Sell Side Research Articles

Trade Cost: Handicapping on PAR

We analyze the prevailing approach to estimating implicit trade costs and suggest improvements that create greater precision. Our model studies buy-side parent orders to prove that Size/ADV is a sublinear factor, which means that doubling an order does not double the trade cost. The same precision cannot be achieved from the child order data available to the sell side. After improving on existing methods, we cast doubt on whether it is realistic to delineate permanent and temporary costs when numerous market participants influence prices simultaneously. As a result, we introduce a new highly accurate pre-trade cost model with predictive power (R2) of up to 26%.

Does Sentiment Risk Persist as Priced Risk Factor? A Multifactor Approach for Stock Return

Much of the academic debate has gone in to exploring the better asset pricing model that can explain the quantification of the trade-off between risk and expected return for the cross section of stock return. Nevertheless this intimidating task becomes more pragmatic given the market structure of emerging markets, liquidity effects, market inefficiency, and more significantly the presence of inherent imperfect rationality or sentiment. The basic objective of this paper is to evaluate the pricing implication of unconditional five factor model to explain the cross sectional stock return behaviour in the context of Indian stock market. Our analysis also aims to examine the pricing nature of aggregate market wide sentiment risk in the presence of other risk factors. We employ Fama and French time series regression approach to examine the impact of market risk premium, size, book-to-market equity, momentum and liquidity as risk factors on stock return. Our empirical results show that given the multidimensional nature of risk the choice of a five factor model is apparently persuasive for consideration in investment decisions. However, inconsistent with prior literature book-to-market equity fails to explain the average return in case of large stocks, and pricing evidence of momentum profits fades in case of winner stocks and momentum strategy retains its value only for the sell side transactions i.e., loser portfolios. With the presence of liquidity factor in the five factor model specification, the results suggest that liquidity is priced and explains a cross sectional variation in stock returns. Our results also suggest that it is naive to argue for the universal pricing implication of sentiment risk in a multifactor model framework, and market wide risk factors resume their importance as rational source of priced risk.

Do Health Insurers Possess Market Power?

During the 2009–2010 health care reform debates, many policy makers presumed that a lack of competition in the U.S. health insurance industry had resulted in greater levels of uninsurance. However, such a presumption has no basis in current research. This study, with a panel data set of the 50 states and the District of Columbia over the years 2001–2007, examines how health‐insurer market concentration at the state level influences the percentage of the population with either individually purchased or employer‐sponsored private health insurance. Two‐stage least squares estimates are derived using a lagged measure of health‐insurer concentration as an instrument. Results suggest that health insurers exercise market power on the seller side of the health insurance marketplace, but the restriction of output is limited to the individually purchased insurance market segment.

Banning short sales and market quality: The UK’s experience

We study the effects that the ban on short sales of shares in financial firms introduced in late 2008 and removed early 2009 had on the microstructure and the quality of UK equity markets. We show that the ban did nothing to affect order flows: financial stocks were being more aggressively sold off than their peers pre-ban and this situation persisted through the ban period. Trading volume in financials was massively reduced, however. The ban decimated order book liquidity for financials. The deterioration was symmetric, affecting the limit buy and limit sell side of the order book equally. Finally we show that, through the period of the ban, markets for financial stocks were substantially less efficient and that the role of the trading process in aiding price discovery was greatly reduced. The effects identified above were largely reversed once the ban was lifted. The persistence of the deterioration in market quality and liquidity though the relatively long-lasting UK ban on short selling suggests that other major market developments such as the TARP program were not responsible since these were concentrated in the early half of the ban. We thus argue that the short selling ban was responsible for detrimental effects on the quality of UK equity markets and that, far from being stabilising, the ban exacerbated problems in valuing UK financial stocks.

