This study examines the comparative magnitude of disturbances in intraday data for exchange traded foreign exchange (FX) options. An in-depth time series analysis on the frequency and extent of discrepancies in the disturbances is conducted. The purpose of this study is twofold. First, using intraday data and trading volume, this study attempts to determine whether both put-call parity and lower boundary conditions consistently hold for exchange traded options written on U.S. dollar denominated options on the Euro trading on the Philadelphia Stock Exchange (PHLX). Second, this study attempts to investigate the magnitude of any discrepancies that may exist due to a temporary cessation of either put-call parity or lower boundary conditions. Intraday (tick-by-tick) bid prices, ask prices, and trading volume on U.S. dollar denominated European style call options and put options on the Euro are obtained. Option data is collected through a Structured Query Language (SQL) request from the Bloomberg database. Corresponding tick-by-tick spot rates for the underlying exchange rate are obtained for the same time period. Tick-by-tick 3-month Treasury bill rates are obtained to for use as the relevant risk-free interest rate. The primary data set spans an approximate one month period from 11/1/2011 to 12/6/2011. Call and option …

This dissertation examines whether Percs, Preferred Equity Redemption Cumulative Stocks, are properly priced regarding to the relevant securities, such as the underlying common stock, the long-term call option of the stock, and so on. Test results indicate that Percs were overpriced with respect to the equivalent packages composed of the relevant securities. Further tests on arbitrage restrictions show that transaction costs would prevent arbitrage profits. This dissertation also examines the market reactions to Percs offerings. Test results reveal that the market reactions to the announcement of Percs offering and the actual issuance are both significantly negative. Compared to the market reaction on common stock offering announcement, the market reaction on Percs offering announcement is weaker. The overpricing of Percs and the weaker reaction of the market suggest that Percs may have advantages in transaction costs, taxes and some corporate finance issues.

Bankruptcy is a costly event. Holders of publicly traded securities can rely on security prices to reflect their risk. Other stakeholders have no such mechanism. Hence, methods for accurately forecasting bankruptcy would be valuable to them. A large body of literature has arisen on bankruptcy forecasting with statistical classification since Beaver (1967) and Altman (1968). Reported total error rates typically are 10%-20%, suggesting that these models reveal information which otherwise is unavailable and has value after financial data is released. This conflicts with evidence on market efficiency which indicates that securities markets adjust rapidly and actually anticipate announcements of financial data. Efforts to resolve this conflict with event study methodology have run afoul of market model specification difficulties. A different approach is taken here. Most extant criticism of research design in this literature concerns inferential techniques but not sampling design. This paper attempts to resolve major sampling design issues. The most important conclusion concerns the usual choice of the individual firm as the sampling unit. While this choice is logically inconsistent with how a forecaster observes financial data over time, no evidence of bias could be found. In this paper, prediction performance is evaluated in terms of expected loss. Most …

Monthly returns on twenty-seven Eurobonds from July 1982 to June 1986 were examined. There were no consistent differences in returns based on the country in which a firm is located. There were consistent differences due to industry classification, with energy-related firms exhibiting higher average returns and variances. Excess returns were calculated using the capital asset pricing model and arbitrage pricing theory. The results from calculation of mean average deviation, root mean square, and R2 all indicate that the arbitrage pricing theory was a better descriptor of the Eurobond market. The excess returns were also examined using stochastic dominance. Arbitrage pricing theory never dominated the capital asset pricing model using first-order criteria, but consistently dominated using second-order criteria. The results were discussed in terms of the implications for investors and portfolio managers.

When a stock is added into the S&P 500 Index, it is automatically "cross-listed" in the index derivative markets (i.e., S&P 500 Index futures and Index options). I examined the effects of such cross-listing on the trading volume and return volatility of the underlying component stocks. Traditional finance theory asserts that futures and "cash" markets are connected by arbitrage mechanism that brings both markets to equilibrium. When arbitrage opportunities arise, arbitrageurs buy (sell) the index portfolio and take short (long) positions in the corresponding index derivative contracts until prices return to theoretical levels. Such mechanical arbitrage trading tends to create large order flows that could be difficult for the market to absorb, resulting in price changes. Utilizing a list of S&P 500 index composition changes occurring over the period September 1976 to December 2005, I investigated the market-adjusted volume turnover ratios and return variances of the stocks being added to and deleted from the S&P 500, surrounding the effective day of index membership changes. My primary finding is that, after the introduction of the S&P 500 index futures and options contracts, stocks added to the S&P 500 experience significant increase in both trading volume and return volatility. However, deleted stocks …

Poster presentation for the 2010 University Scholars Day at the University of North Texas discussing research on the changing role of risk management in a global capital market.

