Euronext Paris Research Articles

Are high–frequency traders informed?

Are high–frequency traders (HFTs) informed? To address this question, we examine HFTs' activity in the call auction environment, where speed-related trading is limited and signal processing capacity becomes more relevant. To model the call market, we consider the Kyle (1989) rational expectations framework for strategic trading. The test we propose for detecting informed HFTs in this market assesses potential deviations of the informativeness of HFTs' aggregate (net) demand, from the informativeness of the aggregate demand submitted by the rest of the traders. Data from the Euronext Paris preopening phase indicate that informed HFTs are present in the market just before the opening. Our results provide useful guidance for the assessment of the influence of HFTs’ quotes on price quality, an important issue for market regulators and policy makers.

Sanofi to spin off drug-making unit

The French drug company Sanofi says it will create a new contract manufacturing firm composed of six of its European active pharmaceutical ingredient (API) production sites. Sanofi plans an initial public offering for the firm on the Euronext Paris stock exchange by 2022. The new company will rank as the world’s second-largest API maker, with about $1.1 billion in annual sales, according to Sanofi. The Swiss firm Lonza is generally considered the largest API producer. Sanofi says the company will bolster European supply of APIs and “help in balancing the industry’s heavy reliance on API sourced from the Asian region.” It will include Sanofi sites in England, France, Germany, Hungary, and Italy and will employ 3,100. Sanofi says it plans to hold a 30% stake in the new company. “This new entity would be agile as a standalone company, and able to unlock its growth potential, especially in capturing new

The growing importance of the closing auction in share trading volumes

The increasing concentration of share trading volumes at the end of the day is a phenomenon that can be witnessed to varying degrees on all the main markets worldwide. France is, however, one of the markets where this trend has reached the highest levels, with close to 41 per cent of CAC 40 volumes traded at the closing auction on Euronext Paris in June 2019. This rate is well above the 12–14 per cent level seen in the United States. Several factors could account for this phenomenon: • The rapid growth in passive management, for which unit creation and cancellation generally takes place at the end-of-day liquidation value and for which a precise replication entails trading at the closing price. • The obligation of ‘best execution’ and especially reporting obligations of the tradeand- cost-analysis type to which fund managers have been subject since the application of MiFID II. By trading at the closing auction, this type of reporting becomes superfluous. • A move to avoid high-frequency trading (HFT) arbitrageurs, who rarely get involved in the closing auction phase. • Lastly, the role of execution algorithms, which have amplified the preceding factors, as liquidity attracts liquidity. The study also describes the price formation process during the closing auction phase and shows that while volumes and prices converge rapidly towards their final level during the first half of the order accumulation phase (90 per cent of the volumes traded are already present in the order book with an average price differential of 0.30 per cent), final convergence takes place in the last 15 seconds of the auction. Finally, this change in market structure is accompanied by the emergence of certain risks, in particular an increased exposure to operational incidents, which could occur during this very brief phase, and lower levels of liquidity in the rest of the session.

The Optimal Wheat Futures Hedge at the Euronext Paris from a Farmer’s Perspective

Futures contracts are extensively used by commer-cial market participants to hedge commodities against the risk of adverse price fluctuations. But although farmers have faced increased volatility in commodity prices in recent years, only very few of them actively use hedging as a risk management instrument. In this article we analyze the hedging potential of the Euronext milling wheat futures market for German farmers based on the estimation of optimal static as well as optimal dynamic hedge ratios. We find that both hedging approximately one year and half a year before harvesting leads to a reduction in the variance of returns compared with unhedged portfolios. But this risk minimization is achieved at the cost of lower returns on average. In addition we find that margin calls might be one of the reasons why so few farmers hedge since they cause liquidity problems especially in marketing years with unanticipated price shocks.