Belief changes and expectation heterogeneity in buy- and sell-side professionals in the Japanese stock market

We document the determinants of the expectation heterogeneity of stock price forecasters on TOPIX. Monthly panel data collected by QUICK Corporation in the Nikkei Group via surveys is utilized in the process. We examine the determinants of expectation heterogeneity by categorizing our sample into buy-side and sell-side professionals and demonstrate that the co-existence of different types of professionals contributes to the expectation heterogeneity. We show that buy-side and the sell-side professionals, who possess different business goals, differentiate the information contents as well as their interpretations of the same information in their forecasts, contributing to the expectation heterogeneity. In addition, we investigate the interactive expectation formulation of buy-side and sell-side professionals and find that buy-side professionals incorporate the sell side's ideas regarding future stock prices into their own forecasts, but refer exclusively to their own ideas when relating foreign exchange rates to future stock prices. Meanwhile, sell-side professionals tend to utilize buy-side professionals' ideas about future prices in order to improve their research and ingratiate themselves to their clients, that is, to the buy-side professionals. We demonstrate that this interactive expectation formulation also contributes to the generation of the expectation heterogeneity.

Overvalued Equity and the Accruals Anomaly: Evidence from Insider Trades

This paper examines the accruals anomaly in an agency context where managers of overvalued firms have incentives to sustain overvaluation. We hypothesize that mangers anticipate the ultimate share price reversals and use high accruals to temporarily sustain overvaluation, while at the same time sell their shares. There is no incentive to deflate earnings of undervalued firms, leading to the prediction of an asymmetric relationship between trading and accruals. Our results support an agency explanation. Quadratic and binary regressions confirm that relationship between trades and accruals is concentrated on the selling side. The relationship between accruals and trading is only significant within the overvalued, low book-to-market (BM) firms. There is also evidence that low BM firms manage their earnings upward compared to high BM firms

Belief Changes and Expectation Heterogeneity in Buy- and Sell-Side Professionals in the Japanese Stock Market

We document the determinants of the expectation heterogeneity of stock price forecasters on the TOPIX. Monthly panel data surveyed by QUICK Corporation in the Nikkei Group is utilized in the process. We examine the determinants of expectation heterogeneity by categorizing our sample into buy-side and sell-side professionals, and demonstrate that expectation heterogeneity arises as a result of the co-existence of different types of professionals within the same market. We show that the buy-side and the sell-side professionals, who have different business goals, differentiate the information contents as well as their interpretations of the same information in their forecasts, contributing to the expectation heterogeneity. In addition, we investigate the interactive expectations formulation of buy-side and sell-side professionals. We find that buy-side professionals incorporate the sell side’s ideas regarding the future stock prices into their own forecasts, although they exclusively refer to their own ideas when relating foreign exchange rates to the future stock prices. Meanwhile, sell-side professionals tend to utilize buy-side professionals’ ideas about future prices in order to improve their research and ingratiate themselves to their clients, i.e., the buy-side professionals. We demonstrate that this interactive expectations formulation also contributes to the generation of the expectation heterogeneity.

An Analysis of the Amihud Illiquidity Premium

This paper analyzes the Amihud (2002) measure of illiquidity and its role in asset pricing. It is shown first that the effect of illiquidity on asset pricing is clarified by using the turnover version of the Amihud measure and including firm size as a separate variable. When we decompose the Amihud measure into elements that correspond to positive (up) and negative (down) return days, we find that in general, only the down-day element commands a return premium. Further analysis of the up and down-day elements using order flows shows that a sidedness variable, which captures the tendency for orders to cluster on the sell side on down days, is associated with a more significant return premium than the other components of the Amihud measure.

Internal control material weakness, analysts’ accuracy and bias, and brokerage reputation

The main purpose of this paper is to examine the impact of internal control material weaknesses (ICMW hereafter) on sell side analysts. We find that ICMW reporting firms have less accurate analyst forecasts relative to non-reporting firms when the reported ICMWs belong to the Pervasive type. ICMW reporting firms have more optimistically biased analyst forecasts compared than non-reporting firms. The optimistic bias exists only in the forecasts issued by the analysts affiliated with less-highly-reputable brokerage houses. The differences in accuracy and bias between ICMW and non-ICMW firms disappear when ICMW disclosing firms stop disclosing ICMWs. Collectively, our results suggest that the weaknesses in internal control increases forecasting errors and upward bias for financial analysts. However, a good brokerage reputation can curb the optimistic bias.

