Value Of Private Information Research Articles

Pricing and information content of block trades on the Shanghai Stock Exchange

We study the pricing mechanisms and information content of block trades on the Shanghai Stock Exchange (SSE) for the six year period from 2003 to 2009.There is an average of about 4% block discount, which is large in magnitude and statistically significant, reflecting compensation for locating counterparties and the cost of negotiating terms. We also examine permanent price impacts of the trades and find that discount block trades (DBTs) have significant negative permanent price impacts for various periods extended up to 60 trading days after the block trades. Conversely, premium block trades (PBTs) have small and statistically insignificant negative permanent price impacts, suggesting that buyers do not possess valuable private information. Finally, we classify the trades into buys and sells using a set of stricter rules and note similar results to those of DBTs and PBTs. Of additional note, block sells on stocks with expirations of restricted shares seem to have significant information content. As these trades are more likely to be originated from insiders, our results suggest that they strategically time the sale of these shares to maximize gains.

Do Local Individual Investors Learn from Foreign Fund Flows?

We investigate imitative herding and its effects on asset prices by examining how individual investors respond to a noisy signal regarding the positions of traders who they believe may possess valuable private information. We exploit a natural experiment in the Thai equity market, where a regulatory change resulted in the public dissemination of information about foreign institutional investors' aggregate daily flows on a stock-by-stock basis. We find that local individual investors' order imbalances increase in the first hour of trading following the release of information indicating that foreign investors were net purchasers of a stock on the previous day. Stock prices also appear to adjust quickly, and we find no evidence of subsequent reversal. Consistent with such price adjustments, the profitability of trading by foreign investors declines significantly after the transparency change. The results are consistent with a rational model of imitative herding in which the cost of adoption increases as more individuals imitate, preventing herd behavior from having a destabilizing effect on prices.

The Value of Private Information In Investment Research: Do Company Site Visits Affect The Trading Patterns and Performance of Professional Investors?

The Value of Private Information In Investment Research: Do Company Site Visits Affect The Trading Patterns and Performance of Professional Investors?

Empirical Comparisons of Attack and Protection Algorithms for Online Social Networks

Online social networks, like Facebook, are popular social networking websites, on which hundreds of millions of users make friends and interact with people. There is a large amount of personal information in these networking websites and their security is rather concerned by both users and researchers, because valuable private information will bring great profit to some people or groups. In the real world, profits motivate people and groups to obtain the personal private data lawlessly and many attacks are launched on the social networks. Facing various attacks, distinct protective strategies are proposed by researches to reduce the negative effect of attacks. However, the practical performance of protections is unknown when they are battling with the real attacks. Moreover, we also understand little about how strong attacks would be when they are facing protections. Therefore, this paper proposes an Attack-Protect-Attack (APA) comparison scheme to explore the performance and bias of various attack algorithms and protective strategies for online social networks. By this way, the comparison results are valuable and meaningful for further protection of private information. We apply several attacking and protective approaches on a real-world dataset from Facebook, then evaluate them by the accuracy of attack algorithms. Following the comparison scheme, the experiments demonstrate that the performance of protective strategies is not satisfactory in the complex and practical case.

Ratings Changes, Ratings Levels, and the Predictive Value of Analysts’ Recommendations

We show that abnormal returns to analysts’ recommendations stem from both the ratings levels assigned and the changes in those ratings. Conditional on the ratings change, buy and strong buy recommendations have greater returns than do holds, sells, and strong sells. Conditional on the ratings level, upgrades earn the highest returns and downgrades the lowest. We also find that both ratings levels and changes predict future unexpected earnings and the associated market reaction. Our results imply that 1) investment returns may be enhanced by conditioning on both recommendation levels and changes; 2) the predictive power of analysts’ recommendations reflects, at least partially, analysts’ ability to generate valuable private information; and 3) some inconsistency exists between analysts’ ratings and the formal ratings definitions issued by securities firms.

Credit Ratings and Bank Monitoring Ability

In this paper we use credit rating data from two large Swedish banks to elicit evidence on banks? loan monitoring ability. For these banks, our tests reveal that banks? credit ratings indeed include valuable private information from monitoring, as theory suggests. However, our tests also reveal that publicly available information from a credit bureau is not efficiently impounded in the bank ratings: The credit bureau ratings not only predict future movements in the bank ratings but also improve forecasts of bankruptcy and loan default. We investigate possible explanations for these findings. Our results are consistent with bank loan officers placing too much weight on their private information, a form of overconfidence. To the extent that overconfidence results in placing too much weight on private information, risk analyses of the bank loan portfolios in our data could be improved by combining the bank credit ratings and public credit bureau ratings. The methods we use represent a new basket of straightforward techniques that enable both financial institutions and regulators to assess the performance of credit rating systems. ; Supersedes Working Paper 10-21. (This abstract was borrowed from another version of this item.)

