This paper investigates FTSE 100 index membership changes, which are determined quarterly by market capitalization and should have no information content. Return reversal around index additions and deletions suggests that buying (selling) pressure moves prices temporarily away from equilibrium, consistent with short-term downward sloping demand curves. In contrast to widely reported results for the S&P 500, there is no evidence of permanent price effects. Further results suggest that investor awareness and monitoring due to index membership do not explain the price effects. There is statistically significant anticipatory trading in stocks that just fail to be promoted to the FTSE 100. Copyright 2007, The Eastern Finance Association.
Initial public offering, Long-run performance, China’s economy, G30, G34,
PurposeThe purpose of this paper is to examine the effect of name changes on the value of UK companies. Previous research in the USA suggests that there is little effect associated with a name change, except for a small sample of Dot Com companies.Design/methodology/approachThis study uses an event study methodology to measure the short‐term abnormal returns associated with the announcement of company name changes. It uses a calendar time methodology to measure the corresponding long‐term abnormal returns. It distinguishes between amendments and radical name changes, as well as those that signal that a firm is diversifying or re‐focusing.FindingsContrary to the existing research, there is evidence of consistent abnormal returns following name change announcements, particularly when a distinction is made between amendments and radical name changes, and whether the name change reflects a company that is diversifying or re‐focusing.Research limitations/implicationsThis research suggests that companies should reflect on the nature of a proposed name change. Company name changes that drop part of an existing name are not well received by shareholders, whereas those that add to the existing name are. In addition, adding or dropping the term “group” from a company's name can also have considerable effects on the share price, both in the short and long run.Practical implicationsThis paper shows that shareholders' perceptions of the implications of a company's name change are important. Name change announcements should therefore be regarded as influential signals to investors.Originality/valueThis paper finds significant abnormal returns associated with company name change announcements. Further, it shows that the type of name change is important in determining the sign of these resulting abnormal returns.
PurposeThe aim of this paper is to identify why the historically observed equity risk premium is larger than most researchers believe is reasonable. Whilst equity is undoubtedly riskier than government issued securities, the extent of the realised premium on equity has been characterised as a “puzzle”.Design/methodology/approachThis paper measures the equity premium for a number of countries over the past 132 years, and then uses a pooled cross‐section and time‐series analysis to investigate the relationship between the equity premium and inflation.FindingsThis paper shows that the equity premium over the past 132 years has been significantly positively related to the rate of inflation and, therefore, has resulted in an equity premium that is substantially higher in the post 1914 period than before. This effect results from the relative performance of bonds and stocks during inflationary periods. The relatively poor performance of bonds during periods of inflation drives much of the equity premium.Research limitations/implicationsCounterfactual simulations in the paper show that the average equity premium post 1914 would have been 4.61 per cent and not 7.34 per cent had the rate of inflation been zero. This is much closer to theoretically derived estimates.Practical implicationsThe size of the equity premium has implications for investors' asset allocation decision. The importance of inflation suggests that in a low inflation environment, the expected equity premium will be considerably lower than the historically realised equity premium.Originality/valueThis paper establishes a clear link between the rate of inflation and the equity premium.
UK executives' stock option exercises and associated sell decisions are motivated by private, inside, information. Executives use their inside information to lock in short-term gains, and to sell stock acquired prior to negative abnormal stock returns. This informed trading is robust to the alternative factors that might motivate the exercise of executive stock options, including option moneyness and value of exercise. We suggest that the disparity in informed trading between US and UK executives' option trades is related to important differences in the proportion of executive remuneration linked to options, the regulation of options, and the taxation of option gains. Copyright (c) The London School of Economics and Political Science 2009.
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