Comparison between Cooperative and Non-cooperative Game in Seller Side B2B Electronic Market

B2B electronic marketplaces facilitate the transactions between companies. Unfortunately some B2B e-markets failed because they couldn’t satisfy market participant’s expectations. Especially sellers are not willing to participate in an e-market because of the pressure of competition in electronic trade world. So, for preventing sellers to leave e-market and analysis their situation, we considered a seller center B2B electronic market. Using game theory approaches is a way for analyzing this kind of markets. So, this method is used here. Profit and cost for both form of game -cooperative and non-cooperativeare calculated and compared based on a case. The result shows the best situation for sellers and how they can make more profit.

Overvalued Equity and the Accruals Anomaly: Evidence from Insider Trades

This paper examines the accruals anomaly in an agency context where managers of overvalued firms engage in various activities, including accruals-based earnings management, to sustain overvaluation. We use managerial trading to operationalize the empirical investigation, hypothesizing that mangers anticipate the ultimate share price reversals, and use high accruals to temporarily sustain overvaluation while at the same time sell their shares. There is no incentive to deflate earnings of undervalued firms, leading to the prediction of an asymmetric relationship between trading and accruals. We contrast this to the fixation hypothesis where high (low) accruals are associated with negative (positive) returns. Although investor errors are operative in both agency and fixation, the causes, mechanisms and implications are very different. Our results, which are important to the distinction, support an agency explanation for the anomaly. Quadratic and binary regressions confirm an asymmetric relationship between trades and accruals concentrated on the selling side. The relationship between accruals and trading is only significant within the overvalued, low book-to-market (BM) firms. There is also evidence that low BM firms manage their earnings upward compared to high BM firms. Tests using a subset of firms sorted on valuation ratios and past growth provide evidence of a strong relationship between insider sales and income increasing accruals for the glamour firms while buying and accruals are not related for the value firms.

Co-production and its effects on service innovation

This study explores the influence of business-to-business (i.e., upstream) co-production on service innovation in the information technology (IT) industry, and examines the antecedents of co-production, based on a survey of sales managers, the seller side of the co-producers, from 157 IT businesses in Taiwan. The findings indicate that co-production positively influences service innovation to a degree that depends on the collaborative partner's compatibility and history of business relations, affective commitment, and expertise. Moreover, the business' innovation orientation enhances (moderates) the relationship between co-production and service innovation. These results have several managerial implications. Businesses should choose co-production partners that are compatible and can contribute toward advancing the relationship. Furthermore, investments in building their innovation orientation will strengthen their efforts in service innovation through co-production.

An examination into the factors that influence consumers’ perceptions of value

Recent trends in ticketing, such as dynamic ticket pricing, indicate a fundamental shift towards demand-based pricing strategies. As such, research is needed to understand the factors that may influence the price that consumers are willing to pay for tickets. Using the contingent valuation method (CVM), the current study examined the value that consumers placed on a ticket to a National Basketball Association game. Previous CVM research suggests that valuations differ based on whether the participant is on the buy side or the sell side of the transaction. Therefore, the current study examined the difference between buyer and seller valuations in addition to identifying factors that influenced these valuations. Results indicated a strong difference between buyer and seller valuations, which is consistent with previous CVM studies. Further, the factors that influenced these valuations, including the printed price on the ticket, also differed based on whether the participant was buying or selling the ticket.