Corporate social responsibility disclosure and debt financing

PurposeThe purpose of this paper is to examine how corporate social responsibility (CSR) reporting influences leverage ratios. In particular, this paper aims to determine whether firms with higher CSR disclosure scores have better access to debt financing.Design/methodology/approachThis paper uses a panel data analysis of non-financial French firms listed on the Euronext Paris Stock Exchange and members of the SBF 120 index from 2010 to 2015. The environmental, social and governance (ESG) disclosure scores that are collected from the Bloomberg database are used as a proxy for the extent of ESG information disclosures by French companies.FindingsThe empirical results demonstrate that leverage ratios are positively related to CSR disclosure scores. In addition, the results show that the levels of long-term and short-term debt increase with the disclosure of ESG information, thus suggesting that CSR disclosures play a significant role in reducing information asymmetry and improving transparency around companies’ ESG activities. This finding meets the lenders’ expectations in terms of extrafinancial information and attracts debt financing sources.Research limitations/implicationsThe research is based only on the quantity of the ESG information disclosed by French companies and does not account for the quality of the CSR disclosures. The empirical model omits some control variables (e.g. the nature of the industry, the external business conditions and the age of the firm). The results should not be generalized, since the sample was based on large French companies for 2010–2015.Practical implicationsFrance is a highly regulated context that places considerable pressure on French firms in terms of CSR policies. The French Parliament has adopted several laws requiring transparency in the environmental, social, and corporate governance policies of French firms. In this context, firms often regard CSR policies as constraints rather than opportunities. This study highlights the benefits that result from transparent CSR practices. More precisely, it provides evidence that the high disclosure of ESG information is a pull factor for credit providers.Originality/valueThis study extends the scope of previous studies by examining the value and relevance of CSR disclosures in financing decisions. More precisely, it focuses on the relatively little explored relationship between the extent of CSR disclosures and access to debt financing. This paper demonstrates how each category of CSR disclosure information (e.g. social, environmental and governance) affects access to debt financing. Moreover, this study focuses on the rather interesting empirical setting of France, which is characterized by its highly developed legal reforms in terms of CSR. Achieving a better understanding of the effects of ESG information is useful for corporate managers desiring to meet lenders’ expectations and attract debt financing sources.

Order Placement Strategies in High-Frequency Markets

I analyze order placement strategies by high-frequency traders (HFT) and non-HFT on Euronext Paris. Virtually all orders are limit orders submitted by fast traders, in most cases acting as market makers. Fast traders display high limit to market order ratios and their orders have lower ll rates, higher cancellation rates, and shorter lifetime than non-HFT orders. Liquidity taking orders are less costly for HFT than non-HFT whereas liquidity supplying orders are cheaper for non-HFT than HFT. As volatility rises, the ratio of limit order to market orders increases (decreases) for fast (slow) traders but fast traders become more conservative in their limit order submissions.

Stage financing and syndication in the IPO underpricing of venture-backed firms: Venture capital and IPO underpricing

The article investigates the impact of stage financing and syndication practices on the underpricing level of venture-backed firms (VBFs) undertaking their initial public offerings (IPOs). This empirical study uses a unique hand-collected data set concerning more than 260 VBFs that went public on Euronext Paris and Alternext between 1997 and 2013. Our findings suggest a lower level of underpricing for firms backed by syndicated venture capital investment. Additionally, we find that the syndicate size is negatively associated with the level of underpricing. However, there is no evidence that stage financing has a significant impact. Syndication thus appears to be the only relevant mechanism to improve IPO performance (measured by the underpricing level), as it reduces agency costs and information asymmetry between the different stakeholders in an IPO process.