Strategic complementarity of information in financial markets with large shocks

In a simple model of a frictionless financial market with rational agents, the value of private information increases when large discrete shocks independently affect the fundamental value of the asset and the exogenous trading. The complementarity in information gathering generates multiple equilibria.

The Value of Private Information Under Transactions Costs

The Value of Private Information Under Transactions Costs

Information Asymmetry and Acquisition Premiums in Domestic and Cross Border M&As in Emerging Markets

In this paper, we test and find a strong positive relationship between information asymmetry and acquisition premium in the acquisitions of emerging market firms. The results are based on a large sample of domestic and cross-border acquisitions in 20 emerging countries between 1990 and 2007. We also confirm that under higher level of information asymmetry, acquiring firms tend to use lower cash payments (i.e., higher stock payments) and they are more likely to acquire majority control (>50%) in the target firms. After considering the endogenous relationship among acquisition premium, payment method, and majority control based on a simultaneous equation model, the positive relationship between asymmetric information and acquisition premium continues to exist. We also conduct various robustness tests with respect to the choice of information asymmetry proxy, estimation period and the correction of sample selection bias and find that the results do not change. We argue that acquiring firms pay high premium in order to gain majority control in the target firms to mitigate the information asymmetry problem and to access more valuable private information resources that are not accessible to public investors.

Evidence of Management Discrimination Among Analysts during Earnings Conference Calls

ABSTRACTThis paper considers the potential for public information disclosures to complement the existing private information of financial analysts. In such a setting, analysts allowed to participate during earnings conference calls by asking questions receive public signals that can facilitate the generation of new and valuable private information for the asking analyst. Realizing these public signals are valuable for the asking analyst, managers can use their discretion to discriminate among analysts by granting more participation to more favorable analysts. I use post–Regulation Fair Disclosure conference call transcripts to document that the probability of an analyst asking a question during an earnings conference call is increasing in the favorableness of the analyst's outstanding stock recommendation. I also find that downgrades are associated with decreases in access to management during the conference call relative to other recommendation change activity. Analyst prestige moderates these effects. Favorable and prestigious analysts have higher participation probabilities than favorable and unprestigious analysts. Further, downgrades result in participation decreases only for unprestigious analysts. These findings are consistent with practitioner and regulatory concerns that managers discriminate among analysts by allowing more management access to more favorable analysts.

How Noise Trading Affects Markets: An Experimental Analysis

We use a laboratory market to investigate the behavior of noise traders and their impact on the market. Our experiment features informed traders (who possess fundamental information), liquidity traders (who have to trade for exogenous reasons), and noise traders (who do not possess fundamental information and have no exogenous reasons to trade). We find differences in behavior between liquidity traders and noise traders, justifying their separate treatment. We find that noise traders exert some positive effects on market liquidity: volume and depths are higher and spreads are lower. We provide evidence suggesting that the main effect of the liquidity-enhancing trading strategies of the noise traders is to weaken price reversals (decreasing the temporary price impact of market orders) rather than to reduce the permanent price impact of trades (as liquidity traders supposedly do in market microstructure models with information asymmetry). We find that noise traders adversely affect the informational efficiency of the market, but only when the extent of adverse selection is large (i.e., when informed traders have very valuable private information). Finally, we examine how trader behavior and certain market quality measures are affected by a transaction tax. Although such taxes do reduce noise trader activity, they take a toll on informed trading as well. As a result, while taxes reduce volume, they do not affect spreads and price impact measures, and have at most a weak effect on the informational efficiency of prices.

Career Concerns, Fund Performance, and the Active Manager's Problem

We examine the implications of career concerns for the portfolio strategy of an equity mutual fund manager who times the market with valuable private information. The manager solves a dynamic lifetime portfolio/consumption choice problem with endogenous stochastic income, generated by fund management fees, in a setting without learning. Career concerns are defined as the endogenous effect of the manager's actions on both fund flows and the probability of demotion, which is defined as a discrete drop in the assets under management.

