Selling Pressure Research Articles

Stock Market Volatility, Speculative Short Sellers and Weekend Effect: International Evidence

We test the Chen and Singal (2003) hypothesis that speculative short sellers add to the selling pressure on Mondays, and hence add to the weekend effect, by examining evidence from 60 market indices. We find strong evidence that, until about a decade ago, the actions of short sellers could explain the weekend effect. Recently, however, the relationship between short sales and the weekend effect is gradually dissipating in developed markets, probably due to the cross-market hedges of short sellers. These findings strongly support, rather than weaken, the Chen and Singal hypothesis.

Stock Market Volatility, Speculative Short Sellers and Weekend Effect: International Evidence

We test the Chen and Singal (2003) hypothesis that speculative short sellers add to the selling pressure on Mondays, and hence add to the weekend effect, by examining evidence from 60 market indices. We find strong evidence that, until about a decade ago, the actions of short sellers could explain the weekend effect. Recently, however, the relationship between short sales and the weekend effect is gradually dissipating in developed markets, probably due to the cross-market hedges of short sellers. These findings strongly support, rather than weaken, the Chen and Singal hypothesis.

Flow-Induced Mispricing and Corporate Investment

The impact of liquidity-motivated institutional trading on firms’ real decisions is not confined to periods of financial crises. Firms subject to mutual fund flow-driven selling pressure reduce share issuance and investment, whereas firms experiencing buying pressure do not increase investment, although they issue more equity. Firms under extreme selling pressure cut quarterly investment by 0.075 percentage points of total assets, which is 4.3% of the average quarterly investment in our sample. We also find evidence that the effect is not attributed to managerial learning or catering incentives. Rather, flow-driven trading affects investment mainly through its impact on the financing cost.

CDS and the Liquidity Provision in the Bond Market

We study the effect of credit default swap (CDS) on the corporate bond market. We argue that CDS, by reducing the need of investors to liquidate the bonds in the face of credit deterioration of the issuer, reduces fire sale risk and provides bond liquidity. Given that bond investors are segmented by regulation – i.e., insurance companies, banks, and pension funds are subject to the risk-based capital requirements and in principle only hold high quality assets, – we expect the liquidity provision role of CDS to be concentrated among investment grade bonds. We test this hypothesis using a comprehensive sample of US corporate bonds with CDS contracts information over the 2001-2009 period. We show that the presence of CDS reduces yield spreads and increases liquidity for investment grade bonds. This effect is stronger during the financial crisis period. We provide a proper instrumental variable identification that pins down the need for CDS contracts by exploiting the level of loan concentration of the banks which the bond issuer borrows from. We also examine two events that have been shown to trigger forced sales by bond investors: bond rating downgrades from investment grade to high yield, and the selling pressure of property insurance companies following Hurricane Katrina. In both cases, the presence of CDS contracts lowers the impact of fire sales by reducing the drop in bond liquidity and the rise in yield spreads. Our results have important normative implications, as they suggest that – at least for the class of investment grade bonds – CDS may actually help to reduce risk contagion around financial crises.

Determinants of telemarketer misselling in life insurance services

PurposeThe purpose of the article is to present and test a model regarding important factors that may help reduce unethical behavior (i.e. misselling) of salespeople in the financial services industry.Design/methodology/approachTo test the hypotheses, telemarketers from the life insurance industry in South Korea were surveyed (n=204).FindingsUsing structural equation modeling, the results indicate that: ethics training is positively related to salesperson ethical attitude; ethical climate is positively related to salesperson ethical attitude; selling pressure is unrelated to ethical attitude; competitive intensity is positively related to salesperson ethical attitude; competitive intensity is unrelated to misselling; and misselling is inversely related to salesperson ethical attitude, positively associated with product complexity, and positively related to product variety.Research limitations/implicationsFuture empirical work could: investigate different variables from those utilized in this study; consider inter‐country and gender differences; use alternate sources of data to examine stability of the findings; and employ samples of firms in other industries and other marketing channels. Limitations include a limited number of study variables, use of solely the telemarketing channel for life insurance, a preponderance of female respondents, and potential for socially desirable responses.Practical implicationsManagement should seek to maintain a high ethical attitude among sales agents to help foster a reduction in unethical behavior. Sales personnel should receive extensive ethics training to help enhance their ethical attitude in the job. Salespeople should also seek to establish and maintain long‐term relationships with their customers and to pursue long‐term profitability. Sales managers should seek to educate consumers about the various types of financial products, their respective strengths and weaknesses, and the appropriate conditions under which they should be purchased.Originality/valueThe potential for financial services industry salespeople to behave unethically has received extensive research attention. A key area, though, which has been virtually ignored is antecedents of misselling of financial services. The article seeks to address partially this gap in the literature.