How to evaluate startups and SMEs? A study of French analysts’ IPO reports

This paper presents a study of the valuation methods used by analysts to price small and medium-sized enterprises (SMEs) and startups, characterized generally by a lack of accounting history, an absence of comparable firms, and a high growth potential, or even going through a stage of hypergrowth, despite operating in a particularly uncertain environment. According to a sample of 203 analysts’ IPO reports on Euronext Paris, it is noted that analysts are restricted to using a limited number of valuation models for startups and SMEs, despite the multitude of available assessment methods. The data strongly proved that the discounted cash flow method (DCF) is the most widely used model for startups and SMEs. The real options model, recognized by the literature as the most suitable model for these firms, has never been used. All the valuation methods tend to overestimate firms. Furthermore, the given estimates in the reports were closer to the stock price values one month after the IPO. Regressions prove that the analysts’ choice to use the comparables method depends significantly on the activity sector of the assessed firm.JEL classification: G32, G24

Accruals quality, financial constraints, and corporate cash holdings

PurposeThe purpose of this paper is to examine how information asymmetry driven by earnings quality affects corporate cash holdings. It also investigates the role that financial constraints play in this effect.Design/methodology/approachThe paper examines a large sample of 6,501 observations of 741 firms listed on Euronext Paris over the period 2000–2015. Earnings quality is computed using the Jones model performance-matched discretionary accruals developed by Kothari et al. (2005): the larger the absolute value of discretionary accruals, the lower the accruals quality.FindingsThe study finds that firms with poor accruals quality hold more cash and that cash holdings in firms of low reporting quality are higher under financial constraints. These results indicate that firms tend to increase their cash reserves in the presence of high information asymmetry which is notably driven by low accounting quality. The findings also suggest that information asymmetry associated with low reporting quality is greater when firms also have strong financial constraints. The study’s conclusions are consistent with the precautionary motive for cash holdings.Practical implicationsThe results would enhance practitioners’ awareness of the importance of accounting choices in the management of cash policies. It would also give researchers an incentive to further explore how these policies are influenced by the precautionary behavior of managers.Originality/valueThis paper is the first work to investigate the effect of accruals quality on corporate cash holdings in the French equity market, which typically has a poor information environment resulting in high information asymmetry. Moreover, the role of financial constraints in this effect has not yet been explored.

Price formation in call auctions with insider information

PurposeThis study aims to investigate – theoretically and empirically – if call auctions incorporate asymmetric information into prices.Design/methodology/approachFirst, this study introduces a new model of price formation in a call auction with insider information. In this call auction model, insider trading gives rise to an asymmetric information component of transaction costs. Next, this study estimates the model using 20 stocks from Euronext Paris and investigates if the asymmetric information component is present.FindingsThe theoretical analysis reveals that call auctions incorporate asymmetric information into prices. The empirical analysis finds strong evidence for the asymmetric information component. Testable implications provide further support for the model.Practical implicationsCall auctions have recently been proposed as an alternative to continuous limit order book markets to overcome problems associated with high-frequency trading. However, it is still an open question whether call auctions efficiently aggregate asymmetric information. The findings of this study imply that call auctions facilitate price discovery and, therefore, are a viable alternative to continuous limit order book markets.Originality/valueThere is no generally accepted measure of trading costs for call auctions. Therefore, the measure introduced in this study is of great value to anyone who wants to quantify trading costs in call auctions, understand the determinants of trading costs in call auctions or compare trading costs and their components between continuous markets and call auctions. This study also contributes to the literature devoted to estimating the probability of information-based trading.

Unequal Impact of Conditional Conservatism on Components Accruals: Evidence from French Capital Market

Applied to the French context, this study examines the unequal impact of conditional conservatism on accrual components. The study’s sample is an unbalanced panel of 331 French companies listed on Euronext Paris during the period time going from 2000 till 2015. First, this work aims at attributing empirical evidence to conditional conservatism using Basu (1997) and Khan and Watts (2009) models to detect this accounting practice. Then, it analyses differential implications of conditional conservatism on accrual components.Actually, French companies are known to be conservative firms as they implement conditional conservatism through an accrual component of earning, two accruals drivers (Revenue and receivables) and the non-discretionary accrual. According to Richardson, Sloan, Soliman & Tuna (2005), the working capital component is the preferred tool, among accrual components, for the transmission of conditional conservatism.