Do Institutions Receive Favorable Allocations in IPOs with Better Long-Run Returns?

AbstractWe analyze allocations to institutional and retail investors in 441 initial public offerings (IPOs). In addition to the well-known favorable first-day returns, we show that institutions also obtain more allocations in IPOs with better long-term performance. We find that initial institutional flips help predict future returns, suggesting that at least some institutions retain valuable private information about IPO firms. Collectively, these findings illustrate the importance of aftermarket relations between underwriters and investors and that underwriters have discretionary means to compensate IPO investors beyond first-day returns and price stabilization.

Privacy and Deviation

In spite of the widespread concerns expressed about the importance of privacy, individuals frequently give away or sell a myriad of personal data. How and why people decide to transition their information from the private to the public sphere is poorly understood. To address this puzzle, we conducted a reverse second-price auction to identify the monetary value of private information to individuals and how that value is set. Our results demonstrate that deviance, whether perceived or actual, from the group's average asymmetrically impacts the price demanded to reveal private information.

Termination fees in mergers and acquisitions

The paper provides evidence on the effects of including a target termination fee in a merger contract. I test the implications of the hypothesis that termination fees are used by self-interested target managers to deter competing bids and protect “sweetheart” deals with white knight bidders, presumably resulting in lower premiums for target shareholders. An alternative hypothesis is that target managers use termination fees to encourage bidder participation by ensuring that the bidder is compensated for the revelation of valuable private information released during merger negotiations. My empirical evidence demonstrates that merger deals with target termination fees involve significantly higher premiums and success rates than deals without such clauses. Furthermore, only weak support is found for the contention that termination fees deter competing bids. Overall, the evidence suggests that termination fee use is at least not harmful, and is likely beneficial, to target shareholders.

Do Institutions Receive Favorable Allocations in IPOs with Better Long Run Returns?

We analyze allocations to institutional and retail investors in 441 initial public offerings (IPOs). In addition to the well known favorable first-day returns, we show that institutions also obtain more allocations in IPOs with better long-term performance. We find that initial institutional flips help predict future returns, suggesting that at least some institutions retain valuable private information about IPO firms. Collectively, these findings illustrate the importance of aftermarket relationships between underwriters and investors and that underwriters have discretionary means to compensate IPO investors beyond first-day returns and price stabilization.

Social Value of Public Information

What are the welfare effects of enhanced dissemination of public information through the media and disclosures by market participants with high public visibility? We examine the impact of public information in a setting where agents take actions appropriate to the underlying fundamentals, but they also have a coordination motive arising from a strategic complementarity in their actions. When the agents have no socially valuable private information, greater provision of public information always increases welfare. However, when agents also have access to independent sources of information, the welfare effect of increased public disclosures is ambiguous.

A guide to extracting information from environmental pressure groups

This paper examines the relationship between environmental pressure groupsand environmental policy makers. Environmental pressure groups are assumedto possess valuable private information on environmental issues.Environmental pressure groups are also assumed to pursue their ownpreferences, which are only partially correlated with policy makers'preferences. A new aspect is that binding contracts with side payments arenot allowed, which accurately describes the interaction betweenenvironmental pressure groups and governments. It is shown that by choosingprobabilities of acting on environmental pressure groups' signals, adecision maker can force environmental pressure groups to reveal superiorinformation even in the absence of binding contracts.

The importance of relationships to the availability of credit

In this article, I examine the effect of pre-existing relationships between a firm and its potential lender on the potential lender's decision whether or not to extend credit to the firm. I find that a potential lender is more likely to extend credit to a firm with which it has a pre-existing relationship as a source of financial services, but that the length of this relationship is unimportant. These findings provide empirical support for theories of financial intermediation positing that banking relationships generate valuable private information about the financial prospects of the financial institution's customer. The results also provide evidence that potential lenders are less likely to extend credit to firms with multiple sources of financial services, in support of the theory that the private information a financial institution generates about a firm is less valuable when the firm deals with multiple sources of financial services.

Equilibrium, Price Formation, and the Value of Private Information

An economy is analyzed in which agents first choose whether to acquire costly information about the return to a risky asset, and then choose demand functions that determine the allocation of assets. It is a well-known paradox that if agents are price-takers and prices are fully revealing, then an equilibrium with costly information acquisition does not exist. It is shown that if the price formation process is modeled explicitly and agents are not price-takers, then it is possible to have an equilibrium with fully revealing prices and costly information acquisition.