Front-Running of Mutual Fund Fire-Sales

We show that a real-time trading strategy which front-runs the anticipated forced sales by mutual funds experiencing extreme capital outflows generates an alpha of 0.5% per month during the 1990-2010 period. The abnormal return stems from selling pressure among stocks that are below the NYSE mean size and cannot be attributed to the arrival of public information. While the largest stocks also exhibit downward price pressure, their prices revert before the front-running strategy can detect it. The duration of the anticipated selling pressure has decreased from about a month in the 1990s to about two weeks in the most recent decade. Our results suggest that publicly available information of fund flows and holdings exposes mutual funds in distress to predatory trading.

Last Exit Before Toll: Venture Capital and Liquidity Pressure

We study the impact of traditional venture capital funds’ (VC) limited lifespan on the timing and outcome of their portfolio firms’ exit events. We find that portfolio firms backed by funds approaching maturity experience quicker initial public offerings and selloffs, consistent with the idea that the liquidity pressure faced by older funds influences the venture capital exit cycle. VCs under liquidity pressure are more likely to sell their portfolio firms off versus taking them public and are more likely to trigger exits during cold markets. Focusing on initial public offerings, we document that firms backed by VCs that are under liquidity pressure raise less capital at the IPO, issue more secondary shares, and have shorter lockup periods. Moreover, IPO firms experience significantly larger trading volume and lower stock returns around the expiration of their lockup periods if they are backed by older funds, consistent with a larger selling pressure by these VCs, and this lockup effect is amplified if there are multiple VC firms facing liquidity pressure. Our results indicate that VC funds’ limited lifespan — a standard contractual feature intended to alleviate agency problems between general partners and limited partners — influences the venture capital exit cycle and imposes externalities on VC-backed portfolio firms.

Flight-to-Liquidity, Market Uncertainty, and the Actions of Mutual Fund Investors

We explore institutional investor trading decisions during crisis periods and provide evidence that the flight-to-liquidity premium is at least partially driven by mutual fund flows. Mutual funds, on aggregate, reduce their holdings of illiquid stocks. This reduction is a result of larger withdrawals from funds that hold less liquid stocks, and not of fund manager strategic trading decisions. Fund managers are forced to trade, which in turn creates a direct selling pressure that contributes to the decline in illiquid stocks prices. These findings suggest a new and important link between the literature on the price impact of institutional flows and systematic liquidity pricing.

Noise Traders and Cultural Factors: The Japanese Rokuyo Effect Evidence Implications For Investor Sentiment Induced Return Anomalies

This paper examines unique cultural features associated with the Japanese calendar known as rokuyo, which classifies days into six categories of varying levels of favorable/unfavorable sentiment days. Prior to the internationalization of Japanese financial markets in the early 1980s, rokuyo has a significant impact on both daily trading volume and returns. Thereafter it impact is greatly diminished. This research is consistent with prior studies that cultural factors and superstition affect investment decisions. The results support the hypothesis that noise trading induced return patterns, in general are not persistent over time. Anecdotal evidence is presented supporting the hypothesis investor sentiment influences equity prices through buying and selling pressure induced by dynamic money flow patterns precipitated by the evolutionary nature of financial markets. Additional evidence is provided by examination of the U.S. Monday effect and a proxy for mutual fund money flows over the period 1970-2011.

