Tuesday, October 26, 2010

Papers from the FMA conference in NYC-Part 2

More fast reviews of some papers/sessions that were at last week's FMA conference which was in NYC.
Politics matter.   Kim, Panzalis, and Park create a Political Alignment Index (PAI) that looks at whether state and federal representatives (House, Senate, Governor, and State Legislature) are in "alignment" with the president. They then document a positive return for firms in high PAI states (a zero cost portfolio created by buying high PAI firms and selling low PAI firms yielded .27% per month!) .  Findings most pronounced in multiterm office holders, when a Democrat is in power, when incumbents win, and for smaller firms.
Location matters.   Engleberg, Ozoguz, and Wang look at Industry Clusters.  That is when a group of similar firms are headquartered in the same area.  The authors show analyst coverage is greater for firms in such a cluster.  Which seems to make sense since their transaction costs (cost to understand industry and cost to go to visit sites etc), would be lower.
Insider Trading I  Rajan, Lei, and Wang show that insider trading is indeed profitable even after accounting for higher than ordinary transaction costs (due to the price impact of their trades).
After examining trades from 1993-2008, the authors report that "corporate insiders as a group have an average trading alpha of 4.2 cents for purchases and 3.6 cents for sales" which is positive even after adjusting for transaction costs.  Interestingly, the paper also reports that if managers can successfully feign a liquidity motivation for their trades, they incur lower transaction costs.

Insider Trading II. Frino, Satchell, Wong, and Zheng use hand collected data from 1996-2004 to look at how much insiders who are caught trading illegally are actually trading.   Their findings suggest that trading increases with expected return and is negatively related to expected punishment, volatility (your so-called "info" could be a noisy signal), and the likelihood of getting caught.  Overall, the median amount of trading (remember these were only the ones that got caught): traded 7 days before announcement, trades 4,625 shares (about 4.5% of daily volume for the stocks in question), most only made one trade (the maximum number of trades was 12), the scaled penalty was just over 2Xs the profits.
Here is Part I.
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