Paying for Market Liquidity: Competition and Incentives

Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from the NYSE Euronext Paris, we show that an exogenous increase in competition among DMMs leads to a significant decrease in quoted and effective spreads, mainly through a reduction in the realized spread. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. Our analysis shows that incentivizing DMMs might not necessary lead to an improvement of market liquidity unless exchanges induce greater competition among DMMs.

Corporate governance and initial public offerings

The study aims to determine how different factors shape the size of boards of directors in private firms conducting an initial public offering (IPO) on the regulated Euronext Paris market. These factors include the presence of a venture capitalist, ownership structure, firm-specific characteristics and CEO characteristics. To study the determinants of board size, we used a sample of 568 firms that went public from 1995 to 2012 and found that the boards tend to become more independent shortly after going public, which indicates that firms are affected by monitoring in financial markets. The study found strong evidence that ownership variables, board structure variables, CEO characteristic variables and firm characteristic variables tend to affect board size. Our results also indicate that venture capitalists are a major catalyst for IPOs because they provide financing and strategic advice, act as an opposing force to the CEO and shape the governance structure.

Corporate governance and initial public offerings

The study aims to determine how different factors shape the size of boards of directors in private firms conducting an initial public offering (IPO) on the regulated Euronext Paris market. These factors include the presence of a venture capitalist, ownership structure, firm-specific characteristics and CEO characteristics. To study the determinants of board size, we used a sample of 568 firms that went public from 1995 to 2012 and found that the boards tend to become more independent shortly after going public, which indicates that firms are affected by monitoring in financial markets. The study found strong evidence that ownership variables, board structure variables, CEO characteristic variables and firm characteristic variables tend to affect board size. Our results also indicate that venture capitalists are a major catalyst for IPOs because they provide financing and strategic advice, act as an opposing force to the CEO and shape the governance structure.

On the Gains of Using High Frequency Data in Portfolio Selection

Abstract This paper analyzes empirically the performance gains of using high frequency data in portfolio selection. Assuming Constant Relative Risk Aversion (CRRA) preferences, with different relative risk aversion levels, we compare low and high frequency portfolios within mean-variance, mean-variance-skewness and mean-variance-skewness-kurtosis frameworks. Using data on fourteen stocks of the Euronext Paris, from January 1999 to December 2005, we conclude that the high frequency portfolios outperform the low frequency portfolios for every out-of-sample measure, irrespectively to the relative risk aversion coefficient considered. The empirical results also suggest that for moderate relative risk aversion the best performance is always achieved through the jointly use of the realized variance, skewness and kurtosis. This claim is reinforced when trading costs are taken into account.

Gender‐diverse audit partners and audit fee premium: The case of mandatory joint audit

This study empirically investigates the impact of auditor gender on audit fees in a unique audit regulatory environment, namely France, where joint audit is mandatory by law. Apart from the fact that male and female auditor engagement partners have distinctive behaviors and style, the question also arises at to whether coordination problems between two competing audit firms are exacerbated or mitigated by the presence of a female auditor in the joint auditor pair composition. This issue could be more challenging in the context of International Financial Reporting Standards adoption, which increases audit task complexity, audit risk, and audit effort required for an audit engagement. Using a matched sample of firms from the CAC All‐Shares Index listed on Euronext Paris from 2002 to 2010, we find that, when a female auditor is paired with a male auditor, the difference in audit fees stems not only from the presence of the female auditor partner but also from male–female interaction within the joint auditor pair composition. In a supplementary analysis, we show that the impact on audit fees of both the presence of a female partner and male–female auditor interaction is dependent, but in a different way, on the number of Big 4 audit firms in the auditor pair composition.

