Contents

Long-Run Performance and Insider Trading in Completed and Canceled Seasoned Equity Offerings
Jonathan Clarke, Craig Dunbar, and Kathleen M. Kahle

Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints
Bartley R. Danielsen and Sorin M. Sorescu

The Effect of Green Investment on Corporate Behavior
Robert Heinkel, Alan Kraus, and Josef Zechner

Tick Size, Bid-Ask Spreads, and Market Structure
Roger D. Huang and Hans R. Stoll

Trade Size and Information-Motivated Trading in the Options and Stock Markets
Jason Lee and Cheong H. Yi

Trading Volume and Information Revelation in Stock Markets
Matti Suominen

Abstracts

Economic News and Bond Prices: Evidence from the U.S. Treasury Market
Pierluigi Balduzzi, Edwin J. Elton, and T. Clifton Green

This paper uses intraday data from the interdealer government bond market to investigate the effects of scheduled macroeconomic announcements on prices, trading volume, and bid-ask spreads. We find that 17 public news releases, as measured by the surprise in the announced quantity, have a significant impact on the price of at least one of the following instruments: a three-month bill, a two-year note, a 10-year note, and a 30-year bond. These effects vary significantly according to maturity. Public news can explain a substantial fraction of price volatility in the aftermath of announcements, and the adjustment to news generally occurs within one minute after the announcement. We document significant and persistent increases in volatility and trading volume after the announcements. Bid-ask spreads, on the other hand, widen at the time of the announcements, but then revert to normal values after five to 15 minutes. The effects that we document have relevant implications for yield curve modeling and for the microstructure of bond markets.

Long-Run Performance and Insider Trading in Completed and Canceled Seasoned Equity Offerings
Jonathan Clarke, Craig Dunbar, and Kathleen M. Kahle

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 completed and canceled SEOs, but declines afterward 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 insider trading around SEO filing affect the probability of cancellation. Overall, the evidence 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.

Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints
Bartley R. Danielsen and Sorin M. Sorescu

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.

The Effect of Green Investment on Corporate Behavior
Robert Heinkel, Alan Kraus, and Josef Zechner

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 firms to reform. Existing empirical evidence indicates that at most 10% of funds are invested by green investors.

Tick Size, Bid-Ask Spreads, and Market Structure
Roger D. Huang and Hans R. Stoll

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, and also traded as ADRs on the New York Stock Exchange, an auction market. We conclude that market characteristics are endogenous to the market structure. The London dealer market does not have a mandated tick size, and it exhibits higher spreads, higher quote clustering, and higher market depth than the NYSE auction market. Clustering of trade prices is similar in London and New York.

Trade Size and Information-Motivated Trading in the Options and Stock Markets
Jason Lee and Cheong H. Yi

This study investigates the extent of information-motivated trading conditional on trade size in the options and stock markets. We find evidence that the options market is the primary venue for information trading only for small investors, whereas large investors 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 financial leverage attract more informed investors. Overall, our results reinforce the notion that the options market is a venue for information-motivated trading.

Trading Volume and Information Revelation in Stock Markets
Matti Suominen

I consider a market microstructure model in which the rates of public and private information arrival are probabilistic. The latter depends on the availability of private information that is stochastically changing over time. In equilibrium, traders estimate the availability of private information using past periods' trading volume and use this information to adjust their strategies. The time-series properties include contemporaneous correlation between price variability and volume and autocorrelation in price variability (similar to GARCH). The model explains why trading volume contains useful information for predicting volatility and provides predictions on the limit and market order placement strategies of traders.