This paper was awarded a Nicholas and Anna Ricco Ethics Award for 2013. In this paper, the author discusses corporate responsibility through a case study of TOMS shoes and their stance in the business world as a for-profit company with social responsibility at its core.

There is a limited amount of research dealing with the wealth effects of sale-and-leaseback transactions, but previous research has focused predominantly on the tax effects of these transactions. The results of these studies have often been in conflict with one another. This dissertation shows that tax effects do play a role in determining the wealth effect of sale-and-leasebacks on stockholders, but there exists a framework of finance research that suggests several other factors could play a determining role as well.

This study attempts to resolve two important issues. First, it investigates the diversification benefit of crude oil for equities. Second, it examines whether or not crude oil derivatives transactions by oil and gas producers can change shareholders' wealth. With these two major goals in mind, I study the risk and return profile of crude oil, the value effect of crude oil derivatives transactions, and the systematic risk exposure effect of crude oil derivatives transactions. In contrast with previous studies, this study applies the Goldman Sachs Commodity Index (GSCI) methodology to measure the risk and return profile of crude oil. The results show that crude oil is negatively correlated with stocks so adding crude oil into a portfolio with equities can provide significant diversification benefits for the portfolio. Given the diversification benefit of crude oil mixed with equities, this study then examines the value effect of crude oil derivatives transactions by oil and gas producers. Differing from traditional corporate risk management literature, this study examines corporate derivatives transactions from the shareholders' portfolio perspective. The results show that crude oil derivatives transactions by oil and gas producers do impact value. If oil and gas producing companies stop shorting crude oil derivatives contracts, …

The observed use (and indeed tremendous growth in volume) of forward contracts, futures, options, and swaps as hedges against interest rate risk, foreign exchange risk, and commodity price risk indicates that hedging does add value to the firm. The purpose this research was to empirically examine the value of off-balance-sheet hedging. The benefits of off-balance-sheet hedging were found to accrue from reducing (1) taxes, (2) expected financial distress costs, and (3) agency costs. Taxes. Hedging reduces the firm's tax liability by reducing the variability in taxable income. The value of hedging to the firm is a positive function of the convexity of the tax function and the variability of taxable income. Expected Financial Distress Costs. The value of hedging is a positive function of the degree to which hedging reduces the probability of financial distress and the costs of financial distress. Agency Cost. Due to the fact that bondholders and some managers hold fixed claims while shareholders hold variable claims, shareholders desire more risky projects than do bondholders or managers. Hedging reduces this conflict by allowing shareholders to undertake higher risk projects while protecting the holders of fixed claims. Firms can achieve the same benefits of hedging by using alternative …

This dissertation identifies key determinants of outbound cross-border mergers and acquisitions (M&As) by emerging Asian acquirers during 2001-2012. Using a zero-inflated model that takes into account different mechanisms governing country pairs that never engage in cross-border M&As and country pairs that actively participate in cross-border M&As, I uncover unique patterns for emerging Asian acquirers. Emerging Asian acquirers originate from countries with lower corporate tax rates than those countries where their targets are located. Furthermore, the negative impact of an international double tax burden is significantly larger than that found in previous studies. While country governance differences and geographical and cultural differences are important determinants of international M&As, relative valuation effects are muted. Coefficients of these determinants vary substantially, depending on whether targets are located in developing or advanced nations. Also, determinants differ considerably between active and non-active players in cross-border M&As. Moreover, comparisons of empirical models illustrate that estimating a non-linear model and taking into account both the bounded nature and non-normal distributions of fractional response variables lead to different inferences from those drawn from a linear model estimated by the ordinary least squares method. Overall, emerging Asian acquirers approach the deals differently from patterns documented in developed markets. So, …

Poster presentation for the 2009 University Scholars Day at the University of North Texas discussing research on whether it pays for companies to go green.

