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UBC Theses and Dissertations

The effects of new information on Canadian equity prices Watson, Patrick William 1974

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THE EFFECTS OF NEW ON CANADIAN  INFORMATION  EQUITY  PRICES  by  PATRICK WILLIAM WATSON B.Comm., U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1 9 7 3  A THESIS SUBMITTED  IN PARTIAL FULFILMENT OF  THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN BUSINESS ADMINISTRATION in  the Faculty of  Business  We a c c e p t t h i s required  Administration  t h e s i s as c o n f o r m i n g  to the  standard  THE UNIVERSITY OF B R I T I S H COLUMBIA A u g u s t , 19 74  In p r e s e n t i n g t h i s t h e s i s in p a r t i a l f u l f i l m e n t o f t h e r e q u i r e m e n t s an advanced degree at the U n i v e r s i t y of B r i t i s h C o l u m b i a , I a g r e e the L i b r a r y  s h a l l make i t f r e e l y a v a i l a b l e f o r  r e f e r e n c e and  I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s  of  It  i s understood that c o p y i n g or  thesis  Depa rtment The U n i v e r s i t y o f B r i t i s h Columbia Vancouver 8, Canada  or  publication  t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d w i t h o u t my  written permission.  that  study.  f o r s c h o l a r l y purposes may be g r a n t e d by the Head of my D e p a r t m e n t by h i s r e p r e s e n t a t i v e s .  for  A B S T R A C T  This securities  paper  investigates  market; s p e c i f i c a l l y ,  ces  to a p a r t i c u l a r piece  new  information  the  quarterly  Financial the  mutual  As s u c h ,  semi-strong  duration  fund  form  o f the p r i c e  analysis,  Roll  i n a paper e n t i t l e d Information"  eliminate zon  with varying information The  the  cific  information  trend  of the r e s i d u a l  of mutual  returns  during  the p o r t i o n  t h e time  hori-  associ-  returns.  investigated  on t h e d a t e  over time.  t h e spe-  and a l s o the  In a d d i t i o n , t h e  as a f u n c t i o n  activity  data to  the e f f e c t s of the  became p u b l i c l y a v a i l a b l e  were i n v e s t i g a t e d  Resi  Prices to  o f return  i n the r e s i d u a l  r e s i d u a l returns  funds n e t t r a d i n g  a test of  J e n s e n and  on the r e t u r n  conditions  returns  i n The  t h e e x t e n t and  o f Stock  o f the r e s i d u a l returns  averages o f these  residual  was  in  hypothesis.  by Fama, F i s h e r ,  economic c o n d i t i o n s ,  analysis  contained  t o t h i s new i n f o r m a t i o n .  conducted  a r e impounded  analyzed, t h  published  markets  "The A d j u s t m e n t  economic  was  constitutes  o f the a n a l y s i s  implemented  ( 2 ) , was  differing  reports  the analysis  o f t h e s t u d y . By e l i m i n a t i n g  ated new  first  of security p r i  the i n f o r m a t i o n  trading  reaction  dual  New  o f new i n f o r m a t i o n  o f the e f f i c i e n t  prime concern  o f the Canadian  the r e a c t i o n  o f concern being  Post.  The  the e f f i c i e n c y  i n that  o f the s i z e  security.  iii  In only one markets may  be  case d i d i t appear t h a t the Canadian s e c u r i t y  inefficient.  However, the g e n e r a l  conclusion is  that the Canadian s e c u r i t y markets are e f f i c i e n t w i t h to  the new  information  analyzed  by t h i s  study.  respect  TABLE OF CONTENTS  Page  L I S T OF TABLES  v  L I S T OF FIGURES  vi  CHAPTER  I.  II.  III.  IV.  V.  VI.  INTRODUCTION  1  THE E F F I C I E N T MARKET HYPOTHESIS  6  THE DATA  11  METHODOLOGY  16  EMPIRICAL RESULTS  21  CONCLUSION  41  45  BIBLIOGRAPHY  iv  L I S T OF  TABLES  TABLE  Page  1  DATA FOR BUYS  <.5 % (69 TRADES)  2  DATA FOR SELLS <.5 % (71 TRADES).  3  DATA FOR BUYS  > 1 % (64 TRADES)  25  4  DATA FOR S E L L S < 1 % (72 TRADES)  26  v  23  . . . . . . . .  24  LIST OF FIGURES  FIGURE 1  2  3  4  Page API FOR BUYS INVOLVING LESS THAN .5% OF CAPITALIZATION (69 TRADES)  27  API FOR SELLS INVOLVING LESS THAN .5% OF CAPITALIZATION (71 TRADES)  28  API FOR BUYS INVOLVING MORE THAN \% OF CAPITALIZATION (64 TRADES)  29  API FOR SELLS INVOLVING MORE THAN 1% OF CAPITALIZATION (72 TRADES)  30  vi  CHAPTER 1 INTRODUCTION  In  an  mation which flected  firm.  an  are  actions the  that  accurate  for  or  by  of  the  underlying  s h o u l d not  a particular  re-  of  economic v a l u e  of  economic v a l u e ,  in  be  affected  no  by  inves-  significance  as  company.  implication  c a n n o t use  infor-  is fully  such a market p r i c e s  indicators  reflect  available  valuation  i n f o r m a t i o n w h i c h has  direct  investors  a l l publicly  security In  market, p r i c e s  value of A  market,  prices.  Since prices  efficient  tor to  is relevant  in security  securities a  efficient  of  an  efficient  "publicly available"  market  is  information^  2 to  r e a l i z e abnormal r e t u r n s  already mation  impounded  in security  i s impounded the  new  entering  regarding  r e s u l t of  of  the  As  prices,  security  information  a l l public  observed price  is  infor-  price  adjustments  to  market.  The  intent  the  e f f i c i e n c y with which  Information knowledge w h i c h may be pricing calculus.  this  a l l such  prices.  in security  c h a n g e s must be information  since  study  i s to  provide  "publicly  evidence  available"  i s a t e r m u s e d t o encompass a l l t h e of v a l u e i n the market's s e c u r i t y  2 A b n o r m a l r e t u r n s w i l l be d e f i n e d as r e t u r n s w h i c h d i f f e r f r o m t h o s e w h i c h w o u l d be o b t a i n e d u n d e r e q u i l i brium conditions.  1  2  information can  be d e m o n s t r a t e d  reflect ity  i s impounded  information  exists that  may y i e l d prices  that  i n Canadian Canadian  which  abnormal r e t u r n s  considered  a f i r m , w h i c h may  information,  result  this  the p o s s i b i l information  In a d d i t i o n , i f they  c a n n o t be  f o r the u n d e r l y i n g  i n a non-optimal  If i t  p r i c e s do n o t f u l l y  r u l e employing  proxy  prices.  known, t h e n  to i n v e s t o r s .  reflect  an a c c u r a t e  equity  is publicly  some t r a d i n g  do n o t f u l l y  equity  value  of  allocation of  3 new f u n d s  i n t h e economy. Much h a s b e e n w r i t t e n on t h e e f f i c i e n t  hypothesis "publicly  (i.e.,  that  security prices fully  a v a i l a b l e " information)and  market  reflect a l l  many t e s t s o f i t u n d e r -  4 taken. the  The m a j o r c o n c l u s i o n  capital  reflect  markets  a l l public  are e f f i c i e n t  efficiency cerned The  with  t e s t s has been  i n t h a t p r i c e s do  that  indeed  information.  One f e a t u r e market h y p o t h e s i s  o f these  common t o most  i s that  o f U.S. c a p i t a l the e f f i c i e n c y  t r e n d h a s been t o t e s t  they  t e s t s o f the e f f i c i e n t  concern  markets.  themselves with the  O n l y a few a r e c o n -  of markets  i n other  the e f f i c i e n t  market  countries. hypothesis  ""Non-optimal i n t h e s e n s e o f f u n d s b e i n g a l l o c a t e d t o a r e a s w h i c h may n o t have t h e h i g h e s t e x p e c t e d r e t u r n . See i n t r o d u c t i o n o f (8) .  and  ^See (3) f o r a c o m p r e h e n s i v e empirical findings.  review of theory  3  w i t h U.S,  data  situation  o r to ignore  As  a result,  and g e n e r a l i z e  markets,  this  analyses  In s t u d y i n g  5  t o t h e non-U.S.  t h e non-U.S. s i t u a t i o n  few r i g o r o u s  kets are a v a i l a b l e ,  the r e s u l t s  study w i l l  entirely.  