The Journal of Finance

Long‐Term Market Overreaction or Biases in Computed Returns?

Published: 3/1993,  Volume: 48,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1993.tb04701.x  |  Cited by: 196

JENNIFER CONRAD, GAUTAM KAUL

We show that the returns to the typical long‐term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single‐period (monthly) returns over long intervals. The cumulation process not only cumulates “true” returns but also the upward bias in single‐period returns induced by measurement errors. We also show that the remaining “true” returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.

Oil and the Stock Markets

Published: 6/1996,  Volume: 51,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1996.tb02691.x  |  Cited by: 1265

CHARLES M. JONES, GAUTAM KAUL

We test whether the reaction of international stock markets to oil shocks can be justified by current and future changes in real cash flows and/or changes in expected returns. We find that in the postwar period, the reaction of United States and Canadian stock prices to oil shocks can be completely accounted for by the impact of these shocks on real cash flows alone. In contrast, in both the United Kingdom and Japan, innovations in oil prices appear to cause larger changes in stock prices than can be justified by subsequent changes in real cash flows or by changing expected returns.

Relative Price Variability, Real Shocks, and the Stock Market

Published: 6/1990,  Volume: 45,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1990.tb03699.x  |  Cited by: 80

GAUTAM KAUL, H. NEJAT SEYHUN

In this paper, we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return‐inflation regressions. The evidence shows that the negative stock return‐inflation relations proxy for the adverse effects of relative price variability on economic activity, particularly during the seventies, when the U.S. experienced oil supply shocks. Hence, it appears that inflation spuriously affects the stock market in two ways: the aggregate output link of Fama (1981) and the supply shocks reflected in relative price variability.

Value versus Glamour

Published: 9/11/2003,  Volume: 58,  Issue: 5  |  DOI: 10.1111/1540-6261.00594  |  Cited by: 90

Jennifer Conrad, Michael Cooper, Gautam Kaul

AbstractThe fragility of the CAPM has led to a resurgence of research that frequently uses trading strategies based on sorting procedures to uncover relations between firm characteristics (such as “value” or “glamour”) and equity returns. We examine the propensity of these strategies to generate statistically and economically significant profits due to our familiarity with the data. Under plausible assumptions, data snooping can account for up to 50 percent of the in‐sample relations between firm characteristics and returns uncovered using single (one‐way) sorts. The biases can be much larger if we simultaneously condition returns on two (or more) characteristics.

Trading Volume and Transaction Costs in Specialist Markets

Published: 9/1994,  Volume: 49,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1994.tb02463.x  |  Cited by: 26

THOMAS J. GEORGE, GAUTAM KAUL, M. NIMALENDRAN

Prior work with competitive rational expectations equilibrium models indicates that there should be a positive relation between trading volume and differences in beliefs or information among traders. We show that this result is sensitive to whether and how transaction costs are modeled. In a specialist market with endogenous transaction costs we show that trading volume can be negatively related to the degree of informational asymmetry in the market. Our analysis highlights the dependence of volume on market structure, and our results suggest that the “volume effects” of corporate or macroeconomic events reflect a decrease, rather than an increase, in heterogeneity of beliefs or asymmetry of information.

Demand Curves for Stocks Do Slope Down: New Evidence from an Index Weights Adjustment

Published: 4/2000,  Volume: 55,  Issue: 2  |  DOI: 10.1111/0022-1082.00230  |  Cited by: 303

Aditya Kaul, Vikas Mehrotra, Randall Morck

Weights in the Toronto Stock Exchange 300 index are determined by the market values of the included stocks' public floats. In November 1996, the exchange implemented a previously announced revision of its definition of the public float. This revision, which increased the floats and the index weights of 31 stocks, conveyed no information and had no effect on the legal duties of shareholders. Affected stocks experienced statistically significant excess returns of 2.3 percent during the event week, and no price reversal occurred as trading volume returned to normal levels. These findings support downward sloping demand curves for stocks.

Debt Financing under Asymmetric Information

Published: 6/1995,  Volume: 50,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1995.tb04798.x  |  Cited by: 37

GAUTAM GOSWAMI, THOMAS NOE, MICHAEL REBELLO

We analyze the optimal design of debt maturity, coupon payments, and dividend payout restrictions under asymmetric information. We show that, if the asymmetry of information is concentrated around long‐term cash flows, firms finance with coupon‐bearing long‐term debt that partially restricts dividend payments. If the asymmetry of information is concentrated around near‐term cash flows and there exists considerable refinancing risk, firms finance with coupon‐bearing long‐term debt that does not restrict dividend payments. Finally, if the asymmetry of information is uniformly distributed across dates, firms finance with short‐term debt.

Screening, Market Signalling, and Capital Structure Theory

Published: 12/1983,  Volume: 38,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1983.tb03837.x  |  Cited by: 11

WAYNE L. LEE, ANJAN V. THAKOR, GAUTAM VORA

This paper develops an equilibrium model in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signalling and costly screening approaches. The model is developed in the context of a capital market setting in which bondholders produce costly information about a firm's a priori imperfectly known earnings distribution and use this information in specifying a bond valuation schedule to the firm. Given this schedule, the firm's optimal choices of debt‐equity ratio and debt maturity structure subsequently signal to prospective shareholders the relevant parameters of the firm's earnings distribution.