Posts Tagged ‘Information asymmetries’

SEC Dissemination in a High-Frequency World

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday February 11, 2015 at 9:11 am
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Editor’s Note: The following post comes to us from Douglas Skinner and Sarah Zechman, both of the Accounting Area at the University of Chicago, and Jonathan Rogers of the Accounting Division at the University of Colorado at Boulder.

Understanding the mechanics of public dissemination of firm information has become especially critical in a world where trading advantages are now measured in fractions of a second. In our study, Run EDGAR Run: SEC Dissemination in a High-Frequency World, which was recently made publicly available on SSRN, we examine the SEC’s process for disseminating insider trading filings. We find that, in the majority of cases, filings are available to private paying subscribers of the SEC feeds before they are posted to the SEC website, with an average private advantage of 10.5 seconds.

…continue reading: SEC Dissemination in a High-Frequency World

Financial Disclosure and Market Transparency with Costly Information Processing

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday February 4, 2015 at 9:00 am
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Editor’s Note: The following post comes to us from Marco Di Maggio of the Finance and Economics Division at Columbia University and Marco Pagano, Professor of Economics at the University of Naples Federico II.

In our paper, Financial Disclosure and Market Transparency with Costly Information Processing, which was recently made publicly available on SSRN, we provide new insights about the effects of financial disclosure and market transparency. Specifically, we address the following question: can the disclosure of financial information and the transparency of security markets be detrimental to issuers? On the one hand, there is an increasing concern that, in John Kay’s words, “there is such a thing as too much transparency. The imposition of quarterly reporting of listed European companies five years ago has done little but confuse and distract management and investors.” On the other, insofar as disclosure reduces adverse selection and thus increases assets’ issue prices, it should be in the best interest of asset issuers: these should spontaneously commit to high disclosure and list their securities in transparent markets. This is hard to reconcile with the need for regulation aimed at augmenting issuers’ disclosure and improving transparency in off-exchange markets. Yet, this is the purpose of much financial regulation such as the 1964 Securities Acts Amendments, the 2002 Sarbanes-Oxley Act, and the 2010 Dodd-Frank Act.

…continue reading: Financial Disclosure and Market Transparency with Costly Information Processing

Mutual Funds and Information Diffusion: The Role of Country-Level Governance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday October 29, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Chunmei Lin of the Department of Business and Economics at Erasmus University Rotterdam; Massimo Massa, Professor of Finance at INSEAD; and Hong Zhang of the PBC School of Finance, Tsinghua University.

If the institutions of a country (e.g., property rights and contracting institutions) jeopardize the quality of its financial market, can the market by itself put in force corrective mechanisms that counterbalance and offset such negative impact? This question is at the core of modern financial economics because it essentially asks whether the market plays a more fundamental role than institutions in shaping modern financial activities, or the other way around. While the role of institutions has many facets and is subtle in nature, in our paper, Mutual Funds and Information Diffusion: The Role of Country-Level Governance, forthcoming in the November issue of the Review of Financial Studies, we focus on one unique element of the market—the global mutual fund industry—to provide some new insights.

…continue reading: Mutual Funds and Information Diffusion: The Role of Country-Level Governance

Opacity in Financial Markets

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday October 23, 2014 at 9:17 am
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Editor’s Note: The following post comes to us from Yuki Sato of the Department of Finance at the University of Lausanne and the Swiss Finance Institute.

In my paper, Opacity in Financial Markets, forthcoming in the Review of Financial Studies, I study the implications of opacity in financial markets for investor behavior, asset prices, and welfare. In the model, transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds) trade transparent assets (e.g., plain-vanilla products) and opaque assets (e.g., structured products). Investors observe neither opaque funds’ portfolios nor opaque assets’ payoffs. Consistent with empirical observations, the model predicts an “opacity price premium”: opaque assets trade at a premium over transparent ones despite identical payoffs. This premium arises because fund managers bid up opaque assets’ prices, as opacity potentially allows them to collect higher fees by manipulating investor assessments of their funds’ future prospects. The premium accompanies endogenous market segmentation: transparent funds trade only transparent assets, and opaque funds trade only opaque assets. A novel insight is that opacity is self-feeding in financial markets: given the opacity price premium, financial engineers exploit it by supplying opaque assets (that is, they render transparent assets opaque deliberately), which in turn are a source of agency problems in portfolio delegation, resulting in the opacity price premium.

…continue reading: Opacity in Financial Markets

Window Dressing in Mutual Funds

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 17, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Vikas Agarwal and Gerald Gay, both of the Department of Finance at Georgia State University, and Leng Ling of the College of Business at Georgia College & State University.

In our paper, Window Dressing in Mutual Funds, forthcoming in the Review of Financial Studies, we investigate an alleged agency problem in the mutual fund industry. This problem involves fund managers attempting to mislead investors about their true ability by trading in such a manner that they disclose at quarter ends disproportionately higher (lower) holdings in stocks that have recently done well (poorly). The portfolio churning associated with this practice of window dressing has potentially damaging effects on both fund value and performance.