o f non-U.S. c a p i t a l the Canadian  hopefully  begin  mar-  capital  to r e c t i f y  this  situation. Although markets kets,  the s t r u c t u r e  i s basically  several  similar  differences  i n the degree  differences  a r e (1)  which  require  less  (2)  lute  capitalization  illiquidity  lower r e l a t i v e market is  related  stringent  i n the removal  of Canadian equity  of large  r i s e to  reporting  firm  laws  This  abso-  and t h e  securities  (equity)  blocks  The m a i n  the s m a l l e r  Canadian  by m u l t i n a t i o n a l  mar-  t h a n i n t h e U.S.;  t o U.S. s e c u r i t i e s , ^  firms  give  corporate  direct  capital  capital  efficiency.  from both  of the t y p i c a l  to the s u b s t a n t i a l  ment i n C a n a d i a n  may  disclosure  resulting  turnover  as compared  results  less  o f U.S,  which  o f market  corporate  and,  to that  exist  differences  o f the Canadian  latter foreign  organizations of equities  i n the point investwhich  from  active  trading. Since  corporate  Canada as compared  Evans' 6  See  information  t o t h e U.S.,  Study  (1).  (1)  i s less  t h e r e may  abundant i n  be a t e n d e n c y f o r  i s one o f t h e few  exceptions,  4  market p a r t i c i p a n t s to use o t h e r formation, vestors  s u c h as t h e t r a d i n g  i n their  types  activity  s e c u r i t y purchase  security  information,  the  study w i l l  information  examine m a r k e t  concerning  funds.  securities  the q u a r t e r l y  by m u t u a l  i s that  in a security  period  funds  (the fact  that  i n the study.  knowledge w h i c h  follows  will  the e f f i c i e n t Several  market h y p o t h e s i s literature.  trading  activity  constitute  market  indirect  Since  this  adjust  split  traders active  information i n reaction study  to this  i s concerned  to information,  that  a t e s t o f the semi-strong  form  hypothesis.  semi-strong using  f u n d s were  I t i s the p r i c e  efficiently  The p e r i o d  t h e d a t e when i t be-  form t e s t s o f the e f f i c i e n t  U.S. d a t a  are a v a i l a b l e i n the  Fama, F i s h e r , J e n s e n a n d R o l l  of stock  with  information  f u n d s were a c t i v e  the mutual  i s analyzed).  w i t h whether p r i c e s  effects  influence  i s of concern,  surrounding  o f a s e c u r i t y i s t h e new  vestigated  of  in a similar  efficiency  of indirect  comes p u b l i c l y known t h a t m u t u a l  which  could  sufficient  In p a r t i c u l a r , the p r i c e behaviour o f  traded  analysis  traders  and r e a c t  such a c t i v i t y  to a p a r t i c u l a r piece  of mutual  of  If a  prices. This  respect  in-  of professional i n -  decision.  number o f m a r k e t p a r t i c i p a n t s u t i l i z e manner t o t h i s  of (indirect)  (2) e x a m i n e d t h e  announcements on s e c u r i t y p r i c e s ;  5  Kraus and S t o l l parallel  ( 8 , 9 ) studied  trading;  Scholes  the e f f e c t s o f b l o c k t r a d i n g and  (12) s t u d i e d  the e f f e c t s o f second-  ary d i s t r i b u t i o n s on s e c u r i t y p r i c e s ; and P e t t i t the e f f e c t s o f d i v i d e n d  announcements.  vant to t h i s study f o r two reasons.  (10) s t u d i e d  These papers  First,  are r e l e -  they p r o v i d e con-  s i s t e n t evidence i n t h a t they a l l conclude the U.S. markets are e f f i c i e n t , p r o v i d i n g tion.  a comparison  Second, and more i m p o r t a n t l y ,  f o r the Canadian these s t u d i e s  situa-  provide a  comprehensive method of i n v e s t i g a t i n g the e f f e c t s o f new i n f o r m a t i o n on s e c u r i t y p r i c e s . used i n the aforementioned Fama, F i s h e r , Jensen study as w e l l .  The a n a l y s i s  studies,  and R o l l  of r e s i d u a l s  originally  developed by  ( 2 ) , w i l l be u t i l i z e d  i n this  CHAPTER I I THE E F F I C I E N T MARKET HYPOTHESIS An  efficient  m a r k e t was d e f i n e d  t i o n as a market i n which p r i c e s f u l l y information.  Investors  consistently  to realize  using  this  returns  i n the previous  reflect  sec-  a l l available  information  cannot  expect  i n e x c e s s o f t h o s e t o be  obtained  u n d e r e q u i l i b r i u m c o n d i t i o n s , a s new  reaching  t h e market i s q u i c k l y impounded i n s e c u r i t y p r i c e s . ^ Investors,  buy  and s e l l  alter  tion patterns. portfolio the  both p r o f e s s i o n a l s and i n d i v i d u a l s ,  securities f o r several  t h e i r holdings  "publicly  reasons,  Firstly  due t o c h a n g e s i n t h e i r d e s i r e d  they consump-  S e c o n d l y , a l t e r a t i o n s may be a r e s u l t o f  rebalancing  operations, r e f l e c t i n g 2  investors' r i s k preferences.  may f e e l  information  Finally,  a change i n the investor  t h a t he p o s s e s s e s s p e c i a l i n f o r m a t i o n  which i f  a v a i l a b l e " w o u l d c a u s e a change i n t h e e q u i l i b r i u m  price of securities.  Such i n v e s t o r s would s e l l  s e c u r i t i e s of  S e e (3) f o r t e s t s a n d e m p i r i c a l w o r k - e v i d e n c e s u g g e s t i n g t h a t t h e e f f i c i e n t m a r k e t s h y p o t h e s i s i s an accurate d e s c r i p t i o n of p r i c e behaviour i n the s e c u r i t i e s market. i  2  These r e a s o n s were f i r s t  6  s u g g e s t e d by S c h o l e s (12).  7  firms  which they  believed  of firms which they of this  this  keen  cient  Since  being  competition  on t h e b a s i s  by i n v e s t o r s ,  commodity.  among i n v e s t o r s t h a t  to predict that  securities  to i n f o r m a t i o n  realized  i s a highly sought-after  m a r k e t model  and buy  the e a r l y access  i n abnormal r e t u r n s  such i n f o r m a t i o n  overvalued  b e l i e v e d t o be u n d e r v a l u e d  information.  may r e s u l t  t o be  leads  It is  the e f f i -  the average value  o f any  3  new i n f o r m a t i o n  i s very  any i n v e s t o r o b t a i n s generate  abnormal  Since the  information  returns  there  cated  to research w i l l Thus  i t i s u n l i k e l y that  which would  are s u b s t a n t i a l c o s t s  investors with  4 value.  Thus  c o n s i s t e n t l y over  findings of information  sional  of  small.  o f value,  allow  him t o  the long run.  associated  i t may be t h a t  with profes-  l a r g e sums o f money w h i c h c a n be have  the trades  first  access  o f mutual  t o new  funds  5  may  allo-  information contain  3  I t i s t h i s c o n s t a n t s t r i v i n g f o r more i n f o r m a t i o n which plays a major r o l e i n a s s u r i n g that s e c u r i t y p r i c e s reflect a l l publicly available information. A l t h o u g h the m a r g i n a l r e s e a r c h e r ' s work i s o f v e r y s m a l l v a l u e , r e s e a r c h e r s as a w h o l e p l a y a f u n d a m e n t a l r o l e i n m a r k e t e f f i c i e n c y .  4 P o s s i b l y p r o f e s s i o n a l i n v e s t o r s a r e more w i l l i n g t o s p e n d l a r g e amounts o f money t o a c q u i r e new i n f o r m a t i o n , as they can r e g a i n t h e expenses v i a s l i g h t l y b e t t e r p o r t f o l i o p e r f o r m a n c e when l a r g e amounts a r e i n v e s t e d . ^Mutual fund t r a d i n g r e p o r t s a r e examined by t h i s study because they r e p r e s e n t the o n l y p r o f e s s i o n a l t r a d i n g r e p o r t e d on a s y s t e m a t i c b a s i s .  8  more i n f o r m a t i o n vestors. mation,  of value  In c o n j u n c t i o n the less  ing  sources  of individual i n -  the large cost  t o t h e U.S. may  to use i n d i r e c t activity  with  stringent corporate  Canada as compared tors  than the t r a d e s  o f new  infor-  r e p o r t i n g laws o f  force  individual  of information  of professional investors.