Liability dollarization, exchange market pressure and fear of floating: empirical evidence for Turkey

The objective of this article is to examine the relationship between liability dollarization and the Exchange Market Pressure (EMP) in Turkey within an Autoregressive Distributed Lag (ARDL) and Granger causality framework using monthly data from 1991:12 to 2006:08. The findings suggest that there exists a long-term equilibrium relationship between EMP and liability dollarization, where liability dollarization Granger causes EMP both in the short- and long-run, with no evidence of reverse causality. This suggests that the predominance of foreign currency liabilities in the banks’ balance sheets in Turkey induces a selling pressure in the exchange market as well as a fear of floating.

Stock returns’ sensitivities to crisis shocks: Evidence from developed and emerging markets

We consider three “crisis shocks” related to key features of the 2007–2008 crisis, for emerging and developed economies: (1) the collapse of global trade, (2) the contraction of credit supply, and (3) selling pressure on firms’ equity. Using an international cross-section of firms, we find that returns’ sensitivities to these shocks imply large and statistically significant influences on residual equity returns during the crisis period (after controlling for normal risk factors that are associated with expected returns). Similar analysis for several placebo periods shows that these effects are generally less severe or absent in non-crisis periods. Relative to developed economies, emerging markets are more responsive to global trade conditions (in crisis and in placebo periods), but less responsive to selling pressures. An analysis of portfolios of firms during various placebo periods indicates that investors are not compensated for the risks associated with the crisis shocks. Finally, a month-by-month analysis of returns during the crisis period shows that the time variation of the importance of each of the sensitivities to shocks tracks related changes in the global economic environment.

The Effect of Accelerating SEOs on Issuance Costs and the Role of Underwriter Relationships

Between 2009 and 2014, 75% of seasoned equity offerings (SEOs) were announced and issued overnight, compared to 27% between 2000 and 2008. I find that issuing overnight results in a higher SEO offer price because it mitigates negative pre-offer returns. Consistent with these favorable returns being due to the avoidance of pre-issue selling pressure, non-overnight issuers experience a 2.5% pre-issue stock price decline that reverses within seven days. This post-issue reversal is increasing in SEO offer size and bigger following large pre-issue price declines. In contrast, the returns following overnight offerings are less positive and unrelated to SEO offer size or pre-issue returns.

The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures

I model how corporate bond prices are affected by search frictions and occasional selling pressures, and test my predictions empirically. A key prediction in my model is that in a distressed market with more sellers than buyers, the midprice (i.e. the average of bid and ask price) paid by institutional investors is lower than that of retail investors. Using a structural estimation, the model is able to identify liquidity crises based on the relative prices of institutional and retail investors. I identify two liquidity crises (i.e. high estimated numbers of forced sellers), namely the downgrade of GM and Ford in 2005 and the current crisis. I also estimate that search costs for institutional investors increase strongly during the subprime crisis, while search costs for retail investors appear stable. Finally, search costs have the highest impact on yields for bonds with short maturities according to the estimation.

Order Imbalances Around Seasoned Equity Offerings

Using market microstructure data, we study the determinants of the buying/selling pattern around seasoned equity offerings (SEOs) and their effect on underpricing. We find that the trading pattern around SEOs is slightly positive before the issue date and heavily negative after the SEO, and this pattern is distinctly different from what has been inferred from stock returns. The large negative order imbalances mostly occurred during the late 90s in NASDAQ market, where 86% of underwriters are also market makers and market depth is shallow. The abnormal order imbalances appear to be the result of underwriter market making activities. We also find that SEO underpricing is correlated with the post-issue-date negative order imbalances. The selling pressure on stock returns is estimated as 20% of SEO underpricing, indicating a significant portion of SEO underpricing is related to market making risk.