Recent increases in stock repurchases among U.S. corporations coupled with a historically low cost of debt since the Global Financial Crisis has created media speculation that firms in recent years are paying for their expanding share buyback programs with debt. Repurchasing stock by increasing leverage, instead of using internal funds, implies that managers may speculate on current low interest rate environments at the expense of shareholders. Recent studies find that stock repurchases are associated with reductions in future firm employment and investments such as capital expenditures and research and development expenses. This study expands on prior studies by evaluating how debt-financed stock repurchases affect firm investment, investigating the likelihood of these repurchases in low interest rate environments and assessing the effects on firm value. Results confirm that, in recent years, debt-financed repurchases have increased substantially and the probability of debt-financed repurchases increases in the presence of low interest rates. This relationship is especially pronounced in the years following the Global Financial Crisis. Debt-financed repurchases are associated with small reductions in firm investment; however, these reductions are significantly less after adjusting for industry conditions. Finally, there is little evidence that the method of financing repurchases affects firm value nor does it …

The initial matching relationships between underwriters and bonds/issuing firms and the certification quality of underwriters, as determined by changes in the issuing firm’s financial strength post issue, are the two primary research topics in this dissertation. Based on total underwriter syndicate market share, two distinct categories, low market power (LMP) syndicates and high market power (HMP) syndicates were defined. Firm financial strength is examined based on a new factor developed in this research. A comparison of the two underwriting categories, or pools, indicates that the HMP underwriters take on firms of lower initial financial strength and additionally, the issuing firms decline more in financial strength two years following bond issuance than do firms using LMP underwriters. Notwithstanding these results, the more interesting findings are the relationships within each of these pools. In the LMP pool of underwriters, financially stronger firms used the larger LMPs to underwrite their bonds, while the weaker firms used smaller LMPs. In contrast, among HMP underwriters, the largest HMPs aligned with the firms of relatively lower financial strength. The relationships in both pools reverse when changes in financial strength are examined. Larger LMPs are associated with greater issuing firm financial decline while larger HMPs correlate with …

Several studies have observed that stocks tend to drop by an amount that is less than the dividend on the ex-dividend day, the so-called ex-dividend day anomaly. However, there still remains a lack of consensus for a single explanation of this anomaly. Different from other studies, this dissertation attempts to answer the primary research question: How can investors make trading profits from the ex-dividend day anomaly and how much can they earn? With this goal, I examine the economic motivations of equity investors through four main hypotheses identified in the anomaly’s literature: the tax differential hypothesis, the short-term trading hypothesis, the tick size hypothesis, and the leverage hypothesis. While the U.S. ex-dividend anomaly is well studied, I examine a long data window (1975 to 2010) of Thailand data. The unique structure of the Thai stock market allows me to assess all four main hypotheses proposed in the literature simultaneously. Although I extract the sample data from two data sources, I demonstrate that the combined data are consistently sampled. I further construct three trading strategies: “daily return,” “lag one daily return,” and “weekly return” to alleviate the potential effect of irregular data observation. I find that the ex-dividend day anomaly exists …

This study examines the impact of reducing tick size and, in particular decimalization on stock splits. Based on previous studies, this study examines hypotheses in the following three areas: first, market reaction around stock split announcement and ex-dates, second, the effect of tick size on liquidity after stock split ex-dates, and third, the effect of tick size on return volatility after stock split ex-dates. The impact of tick size on market reaction around split announcement and ex-dates is measured by abnormal returns and buy and hold abnormal returns (BHARs). Also, this study investigates the long term impact of decimalization on market reaction for small, medium, and large firms for the three different tick size periods. The effect of tick size on liquidity after stock split ex-dates is measured by turnover, relative bid ask spread, and market maker count. The effect of tick size on return volatility around stock split announcement and ex-dates is measured by return standard deviation. Also, this study investigates the long term impact of decimalization on volatility after split ex-dates for small, medium, and large firms for three different tick size periods.

