The Journal of Finance

Stock Splits, Tick Size, and Sponsorship

Published: 03/31/2007   |   DOI: 10.1111/0022-1082.00211

Paul Schultz

A traditional explanation for stock splits is that they increase the number of small shareholders who own the stock. A possible reason for the increase is that the minimum bid‐ask spread is wider after a split and brokers have more incentive to promote a stock. I document a large number of small buy orders following Nasdaq and NYSE/AMEX splits during 1993 to 1994. I also find strong evidence that trading costs increase, and weak evidence that costs of market making decline following splits. This is consistent with splits acting as an incentive to brokers to promote stocks.

Calls of Warrants: Timing and Market Reaction

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04733.x

PAUL SCHULTZ

This paper examines the timing of, and reaction to, calls of callable warrants. Three main findings emerge. First, unlike convertible bonds or preferred stock, callable warrants are called almost as soon as possible. Second, there is a negative price reaction of about 3 percent when a call is announced. Finally, at the completion of a call, the stock price rebounds by an average of 7 percent. The total reaction from announcement through completion of the call is a positive excess return of about 4 percent.

Corporate Bond Trading Costs: A Peek Behind the Curtain

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00341

Paul Schultz

In this paper, I use institutional corporate bond trade data to estimate transactions costs in the over‐the‐counter bond market. I find average round‐trip trading costs to be about $0.27 per $100 of par value. Trading costs are lower for larger trades. Small institutions pay more to trade than large institutions, all else being equal. Small bond dealers charge more than large ones. I find no evidence that trading costs more for lower‐rated bonds.

Personal Income Taxes and the January Effect: Small Firm Stock Returns Before the War Revenue Act of 1917: A Note

Published: 03/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04954.x

PAUL SCHULTZ

This paper tests the tax explanation of the January effect by examining small firm stock returns before the War Revenue Act of 1917. No evidence of a turn‐of‐the‐year effect is found. This paper also extends previous authors' work on the subject to 1918–29. A January effect is found during that period.

Downward‐Sloping Demand Curves, the Supply of Shares, and the Collapse of Internet Stock Prices

Published: 01/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01318.x

PAUL SCHULTZ

Over March and April 2000, Internet stocks lost 56%, or $700 billion. This sudden collapse has been attributed to an increasing supply of shares from lockup expirations and equity offerings. I show that Internet stocks collapsed in this period regardless of whether their lockups expired. Furthermore, daily Internet stock portfolio returns were almost unaffected by the number or dollar amount of lockup expirations that day, or by the amount of stock offered in IPOs or SEOs. Most of the Internet stock decline is explained by poor marketwide returns, particularly for growth stocks.

Pseudo Market Timing and the Long‐Run Underperformance of IPOs

Published: 03/21/2003   |   DOI: 10.1111/1540-6261.00535

Paul Schultz

Numerous studies document long‐run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed ex‐post in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. Ex‐post, issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when ex‐ante expected abnormal returns are zero, median ex‐post underperformance for equity issuers will be significantly negative in event‐time. Using calendar‐time returns solves the problem.

Options and the Bubble

Published: 09/19/2006   |   DOI: 10.1111/j.1540-6261.2006.01051.x

ROBERT BATTALIO, PAUL SCHULTZ

Many believe that a bubble existed in Internet stocks in the 1999 to 2000 period, and that short‐sale restrictions prevented rational investors from driving Internet stock prices to reasonable levels. In the presence of such short‐sale constraints, option and stock prices could decouple during a bubble. Using intraday options data from the peak of the Internet bubble, we find almost no evidence that synthetic stock prices diverged from actual stock prices. We also show that the general public could cheaply short synthetically using options. In summary, we find no evidence that short‐sale restrictions affected Internet stock prices.

Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets

Published: 11/14/2011   |   DOI: 10.1111/j.1540-6261.2011.01700.x

ROBERT BATTALIO, PAUL SCHULTZ

We examine how the September 2008 short sale restrictions and the accompanying confusion and regulatory uncertainty impacted equity option markets. We find that the short sale ban is associated with dramatically increased bid‐ask spreads for options on banned stocks. In addition, synthetic share prices for banned stocks become significantly lower than actual share prices during the ban. We find similar results for synthetic share prices of hard‐to‐borrow stocks, suggesting that the dislocation in actual and synthetic share prices is attributable to the increased hedging costs for options on banned stocks during the short sale ban.

Pricing Warrants: An Empirical Study of the Black‐Scholes Model and Its Alternatives

Published: 09/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb02432.x

BENI LAUTERBACH, PAUL SCHULTZ

This paper uses a sample of over 25,000 daily warrant prices to empirically investigate potential problems with the commonly used warrant pricing model proposed by Black and Scholes as an extension of their call option model. One problem seems to be especially important: the constant variance assumption of the dilution adjusted Black‐Scholes model appears to cause biases in model prices for almost all warrants and over the entire sample period. We show that more accurate price forecasts are obtained with a specific form of the constant elasticity of variance model.

