Volume 3, No. 3, Third Quarter 2005

Practitioner’s Digest • Vol. 3, No. 3

The “Practitioners Digest” emphasizes the practical significance of manuscripts featured in the “Insights” and “Articles” sections of the journal. Readers who are interested in extracting the practical value of an article, or who are simply looking for a summary, may look to this section.

Call Protection in Convertible Bonds: How Much and Why?

by: Timo P. Korkeamaki and William T. Moore

This article is drawn largely from "Convertible Bond Design and Capital Investment: The Role of Call Provisions," published by the authors in the Journal of Finance, Volume 59, 2004, pp. 391-405. The authors are indebted to colleagues at the University of South Carolina for helpful comments and guidance, as well as Rick Green, Jeremy Stein, and Jeff Woolridge. We are grateful for comments from participants at a 2002 joint seminar of the Swedish School of Economics and Business and the Helsinki School of Economics. Many thanks to Ellen Roueche for her expert help in preparing and editing this manuscript.

Regulation Fair Disclosure and Volatility: An Intraday Analysis

by: Robert B. Mendelson, Rajneesh Sharma and Daniel G. Weaver

Regulation Fair Disclosure (Reg FD) prohibits selective disclosure policies by companies. This study uses a sample of earning announcements before and after Reg FD to examine the impact on trade size, share volume, number of transactions per day, intraday return volatility, and bid-ask spread. Our methodology avoids biases induced by changes in tick size present in previous studies. Overall our results suggest that Reg FD has been successful in its goal of reducing the level of asymmetric information surrounding firm earnings announcements. In particular we find that intraday return volatility, volume, number of transactions, and spreads are lower under the general disclosure regime provided by Reg FD than under the previous selective disclosure regime. The univariate results are unchanged by controlling for factors not associated with Reg FD.

NASDAQ-100 Index Futures: Intraday Momentum or Reversal?

by: Susana Yu, Joel Rentzler and Avner Wolf

This paper explores the intraday behavior of the NASDAQ-100 futures index for momentum and reversals. A multiple regression model simultaneously (1) relates today's intraday returns to yesterday's and last night's returns, and (2) estimates how the relationship changes with the signs of yesterday's and last night's return, whether today is in a bull or bear market, and the day of the week. A simplistic view of momentum and reversal proves untenable. There appear to be both momentum and reversal effects and they appear to depend on the signs of yesterday's and last night's returns, and whether today is a Monday. Yesterday's return is associated with both momentum and reversals. Last night's return is predominately associated with reversals. An efficient forecast model is in favor on four intraday periods. This result suggests that there is a structural feature of the futures market in the opening hours.

Investment Banker Directors and Affiliated Analysts’ Forecasts

by: Murali Jagannathana and Srinivasan Krishnamurthy

Equity research analysts of investment banks have been subjected to significant regulatory scrutiny and enforcement action in recent years. Specifically, two major issues have attracted legal attention: (1) whether analysts favorably bias their forecasts to secure investment-banking business, and (2) whether selective disclosure to analysts worsens the firm's information environment. In this paper, we address the justification for the regulatory actions concerning these two issues. We use a hand-collected sample of firms with investment banker directors, and hypothesize that the conflicts of interests are likely to be most severe in these firms. Our evidence provides little support for the concerns of the regulators. We do not find that affiliated analysts forecasts are more biased or less accurate than forecasts of other analysts. We do find that firms with investment banker directors have a superior information environment. If analysts affiliated with the investment banker director are more likely to receive selective information, this evidence is not supportive of the contention that firms use selective disclosure to gain favors from these analysts.

Cereal Mergers

by: Jack L. Treynor

“Case Studies” presents a case pertinent to contemporary issues and events in investment management. Insightful and provocative questions are posed at the end of each case to challenge the reader. Each case is an invitation to the critical thinking and pragmatic problem solving that are so fundamental to the practice of investment management.

Power Laws

by: Sanjiv R. Das and Jacob Sisk

We provide a brief survey of two areas in finance in which power laws may play an important role—one, in better describing the tails of return distributions; and two, in market microstructure modeling. While the existing literature in finance is not extensive, we have surveyed a collection of papers in finance, as well as in other areas, attempting to highlight cross-disciplinary connections.

Fischer Black and the Revolutionary Idea of Finance

by: Perry Mehrling • reviewed by: Mark Kritzman

The Sociology of Financial Markets

by: Karin Knorr Cetina and Alex Preda • reviewed by: Elizabeth Gorman

“Book Reviews” identifies important, and often popular, new books from a wide range of investment topics. Beyond providing a summary and review of the content and style of the books, “Book Reviews” seeks to contribute to a conscious, critical, and informed approach to investment literature.