The Journal of Finance

The Price Effect of Option Introduction

Published: 6/1989,  Volume: 44,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1989.tb05068.x  |  Cited by: 223

JENNIFER CONRAD

This paper examines the price effect of option introduction from 1974 to 1980. The introduction of individual options causes a permanent price increase in the underlying security, beginning approximately three days before introduction. The price effect appears to be associated with introduction, and not announcement, throughout the sample period. Excess returns volatility declines with option introduction. Systematic risk is unchanged. There is a positive relation between the price increase and a measure of activity in the options market.

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.

Market Microstructure and the Ex‐Date Return

Published: 9/1994,  Volume: 49,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1994.tb02464.x  |  Cited by: 21

JENNIFER S. CONRAD, ROBERT CONROY

This article examines the role of measurement biases, due to order flow effects, in abnormal split ex‐day returns. We conjecture that postsplit orders consist of numerous small buyers and fewer larger sellers. This change in order flow causes closing prices to occur more frequently at the ask price, consistent with Maloney and Mulherin (1992) and Grinblatt and Keim (1991). In addition, this change causes specialists' spreads to increase, perhaps to offset larger average inventories. We examine both NYSE and NASDAQ samples and find that order flow biases can explain approximately 80 percent (48 percent) of the NYSE (NASDAQ) ex‐day return.

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.

Ex Ante Skewness and Expected Stock Returns

Published: 1/11/2013,  Volume: 68,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2012.01795.x  |  Cited by: 686

JENNIFER CONRAD, ROBERT F. DITTMAR, ERIC GHYSELS

We use option prices to estimate ex ante higher moments of the underlying individual securities’ risk‐neutral returns distribution. We find that individual securities’ risk‐neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative (positive) relation between ex ante volatility (kurtosis) and subsequent returns in the cross‐section, and more ex ante negatively (positively) skewed returns yield subsequent higher (lower) returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co‐moments, individual securities’ skewness matters.

Volume and Autocovariances in Short‐Horizon Individual Security Returns

Published: 9/1994,  Volume: 49,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1994.tb02455.x  |  Cited by: 147

JENNIFER S. CONRAD, ALLAUDEEN HAMEED, CATHY NIDEN

This article tests for the relations between trading volume and subsequent returns patterns in individual securities' short‐horizon returns that are suggested by such articles as Blume, Easley, and O'Hara (1994) and Campbell, Grossman, and Wang (1993). Using a variant of Lehmann's (1990) contrarian trading strategy, we find strong evidence of a relation between trading activity and subsequent autocovariances in weekly returns. Specifically, high‐transaction securities experience price reversals, while the returns of low‐transactions securities are positively autocovarying. Overall, information on trading activity appears to be an important predictor of the returns of individual securities.

When Is Bad News Really Bad News?

Published: 12/2002,  Volume: 57,  Issue: 6  |  DOI: 10.1111/1540-6261.00504  |  Cited by: 207

Jennifer Conrad, Bradford Cornell, Wayne R. Landsman

We examine whether the price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a complete sample of annual earnings announcements during the period 1988 to 1998. The relative level of the market is based on the difference between the current market P/E and the average market P/E over the prior 12 months. We find that the stock price response to negative earnings surprises increases as the relative level of the market rises. Furthermore, the difference between bad news and good news earnings response coefficients rises with the market.

Institutional Trading and Soft Dollars

Published: 2/2001,  Volume: 56,  Issue: 1  |  DOI: 10.1111/0022-1082.00331  |  Cited by: 118

Jennifer S. Conrad, Kevin M. Johnson, Sunil Wahal

Proprietary data allow us to distinguish between institutional investors' orders directed to soft‐dollar brokers and those directed to other types of brokers. We find that soft‐dollar brokers execute smaller orders in larger market value stocks. Allowing for differences in order characteristics, we estimate the incremental implicit cost of soft‐dollar execution at 29 (24) basis points for buyer‐ (seller‐) initiated orders. For large orders, incremental implicit costs are 41 (30) basis points for buys (sells). However, we document substantial variability in these estimates, and research services provided by soft‐dollar brokers may at least partially offset these costs.

Does Option Compensation Increase Managerial Risk Appetite?

Published: 10/2000,  Volume: 55,  Issue: 5  |  DOI: 10.1111/0022-1082.00288  |  Cited by: 743

Jennifer N. Carpenter

This paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls. Under the manager's optimal policy, the option ends up either deep in or deep out of the money. As the asset value goes to zero, volatility goes to infinity. However, the option compensation does not strictly lead to greater risk seeking. Sometimes, the manager's optimal volatility is less with the option than it would be if he were trading his own account. Furthermore, giving the manager more options causes him to reduce volatility.

Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms

Published: 3/18/2016,  Volume: 71,  Issue: 2  |  DOI: 10.1111/jofi.12367  |  Cited by: 257

JENNIFER BROWN, DAVID A. MATSA

We use novel data from a leading online job search platform to examine the impact of corporate distress on firms’ ability to attract job applicants. Survey responses suggest that job seekers accurately perceive firms’ financial condition, as measured by companies’ credit default swap prices and accounting data. Analyzing responses to job postings by major financial firms during the Great Recession, we find that an increase in an employer's distress results in fewer and lower quality applicants. These effects are particularly evident when the social safety net provides workers with weak protection against unemployment and for positions requiring a college education.

How Are Derivatives Used? Evidence from the Mutual Fund Industry

Published: 4/1999,  Volume: 54,  Issue: 2  |  DOI: 10.1111/0022-1082.00126  |  Cited by: 322

Jennifer Lynch Koski, Jeffrey Pontiff

We investigate investment managers' use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives. In contrast to public perception, derivative users have risk exposure and return performance that are similar to nonusers. We also analyze changes in fund risk in response to prior fund performance. Changes in risk are substantially less severe for funds using derivatives, consistent with the explanation that managers use derivatives to reduce the impact of performance on risk. We provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk.

Getting Out Early: An Analysis of Market Making Activity at the Recommending Analyst's Firm

Published: 9/28/2009,  Volume: 64,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2009.01502.x  |  Cited by: 92

JENNIFER L. JUERGENS, LAURA LINDSEY

This paper examines trading volume for Nasdaq market makers around analyst recommendation changes issued by an analyst at the same firm. Using Nasdaq PostData, we find a disproportionate increase in market making volume associated with the firm's recommendation changes and evidence of elevated sell volume at the recommending analyst's firm in the 2 days preceding a downgrade. The implications are that the information source matters in determining the placement of trades and that the issuing analyst's firm appears to be rewarded for prereleasing information through increased volume. These findings constitute new evidence of compensation for research production through the market making channel.

Ex‐Dividend Profitability and Institutional Trading Skill

Published: 1/12/2017,  Volume: 72,  Issue: 1  |  DOI: 10.1111/jofi.12472  |  Cited by: 46

TYLER R. HENRY, JENNIFER L. KOSKI

We use institutional trading data to examine whether skilled institutions exploit positive abnormal ex‐dividend returns. Results show that institutions concentrate trading around certain ex‐dates, and earn higher profits around these events. Dividend capture trades represent 6% of all institutional buy trades but contribute 15% of overall abnormal returns. Institutional dividend capture trading is persistent. Institutional ex‐day profitability is also strongly cross‐sectionally related to trade execution skill. The relation between execution skill and profits disappears around placebo non‐ex‐days. Results suggest that skilled institutions target certain opportunities rather than benefiting uniformly over time. Furthermore, only skilled institutions can profit from dividend capture.

Participation Costs and the Sensitivity of Fund Flows to Past Performance

Published: 5/8/2007,  Volume: 62,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2007.01236.x  |  Cited by: 436

JENNIFER HUANG, KELSEY D. WEI, HONG YAN

We present a simple rational model to highlight the effect of investors' participation costs on the response of mutual fund flows to past fund performance. By incorporating participation costs into a model in which investors learn about managers' ability from past returns, we show that mutual funds with lower participation costs have a higher flow sensitivity to medium performance and a lower flow sensitivity to high performance than their higher‐cost peers. Using various fund characteristics as proxies for the reduction in participation costs, we provide empirical evidence supporting the model's implications for the asymmetric flow‐performance relationship.

Employee Stock Option Exercise and Firm Cost

Published: 1/7/2019,  Volume: 74,  Issue: 3  |  DOI: 10.1111/jofi.12752  |  Cited by: 14

JENNIFER N. CARPENTER, RICHARD STANTON, NANCY WALLACE

We develop an empirical model of employee stock option exercise that is suitable for valuation and allows for behavioral channels. We estimate exercise rates as functions of option, stock, and employee characteristics using all employee exercises at 88 public firms, 27 of them in the S&P 500. Increasing vesting frequency from annual to monthly reduces option value by 11% to 16%. Men exercise faster, reducing value by 2% to 4%, while top employees exercise slower, increasing value by 2% to 7%. Finally, we develop an analytic valuation approximation that is more accurate than methods used in practice.

Block Share Purchases and Corporate Performance

Published: 4/1998,  Volume: 53,  Issue: 2  |  DOI: 10.1111/0022-1082.244195  |  Cited by: 327

Jennifer E. Bethel, Julia Porter Liebeskind, Tim Opler

This paper investigates the causes and consequences of activist block share purchases in the 1980s. We find that activist investors were most likely to purchase large blocks of shares in highly diversified firms with poor profitability. Activists were not less likely to purchase blocks in firms with shark repellents and employee stock ownership plans. Activist block purchases were followed by increases in asset divestitures, decreases in mergers and acquisitions, and abnormal share price appreciation. Industry‐adjusted operating profitability also rose. This evidence supports the view that the market for partial corporate control plays an important role in limiting agency costs in U.S. corporations.