent behavior of investment spending growth, it may not continue to perform well in future periods. Copyright © 2007 John Wiley & Sons, Ltd.

This paper uses daily stock prices and the trading volume of 39 constituent companies in the SZSE Component A-Share Index on the Shenzhen Stock Exchange to examine the usefulness of technical analysis. It finds very weak evidence to support the view that traders and/or technical analysts can learn more about the future pattern of returns by actively using volume in conjunction with returns than those who only watch price movements.

There is considerable discussion about controlling volatility by imposing price limits on asset prices. We examine the effects of price limits on a stock market by testing the volatility spillover, delayed price discovery, and trading interference hypotheses in a leading emerging market, the Istanbul Stock Exchange, which has a unique market microstructure as related to price limits. Our results support the volatility spillover, delayed price discovery, and trading interference hypotheses. We also show price locks at limits provide significantly stronger evidence regarding the effects of price limits than limit moves only. Finally, price limits have a significant effect on the stock market, casting doubt on their effectiveness.

The daily efficient price is the price that wouldprevail if the market were frictionless. I show that volume-weighted average price (VWAP) provides a less noisy estimate for the unobservable efficient price as compared to the closing price. The variance of daily returns computed with VWAPs is smaller than that computed with closing prices. The difference between these two realized variances is economically significant. The volatility of log closing price change tends to understate the beta risk and Sharpe ratio. A higher noise level in the closing price leads to derivative prices that favor option and volatility-related swap writers. The daily closing price is often used as the end-of-day market value of a stock but despite its popularity, traders' transaction performance is not measured against it. Instead, practitioners use the volume-weighted average price (VWAP) as the benchmark. This price is the ratio of the dollar volume to the number of shares exchanged over a trading period. For a trader who buys a stock at several different prices and share volumes, the VWAP is the break-even price before transaction costs. To calculate the profit and loss in dollars before costs, investors use the VWAP rather than the closing price. Moreover, broker-dealers provide services to fund managers by implementing VWAP strategies to rebalance their clients' portfolios. At times, broker-dealers may buy directly from fund managers at an ex ante VWAP. The acquired shares are then disposed of by selling in the open markets with VWAP strategies (Madhavan, 2002). Since both the closing price and the VWAP are popular reference prices, in this article, I present a method for ascertaining which of them is relatively closer to the efficient price. The method is based on the intuition that if the random variable of a stochastic process is generally smaller than the random variable of another stochastic process with which it shares a common component, then the variance of the change in the smaller random variable will also tend to be smaller. The two random variables are the closing price and the VWAP, both of which are noisy estimates of the daily efficient price. If the noise level in the VWAP is lower (higher) than that of the closing price, then the realized variance of the log VWAP change will be smaller (larger) than the realized variance of the log closing price change. I provide strong evidence that the VWAP gives rise to a smaller realized variance. I show that its noise level is lower, which implies that the deviation from the efficient price is smaller. Thus, the VWAP is relatively closer to the efficient price than is the closing price. An important by-product of the method is that I can infer the realized variance of the log efficient price change under reasonable assumptions. Using a large sample ofNYSE common stocks, I find that the inferred realized volatility of the log efficient price change is smaller than that computed with I thank Aurobindo Ghosh, Jun Yu, and especially an anonymous referee for many insightful suggestions and comments to improve the paper I am also grateful to William G Christie (the Editor) for his suggestions in the review process, and Sandra Sizer for editorial assistance.

We test whether U.K. common stocks hedge against inflation using a framework of the tax-augmented Fisher hypothesis. Aggregate and disaggregate (seven industry groups) monthly data covering 48 years are used. All pairs of stock and retail price indexes are cointegrated. Tests in most cases reveal significant shifts in the cointegrating vectors, and accounting for these shifts improves the precision of the estimates. The point estimates of goods price elasticity are significantly above unity in all but two cases. These findings, though in sharp contrast to most existing findings that report price elasticity of below unity, appear theoretically more plausible because nominal stock returns must exceed the inflation rate to insulate tax-paying investors.

The authors begin by summarizing the results of their recently published study of the relation between stock returns and changes in several annual performance measures, including not only growth in earnings and EVA, but changes during the year in analysts' expectations about future earnings over three different periods: (1) the current year; (2) the following year; and (3) the three-year period thereafter. The last of these measures—changes in analysts' expectations about three- to five-year earnings—had by far the greatest explanatory “power” of any of the measures tested. Besides being consistent with the stock market's taking a long-term, DCF approach to the valuation of companies, the authors' finding that investors seem to care most about earnings three to five years down the road has a number of important implications for financial management: First, a business unit doesn't necessarily create shareholder value if its return on capital exceeds the weighted average cost of capital—nor does an operation that fails to earn its WACC necessarily reduce value. To create value, the business's return must exceed what investors are expecting. Second, without forecasting returns on capital, management should attempt to give investors a clear sense of the firm's internal benchmarks, both for existing businesses and new investment. Third, management incentive plans should be based on stock ownership rather than stock options. Precisely because stock prices reflect expectations, the potential for prices to get ahead of realities gives options-laden managers a strong temptation to manipulate earnings and manage for the short term.