^  such  inves-  as t h e t r a d -  As a r e s u l t , t h e  efficient  market h y p o t h e s i s  w o u l d p r e d i c t t h a t when t h e  formation  about mutual  trading activity  fund  licly  a v a i l a b l e " the p r i c e o f the s e c u r i t i e s  funds  should  (if  change b y t h e e x p e c t e d  any) c o n t a i n e d  value  the  i n mutual  efficient  maintains  a systematic  trading reports  the adjustment  p r i c e response  information w i l l hypothesis.  fund  markets h y p o t h e s i s ,  that  i s made "pubtraded  by mutual  o f the i n f o r m a t i o n  i n the t r a d i n g reports.  A l t h o u g h p r i c e changes i n response contained  in-  t o any i n f o r m a t i o n i s consistent  the h y p o t h e s i s  should  be i n c o n s i s t e n t w i t h  However, a s y s t e m a t i c  i n addition  be i n s t a n t a n e o u s .  over a l o n g p e r i o d  with  o f time  the e f f i c i e n t  Hence t o new  market  p r i c e movement a f t e r t h e  I n d i v i d u a l i n v e s t o r s may f e e l t h a t t h e y c a n g a i n some o f t h e b e n e f i t s o f t h e l a r g e e x p e n d i t u r e s i n c u r r e d by p r o f e s s i o n a l i n v e s t o r s by e m p l o y i n g a f o l l o w - t h e - l e a d e r s t r a t e g y w i t h r e s p e c t t o mutual funds. 7  S y s t e m a t i c p r i c e movement i n r e s p o n s e t o a s i n g l e p i e c e o f new " p u b l i c l y a v a i l a b l e " i n f o r m a t i o n w o u l d i m p l y t h a t i n v e s t o r s c o u l d e a r n a b n o r m a l r e t u r n s u s i n g o n l y "publ i c l y available" information.  9  date t h a t t h e t r a d i n g r e p o r t becomes " p u b l i c l y a v a i l a b l e " may have a n o t h e r e x p l a n a t i o n . mation with  prior  P o s s i b l y t h e new i n f o r -  t o the t r a d i n g r e p o r t s  the t r a d i n g r e p o r t  information.  i s correlated  In such a c a s e , the  s y s t e m a t i c p r i c e movement w o u l d r e f l e c t t h e market's  effi-  c i e n t p r i c e adjustment t o a s e r i e s o f c o r r e l a t e d p i e c e s o f information.  Hence s y s t e m a t i c p r i c e movements do n o t  n e c e s s a r i l y i m p l y market i n e f f i c i e n c y . I f mutual fund t r a d i n g r e p o r t s  trigger intensive  r e s e a r c h on t h e f i r m s o f the s e c u r i t i e s t r a d e d , highly possible  i t is  t h a t s y s t e m a t i c p r i c e movements a r e i n  response t o a c o r r e l a t e d s e r i e s o f new i n f o r m a t i o n , the c o n c l u s i o n The  b e i n g t h a t t h e market i s  above d i s c u s s i o n  efficient.  o f the e f f i c i e n t market hypo-  t h e s i s suggests s e v e r a l t e s t a b l e i m p l i c a t i o n s . s e c u r i t y returns  with  Firstly,  s u r r o u n d i n g t h e date when mutual fund t r a d -  i n g a c t i v i t y becomes " p u b l i c l y a v a i l a b l e " can be a n a l y z e d t o determine t h e e x t e n t o f t h e p r i c e adjustment as a r e s u l t o f t h i s new i n f o r m a t i o n .  The e f f i c i e n t market h y p o t h e s i s would i  Fama, F i s h e r , Jensen and R o l l (2) use t h i s argument t o account f o r the apparent s y s t e m a t i c p r i c e movement p r i o r t o the date when a s t o c k s p l i t i s announced.  10  maintain tition  t h a t the adjustment would be small as the compe-  f o r new  i n f o r m a t i o n would p r e c l u d e  s i g n i f i c a n t amounts of new q adjustment  o f p r i c e s may  w i t h theory m a i n t a i n i n g instantaneous.  information.  the  f i n d i n g of  A l s o the speed o f  be an i n d i c a t o r o f market  t h a t the adjustment would be  efficiency almost  Another i n t e r e s t i n g e m p i r i c a l q u e s t i o n i s  whether or not the value  o f i n f o r m a t i o n contained  i n the  r e p o r t s i s a f u n c t i o n o f the s i z e " ^ o f the t r a n s a c t i o n r e ported.  T h i s being s u b j e c t to the e a r l i e r r e s e r v a t i o n of c o r r e l a t i o n i n the i n f o r m a t i o n flow. S i z e f o r the purposes o f t h i s study net percentage of c a p i t a l i z a t i o n t r a d e d .  i s d e f i n e d as  serial  the  CHAPTER I I I THE DATA  The F i n a n c i a l Post  publishes q u a r t e r l y a l i s t of  s e c u r i t i e s t r a d e d by mutual f u n d s , l i s t i n g t h e number o f shares p u r c h a s e d and the number o f s h a r e s s o l d f o r each s e c u r i t y traded.  The r e p o r t s cover the t r a d i n g a c t i v i t y  o f some 95 p e r c e n t  (by n e t a s s e t v a l u e ) o f a l l Canadian  mutual f u n d a c t i v i t y .  These r e p o r t s a r e p u b l i s h e d on a v e r -  age n i n e weeks a f t e r the t e r m i n a t i o n o f each c a l e n d a r ter.  T h i s d a t a was c o l l e c t e d f o r 26 c o n s e c u t i v e  quarters,  commencing w i t h t h e t h i r d q u a r t e r i n 1965 and e n d i n g the l a s t q u a r t e r o f 1971.  In a l l ,  quar-  with  3,924 " q u a r t e r - t r a n s -  a c t i o n s " * i n v o l v i n g 504 d i f f e r e n t s e c u r i t i e s were  compiled.  F o r each s e c u r i t y t r a d e d , t h e t o t a l number o f o u t s t a n d i n g shares was a l s o c o l l e c t e d .  The number o f o u t s t a n d i n g  s h a r e s p l u s the t r a d i n g volume f i g u r e s p r o v i d e t h e r e q u i r e d d a t a f o r the c a l c u l a t i o n o f t h e r e l a t i v e s i z e o f mutual funds' t r a d i n g a c t i v i t y i n each s e c u r i t y .  T h i s s t u d y uses  •""Each time a s e c u r i t y was l i s t e d i n t h e q u a r t e r l y r e p o r t s i t was counted as a q u a r t e r - t r a n s a c t i o n . 2 Toronto  Outstanding  Stock  c a p i t a l i z a t i o n f i g u r e s appear i n the  Exchange  Review.  11  12  t h e same s i z e v a r i a b l e  as  balance  Shares  PI0S)  of Outstanding  and  i s defined  and  TS  are  the  t o t a l number o f s h a r e s ity  study,  (hereinafter  T  P  C  A  T  P  total  Percent  referred  Im-  to  as  sold,  outstanding  (1)  S  number o f s h a r e s respectively,  d u r i n g a q u a r t e r by m u t u a l  of shares  (1)  as:  PIOS = where TP  the Evans  funds,  a t t h e end  A l s o c a l c u l a t e d was  and  o f the  purchased  of a given CAP  and  secur-  i s t h e number  quarter.  a measure o f the e x t e n t  to which  4 mutual funds tend Stoll  (9)  t o as PNI)  to act together,  Percentage and  defined PNI  and  Net  Imbalance^  c a l l e d by  Kraus  (hereinafter  and  referred  as: =  T h i s m e a s u r e was Crockett ( 5 ) .  T  P  ^  (2)  T S  originally  p r o p o s e d by  Friend,  Blume  ^A v a l u e o f PNI e q u a l t o 1 i n d i c a t e s t h a t m u t u a l f u n d s w e r e i n c o m p l e t e a g r e e m e n t as a l l m u t u a l f u n d a c t i v i t y i n t h e s e c u r i t y was b u y i n g a c t i v i t y , a v a l u e e q u a l t o - 1 i n d i c a t e c o m p l e t e s e l l i n g a g r e e m e n t and a v a l u e o f 0 i n d i c a t e s no c o n s e n s u s among t h e m u t u a l f u n d s . ^ T h i s m e a s u r e was o r i g i n a l l y s u g g e s t e d by K r a u s a n d S t o l l (9) and was m o d i f i e d by E v a n s ( 1 ) . I t i s the m o d i f i e d v e r s i o n which i s employed i n t h i s s t u d y .  13  where TP and TS a r e d e f i n e d as above and GV i s e q u a l t o TP p l u s TS. From t h i s l a r g e sample o f q u a r t e r t r a n s a c t i o n s , two s m a l l e r s u b s e t s were s e l e c t e d on the b a s i s o f PIOS and t h e i r i n v o l v e m e n t i n the f o l l o w i n g q u a r t e r ' s fund t r a d i n g a c t i v i t y .  