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ItemFundamental Analysis Conditioned on the Direction of Sales Change( 2018-09-01)We add to previous research on fundamental analysis by investigating why and how specific signals provide value-relevant information under different conditions. Our analysis provides empirical support for predictions about the value-relevance of various signals based on either providing information about future sales growth or about the efficiency of the business in using or consuming resources to generate sales. We demonstrate how specific signals are differentially informative in sales-increase versus sales-decrease periods.
ItemOff-exchange trading and post earnings announcement drift( 2018-08-24)Off-exchange trading, which tends to attract uninformed trades, accounts for about 35 percent of total trading volume today. Taking uninformed trades off exchanges harms liquidity but improves price discovery, indicated by a decline in intraday price inefficiency (deviation of price changes from a random walk). We examine whether it also decreases an accounting inefficiency: investor underreaction to quarterly earnings news. Our results, based on investigation of a large panel of US firms and a natural experiment created by the SEC’s Tick Size Pilot program, suggest the opposite conclusion: off-exchange trading increases underreaction to earnings news. The negative effects of off-exchange trading on liquidity (less depth and wider spreads) likely increase arbitrage costs, thereby reducing arbitrage activity that partially corrects underreaction. We find that the positive relation between off-exchange trading and underreaction remains strong even when we control for a host of observable arbitrage cost measures. Levels of off-exchange trading appear to serve as a useful proxy for hard-to-measure arbitrage costs.