Forthcoming Articles

Shining a Light in a Dark Corner: Does EDGAR Search Activity Reveal the Strategically Leaked Plans of Activist Investors?

Ryan Flugum, Choonsik Lee, and Matthew E. Souther

We provide evidence of a network of information flow between activists and other investors prior to 13D filings. We match EDGAR search activity to investor IP addresses, identifying specific investors who persistently download information on an individual activist’s campaign targets prior to that activist’s 13D disclosures. This outside investor’s knowledge of pending activist campaign plans seems to benefit both parties: the informed investor, unnamed in the 13D, increases its holdings in the targeted stock prior to the price surge upon 13D disclosure, while the activist earns voting support that increases their likelihood of pursuing and winning a proxy fight.

The Demise of the NYSE and NASDAQ: Market Quality in the Age of Market Fragmentation

Peter Haslag and Matthew C. Ringgenberg

U.S. equity exchanges have experienced a dramatic increase in competition from new entrants, resulting in the fragmentation of trading across venues. While market quality has generally improved over this period, we show most of the improvements have accrued to the largest stocks. We then show this bifurcation in market quality is related to the fragmentation of trading. Theoretically, more exchange competition should reduce trading costs, yet it may also increase adverse selection for liquidity providers, leading to higher spreads. We document evidence of both effects — fragmentation improves market quality for large stocks while small stocks experience relatively worse quality.

Shoot the Arrow, Then Paint the Target: CEO Compensation and ISS Benchmarking

Subramanian R. Iyer, Oded Palmon, and Harikumar Sankaran

We document that firms that expect their CEOs’ compensation to exceed the median CEO compensation of their ISS peers influence ISS to revise these peer sets. Controlling for changes in firm characteristics that ISS uses to select peers, we find that ISS applies an abnormally high turnover rate in the members of these peer sets and increases the representation of focal firms’ chosen peers. This turnover results in increases in the medians of the ISS peers’ CEO compensation and size. We find that these firms underperform and conclude that they attempt to camouflage high CEO pay to mitigate outrage costs.

Do Directors Respond to Stock Mispricing? Evidence from CEO Turnovers

Jim Goldman

This paper examines whether and how stock mispricing can affect the probability of CEO turnover. In a sample of 1,573 US public firms, I find that, after controlling for fundamental performance, a one standard deviation negative uninformative stock price shock increases the likelihood of CEO turnover by 10%. The mispricing-turnover sensitivity is stronger at firms with an independent board, and a difference-in-difference analysis further supports that finding. Ancillary results suggest that independent directors’ career concerns may play a role in the response of independent boards to mispricing.

PEAD.txt: Post-Earnings-Announcement Drift Using Text

Vitaly Meursault, Pierre Jinghong Liang, Bryan R. Routledge, and Madeline Marco Scanlon

We construct a new numerical measure of earnings announcement surprises, standardized unexpected earnings call text (SUE.txt), that does not explicitly incorporate the reported earnings value. SUE.txt generates a text-based post-earnings announcement drift (PEAD.txt) larger than the classic PEAD. The magnitude of PEAD.txt is considerable, even in recent years when the classic PEAD is close to zero. We explore our text-based empirical model to show that the calls’ news content is about details behind the earnings number and the fundamentals of the firm.

When Bigger Is Better: The Impact of a Tiny Tick Size on Undercutting Behavior

Anne Haubo Dyhrberg, Sean Foley, and Jiri Svec

Economically insignificant tick sizes encourage undercutting behavior, thus harming market quality. Theoretical work shows that increasing tick sizes in unconstrained markets reduces undercutting and improves market quality. Equity market pricing grids are generally too coarse to test this prediction. We examine a cryptocurrency market with infinitesimal tick sizes where undercutting limit orders acquire price priority without meaningful economic cost. We show that increasing tick sizes reduces undercutting behavior, increases liquidity provision and quoted depth, and reduces transaction costs for institutional and retail-sized trades while decreasing short-term volatility. Tiny tick sizes are suboptimal, supporting increased minimum trading increments in tick-unconstrained markets.

Short-Sale Constraints and Corporate Investment

Xiaohu Deng, Vishal Gupta, Marc L. Lipson, and Sandra Mortal

In a sample of non-US regulatory regime shifts we find that expanded short selling is associated with stock price declines, reductions in capital expenditure, and lower asset growth. In a reversal of results found for US stocks in a study of Regulation SHO by Grullon, Michenaud, and Weston (2015), our results are stronger for large firms than for small firms. We also show that this investment effect is stronger for firms that previously relied on outside financing. Our results suggest short-sale policies affect corporate investment and that this effect is not driven by capital constraints.

Diseconomies of Scale in Quantitative and Fundamental Investment Styles

Richard B. Evans, Martin Rohleder, Hendrik Tentesch, and Marco Wilkens

We examine diseconomies of scale for two different investment approaches: quantitative and fundamental. Using separate account (SA) data where the investment approach is self-identified, we find that fundamental SAs exhibit greater diseconomies of scale than quantitative SAs.  Looking at liquidity costs, we find that quantitative SAs hold more diversified portfolios of higher liquidity stocks than fundamental SAs, thereby reducing their expected liquidity costs.  We also find that consistent with lower information processing/hierarchy costs, the speed of information diffusion is higher for quant SAs. Accounting for these differences helps to explain the differences in diseconomies of scale.