mutual  The f i r s t subset was s e l e c t e d  u s i n g t h e c r i t e r i a t h a t t h e a b s o l u t e v a l u e o f PIOS s h o u l d be g r e a t e r t h a n .01 (more than one p e r cent o f c a p i t a l i z a t i o n traded)  and t h a t t h e s e c u r i t y s h o u l d n o t be t r a d e d  by mutual funds i n the f o l l o w i n g q u a r t e r . ^  The random  sample o f e l i g i b l e s e c u r i t y q u a r t e r - t r a n s a c t i o n s c o m p r i s e s 72 o b s e r v a t i o n s when the mutual funds were n e t s e l l e r s o f more than 1 p e r cent o f t h e f i r m ' s o u t s t a n d i n g shares the q u a r t e r , and 64 o b s e r v a t i o n s purchasers  during  when t h e funds were n e t  of more than 1 p e r cent o f the f i r m ' s  outstanding  shares. 7  The second subset  was chosen u s i n g t h e c r i t e r i a  the a b s o l u t e v a l u e o f PIOS s h o u l d be l e s s than .005  that  (less  The i n f o r m a t i o n i s r e p o r t e d , on a v e r a g e , n i n e weeks a f t e r t h e end o f the t r a d i n g q u a r t e r . Since t h i s s t u d y i s concerned w i t h t h e i n f o r m a t i o n r e l a t e d p r i c e b e h a v i o u r around the r e p o r t i n g d a t e , t h e r e s t r i c t i o n on t r a d i n g d u r i n g the r e p o r t i n g q u a r t e r c o n t r o l s f o r p r i c e - p r e s s u r e e f f e c t s as d i s cussed by S c h o l e s ( 1 2 ) , among o t h e r s . 7 C h o o s i n g two s u b s e t s w i t h d i f f e r i n g p r o p o r t i o n s o f c a p i t a l i z a t i o n t r a d e d a l l o w s an e m p i r i c a l t e s t o f t h e hypot h e s i s t h a t the v a l u e o f i n f o r m a t i o n c o n t a i n e d i n t r a d e s i s a f u n c t i o n o f the s i z e o f t h e t r a d e .  14  than h p e r cent o f c a p i t a l i z a t i o n t r a d e d ) and t h a t the s e c u r i t y s h o u l d n o t be i n v o l v e d i n the f o l l o w i n g q u a r t e r ' s mutual fund t r a d i n g a c t i v i t y .  A random sample y i e l d e d 71 q u a r t e r -  t r a n s a c t i o n s f o r which the mutual funds were n e t s e l l e r s o f l e s s than h p e r c e n t o f a f i r m ' s o u t s t a n d i n g shares and 69 q u a r t e r - t r a n s a c t i o n s f o r w h i c h the funds were n e t p u r c h a s e r s o f l e s s than h p e r c e n t o f a f i r m ' s o u t s t a n d i n g s h a r e s . F o r each o f t h e s e c u r i t i e s i n v o l v e d i n a q u a r t e r t r a n s a c t i o n o f e i t h e r s u b s e t , p r i c e and d i v i d e n d d a t a were collected.  The date t h a t t h e t r a d i n g r e p o r t s were p u b l i s h e d  i n The Financial  Post  i s t h e date t h a t the i n f o r m a t i o n be-  comes " p u b l i c l y a v a i l a b l e . "  F o r t h e purposes  o f this study, 8  the p u b l i s h i n g d a t e has been d e f i n e d as day 0. P r i c e and d i v i d e n d d a t a on t h e 6 0 t h t r a d i n g day, 30th t r a d i n g day, 2 0 t h t r a d i n g day and 15th to 1 s t t r a d i n g days i n c l u s i v e b e f o r e day 0 were c o l l e c t e d , as w e l l as t h e d a t a on day 0 and on the 1 s t t o 1 5 t h t r a d i n g days i n c l u s i v e ,  20th  t r a d i n g day, 30th t r a d i n g day and 60th t r a d i n g day a f t e r day 0.  Thus 37 p r i c e and d i v i d e n d o b s e r v a t i o n s were c o l l e c t e d  f o r each s e c u r i t y s e l e c t e d . from The Globe g  and Mail  The p r i c e d a t a was o b t a i n e d  and t h e d i v i d e n d d a t a was o b t a i n e d  Day 0 i s d e f i n e d as the date t h a t the i n f o r m a t i o n becomes " p u b l i c l y a v a i l a b l e " and i s u n i f o r m a c r o s s each q u a r t e r - t r a n s a c t i o n , independent o f i t s c h r o n o l o g i c a l time.  15  from The  Financial  In a d d i t i o n observations,  Post's  yearly dividend  to c o l l e c t i n g the  the v a l u e s o f the  record.  37 p r i c e and  dividend  four Toronto Stock Exchange 9  i n d i c e s on each o f the  37  were obtained from the  Toronto  and  days were a l s o c o l l e c t e d .  The four i n d i c e s are Oils indices.  Stock  the  Exchange  These  Review,  I n d u s t r i a l , Gold, Base Metal  CHAPTER IV METHODOLOGY  One o f t h e major problems a s s o c i a t e d w i t h t h e a n a l y s i s of s e c u r i t y r e t u r n s vary  across  time i s t h a t economic c o n d i t i o n s  from p e r i o d t o p e r i o d .  Since  d i f f e r i n g economic  conditions  tend t o obscure the p r i c e e f f e c t s o f o t h e r s p e c i f i c k i n d s o f i n f o r m a t i o n , a method o f a b s t r a c t i n g from g e n e r a l movements must be found.  market  The market model o f s e c u r i t y r e -  t u r n s p r o p o s e d by Sharpe (13,14) i s such a method. model e x p r e s s e s t h e r e t u r n on a s e c u r i t y as a l i n e a r  This func-  t i o n o f t h e r e t u r n on t h e market as:"'" R.  = a.  + g.R  M  + a.  (3)  th where Rj i s t h e r e t u r n on the j 2 of the market,  s e c u r i t y , R^ i s t h e r e t u r n  and B. a r e parameters unique t o s e c u r i t y  j and £. i s a random d i s t u r b a n c e  term w h i c h i s assumed t o  s a t i s f y t h e u s u a l assumptions o f the l i n e a r r e g r e s s i o n  model.  The model implemented i n t h i s s t u d y i s a s l i g h t l y modified  v e r s i o n o f t h e u s u a l market model.  ^"See Fama, F i s h e r , Jensen and R o l l model s p e c i f i c a t i o n .  The l o g o f t h e  (2) f o r t e s t o f  2 The r e t u r n on a market i n d e x i s t y p i c a l l y used as a p r o x y f o r market r e t u r n .  17  return on a security i s expressed as a linear function of the log of return on four^ market indices^ and i s defined as: 4  In R. = 3  where R. i s the return  a.  +  5  J  [ l n  E g  k=l  3  on the j  th  R  k+ ]  (4)  Z .  J K  3  security, 7 _  Sjk's are parameters unique to security j ,  6  a . and the 1  the R^'s  are  the return on the four Toronto Stock Exchange indices (Indust r i a l s , Golds, Base Metals and Oils) and Z.  i s a random distur^  bance term which i s assumed to s a t i s f y the usual of the linear regression model.  S p e c i f i c a l l y , a.  assumptions has zero  3  The four indices used are the Toronto Stock Exchange's Industrial, Gold, Base Metal and O i l Indices. 4  A s i m i l a r approach was employed by Evans (1). "'The logarithmic (natural logs) form was used for two reasons. F i r s t l y , the d i s t r i b u t i o n of the log of R. i s more nearly symetric than the d i s t r i b u t i o n of R-, r e s u l t i n g i n fewer estimation problems. Secondly, Fama, Fisher, Jensen and Roll (2) found that when least squares i s used to estimate a and g's, the residuals conform well to the l i n e a r regression model. ^Price r e l a t i v e s were a c t u a l l y used instead of returns. This f a c i l i t a t e s the use of the logarithmic formulation. The price r e l a t i v e equals R. = t + 1 „ " f 1 = R + 1 t where P , i s the price of a security at time t+1, D -i i s the dividend paid ( i f any) during the period, and P i s the price at time t . Daily c l o s i n g prices were used. The log of the r e l a t i v e has an economic i n t e r p r e t a t i o n as the rate of return over the period, assuming continuous compounding. p  n  7 Using time series data of security returns  (R..) and  18  e x p e c t a t i o n and c o n s t a n t  v a r i a n c e , s u c c e s s i v e l^ 's are  s e r i a l l y independent and are u n c o r r e l a t e d w i t h the market indices  (Rj,) .  to c a p t u r e  The market model as f o r m u l a t e d  here i s assumed  an i n d i v i d u a l s e c u r i t y ' s market r e l a t e d r e t u r n  w h i l e a l l non-market or company s p e c i f i c components o f r e t u r n are impounded i n the d i s t u r b a n c e mal r e t u r n b e h a v i o u r  term C^j)-  Hence any  t h a t i s a r e s u l t o f company  f o r m a t i o n w i l l be ob s e r v e d  i n the b e h a v i o u r  abnor-  specific in-  of the  disturbance  term, £ j . The  residual returns  ( d i s t u r b a n c e term) may  be  defined  R^TJ  (5)  as f o l l o w s : 4 y. where y.  j^  t  = i n R.  t  - [a.  +  ^  6 j k  (ln  i s the d i f f e r e n c e between the a c t u a l r e t u r n on  security j during period  8 t and  the  equilibrium return during period t.  estimated The  e f f e c t s o f company  s p e c i f i c i n f o r m a t i o n w i l l be v i s i b l e i n the b e h a v i o u r  of  y.._.  market r e t u r n s ( R . , ) , l e a s t s q u a r e s was used to e s t i m a t e a. and 6-^'s i n e q u a t i o n (4) f o r each o f the 278 s e c u r i t y "quart e r - t r a n s a c t i o n s " i n the sample. I f i n e f f i c i e n c i e s e x i s t , the p o s s i b i l i t y t h a t t h e e x p e c t e d v a l u e o f the r e s i d u a l w i l l d e v i a t e from zero i s l a r g e . D u r i n g the days s u r r o u n d i n g the time when the i n f o r m a t i o n becomes " p u b l i c l y a v a i l a b l e , " the r e s i d u a l may not conform t o t h e assumption o f t h e r e g r e s s i o n model and, i f i n c l u d e d i n the e s t i m a t i n g s e r i e s , may cause s p e c i f i c a t i o n e r r o r s i n the p a r a m e t e r s . Thus the o b s e r v a t i o n s d u r i n g the f i v e months p r e c e e d i n g and the t h r e e months f o l l o w i n g the r e l e a s e o f the i n f o r m a t i o n were d e l e t e d from the e s t i m a t i n g s e r i e s . The f i v e months p r e c e e d i n g the publ i s h i n g date were removed to a v o i d the p o s s i b i l i t y o f any p r i c e p r e s s u r e e f f e c t s d u r i n g the t r a d i n g q u a r t e r distorting the e s t i m a t i o n . to  P e r i o d t i n t h i s study v a r i e s from one 30 t r a d i n g days.  t r a d i n g day  19  Since  the g e n e r a l e f f e c t s o f new  c o n c e r n i n t h i s study  i n f o r m a t i o n are  and not the e f f e c t s o f t h i s  of  information  on s p e c i f i c s e c u r i t i e s , the e s t i m a t e d  r e s i d u a l returns  averaged on a c r o s s - s e c t i o n a l b a s i s .  The  are  averaged r e s i d u a l  9  return for period  t i s defined N E  U T  w  - J " N =  U  1  as:  it  (6)  3  where N i s the number o f s e c u r i t y q u a r t e r - t r a n s a c t i o n s i n the , 10 sample. In a d d i t i o n to c a l c u l a t i n g the average r e s i d u a l r e t u r n f o r each time p e r i o d , the cummulative r e s i d u a l r e t u r n over the time p e r i o d s t u d i e d was  calculated.  i s termed an "abnormal performance i n d e x " to as API)  and may  be d e f i n e d  Such a s e r i e s  (hereinafter referred  as:  M API  M  =  Z U T=-60  (7)  T  where M i s d e f i n e d i n r e l a t i o n t o the day  t h a t the  infor-  mation becomes " p u b l i c l y a v a i l a b l e , " o r , a l t e r n a t i v e , as  t 0). J  (day  i s always d e f i n e d r e l a t i v e  t o the r e p o r t i n g date  "^The averaged r e s i d u a l r e t u r n s were c a l c u l a t e d a f t e r d i v i d i n g each o f the two p r e v i o u s l y - m e n t i o n e d subsets i n t o two s m a l l e r samples. One sample c o n t a i n s the n e t buy q u a r t e r t r a n s a c t i o n s i n v o l v i n g l e s s than .51 of the f i r m ' s c a p i t a l i z a t i o n , one c o n t a i n s the net s e l l s , a n o t h e r c o n t a i n s the n e t buy q u a r t e r - t r a n s a c t i o n s i n v o l v i n g more than 1% o f the f i r m ' s c a p i t a l i z a t i o n and the l a s t one c o n t a i n s the net s e l l s . Thus, f o u r s u b s e t s were c r e a t e d .  20  "day  0."  An i n t e r e s t i n g i n t e r p r e t a t i o n o f API  was s u g g e s t e d  by S c h o l e s (12). I t can be r e g a r d e d as the r e t u r n an i n v e s tor  w o u l d r e a l i z e i f he had c o n t r a c t e d  t o r e c e i v e o n l y the  non-market r e t u r n o f t h e p o r t f o l i o o f s e c u r i t i e s  contained  i n each sample. The  above methodology w i l l  enable t h i s study  v e s t i g a t e t h e e f f e c t ( i f any) o f new i n f o r m a t i o n i n m u t u a l fund t r a d i n g r e p o r t s . capture  to i n -  contained  The r e s i d u a l terms  will  any abnormal r e t u r n b e h a v i o u r a s s o c i a t e d w i t h t h e  d i s c l o s u r e o f mutual t r a d i n g i n f o r m a t i o n .  The U^. w i l l  mea-  sure t h e abnormal r e t u r n s from p e r i o d t o p e r i o d and t h e API w i l l provide o v e r time.  a measure o f t h e c u m u l a t i v e The API w i l l  abnormal r e t u r n s  i n d i c a t e t h e average abnormal r e -  t u r n s an i n v e s t o r would have r e a l i z e d i f he had p u r c h a s e d the s t o c k a t some p o i n t i n time and s o l d them a t some l a t e r point  (gross o f t r a n s a c t i o n c o s t s ) .  CHAPTER V EMPIRICAL RESULTS  The  i m p l i c a t i o n s o f t h e e f f i c i e n t market  w i l l be t e s t e d i n t h i s s e c t i o n .  hypothesis  The f i r s t t e s t w i l l  consist  o f t h e c a l c u l a t i o n o f t h e average r e s i d u a l r e t u r n s , t h e abnormal performance i n d e x and t h e s t a n d a r d  d e v i a t i o n o f the  r e s i d u a l r e t u r n s f o r each day r e l a t i v e t o t h e p u b l i s h i n g day.  In a d d i t i o n , the f r a c t i o n of negative  is also calculated.  r e s i d u a l values  The e f f i c i e n t market h y p o t h e s i s  d i c t s t h a t any p r i c e adjustment s h o u l d o c c u r  pre-  instantaneously  thus e l i m i n a t i n g t h e p o s s i b i l i t y o f i n v e s t o r s , u s i n g l i c l y a v a i l a b l e " information, earning  "pub-  abnormal r e t u r n s .  How-  e v e r , as p o i n t e d out e a r l i e r , a s y s t e m a t i c movement o f t h e r e s i d u a l r e t u r n s only suggests the p o s s i b i l i t y of i n e f f i c i e n c i e s but does n o t c o n f i r m t h e i r The  existence.  methodology o f t h e p r e v i o u s  s e c t i o n was a p p l i e d  to t h e 278 q u a r t e r - t r a n s a c t i o n s a f t e r t h i s sample had been subdivided  i n t o f o u r sub-samples.*  The sample was  segregated  on t h e b a s i s o f p e r c e n t a g e o f c a p i t a l i z a t i o n t r a d e d and on the  See  footnote  10, Chapter IV.  21  22  b a s i s o f the q u a r t e r - t r a n s a c t i o n b e i n g a net s e l l buy.  o r net  T a b l e 1 p r e s e n t s the r e s u l t f o r q u a r t e r - t r a n s a c t i o n s  when m u t u a l funds were net p u r c h a s e r s o f l e s s  than h p e r  cent o f a company's c a p i t a l i z a t i o n ; T a b l e 2 p r e s e n t s t h e r e s u l t when mutual funds were net s e l l e r s o f l e s s than h per cent o f a company's c a p i t a l i z a t i o n ; ' T a b l e 3 p r e s e n t s the r e s u l t s  when mutual funds were n e t p u r c h a s e r s o f more  than 1 per cent o f a company's c a p i t a l i z a t i o n and T a b l e 4 p r e s e n t s the r e s u l t s  when mutual funds were net s e l l e r s o f  more than 1 p e r c e n t o f a company's c a p i t a l i z a t i o n . These t a b l e s summarize the r e s u l t The  first  of the  analysis.  column r e f e r e n c e s the day r e l a t i v e to the p u b l i s h -  i n g d a t e ; column 2 p r e s e n t s the average r e s i d u a l s  (Urr.) ,  column 3 p r e s e n t s the abnormal p r e f e r e n c e i n d e x (API)  followed  by the s t a n d a r d d e v i a t i o n o f the average r e s i d u a l s and f r a c t i o n of negative p r e d i c t i o n 1 t o 4 p r e s e n t the p l o t s  e r r o r s f o r each day.  o f t h e APIs  the Figures  f o r each o f the f o u r  samples. The API  f o r the buys l e s s than  1, F i g u r e 1) s t a r t s the p u b l i s h i n g day after  from a v a l u e o f 0,0  s i x t y days b e f o r e  However, from the day t h a t the  i n f o r m a t i o n becomes " p u b l i c l y .017491.  (Table  (day 0) and r i s e s t o 0,0208 s i x t y days  the p u b l i s h i n g d a t e .  r i s e s by  .5 per c e n t  available"  (day 0 ) , the API  In o t h e r words, an i n v e s t o r who  purchases  TABLE 1 DATA FOR BUYS <.5%  DAY -3 0 -20 -15 -14 -13 -12 -11 -10 - 9 - 8 - 7  RESIDUALS  API  (69 TRADES)  S.D. OF RESIDUALS  FRACTION NEGATIVE  - 1  0.01700706 0.00254916 -0.00351869 -0.00136763 0.00539494 -0.00314722 -0.00445990 -0.00462693 -0.00001750 -0.00064729 0.00039908 -0.00189296 -0.00389117 0.00272234 -0.00424555 0.00469341 0.00063014  0.01700706 0.01955621 0.01603752 0.01466990 0.02006484 0.01691762 0.01245772 0.00783079 0.00781329 0.00716599 0.00756508 0.00567212 0.00178098 0.00450328 0.00025773 0.00495114 0.00558127  0.08635147 0.05507232 0.03721555 0.01650077 0.02449351 0.03592209 0.02252960 0.02213993 0.01745364 0.02197565 0.01988939 0.01917287 0.01959960 0.02396635 0.03046453 0.02962745 0.03007776  0.43 0.41 0.58 0.46 0.45 0.52 0.55 0.48 0.51 0.52 0.62 0.51 0.59 0.52 0.48 0.45 0.59  0  -0.00231557  0.00326570  0.01730960  0.55  1  -0.00200711 -0.00366915 0.00115534 -0.00579443 -0.00106123 0.00503649 -0.00333040 0.00226473 -0.00196526 -0.00179930 0.00605153 -0.00028565 0.00036226 -0.00010110 0.00340286 0.00349852 0.00022062 0.01551243  0.00125858 -0.00241057 -0.00125522 -0.00704965 -0.00811087 -0.00307438 -0.00640478 -0.00414005 -0.00610531 -0.00790461 -0.00185309 -0.00213873 -0.00177647 -0.00187757 0.00152529 0.00502381 0.00524443 0.02075685  0.02283154 0.01676413 0.02462704 0.01961305 0.03249728 0.02330141 0.02251926 0.02098338 0.01983270 0.04099449 0.03990309 0.01730587 0.01779130 0.01637287 0.02106362 0.04114929 0.05681460 0.10425699  0.52 0.55 0.52 0.62 0.49 0.46 0.57 0.43 0.59 0.42 0.49 0.48 0.46 0.42 0.41 0.43 0.52 0.45  -  6  - 5 - 4 - 3 -  2  2  3 4 5 6  7 8 9 10 11 12 13 14 15 20 30 60  TABLE 2 DATA FOR SELLS <.5%- (71 TRADES)  DAY  RESIDUAL  API  S.D. OF RESIDUALS  FRACTION NEGATIVE  -3 0 -2 0 -15 -14 -13 -12 -11 -10 - 9 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1.  0.01883212 0.00756704 0.00458829 -0.00068381 0.00016688 0.00342122 -0.00703876 0.00076451 -0.00177598 0.00167187 0.00768181 -0.00411364 0.00143955 -0.00147511 -0.00138670 -0.00110380 -0.00288657  0.01883212 0.02639916 0.03098745 0. 03030364 0.03047052 0.03389174 0.02685298 0.02761749 0.02584151 0.02751338 0.03519519 0.03108155 0.03252110 0.03104599 0.02965929 0.03076309 0.02787652  0.11596266 0.06077943 0.05261097 0.02280519 0.01981027 0.03766895 0.02351599 0.03145003 0.03068079 0.02654762 0.02668534 0.02039453 0.02066826 0.02340262 0.02123473 0.02810166 0.02734012  0.41 0.48 0.44 0.48 0.54 0.52 0.65 0.48 0.63 0.39 0.41 0.54 0.48 0.39 0.56 0.45 0.65  0  0.00503765  0.03291417  0.02214389  0.37  1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 20 30 60  -0.00139812 0.00132364 0.00344213 -0.00016982 -0.00119093 -0.00386009 0.00449911 0.00400635 -0.00117455 0.00087992 -0.00028367 0.00258380 -0.00158214 -0.00236248 -0.00541812 -0.00114709 0.00197736 -0.02079549  0.03151605 0.03283968 0.03628181 0.03611200 0.03492107 0.03106098 0.035560.0 0.03956645 0.03839190 0.03927182 0.03898815 0.04157195 0.03998981 0.03762733 0.03220921 0.03106212 0.03303949 0.01224399  0.02518797 0.02375467 0.01811880 0.02907861 0.02673435 0.03339327 0.02250652 0.02444840 0.02056179 0.02980136 0.02416601 0.02031546 0.02187825 0.02489848 0.02129969 0.03858364 0.07238082 0.12356547  0.52 0.51 0.39 0.48 0.56 0.61 0.41 0.46 0.52 0.44 0.55 0.45 0.52 0.51 0.56 0.51 0.41 0.49  TABLE 3 DATA FOR BUYS >1%  (64 TRADES)  S.D. OF  FRACTION  RESIDUALS  NEGATIVE  DAY  RESIDUAL  API  -30 -20 -15 -14 -13 -12 -11 -10 - 9 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1  0.01731868 0.00856176 0.00434699 0.00277747 -0.00217537 -0.00086485 -0.00384963 -0.00507104 -0.00195614 -0.00015550 0.00463010 0. 00263630 -0.00209028 -0.00046005 0.00526354 -0.00220519 -0.00149798  0.01731868 0.02588043 0.03022743 0.03300489 0.03082952 0.02996467 0.02611504 0.02104400 0.01908786 0.01893236 0.02356246 0.02619876 0.02410848 0.02364843 0.02891197 0.02670678 0.02520880  0.12735217 0.06678567 0.05520237 0.02244667 0.02879809 0.02865840 0.02294684 0.02223914 0,02276094 0.02823260 0.02592978 0.02481457 0.02388122 0.02362101 0.02878783 0.02363963 0.02207682  0.38 0.42 0.58 0.45 0.50 0.56 0.58 0.67 0.56 0.47 0.44 0.42 0.52 0.53 0.47 0.56 0.53  0  0.00530009  0.03050889  0.02721044  0.47  1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 20 30 60  -0.00013600 -0.00412656 0.00515346 -0.00610339 -0. 00318350 0.00293038 -0.00208339 -0.00361884 -0.00316142 0.00165104 -0.00253539 0.00075932 -0.00260311 -0.00059128 0.00467407 -0.00778001 0.00579639 -0.00399654  0.03037289 0.02624633 0.03139979 0.02529640 0.02211290 0.02504328 0.02295989 0.01934105 0.01617963 0.01783067 0.01529529 0.01605461 0.01345150 0.01286022 0.01753429 0.00975428 0.01555067 0.01155414  0.02974554 0.03120975 0.02518629 0.03229820 0.02700366 0.02744620 0.02111214 0.03881546 0.02836756 0.02390649 0.02654562 0.02492798 0.02201768 0.02570937 0.02310118 0.05725984 0.07410582 0.11552134  0.47 0.53 0.52 0.56 0.53 0.42 0.52 0.59 0.59 0.50 0.44 0.53 0.59 0.47 0.42 0.63 0.55 0.55  26 TABLE 4 DATA FOR SELLS >1% (72 TRADES)  API  S.D. OF RESIDUALS  FRACTION NEGATP  -0.03537766 -0.00107098 -0.01308125 0.00132280 -0.00601331 -0.00324809 0,00270051 -0.00288803 0.00017878 -0.00184441 -0.00237481 -0.00210056 -0.00398761 -0.00132631 -0.00397421 0.01205889 0.00093252  -0.03537766 -0.03644864 -0.04952989 -0.04820709 -0.05422040 -0.05746849 -0.05476798 -0.05765601 -0.05747723 -0.05932164 -0.06169645 -0.06379702 -0.06778462 -0.06911094 -0.07308515 -0.06102626 -0.06009374  0.17581373 0.06289776 0.06951880 0.02863267 0.03516838 0.02420132 0.04884645 0.03743812 0.03433436 0.03522591 0.02731713 0.03190217 0.03792279 0.03407135 0.03456781 0.04434069 0.02877026  0.53 0.47 0.61 0.46 0.54 0.57 0.49 0.58 0.58 0.54 0.60 0.56 0.63 0.46 0.57 0.50 0.51  0  0.00557798  -0.05451576  0.04034527  0.51  1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 20 30 60  0.00012483 0.00359889 -0.00447575 0.00072284 0.00444806 -0.00723863 -0.00988324 -0.00062010 -0.00370961 -0.00175064 0.00286053 -0.00911433 0.00387163 -0.00022538 -0.00347732 -0.01167857 0.00649859 -0.01563468  -0.05439093 -0.05079205 -0.05526780 -0.05454496 -0.05009689 -0.05733552 -0.06721877 -0.06783887 -0.07154848 -0.07329912 -0.07043859 -0.07955292 -0.07568130 -0.07590668 -0.07938400 -0.09106256 -0.08456397 -0.10019866  0.03546168 0.03216056 0.02890148 0.03255824 0.03316002 0.02417957 0.03100059 0.02675747 0.03104403 0.03152250 0.02604390 0.02485161 0.02957490 0.02603943 0.02690727 0.06410837 0.06549425 0.11342766  0.57 0.47 0.51 0.56 0.54 0.57 0.60 0.47 0.61 0.54 0.51 0.68 0.53 0.47 0.57 0 . 63 0.47 0.58  DAY  RESIDUAL  -30 -20 -15 -14 -13 -12 -11 -10 - 9 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1  CO OC Z 5  VU J  or  C O C O  -.05U  L U  o X LU  -.10  -60  -40  -20  DAY F I G . I .  A P I (  6  F O R 9  RELATIVE  B U Y S  T R A D E S  )  I N V O L V I N G  0  20  40  TO PUBLISHING L E S S  T H A N  60  DATE  . 5 %  O F  C A P I T A L I Z A T I O N .  C O  z or h U J  or  in L U  o X L U  -60  F I G .  2.  -40 -20 0 20 40 DAY RELATIVE TO PUBLISHING DATE A P I ( 7 1  F O R  S E L L S  T R A D E S )  I N V O L V I N G  L E S S  T H A N  .5%  O F  60  C A P I T A L I Z A T I O N  00  FIG.3.  A P I ( 6 4  FOR BUYS TRADES)  INVOLVING MORE THAN  1 %  OF CAPITALIZATION  ho  -60  -40  -20  0  DAY RELATIVE FIG.4.  API  FOR SELLS  ( 72 TRADES)  20  40  60  TO PUBLISHING DATE  INVOLVING MORE THAN 1% OF CAPITALIZATION  31  these s e c u r i t i e s on day  0 and  s o l d them s i x t y days l a t e r  would have earned an abnormal or excess r e t u r n of 1.7491 per cent.  C l e a r l y , t h i s i s e v i d e n c e w h i c h s u g g e s t s the  o f market i n e f f i c i e n c i e s . included  But when t r a n s a c t i o n c o s t s  the e x t e n t o f the i n e f f i c i e n c y i s not  t o y i e l d i n v e s t o r s ' abnormal r e t u r n s .  