This study examines the effects of delisting on firm value, risk and market liquidity. In a world where markets are becoming increasingly integrated, delistings may prove counter productive. We use the unique event, free from company specifics, that occurred on January 2, 1990 in the stock exchanges of Singapore and Malaysia to test for the above effects. On that day, dual listed companies were required to delist from the foreign stock exchange. We also use this event to test if the Singapore and Malaysia markets are globally integrated. Since financial data is found to show persistence in volatility, we model the return generating process in a generalized autoregressive conditionally heteroskedastic (GARCH) framework that takes into consideration changing volatility. For comparison purposes, OLS and Time-Deformation models are included. The study found delistings to decrease firm value, the size of which is related to how actively the stocks were previously traded on the foreign stock exchange. Risk levels increased following delistings. Nevertheless, thinly traded stocks showed significant changes in neither firm value nor riskiness. Further evidence of new listings to increase firm value was noted. Consistent with the political motive hypothesis, delisted stocks showed an increase in post-event volume, but however, lost …

This study examines two interrelated but separate issues: cross-sectional predictability of equity returns in the Stock Exchange of Thailand (SET), and transmission of stock market movements. The first essay empirically investigates to what extent the evidence of three major documented stock market anomalies (earnings-price ratio, firm size, and book-to-market ratio) can be generalized across national stock markets. The second essay studies the price and volatility spillover effects from the New York Stock Exchange (NYSE) to the SET. The first essay, using the Fama-Macbeth procedure and the pooled time-series cross-sectional GLS regressions, finds a weak relation between the beta and average stock returns. The adjustment of estimated beta for the effect of thin trading does not change the implications of the results. Of the three anomalies investigated, the size effect has the most prominent and consistent role in explaining average returns. For the earnings-price ratio, the results indicate that the significance of the E/P ratio variable persists only if the nonfinancial firms are considered. In contrast to the previous empirical results for the U.S. and Japanese stock markets, the book-to-market ratio fails to explain the SET equity returns. The second essay employs a generalized autoregressive conditionally heteroskedastic (GARCH) model with conditional …

The objective of this study is to answer the following research question: How large is a diversified portfolio? Although previous work is abundant, very little progress has been made in answering this question since the seminal work of Evans and Archer (1968). This study proposes two approaches to address the research question. The first approach is to measure the rate of risk reduction as diversification increases. For the first approach, I identify two kinds of risks: (1) risk that portfolio returns vary across time (Evans and Archer (1968), and Campbell et al. (2001)); and (2) risk that returns vary across portfolios of the same size (Elton and Gruber (1977), and O'Neil (1997)). I show that the times series risk reaches an asymptote as portfolio size increases. Cross sectional risk, on the other hand, does not appears to reach an asymptote as portfolio size increases. The second approach consists of comparing portfolios' performance to a benchmark portfolio that is assumed to be diversified (Statman (1987)). I develop a performance index. The performance index is calculated, for any given test portfolio, as the ratio of the Sharpe-like measure of the test portfolio to the Sharpe-like measure of the benchmark portfolio that is …

This paper discusses research into the development, application, and further growth of real options analysis.

Presentation for the 2010 University Scholars Day at the University of North Texas discussing research on the development, application, and further growth of real options analysis.

In this paper I use an equity duration framework to develop and empirically test the hypothesis that returns on growth stock portfolios react more strongly to Federal Funds target rate change announcements, as compared to value stock portfolios. When I decompose the Federal Funds rate change, I find that portfolio returns are only sensitive to rate shocks, as opposed to the predictable component of rate change. Since growth stocks are expected to have higher duration than value stocks, I further explore the well documented polarity between value and growth stocks, by examining the interest rate sensitivities of portfolios that diverge along four fundamental-to-prices ratios: dividend yield, book-to-market value, earnings-to-price and cashflows-to-price. In each case, I find that price reactions are more pronounced for portfolios with high growth characteristics. I also document that portfolio returns react asymmetrically to positive and negative target rate surprises, and that this reaction is conditional on the state of business cycles - periods of economic expansions and recessions. To improve the robustness of my results, several statistical applications have been applied. First, I include Newey-west estimators to examine significant levels of regression estimates. Second, I check if there is any contemporaneous correlation across target rate shocks …

This paper discusses research on the microfinance industry, for-profit versus nonprofit models, and the efficacy of microfinance in alleviating poverty.

Presentation for the 2008 University Scholars Day at the University of North Texas discussing research on for-profit and nonprofit microfinance and how the poor are affected.