International Jurisdictional Competition under Globalization: From the U.S. Regulation of Foreign Private Issuers to Taiwan's Restrictions on Outward Investment in Mainland China

Drawing a lesson from the story that the Sarbanes-Oxley Act drives away foreign issuers and then their physical exit provokes a change in the U.S. regulation of non-U.S. issuers, this article takes as another case study the phenomenon that Taiwanese firms list shares overseas, to further test how usual law market demand and supply forces (or underlying exit and voice rights) interplay under international jurisdictional competition. Put simply, both cases of the U.S. and Taiwan significantly elaborate that law market forces underlying international jurisdictional competition are similarly at work even on both sides of the Pacific Ocean. Specifically, globalization strengthens the mobility of international production factors, and thus lowers firms’ costs of exiting from a given jurisdiction, which also fuels international jurisdictional competition for mobile firms or capital. Therefore, on the demand side of the international law market, if a regulating jurisdiction ignores business demands and imposes excessive regulation, firms would exit physically or threaten to exit in response. This means that the buyer side of the law market starts to operate and then sparks the seller side. On the international supply side, other jurisdictions as sellers would compete for these exiting firms’ corporate charters, listings and other related economic transactions by providing cost-effective regulatory products, to secure greater benefits to the local economy. Such economic exits send out signals to those in the political marketplace within the regulating jurisdiction, and thus activate interest group competition, or the domestic supply side. In consequence, firms, via these law market forces, exert pressure on the regulatory government to engage in a quest for more legal flexibility, or to liberalize unnecessarily excessive regulation.

What Interest Rate Models to Use? Buy Side Versus Sell Side

Does the selection of a specific interest rate model to use for pricing, hedging, and risk-return analysis depend upon whether the user is a buy-side institution or a sell-side dealer bank? Sanjay Nawalkha and Riccardo Rebonato debate this question in this paper and provide some insightful conclusions. Responding to Nawalkha’s [2010] critique of the LMM-SABR model, Rebonato argues that the LMM-SABR model is currently the best available model for the sell-side dealer banks for pricing and hedging large portfolios of complex interest rate derivatives within tight time constraints. Nawalkha in his rejoinder argues that the LMM-SABR model is useless at best and dangerous at worst for the buy-side institutions, and these institutions must use time-homogeneous fundamental and single-plus interest rate models (e.g., such as affine and quadratic term structure models) for risk-return analysis under the physical measure, as this cannot be done using the time-inhomogeneous double-plus and triple-plus versions of the LMM-SABR model.

Towards a cross‐cultural typology of trust in B2B food trade

PurposeThis paper aims to develop a hierarchical typology of trust elements for business‐to‐business trade among European companies in the food sector.Design/methodology/approachThe paper integrates desk research literature study and a qualitative survey of food industry companies. An extensive literature review about inter‐organizational trust lays a foundation for designing a draft typology based on previous studies, with special attention paid to the influence of culture. Fine‐tuning and validation of the typology is achieved through an exploratory field study based on 18 qualitative in‐depth interviews with key informants in five EU countries, involving practitioners from the fresh fruit and vegetable, grain, meat and olive supply chains.FindingsA detailed typology of trust is developed. Although it is highly specific to the food industry, it is designed to be neutral to culture and sector, thus allowing the identification of differences in culture when dealing with trust building elements in different sectors in the food supply chain.Research limitations/implicationsSince the buyer's perspective is adopted in this paper, further research is needed to validate the typology on the seller side. The typology developed here must also be tested in practice, for instance within a descriptive research quantitative study, aimed at quantifying the relative importance of the different trust elements.Practical implicationsThe typology stimulates the consideration of cross‐cultural or cross‐sector differences in the salience of trust attributes and its construction process confirms that reputation management is an extremely important determinant of success or failure. It can serve as a checklist for any company that is interested in improving its relationships with suppliers or buyers.Originality/valueThe paper adds to the body of knowledge about inter‐organizational trust, providing researchers with a useful tool for conducting experimental research on trust creation mechanisms.