great  transaction costs.  c i e n t markets The 2, F i g u r e  API  From day  s h o r t on day  An  and  a v a l u e o f 0,0  effi-  (Table  r i s e s t o 0,01224 s i x t y days a f t e r  0 to day  i n v e s t o r who  0 and  cent  s i x t y days p r i o r to  60 the API had  falls  from .00503  s o l d these s e c u r i t i e s  c o v e r e d h i s p o s i t i o n 60 days l a t e r  would have r e a l i z e d a r e t u r n of 2.582 per action costs.  ineffi-  tends to s u p p o r t the  f o r the s e l l s l e s s than .5 per  the p u b l i s h i n g day  to -0.02079.  enough  hypothesis.  2) s t a r t s ^rom  t h i s day.  This  are  Thus, the market  appears e f f i c i e n t w i t h i n the bounds o f the known ciency  presence 2  cent before  trans-  A g a i n i t appears t h a t the t r a d i n g r e p o r t s  do  ''The commission on a round t r i p t r a n s a c t i o n would be 4.02% f o r a $20.00 s t o c k . The p e r c e n t a g e c o s t o f t r a n s a c t i o n s i n c r e a s e s as the p r i c e o f the s t o c k d e c r e a s e s and d e c r e a s e s as the p r i c e of the s t o c k i n c r e a s e s . 3  T h i s i s not to suggest t h a t the i n f o r m a t i o n i s valueless. For an i n v e s t o r who has a c e r t a i n amount o f funds t o commit w i l l pay t r a n s a c t i o n s c o s t r e g a r d l e s s o f w h i c h s t o c k s he p u r c h a s e s . Thus knowing t h i s i n f o r m a t i o n he can r e a l i z e a r e t u r n i n excess of the e x p e c t e d e q u i l i b r i u m r e t u r n minus t r a n s a c t i o n c o s t s . In t h i s sense he i s a b l e t o earn abnormal r e t u r n s .  32  c o n t a i n some i n f o r m a t i o n but t h e i n f o r m a t i o n i s n o t s u f f i c i e n t t o y i e l d i n v e s t o r s abnormal r e t u r n s a f t e r t r a n s a c t i o n  4 costs.  T h i s f i n d i n g i s a g a i n i n s u p p o r t o f the e f f i c i e n t  market  h y p o t h e s i s w h i c h m a i n t a i n s t h a t t h e v a l u e o f new i n -  f o r m a t i o n i s v e r y low as a consequence o f t h e keen  competi-  t i o n f o r new i n f o r m a t i o n . ^ The API f o r buys g r e a t e r than 1 p e r c e n t  (Table  3, F i g u r e 3) s t a r t s a t a v a l u e o f 0.0 s i x t y days p r i o r t o the p u b l i s h i n g day and r i s e s t o quent t o day 0.  subse-  However, t h e API f a l l s from .030508 on day  0 t o .011554 on day 60. ing  .011554 s i x t y days  Thus i n v e s t o r s a c t i n g on the p u b l i s h -  day would have l o s t 1.8954 p e r cent i f they had i n v e s t e d  on day 0 and s o l d 60 days l a t e r .  A g a i n , however, t h i s  infor-  m a t i o n i s o f no v a l u e when t r a n s a c t i o n c o s t s a r e c o n s i d e r e d . T h i s f i n d i n g i s i n t e r e s t i n g as p r e v i o u s l y t h e v a l u e o f i n f o r m a t i o n c o n t a i n e d i n mutual f u n d t r a d i n g r e p o r t s was as e x p e c t e d .  That i s , t h e b u y i n g a c t i v i t y o f funds  should  s e r v e as a s i g n a l f o r i n d i v i d u a l i n v e s t o r s t o buy and s i m i l a r l y the s e l l i n g a c t i v i t y o f t h e funds s h o u l d s e r v e as a s i g n a l f o r individual investors to s e l l .  T h i s f o l l o w s from t h e e x p e c t a t i o n  4 See f o o t n o t e 2. A l s o , t h e t r a n s a c t i o n c o s t s on s h o r t s a l e s a r e h i g h e r because o f margin r e q u i r e m e n t s . 5  See Scholes  (12, p. 1 8 3 ) .  33  t h a t the i n s t i t u t i o n a l i n v e s t o r s would have a c c e s s to more i n f o r m a t i o n as they have much more money to spend on ing information.  Thus, the above f i n d i n g s suggest t h a t ,  a v e r a g e , the i n f o r m a t i o n  contained  of the above f i n d i n g may  A possible  c l o s e to the peak of the p r i c e - p r e s s u r e  to the i n f o r m a t i o n  contained  the o b s e r v e d i n c o n s i s t e n c y of a p r i c e - p r e s s u r e  explanation  be t h a t the p u b l i s h i n g day  W h i l e the market may  on  i n mutual fund t r a d i n g  r e p o r t s i s c o u n t e r to e x p e c t a t i o n s .  Evans ( 1 ) .  obtain-  occurs  e f f e c t o b s e r v e d by  be e f f i c i e n t w i t h  respect  i n mutual f u n d t r a d i n g  i n expectation  e f f e c t w h i c h has  may  reports,  be the r e s u l t s  c a r r i e d over from  the  transaction-quarter. The  API  for s e l l s greater  4, F i g u r e 4) s t a r t s a t 0.0 i n g day day. and  and  than 1 per c e n t  (Table  s i x t y days p r i o r to the p u b l i s h -  f a l l s to -.100198 s i x t y days subsequent to  I f i n v e s t o r s had  this  s o l d these s e c u r i t i e s s h o r t on day  c o v e r e d t h e i r p o s i t i o n 60 days l a t e r , t h e y w o u l d have  perienced  an abnormal r e t u r n o f 4.5683 per c e n t over  60-day p e r i o d . inefficiencies.  ex-  the  C l e a r l y , t h i s s u g g e s t s the p r e s e n c e o f market Indeed, even on an a f t e r t r a n s a c t i o n s  b a s i s , the s y s t e m a t i c opportunity  0  p r i c e movement a f f o r d s i n v e s t o r s  to r e a l i z e an abnormal r e t u r n . ^  This  cost an  is a direct  I n v e s t o r s can r e a l i z e an abnormal r e t u r n o n l y i f the share p r i c e i s $16.25 or g r e a t e r . However, i f the share  34  contravention of the e f f i c i e n t market hypothesis which maintains that price mpvements r e s u l t i n g from new should be almost instantaneous.  information  In Figure 4 one can observe  the systematic movement from day 0 to day  60.  Interestingly, t h i s price movement (from day 0 to day 60) i s proceeded by a s i m i l a r period of negative abnormal returns from day -60 to day 0 although the abnormal return i s p o s i t i v e during the period from day -3 to day 0.  One pos-  s i b l e explanation f o r the phenomenon i s that mutual funds do indeed have early access to new  information due to i n e f f i c i e n t  information flows i n the market.  As this information flows  into the marketplace a systematic p r i c e response may  result.  Another p o s s i b i l i t y i s that mutual funds are superior predictors of future p r i c e movements although t h i s p o s s i b i l i t y 7 i s not supported by mutual fund earnings reports.  Perhaps  t h i s behaviour can be explained as a r e s u l t of these  securities  losing favour with investors s i m i l a r to the s o - c a l l e d "two t i e r market" in the U.S.  Unfortunately, none of these  price i s below $16.25, the higher commission on less expensive shares w i l l eliminate abnormal returns after transactions costs. 7  The Financial Times of Canada (October 29, 1973, pp. 24-25) reported that only 11 mutual funds were able to generate returns greater than the TSE i n d u s t r i a l index over the period from October 1, 1968 to September 30, 1973.  35  explanations speculate  can be empirically tested; thus one can only  about the extent  of the influence of each.  Scholes (12) suggested that perhaps the value of the information  i s a function of the size of the transaction.  However, when he tested t h i s hypothesis he found no association between his size variable and subsequent price performance.  This hypothesis w i l l be tested as i t i s quite possible  the i l l i q u i d i t y of the Canadian market may contribute to such a relationship. In an e f f i c i e n t market, prices w i l l . r e f l e c t a l l i n formation  as soon as the information becomes " p u b l i c l y a v a i l -  8  able."  Hence the price adjustment should occur on the pub-  l i s h i n g day (day 0) and be r e f l e c t e d i n the r e s i d u a l return data.  