Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

  • CoxandPetersen(1994)examinedU.S.stocksthat
    hadone-daypricedeclinesofmorethan 10 percent
    andthesubsequentpricereversalthedayafter.They
    concluded that a large component of the reversal
    couldbeexplainedbythebid-askspreadandthatthe
    price reversal could therefore be viewed as
    compensation for illiquidity.
    41 Avramov,Chordia,andGoyal(2005)alsofinda
    strongrelationshipbetweenshortrunpricereversals
    and illiquidity.
    42 Thelargestpricereversalsareinthemostilliquid
    stocks, which would also indicate that contrarian
    investmentstrategies,whichtrytotakeadvantageof
    these price reversals, will be saddled with higher
    transactions costs.

  • Temporalanomaliessuchastheweekendeffectand
    theJanuary effectaremost pronouncedforilliquid
    stocks.EleswarapuandReinganum(1993)notethat
    stocks with lowliquidity and high bid-ask spreads
    earn most of their excess returns in January.
    43 Thehightransactionscostsassociatedwithtrading
    on these stocks may explain why these anomalies
    continue to have the staying power that they do.

  • EllulandPagano(2002)relatedtheunderpricingof
    337 Britishinitialpublicofferingstotheilliquidityof
    theissuesaftertheofferings,andfoundevidencethat
    thelessliquidsharesareexpectedtobeandtheless
    predictable the liquidity, the greater the underpricing.
    44

  • While itwould befoolhardy toattribute allof the
    well documented excess returns
    45 that have been associated with owning small
    marketcapitalizationandlowprice-to-bookstocksto

Free download pdf