A Simple Way to Estimate Bid‐Ask Spreads from Daily High and Low Prices

Published: 03/27/2012   |   DOI: 10.1111/j.1540-6261.2012.01729.x

SHANE A. CORWIN, PAUL SCHULTZ

We develop a bid‐ask spread estimator from daily high and low prices. Daily high (low) prices are almost always buy (sell) trades. Hence, the high–low ratio reflects both the stock's variance and its bid‐ask spread. Although the variance component of the high–low ratio is proportional to the return interval, the spread component is not. This allows us to derive a spread estimator as a function of high–low ratios over 1‐day and 2‐day intervals. The estimator is easy to calculate, can be applied in a variety of research areas, and generally outperforms other low‐frequency estimators.

The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition

Published: 07/20/2005   |   DOI: 10.1111/j.1540-6261.2005.00735.x

SHANE A. CORWIN, PAUL SCHULTZ

We examine syndicates for 1,638 IPOs from January 1997 through June 2002. We find strong evidence of information production by syndicate members. Offer prices are more likely to be revised in response to information when the syndicate has more underwriters and especially more co‐managers. More co‐managers also result in more analyst coverage and additional market makers following the IPO. Relationships between underwriters are critical in determining the composition of syndicates, perhaps because they mitigate free‐riding and moral hazard problems. While there appear to be benefits to larger syndicates, we discuss several factors that may limit syndicate size.

Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market

Published: 01/25/2017   |   DOI: 10.1111/jofi.12496

PENGJIE GAO, PAUL SCHULTZ, ZHAOGANG SONG

Agency mortgage‐backed securities (MBS) trade simultaneously in a market for specified pools (SPs) and in the to‐be‐announced (TBA) forward market. TBA trading creates liquidity by allowing thousands of different MBS to be traded in a handful of TBA contracts. SPs that are eligible to be traded as TBAs have significantly lower trading costs than other SPs. We present evidence that TBA eligibility, in addition to characteristics of TBA‐eligible SPs, lowers trading costs. We show that dealers hedge SP inventory with TBA trades, and they are more likely to prearrange trades in SPs that are difficult to hedge.

Trading Costs and Exchange Delisting: The Case of Firms that Voluntarily Move from the American Stock Exchange to the Nasdaq

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02753.x

PAUL CLYDE, PAUL SCHULTZ, MIR ZAMAN

We examine 47 stocks that voluntarily left the American Stock Exchange from 1992 through 1995 and listed on the Nasdaq. We find that both effective and quoted spreads increase by about 100 percent after listing on the Nasdaq. These spread changes are consistent across stocks. In contrast, excess returns are positive when firms announce a switch from The American Stock Exchange to the Nasdaq. We are unable to explain this apparent contradiction.

Why do NASDAQ Market Makers Avoid Odd‐Eighth Quotes?

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04782.x

WILLIAM G. CHRISTIE, PAUL H. SCHULTZ

The NASDAQ multiple dealer market is designed to produce narrow bid‐ask spreads through the competition for order flow among individual dealers. However, we find that odd‐eighth quotes are virtually nonexistent for 70 of 100 actively traded NASDAQ securities, including Apple Computer and Lotus Development. The lack of odd‐eighth quotes cannot be explained by the negotiation hypothesis of Harris (1991), trading activity, or other variables thought to impact spreads. This result implies that the inside spread for a large number of NASDAQ stocks is at least $0.25 and raises the question of whether NASDAQ dealers implicitly collude to maintain wide spreads.

Why Did NASDAQ Market Makers Stop Avoiding Odd‐Eighth Quotes?

Published: 12/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04783.x

WILLIAM G. CHRISTIE, JEFFREY H. HARRIS, PAUL H. SCHULTZ

On May 26 and 27, 1994 several national newspapers reported the findings of Christie and Schultz (1994) who cannot reject the hypothesis that market makers of active NASDAQ stocks implicitly colluded to maintain spreads of at least $0.25 by avoiding odd‐eighth quotes. On May 27, dealers in Amgen, Cisco Systems, and Microsoft sharply increased their use of odd‐eighth quotes, and mean inside and effective spreads fell nearly 50 percent. This pattern was repeated for Apple Computer the following trading day. Using individual dealer quotes for Apple and Microsoft, we find that virtually all dealers moved in unison to adopt odd‐eighth quotes.

Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks

Published: 05/06/2003   |   DOI: 10.1111/0022-1082.00097

Michael J. Barclay, William G. Christie, Jeffrey H. Harris, Eugene Kandel, Paul H. Schultz

The relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate. On January 20, 1997, the Securities and Exchange Commission began implementing reforms that would permit the public to compete directly with Nasdaq dealers by submitting binding limit orders. Additionally, superior quotes placed by Nasdaq dealers in private trading venues began to be displayed in the Nasdaq market. We measure the impact of these new rules on various measures of performance, including trading costs and depths. Our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality.