Short-term Price Movements Research Articles

The Implications of Accounting Research for Accounting–Based Investment Strategies

RAY J. PFEIFFER, JR. is affiliated with the Department of Accounting and Information Systems in the School of Management at the University of Massachusetts in Amherst, Massachusetts. A wide range of equity investment strategies used by alternative asset managers are based on the analysis of available accounting-based information. In contrast to the classic ‘‘efficient market hypothesis’’ in which today’s security prices fully incorporate available public information, academic research has also explored the importance of accounting information on profitable trading strategies in which the impact of past information is slow to impact prices or in which information is costly to obtain. The purpose of this article is to summarize the findings of recent academic accounting research as they pertain to accounting-based investment strategies. Despite the increasing richness of the information environment in many U.S. and foreign markets, firms’ financial Ž . accounting disclosures broadly defined remain a primary source of firm-specific information for investors and creditors and thus a potential source of investmentrelevant data. For the purposes of this article, relevant accounting research can be broadly . categorized into two streams: 1 investigations of the short-term stock price movements surrounding public releases of ac. counting information and 2 investigations of the longer-term association between accounting information and the information reflected in stock prices. Academic research on short-term stock price movements surrounding public releases of accounting information is concerned with the extent and timeliness of market reactions to the first public release of valuerelevant data in events such as quarterly and annual announcements of earnings per share, announcements of one-time accounting charges, accounting method changes, management earnings forecasts, and similar events. Such studies are sometimes referred to as event studies. In contrast, research on the longer-term association between accounting information and the information reflected in stock prices, so-called association studies, are designed to assess the extent to which accounting reports and market prices reflect the same economywide and firm-specific inforŽ mation over longer time periods e.g., a . fiscal year . To date, the vast majority of capital markets research in accounting is premised on the semistrong form of the efficient markets hypothesis, which predicts that observed stock prices should be consistent with those that would obtain if all market participants possessed the

The existence of metal price cycles

Fluctuations in metal prices have been of interest not only because of the instability they impose on the metal industries but also because of the extent to which they reflect changes in business cycle activity. Regularities in these fluctuations have often been characterized as cycles, even though any periodicity they might possess is confounded by stochastic shocks. Our purpose is to focus on short-term price movements, so as to obtain greater information concerning the forecasts needed for purchasing, making sales, trading and performing other day-to-day activities in the metals industry. The metals we study include aluminum, copper, gold, lead, nickel, silver, tin, tungsten and zinc. This study begins with standard business cycle identification procedures employed in macroeconomic research. After applying the Weibull test of cyclical duration to the discovered cycles, the structural time series method is employed to confirm further the statistical significance of the cycles, not only over the total period beginning 1960, but also over appropriate sub-periods. Finally, conclusions are drawn regarding the significance of the cyclical findings.

Share prices under Tory and Labour governments in the UK since 1945

Given the recent political landscape of the UK with the Labour Party forming a government for the first time since 1979, it is hardly surprising that the performance of the stock market under Tory and Labour governments is a topic of media and general interest. The primary purpose of this paper is to analyse the movement of the UK stock market over the post-war period against the background of different political parties being in power. The evidence presented concerning short-term share price movements indicates that the stock market responds both to the findings of opinion polls in the run up to elections and to elections themselves. Furthermore, the results from elections (inclusive of ‘surprise’ elections) indicate that there is a clear preference for a Tory government. In terms of share price movements across the period of a government's office, however, there is no statistically significant evidence (at commonly accepted confidence levels) to suggest that the stock market has performed better in eith...

The importance of firm quotes and rapid executions: Evidence from the January 1994 SOES rules changes

Nasdaq's Small Order Execution System (SOES) allows orders to be submitted by computer, thereby assuring rapid execution at quoted prices. We examine trading in the 20 largest Nasdaq stocks around the time of a rule change that reduced the largest SOES trades from 1000 to 500 shares. We show that SOES trades contain information about short-term price movements and that SOES trading declined dramatically with the rule change. However, quoted and effective spreads were unaffected by the rule change.

Financial Structure and Corporate Behavior in Japan and the US: insulation versus integration with speculative pressures

This paper examines the impact of speculative financial markets on corporate behavior under the Japanese and US financial systems. While both countries experienced speculative financial booms during the 1980s, real sector corporate decision making was relatively insulated from such activity in Japan by its bifurcated capital markets: high-turnover trading of much equity coexists with another segment in which large blocks of firms equity and debt are held long term, by capital suppliers who are strategic business allies. In the American system, in contrast, fluid and impersonal stock trading leaves firms vulnerable to the impact of short term price movements. This avenue for speculative financial market pressures has militated toward reduced time horizons and financial ratio-based decision criteria in the US corporate sector. The main implication is that mechanisms must be found for insulating American corporate decision making from speculative pressures. Rather than attempting to mimic the undemocratic role played by banks and other buysiness insiders in Japan, US policy makers should achieve a similar insulating effect by vesting more power in corporate constituences other than shareholders—especially employees. An approach built around ‘democratic stakeholder governance’ is proposed.

An empirical survey of Indonesian equities 1985–1992

Using a new data base of equities listed on the Jakarta Exchange, historical returns were documented for the 1985–1992 period. Jakarta stocks had high volatility relative to other countries, and startling short-term price movements, such as several hundred percent during December 1988. A new model of microstructure suitable for markets with infrequent trading was developed and applied to Jakarta. It disclosed substantial non-random price fluctuations. Indonesian equity returns were weakly but significantly related to returns in other countries. Jakarta's value stocks (those with low market/book value ratios) performed much better than growth stocks.