2016- Working Papers: Finance, Accounting and Insurance
Dynamic asset sales with a feedback effect, 50 pp.
S. Frenkel
(Working Paper no. 7/2016)
Research no.: 00750100
I analyze a dynamic model of over-the-counter asset sales in which a manager receives stock-sensitive compensation and a transaction conveys information about the firm's value. I examine how market response to an asset sale feeds back to the manager's decision on the timing and the price of the sale, and analyze the unique pattern of stock prices before and after the sale. The implications of bargaining power, inventories, gains from trade, and the introduction of a vesting period are discussed. The model sheds light on observed properties of corporate sell-offs, as well as explains market dry-ups during downturn periods.
The precision of information in stock prices, and its relation to disclosure, liquidity, and cost of equity, 47 pp.
E. Amir and S. Levi
(Working Paper no. 8/2016)
Research no.: 08150100
We estimate the precision of information embedded in daily returns on the change in firm value, and examine its relation to disclosure, liquidity, and the cost of equity. We find public disclosure increases the precision of information in returns. Liquidity also increases precision, and an exogenous increase in liquidity after inclusion of a stock in major indexes increases the precision of information in its returns. An expected consequence of higher information precision is lower cost of equity, and we find that an increase in the precision of the information in prices is associated with a decrease in cost of equity.
Improved information shock and price dispersion: A natural experiment in the housing market, 41 pp.
D. Ben-Shahar and R. Golan
(Working Paper no. 12/2016)
Research no.: 02260100
This research employs data from a natural experiment to assess the effect of improved price information shock on subsequent real estate transaction price dispersion. While transaction data in the Israeli real estate market had never been open to the public, in 2010 an Israeli court ordered the Israel Tax Authority to post all real estate transaction data on its website. We employ all housing transactions in the period prior and subsequent to this event to assess its effect on housing price dispersion. Results provide strong evidence of improved market efficiency as indicated by a significant decrease in the dispersion of quality-adjusted prices. We further find evidence that the information shock effect on price dispersion varies with household characteristics in the market. Our findings support the market transparency argument for promoting economic efficiency and equity.
The differential information precision of positive and negative daily stock returns, 40 pp.
E. Amir, S. Levi and R. Zuckerman
(Working Paper no. 14/2016)
Research no.: 07160100
We show that positive daily stock returns contain, on average, more precise information on the long-term changes in share prices than negative daily stock returns. Equivalently, days with negative stock returns are more prone to subsequent reversals than days with positive stock returns. This difference in information precision between negative and positive daily returns is larger on non-news days, and decreases significantly on earnings news days. We argue and show that an asymmetric leakage of positive and negative information from firms during the quarter is driving the phenomenon. Specifically, the information precision of positive returns on non-news days has decreased since Regulation Fair Disclosure disallowed selective disclosure, whereas the precision of negative returns has not diminished. Our findings suggest that when managers withhold bad news, investors do not independently acquire and incorporate into prices information that mitigates the lower precision of negative information released by firms.
Voluntary disclosure and strategic stock repurchases, 54 pp.
P. Kumar, N. Langberg, J. Oded and K Sivaramakrishnan
(Working Paper no. 15/2016)
Research nos.: 03260100 and 03760100
We study the choice of disclosure and share repurchase strategies of informed managers using a model that captures how they differentially impact short and long-term stock value. We identify a partial disclosure equilibrium in which firms in the lowest value region neither disclose nor repurchase, firms with intermediate values disclose but do not repurchase, and firms in the highest value region induce undervaluation by not disclosing and buy back shares. In particular, the well known unraveling result when the manager is always informed (and when disclosure is costless)—the typical upper-tailed disclosure region in classic voluntary disclosure models— need not obtain when informed managers can use repurchases to extract information rents. We offer a new perspective on open-market share repurchases—the most common form of share repurchases— when chosen optimally with disclosure. Our analysis indicates that the equilibrium disclosure region shrinks as the firm’s stock trading liquidity increases.
