No abstract

We examine whether the price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a complete sample of annual earnings announcements during the period 1988 to 1998. The relative level of the market is based on the difference between the current market P0E and the average market P0E over the prior 12 months. We find that the stock price response to negative earnings surprises increases as the relative level of the market rises. Furthermore, the difference between bad news and good news earnings response coefficients rises with the market. ONE OF THE LONGEST RUNNING empirical debates in finance regards the relative pricing of "value" and "glamour " stocks. Beginning with early work by Basũ 1983! and Stattman~1980!, evidence has accumulated that excess returns on value stocks-that is, the issues of companies for which the ratio of earnings, cash f low, or book value per share is large relative to stock price-are greater than returns on glamour stocks, for which these ratios are small. On one side, Fama and French~1992, 1993, 1995, 1996! argue that the observed differential between the returns on value and glamour stocks represents a risk premium. The alternative view, articulated by Lakonishok, Shleifer, and Vishny~1994!, is that the market fails to efficiently price value and glamour stocks.Extending Lakonishok et al.~1994!, recent work in behavioral finance by, for example, Barberis, Shleifer, and Vishny~BSV, 1998! and Daniel, Hirshleifer, and Subrahmanyam~1998! argues that the value0glamour effect is the result of investor psychology. In particular, the model in BSV allows for investor underreaction~in the intermediate term! to single shocks and investor overreaction~in the longer term! to a series of shocks. This model also implies an asymmetry in the returns to value and glamour stocks following a news shock. Following a string of positive shocks observed in, say, glamour stocks, the investor in this model expects another positive shock, that is, he expects the earnings to trend. If good news is announced, the market re-2507 sponse is relatively small since the positive shock was anticipated. A negative shock, on the other hand, generates a large negative return, since it is more of a surprise.The primary empirical tests of the competing explanations for the value0 glamour differential have been conducted on earnings announcements~La Porta,~1996!, Dechow and Sloan~1997!!. La Porta et al.~1997! and Bernard, Thomas, and Wahlen~1997! find that earnings announcement returns explain almost half of the return differential between value and glamour stocks. More recently, Skinner and Sloan~1999! use a sample of earnings announcements and find that when pre-announcement effects are included, the differential reaction to earnings announcements completely explains the differential returns to value and glamour stocks. In addition, Skinner and Sloan also find evidence consistent with the BSV hypothesis. In particular, they find that the response to news is asym...

No abstract

No abstract

No abstract

Empirical studies of the Treasury Bill markets have revealed substantial differences between the futures price and the implied forward price. These differences have been attributed to taxes, transaction costs, and the settling up procedure employed in the futures market. This paper examines the forward and futures prices in foreign exchange in an attempt to distinguish between the competing explanations. EMPIRICAL STUDIES OF THETreasury bill market have revealed differences between the futures price (or rate) and the implicit forward price derived from the term structure of interest rates.1 These differences have generally been attributed to market "imperfections" such as taxes and transaction costs. (See, for example, Arak [1], Capozza and Cornell [2], and Rendelman and Carabini [6]). Recently, however, Cox, Ingersoll, and Ross [3], henceforth CIR, derived a model in which forward and futures prices need not be equal, even in perfect markets without taxes, as long as interest rates are stochastic.The significance of the CIR effect may be hard to investigate using only data from the bill market, because of the potentially complicating effects of taxes and transaction costs unique to this market. By using data from the foreign exchange market, we are able to eliminate the tax effect and reduce the impact of transaction costs. The question we address is whether the discrepancies observed in the Treasury Bill market are also observed in the foreign exchange market. If they are, then we have evidence that the differences are due to a combination of the CIR effect and the transaction costs common to both markets. If they are not, then either the magnitude of the CIR effect is much less in the foreign exchange market, or the Treasury Bill results are due to the unique tax treatment and transaction costs of that market. This paper is organized as follows. In Section I the trading mechanics of the forward and futures markets in foreign exchange are discussed. Section II reviews the explanations for the discrepancies between the forward and futures prices for Treasury Bills. The institutional differences between the foreign exchange and bill markets are also summarized to show which of these explanations cannot apply to the foreign exchange market. In Section III, the data are decribed and the empirical results are presented. The conclusions are summarized in the final section. * The authors would like to thank Michael Brennan, John Cox, and Jon Ingersoll as well as participants at finance workshops at UC Berkeley and UCLA for helpful comments. Research assistance was provided by Tom Hay. 'The papers include Capozza and Cornell [2], Lang and Rosche [5], Rendleman and Carbini [6], and Vignola and Dale [7].

We examine how analysts respond to public information when setting stock recommendations. We model the determinants of analysts' recommendation changes following large stock price movements. We find evidence of an asymmetry following large positive and negative returns. Following large stock price increases, analysts are equally likely to upgrade or downgrade. Following large stock price declines, analysts are more likely to downgrade. This asymmetry exists after accounting for investment banking relationships and herding behavior. This result suggests recommendation changes are "sticky" in one direction, with analysts reluctant to downgrade. Moreover, this result implies that analysts' optimistic bias may vary through time.

he prices observed for stock index futures have surprised both academics and T practitioners. The price structure, which gives the relation between the futures and spot prices as a function of the time to maturity, is generally flatter than simple arbitrage models predict. In fact, the futures prices are often below the spot price. This has led some practitioners to conclude that arbitrage profits could be earned by selling stock and buying futures contracts. In this article we suggest that the relatively low futures prices reflect the impact of taxes, not market inefficiency.Throughout the article we assume that forward and futures prices are equal. Of course, it is now well known that these prices will not be exactly equal if interest rates are stochastic because futures contracts are settled daily and forward contracts are not settled until the contract matures. Cox, Ingersoll, and Ross (1981), Jarrow and Oldfield (198lX Richard and Sundaresan (198lX and French (1982a) examine the theoretical difference between forward and futures prices in a variety of contexts. Nonetheless, simulations and empirical studies by Rendleman and Carabini (19791, Cornell and Reinganum (1981), and Elton, Gruber, and Rentzler (1982) indicate that the difference is economically insignificant.' In the remainder of this article forward and futures prices are used interchangeably.The empirical results presented here are limited to contracts on the S & P 500 index and the New York Stock Exchange composite index. The Value Line index is excluded because it is not a value-weighted average. Instead, it is based on a geometric average of the component stocks' price changes. This means that the rate of change in the Value Line index is not equal to the return one would receive from holding the component stocks. Rather than complicate the results of our study by attempting to adjust for the bias produced by the geometric averaging, we ignore the Value Line contract.'French (198%) finds a statistically aignifiant difference between futures and fomard p r i a for copper and silver. However, since he finds that the futures prices are generally larger than the forward p h , distinguishing between these prices would magnify the puzzle, rather than explain i t