…continue reading: Window Dressing in Mutual Funds

How Efficient is Sufficient? Securities Litigation Post-Halliburton

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 9, 2014 at 9:06 am
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Editor’s Note: The following post comes to us from Bradford Cornell at California Institute of Technology.

In its recent decision in Halliburton Co., et al. v Erica P. John Fund, Inc., the U.S. Supreme Court upheld the legal standard for reliance in Rule 10b-5 securities fraud class actions that it had established some 25 years ago in Basic, Inc. v. Levinson. This standard, known as the fraud-on-the market doctrine, created a rebuttable presumption that plaintiffs relied on the integrity of the market price if they can establish that the market for that security was efficient. Defendants can rebut this presumption in several ways, including showing that the market for the security was not efficient or that the security’s price was not affected by the misrepresentations at issue. In delivering its ruling, the Halliburton Court noted that market efficiency is not a binary, yes-or-no proposition but is instead a matter of degree, pointing out that “a public, material misrepresentation might not affect a stock’s price even in a generally efficient market.” (Halliburton, 573 U.S. ___ at 10.)

…continue reading: How Efficient is Sufficient? Securities Litigation Post-Halliburton

The Hidden Costs and Underpinnings of Debt Market Liquidity

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 26, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from Amar Bhidé, Thomas Schmidheiny Professor at The Fletcher School.

Even as rabble rousers rail against financiers, the powers that be prize the breadth and liquidity of financial markets. Flash traders are investigated for unsettling stock markets and violators of securities laws receive jail sentences on par with violent criminals. The Federal Reserve has spent trillions with the avowed aim of pumping up the prices of traded securities, while expressing little more than the pious hope that this largesse might spill over into old-fashioned, illiquid loans.

…continue reading: The Hidden Costs and Underpinnings of Debt Market Liquidity

Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 12, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Albert H. Choi, Albert C. BeVier Research Professor of Law at University of Virginia Law School.

In mergers and acquisitions transactions with privately-held (or closely-held) target companies, transacting parties will often agree to make payments to the target shareholders contingent upon some post-closing measures. Two often used arrangements are purchase price adjustments (PPAs) and earnouts. With a purchase price adjustment mechanism, payment to the target shareholders will be adjusted based on an accounting metric (such as the net working capital or shareholders’ equity) calculated shortly after the deal is closed. For instance, with a purchase price adjustment based on the target’s net working capital, as the target’s post-closing net working capital goes up or down compared to a pre-closing estimate, consideration to the target shareholders increases or decreases in accordance. Similarly, with an earnout, the transacting parties will agree upon post-closing performance targets, using measures such as earnings, net income, or gross revenue, and the amount of consideration that the target shareholders are entitled to receive will depend on whether such targets are met over the earnout period.

…continue reading: Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments

Hedge Funds and Material Nonpublic Information

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday July 31, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg; the complete publication, including footnotes, is available here.

The last thing hedge funds need is another wake up call about the risks of liability for trading on the basis of material nonpublic information. But if they did, a July 17 article in the Wall Street Journal would provide it. According to the article, the SEC is investigating nearly four dozen hedge funds, asset managers and other firms to determine whether they traded on material nonpublic information concerning a change in Medicare reimbursement rates. If so, it appears that the material nonpublic information, if any, may have originated from a staffer on the House Ways and Means Committee, was then communicated to a law firm lobbyist, was further communicated by the lobbyist to a political intelligence firm, and finally, was communicated to clients who traded. According to an April 3, 2013 Wall Street Journal article, the political intelligence firm issued a flash report to clients on April 1, 2013 at 3:42 p.m.—18 minutes before the market closed and 35 minutes before the government announced that the Centers for Medicare and Medicaid Services would increase reimbursements by 3.3%, rather than reduce them 2.3%, as initially proposed. Shares in several large insurance firms rose as much as 6% in the last 18 minutes of trading.

…continue reading: Hedge Funds and Material Nonpublic Information

The Peril of an Expectations Gap in Proxy Advisory Firm Regulation

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 29, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from Asaf Eckstein of Tel Aviv University-Buchmann Faculty of Law.

Over the last few years, Congress and Securities and Exchange Commission (SEC) were put under pressure to seriously consider regulating proxy advisory firms. Financial industry and government leaders have voiced concern that proxy advisory firms exert too much power over corporate governance to operate unregulated. The SEC as well as the Congress have investigated and debated the merits of proxy advisory regulation. The U.S. House of Representatives held a hearing on the matter in June of 2013, and the SEC followed this hearing with a roundtable discussion in December of 2013. On June 30, 2014, the Investment Management and Corporate Finance Divisions of the SEC issued a bulletin outlining the responsibilities of proxy advisors and institutional investors when casting proxy votes. As of yet, no binding regulation has been promulgated, despite repeated calls for it.

…continue reading: The Peril of an Expectations Gap in Proxy Advisory Firm Regulation

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