The Journal of Finance

The Behavior of Stock Prices Around Institutional Trades

Published: 09/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04053.x

LOUIS K. C. CHAN, JOSEF LAKONISHOK

All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence (“package”) of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size, and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact.

Institutional Equity Trading Costs: NYSE Versus Nasdaq

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04819.x

LOUIS K. C. CHAN, JOSEF LAKONISHOK

We compare execution costs (market impact plus commission) on the New York Stock Exchange (NYSE) and Nasdaq for institutional investors. The differences in cost generally conform to each market's area of specialization. Controlling for firm size, trade size, and the money management firm's identity, costs are lower on Nasdaq for trades in comparatively smaller firms, while costs for trading the larger stocks are lower on NYSE. The cost differences estimated from a regression model are, however, sensitive to the choice of time period.

Momentum Strategies

Published: 12/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb05222.x

LOUIS K. C. CHAN, NARASIMHAN JEGADEESH, JOSEF LAKONISHOK

We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book–to–market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

The Stock Market Valuation of Research and Development Expenditures

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00411

Louis K. C. Chan, Josef Lakonishok, Theodore Sougiannis

We examine whether stock prices fully value firms' intangible assets, specifically research and development (R&D). Under current U.S. accounting standards, financial statements do not report intangible assets and R&D spending is expensed. Nonetheless, the average historical stock returns of firms doing R&D matches the returns of firms without R&D. However, the market is apparently too pessimistic about beaten‐down R&D‐intensive technology stocks' prospects. Companies with high R&D to equity market value (which tend to have poor past returns) earn large excess returns. A similar relation exists between advertising and stock returns. R&D intensity is positively associated with return volatility.

The Level and Persistence of Growth Rates

Published: 03/21/2003   |   DOI: 10.1111/1540-6261.00540

Louis K. C. Chan, Jason Karceski, Josef Lakonishok

Expectations about long‐term earnings growth are crucial to valuation models and cost of capital estimates. We analyze historical long‐term growth rates across a broad cross section of stocks using several indicators of operating performance. We test for persistence and predictability in growth. While some firms have grown at high rates historically, they are relatively rare instances. There is no persistence in long‐term earnings growth beyond chance, and there is low predictability even with a wide variety of predictor variables. Specifically, IBES growth forecasts are overly optimistic and add little predictive power. Valuation ratios also have limited ability to predict future growth.

Fundamentals and Stock Returns in Japan

Published: 12/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb04642.x

LOUIS K. C. CHAN, YASUSHI HAMAO, JOSEF LAKONISHOK

This paper relates cross‐sectional differences in returns on Japanese stocks to the underlying behavior of four variables: earnings yield, size, book to market ratio, and cash flow yield. Alternative statistical specifications and various estimation methods are applied to a comprehensive, high‐quality data set that extends from 1971 to 1988. The sample includes both manufacturing and nonmanufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. Our findings reveal a significant relationship between these variables and expected returns in the Japanese market. Of the four variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns.