Research Paper Series

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Year RPS # Title Author/s
2007 2007-019 (FA) WHICH IS LIMIT ORDER TRADERS MORE FEARFUL OF: NON-EXECUTION RISK OR ADVERSE SELECTION RISK? Wee Yong Yeo

Limit order traders can mitigate non-execution risk by canceling limit orders with low probability of execution and resubmitting them in front of their cancelled orders in the limit order book. Conversely, they can mitigate adverse selection risk by canceling limit orders at risk and resubmitting them further behind in the limit order book. The decision of limit order traders are tracked from limit order submission to cancellation and from cancellation to resubmission. The paper also performs both static and dynamic analyses of factors affecting the risks of limit order trading. The results show that limit order traders are generally more concerned with non-execution risk than adverse selection risk, except when trading in the least active stocks. The paper also shows that nearly 40 percent of all limit orders are cancelled and nearly 70 percent of these limit orders are never resubmitted into the market. In other words, liquidity leakage through order cancellations is rarely replenished by the same traders.
 
JEL Classification: G19
 
Keywords: Limit order, Non-execution Risk, Adverse Selection Risk, Cancellation, Resubmission
 
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2007 2007-018 (FA) LIQUIDITY BEYONG THE BEST QUOTE: A STUDY OF THE NYSE LIMIT ORDER BOOK Wenjin Kang & Wee Yong Yeo

We conduct a comprehensive analysis for the New York Stock Exchange (NYSE) limit order book at both the aggregate market-level and the individual stock-level based on a sample covering all the NYSE ordinary stocks. We provide detailed description of the limit order book and show that it supplies considerable liquidity beyond the best quote posted on the market. We find that at the market-level, volatility is a key factor determining the limit order book’s liquidity provision. When market volatility increases, the book becomes more disperse and the liquidity provided by the limit order book decreases. Past market movements, especially market declines, exert significant impact on the limit order book as well. Our limit order book measures possess significant explanatory and predictive power on other liquidity measures such as bid-ask spread or Amihud illiquidity. The cross-sectional analysis of the individual stock’s limit order book suggests that market volatility and returns only affect the systematic component of the liquidity it provides.
 
JEL Classification: G19
 
Keywords: Limit order, Liquidity, Market return, Volatility
 
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2007 2007-017 (MO) ALLIANCES AND PERFORMANCE IN THE AIRLINE INDUSTRY, 1998-2002: A NETWORK PERSPECTIVE Albert C Y Teo & Arthur K C Leong

This study uses a network approach to examine the impact of strategic alliances on organizational performance in the airline industry. The analyses are based on alliance and performance data drawn from the whole population of international airlines over the five-year period, 1998-2002. Results indicate that when an airline’s alliance network is excessively dense, its performance may be adversely affected. Also, excessively deep and intensive alliances may have a negative impact on the partner airlines’ performance.
 
Keywords: strategic alliances, organizational performance, airline industry, network centrality, structural holes
 
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2007 2007-016 (MO) THE IMPACT OF RELATIONSHIP SELF-EFFICACY AND COGNITIVE APPRAISALS ON AFFECTIVE RESPONSES TO SOCIAL INTERACTIONS Zhaoli Song, Angeline Lim, Maw-Der Foo & Marilyn Ang Uy

Social interactions play a part in an individual’s everyday life. Besides being a channel through which information and other resources flow, social interactions also evoke certain affective responses within individuals. This study contributes to social interactions research by examining the role of cognitive appraisals and relationship self-efficacy in relation to affective responses to social interactions. To examine this, we tracked the social interactions and the affective responses of 161 undergraduate students via cell phones over a period of 14 days. Results indicated that relationship self-efficacy moderates the relationship between social interactions and positive moods and cognitive appraisals (pleasant, unpleasant, controllable, and important) mediate the relationship between social interactions and mood.
(110 words)
 
Keywords: Affect, mood, social interactions, self-efficacy, event sampling methodology
 
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2007 2007-015 (MO) JOB SEARCH AND STRESS: A DAILY REPEATED MEASURE STUDY Zhaoli Song, Marilyn A. Uy, Shuhua Zhang & Kan Shi

This study examined the relationship between job search and stress using the diary method. Three models were tested using 100 unemployed job seekers: a direct causal model (examining the effect of job search on stress), a reversed causal model (assessing the impact of stress on job search), and a common factor model (testing the extent to which daily financial strain accounts for the relationship between job search and stress). Results offered support for both direct and reversed models. The common factor model was not supported. Negative job search experience mediated the direct effect of job search on stress. Using a repeated measures design, the study provides important information about the dynamic relationship between job search and stress.
 