The Equity Market and Its Price Discovery Risk: An Empirical Study for the CAC40 Stock Market Index

This paper studies the price discovery dynamics in an order-driven market. Based on the transaction data on individual stocks, the paper focuses on the study of the monthly evolution of normalized volatility ratios on Euronext Paris for the CAC40 stocks before and after the implementation of the Markets in Financial Instruments Directive (MiFID). Since 2007, this European directive ended the national rule of order concentration and increased the fragmentation among trading venues. The normalized volatility ratio is used as a measure of the market quality from the point of view of price discovery. A significant inefficient price determination is observed at the opening period of the market before and after the implementation of MiFID, unlike the closing period. This finding is attributable to the complexity of price discovery following a period of non-trading and relatively heavy information releases. The opening half-hour percentage of High Frequency buyers, the opening half-hour number of trades and the monthly average number of transactions are significant explanatory variables of the volatility accentuation at the opening in the post-MiFID context. The market quality could be improved at the opening half-hour for the CAC40 stock Index on Euronext Paris.

Likelihood based inference for the multivariate renewal Hawkes process

The recent introduction of the renewal Hawkes (RHawkes) process has extended the modeling capabilities of the classical Hawkes self-exciting process by allowing the immigrant arrival times to follow a general renewal process rather than a homogeneous Poisson process. A multivariate extension to the RHawkes process will be proposed, which allows different event types to interact with self- and cross-excitation effects, termed the multivariate renewal Hawkes (MRHawkes) process model. A recursive algorithm is developed to directly compute the likelihood of the model, which forms the basis of statistical inference. A modified algorithm for likelihood evaluation is also proposed which reduces computational time. The likelihood evaluation algorithm also implies a procedure to assess the goodness-of-fit of the temporal patterns of the events and distribution of the event types by computing independent and uniform residuals. The plug-in predictive density function for the next event time and methods to make future predictions using simulations are presented. Simulation studies will show that the likelihood evaluation algorithms and the prediction procedures are performing as expected. To illustrate the proposed methodology, data on earthquakes arising in two Pacific island countries Fiji and Vanuatu and trade-through data for the stock BNP Paribas on the Euronext Paris stock exchange are analyzed.

Price Informativeness and High Frequency Trading in Electronic Call Auction Markets

Are high–frequency traders (HFTs) informed? To address this question, we examine HFTs’ activity in the call auction environment, where speed-related trading is limited and signal processing capacity becomes more relevant. To model the call market, we consider the Kyle (1989) rational expectations framework for strategic trading. The test we propose for detecting informed HFTs in this market assesses potential deviations of the informativeness of HFTs’ aggregate (net) demand, from the informativeness of the aggregate demand submitted by the rest of the traders. Data from the Euronext Paris preopening phase indicate that informed HFTs are present in the market just before the opening. Our results provide useful guidance for the assessment of the influence of HFTs’ quotes on price quality, an important issue for market regulators and policy makers.

Order of preference of debts under asymmetric information

The purpose of this article is to investigate the debt hierarchy adopted by French companies in the context of asymmetric information. In other words, we identify the hierarchy between the three most used forms of debt that best describes the debt behaviors of French companies. The study relies on the ordered probit regression to identify the hierarchy that best describes the debt behaviors of a sample of 121 non-financial firms listed on the Euronext Paris stock exchange. Next, we perform panel-data regressions to investigate the impact of the financial crisis on debt behaviors. The empirical results show that French companies listed on the SBF 250 follow the hierarchy Bank debt, Bond debt, Convertible bonds. This hierarchy is explained primarily by asymmetric information. Other variables that explain the adoption of this hierarchy include the size, default risk, deficit and R&D expenditures of the company. At a time of crisis, despite the strong asymmetric information, the debt hierarchy is modified. To the best of our knowledge, this article constitutes the first study that addresses the existence of a hierarchy between three types of debt: bank debt, bond debt, and convertible bonds. Hence, it extends the previous research on capital structure and provides new managerial insights.