Firm Stock Returns' Sensitivities to Crisis Shocks

We identify three “crisis shocks” related to key features of the 2007-2008 crisis: (1) the collapse of global demand, (2) the contraction of credit supply, and (3) selling pressure on firms’ equity. Using an international cross-section of firms, we analyze whether firms’ sensitivities to these shocks are reflected in stock returns over the period of the global financial crisis of 2007-2008. Firms’ sensitivities to these three “crisis shocks” result in large and statistically significant influences on residual equity returns during the crisis period (after controlling for normal risk factors that are associated with expected returns). Similar analysis for the placebo period of August 2005-December 2006 shows that the influences identified during the 2007-2008 sample period are not significant. A month-by-month analysis shows that the time variation of the importance of each of the sensitivities to shocks tracks related changes in the global economic environment.

The Flash Crash: The Impact of High Frequency Trading on an Electronic Market

We study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic intraday event, known as the Flash Crash, when a large automated sell program was rapidly executed in the E-mini S&P 500 stock index futures market. Using audit trail transaction-level data for the E-mini on May 6 and the previous three days, we find that the trading pattern of the most active non-designated intraday intermediaries (classified as High Frequency Traders) did not change when prices fell during the Flash Crash.

Are Credit Default Swaps Associated with Higher Corporate Defaults?

Are companies with traded credit default swap (CDS) positions on their debt more likely to default? Using a proportional hazard model of bankruptcy and Merton’s contingent claims approach, we estimate the probability of default for U.S. nonfinancial firms. Our analysis does not generally find a persistent link between CDS and default over the entire period 2001-08, but does reveal a higher probability of default for firms with CDS over the last few years of that period. Further, we find that firms trading in the CDS market exhibited a higher Moody’s KMV expected default frequency during 2004-08. These findings are consistent with those of Henry Hu and Bernard Black, who argue that agency conflicts between hedged creditors and debtors would increase the likelihood of corporate default. In addition, our paper highlights other explanations for the higher defaults of CDS firms. Consistent with fire-sale spiral theories, we find a positive link between institutional ownership exposure and corporate distress, with CDS firms facing stronger selling pressures during the recent financial turmoil.

LIQUIDITY PROVISION IN CAPACITY-CONSTRAINED MARKETS

We study a competitive dynamic financial market subject to a transient selling pressure when market makers face a capacity constraint on their number of trades per unit of time with outside investors. We show that profit-maximizing market makers provide liquidity in order to manage their trading capacity constraint optimally over time: they use slack trading capacity early to accumulate assets when the selling pressure is strong in order to relax their trading capacity constraint and sell to buyers more quickly when the selling pressure subsides. When the trading capacity constraint binds, the bid–ask spread is strictly positive, widening and narrowing as market makers build up and unwind their inventories. Because the equilibrium asset allocation is constrained Pareto-optimal, the time variations in bid–ask spread are not a symptom of inefficient liquidity provision.

Probability of Information-Based Trading and the January Effect

We investigate the seasonality in the probability of information-based trading (PIN)-return relationship, the ‘January-PIN effect’. We find that on average stock returns decrease with PIN in January, in contrast to other calendar months. This pattern is more apparent for small stocks. We argue that this seasonality is related to the January effect. According to the analysis, the December selling pressure due to the January effect decreases in PIN, especially for small stocks. This suggests that when the price bounces back in January, low-PIN stocks will exhibit a larger return within a small stock group, leading to the negative PIN-return pattern. Furthermore, this seasonality is different from other January anomalies reported in the literature.

Probability of information-based trading and the January effect

We investigate the seasonality in the probability of information-based trading (PIN)–return relationship, the ‘January PIN effect’. We find that on average stock returns decrease with PIN in January, in contrast to other calendar months. This pattern is more apparent for small stocks. We argue that this seasonality is related to the January effect. According to the analysis, the December selling pressure associated with the January effect decreases in PIN, especially for small stocks. This suggests that when the price bounces back in January, low-PIN stocks will exhibit a larger return within a small stock group, leading to the negative PIN–return pattern. Furthermore, this seasonality is not the same as other January anomalies associated with momentum and idiosyncratic risk.