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2007 2007-014 (MO) UNRAVELING THE STRESS CROSSOVER BETWEEN THE UNEMPLOYED AND THEIR SPOUSES Zhaoli Song, Maw-Der Foo, Marilyn A. Uy & Shuhua Sun

The study examined the stress crossover between unemployed job seekers and their employed spouses using the diary survey method. Three models have been examined using 100 couples for 14 days: the direct crossover model, the mediating crossover model and the spurious model. Results offered support for the direct crossover and spurious models. Negative job search experience of the unemployed spouses was also found positively related to their daily stress. Using the repeated measures design, the study provided a more rigorous test of the dynamic relationship between stress levels between couples.
 
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2007 2007-013 (FA) DO FIRMS MANAGE R&D EXPENDITURES TO MEET ANALYST EARNINGS FORECASTS Michael S. H. Shih & Xuan Lin Teo

We investigate in study the possibility that firms manipulate real expenditures to avoid missing earnings benchmarks. We hypothesize that for firms that incur large R&D expenditures, it is no more difficult to manipulate R&D expenditures to avoid missing earnings benchmarks than to manipulate accounting accruals. We argue accounting accruals are manipulated by changing the assumptions and estimates based on which earnings are calculated. Many of these changes would require the consent of the auditor. Manipulations of R&D expenditures are different. They involved no changes in assumptions or estimates, and therefore would not require the consent of the auditor.
 
We develop a model of normal R&D expenditures based on industry and firm-specific characteristics, from which we estimate abnormal or discretionary R&D expenditures in each firm-quarter. We then compare the mean of estimated discretionary R&D expenditures between firm-quarters in which the consensus analyst earnings forecast is met precisely or beaten narrowly and firm-quarters in which the consensus analyst earnings forecast is missed narrowly. The result is consistent with our prediction. The mean estimated discretionary R&D expenditure is lower in firm-quarters in which the consensus analyst earnings forecast is met precisely or beaten narrowly than in firm-quarters in which the consensus analyst earnings forecast is missed narrowly.

2007 2007-012 (FA) DYNAMICS OF THE DIVERSIFICATION DISCOUNT Seoungpil Ahn

Using a sample of diversified firms over the period of 1980-2003, we investigate changes in the diversification discount during the two recent merger waves. The time-series patterns of the diversification discount coincide with the merger waves. The average discount is higher when many firms diversify during the waves and it is eliminated as firms in deep discount exit. We document some evidence that is consistent with the endogeneous self-selection hypothesis in the estimation of the average excess value. Nonetheless, we find that the distribution of excess value is meaningful. Deep discounted firms are more likely to reverse their diversification within shorter time periods while the survival of diversification strategies among premium firms and moderate discount firms is unrelated to their excess values. After accounting for value effects, premium firms perform better than focused firms as well as discount firms. We interpret the results as evidence that (1) diversification is good for some firms, but it is not for other firms, and (2) excess value correctly identify these firms successful and unsuccessful in their diversification.
 
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2007 2007-011 (FA) POLICY RISK AND EQUITY VALUES: EVIDENCE FROM THE CHINESE STOCK MARKET Swee-Sum Lam, Christabel Tan Dun-Lin, Ruth Tan Seow-Kuan & Weidong Zhang

This study conducts a systematic analysis of the impact of policy reversals on equity values. China is an excellent platform for a study on policy risk as she transitions from a centrally planned economy to a market economy. Flip-flops in policy add uncertainties to an investor’s cash flows. Consistent with our policy risk propositions, we find that policy reversals are accompanied by negative price effects across all stocks in the secondary markets, whether regulated or non regulated, state owned or non state owned, and these persist regardless of the nature of the price sensitive news. And, consistent with our committed government propositions, we find that the Chinese government is committed to learn to build bureaucratic quality; and that Chinese investors are also learning to differentiate between a committed and a populist government.
 
JEL Classification: G12, G18, G32, G38
 
Keywords: policy risk, equity values, committed government, organizational learning
 
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2007 2007-010 (DS) A TACTICAL PLANNING MODEL FOR LINER SHIPPING COMPANIES: MANAGING CONTAINER FLOW AND SHIP DEPLOYMENT JOINTLY Heng-Qing Ye, Xue-Ming Yuan & Xinxin Liu

This paper addresses two practical problems from a liner shipping company, i.e., the container flow management problem and the ship deployment problem at the tactical planning level. The joint optimization model, as well as, a sequential model, is formulated to solve the problems. Our results show the company should implement the joint optimization model at the tactical planning level to improve the shipping capacity utilization rather than the sequential model used in the current practice. Repositioning of empty containers is also considered jointly with the loaded container flow at the tactical planning level. Some important managerial insights into the operational and business processes are gained.
 
Keywords: Container Flow Management, Ship Deployment, Empty Container Repositioning
 
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