Herding of Institutional Traders

This paper sheds new light on herding of institutional investors by using a unique and superior database that identifies every transaction of financial institutions. First, the analysis reveals herding behavior of institutions. Second, the replica- tion of the analysis with low-frequent and anonymous transaction data, on which the bulk of literature is based, indicates an overestimation of herding by previous studies. Third, our results suggest that herding by large financial institutions is not intentional but results from sharing the same preference and investment style. Fourth, a panel analysis shows that herding on the sell side in stocks is positively related to past returns and past volatility while herding on the buy side is nega- tively related to past returns. In contrast to the literature, this indicates that large financial institutions do not show positive feedback strategies.

The Future of Structured Finance Ratings After the Financial Crisis

The authors believe that the rating agency reforms underway in Europe and the United States, as well as at the agencies themselves, are steps in the right direction but do not go far enough to ensure accuracy and timeliness of ratings. Most importantly, they fail to address the conflict-ridden rating agency compensation system. The authors believe that credibility of ratings cannot be restored until rating agencies are paid not by the sell side or the buy side, but by both the buy side and the sell side, via a transaction charge on new issues and secondary market trades. Their proposal is to pay for ratings via an industry fund such as has been operated for over two decades by the U.S. Municipal Securities Rulemaking Board (MSRB), albeit on a smaller scale and for a more limited purpose, for the benefit of the municipal securities markets. Carefully structured, such a compensation system would give rating agencies more appropriate incentives to produce more accurate and timely ratings that can hold up through both up and down markets. <b>TOPICS:</b>Futures and forward contracts, financial crises and financial market history, legal and regulatory issues for structured finance

Banning Short Sales and Market Quality: The U.K.'s Experience

We study the effects that the ban on short sales of shares in financial firms introduced in late 2008 and removed early 2009 had on the microstructure and the quality of UK equity markets. We show that the ban did nothing to affect order flows: financial stocks were being more aggressively sold off than their peers pre-ban and this situation persisted through the ban period. Trading volume in financials was massively reduced, however. The ban also decimated order book liquidity for financials. The deterioration was symmetric, affecting the limit buy and limit sell side of the order book equally. Finally we show that, through the period of the ban, markets for financial stocks were substantially less efficient and that the role of the trading process aiding in price discovery was greatly reduced. The effects identified above were largely reversed once the ban was lifted. We thus argue that the ban had detrimental effects on the quality of UK equity markets and that, far from being stabilising, the ban exacerbated problems of volatility in the prices of and uncertainty in the values of UK financial stocks.

Exploring how garment firms choose international sourcing‐ and sales‐country markets

PurposeThe purpose of this paper is to explore how firms that do both sourcing and selling choose which countries to source from and to which countries to sell. It also looked at the role of competitive strategy, vertical integration, and foreign involvement in the decision‐making.Design/methodology/approachA survey instrument that was designed based on personal interviews with 20 German garment industry executives was administered to 750 German, Austrian and Swiss garment manufacturers. In total, 93 questionnaires were usable. Factor analysis was employed in evaluating the data.FindingsThe results indicate that firms that both source and sell at the same time have more complex decision making than normative models suggest. These decisions tend not to be isolated decisions. The factors that are considered in sourcing are different in the decision as to where to sell. Foreign involvement, competitive strategy, and vertical integration influence the firms' decision making.Research limitations/implicationsThe study is exploratory in nature and it is limited in its application. Moreover, the disproportionately large number of German respondents may skew the results. In addition, the total number of respondents is relatively small. The study may also suffer from any or all of the following deficiencies: lack of reliability and validity test, having only one executive per firm respond to the survey, not considering country‐specific characteristics, and lack of control for the market‐entry strategy and market size variables.Originality/valueMost research in this area focuses on either the sourcing or the selling side. This study looks at how sourcing and selling decisions are made by firms engaged in both activities. Additionally, the roles of competitive strategy, vertical integration, and foreign involvement in relation to the decision making are investigated.