I f the size of a transaction i s a function of the value  of the information then large transactions should be accompanied by large r e s i d u a l returns on day 0. This hypothesis was tested by regression analysis. The r e s i d u a l returns  (dependent variable) on day 0 for a l l  security quarter-transactions were regressed  on the percent-  age of c a p i t a l i z a t i o n trade; the percentage of c a p i t a l i z a t i o n traded being the size variable for the purposes of this study.  For purposes of t h i s study, i t i s assumed that the information becomes " p u b l i c l y a v a i l a b l e " on the publishing day.  36  The r e s u l t i n g f i t t e d equation i s : U.  n J U  =  .0034 (1.979)  +  .0010 PIOS (.013)  where PIOS i s the percentage of the j  R  security  2  = .0000  traded.  Clearly no s t a t i s t i c a l l y s i g n i f i c a n t r e l a t i o n s h i p appears to e x i s t between the price adjustment on day  0 and  size of the transaction.  Thus i t appears that the value of  the information contained  i n mutual fund trading reports i s  not a function of the size of the  the  transaction.  Perhaps, i n addition to the size variable used above, a measure of the degree of unanimity of opinion among the mutual funds may ual returns on day  help to explain the variance  0.  i n the r e s i d -  The variable Percentage Net  Imbalance  (PNI - equation 2) w i l l serve as a measure of mutual funds unanimity of opinion.  When this variable was  added to the  above regression analysis the following r e l a t i o n resulted: U.  n  =  .0034 (1.98)  +  .0831 PIOS - .0031 PNI (.869) (1.366) R  2  = .0000  Again, no s t a t i s t i c a l l y s i g n i f i c a n t r e l a t i o n s h i p i s detected by the regression analysis.  The values in parentheses beneath the equation are t-statistics. A value (value of 2.0) greater than twice i t s standard error i s taken here to be s i g n i f i c a n t .  37  The lack of a s i g n i f i c a n t r e l a t i o n s h i p between the size variable and the unanimity of opinion variable supports the e f f i c i e n t market hypothesis.  The e f f i c i e n t market hypo-  thesis would predict that the value of any new would be small  (this being a result of the keen  among market p a r t i c i p a n t s for new  information competition  information) and not a func-  tion of the size of mutual fund transactions.  The  fact that  the constant term i s not s i g n i f i c a n t implies a higher degree of e f f i c i e n c y .  It implies that prices f u l l y r e f l e c t the i n -  formation contained i n mutual fund trading reports on the day that these reports become " p u b l i c l y a v a i l a b l e " meaning that the information must have been anticipated by the market. If the smaller trades, trades involving less than . 5 per cent of a firm's c a p i t a l i z a t i o n , are motivated  by a  p o r t f o l i o rebalancing considerations,*^ the inclusion of these trades in the above analysis may  obscure the hypothe-  sized r e l a t i o n s h i p s . As a result the above analysis was  re-  peated but this time the smaller trades were deleted from the analysis.  The following two r e l a t i o n s h i p s resulted:  Scholes f i r s t suggested that the smaller transactions may be i n response to p o r t f o l i o rebalancing considerations. However, since most mutual funds w i l l not s e l l short, some of the smaller s e l l transactions may be in response to new information.  38  U  JO  U.  n  =  J U  . 00545 (1.813)  +  .00956 POIS (.103)  T* = .0000  .00543 (1.797)  +  .02048 POIS - .00044 PNI (.125) (. 080)  r  2  = .0001  Once again, none o f the c o e f f i c i e n t s are s i g n i f i c a n t which can be taken as evidence i n support o f the e f f i c i e n t markets  hypothesis. I f the market i s not completely e f f i c i e n t i n a l l  respects, the p o s s i b i l i t y exists that new information may not be f u l l y r e f l e c t e d i n security prices immediately.  Perhaps  the market requires time to evaluate the flow of new information and thus p r i c e s responds i n a delayed fashion to this information.  In addition, i f some investors are able to pro-  cess the information more quickly than others, prices may respond i n a systematic  fashion to new information.  These hypo-  theses may explain the lack of s i g n i f i c a n c e of the above coe f f i c i e n t s as the price adjustment may not occur on day 0 but at some l a t e r date or systematically over many days. The aforementioned hypotheses are tested v i a the u t i l i z a t i o n of the same regression analysis except that the dependent variables the r e s i d u a l returns on day 0 are replaced by the predicted r e s i d u a l returns f o r the period from day 0 to day 60. resulted:  Using a l l the data the following two r e l a t i o n s h i p s  39  API API  j,0-60  -.00989 - .042POIS. (1.350) (.131)  j,0-60  -.00988 - .65057 POIS. + .02329 PNI. (1.361) (1.609) (2.425)  3  3  r  2  = .0000  r  2  = .0212  3  Of the c o e f f i c i e n t s , only the one for PNI i n the second equation i s s i g n i f i c a n t .  Thus i t would appear that  the degree of unanimity of opinions of mutual funds i s of value when searching for possible investment opportunities. This r e s u l t tends to be inconsistent with the e f f i c i e n t market hypothesis  i n two respects.  F i r s t l y , i t would appear that  prices do not instantaneously r e f l e c t information when i t becomes " p u b l i c l y a v a i l a b l e " as i l l u s t r a t e d i n the i n s i g n i f i c a n c e of the c o e f f i c i e n t when residual returns for day 0 were used and the s i g n i f i c a n c e o f the c o e f f i c i e n t when returns over a sixty trading day period were used.  Secondly, i n s i t u a t i o n s  where mutual funds have common expectations, i t appears that they have access to information which i s not currently reflected i n security p r i c e s .  This conclusion i s supported  by the s t a t i s t i c a l s i g n i f i c a n c e of PNI when regressed on A P I  j,0-60'  As done previously, the quarter-transactions involving s e c u r i t i e s which mutual funds traded less than .5 per cent of their c a p i t a l i z a t i o n were dropped from the analysis and the regressions were rerun producing  the following two  40  relationships: API. = 3,u-ou n  A P I  -  fin  n fin ' "  =  J  U  D U  .01563 (1 .477)  .0929 PIOS. (.285)  r  J  = .0006  2  .01476 - .77931 PIOS. + .02768 PNI. (1.668) (1 .363) (1.456) J  3  r Again, none of the regression c o e f f i c i e n t s s i g n i f i c a n t which provides additional  2  = .0163  are s t a t i s t i c a l l y  evidence  i n support  of the e f f i c i e n t market hypothesis. Interestingly,the c o e f f i c i e n t o f PNI loses i t s s i g nificance when the quarter-transactions involving  less than  .5 per cent o f the firm's c a p i t a l i z a t i o n are deleted.  Since  the equation i n Which the c o e f f i c i e n t i s s i g n i f i c a n t explains such a small amount o f the v a r i a t i o n  i n the residual  returns  ( R / = .0212) plus the fact that the sign of the c o e f f i c i e n t of the PIOS i s the opposite of the expected sign, the i n d i cated i n e f f i c i e n c y i s probably very minor. strong evidence which tends to indicate  Thus the only  market i n e f f i c i e n c i e s  i s the large abnormal returns that an astute investor could r e a l i z e by s e l l i n g short the s e c u r i t i e s which mutual funds sold greater than one per cent of the firm's Except for this one s i t u a t i o n ,  capitalization.  the Canadian s e c u r i t i e s market  appear to be e f f i c i e n t within the bounds of known i n e f f i c i e n cies  (transactions costs).  CHAPTER VI CONCLUSION  The purpose of this study was to determine the extent of the security market's e f f i c i e n c y i n r e f l e c t i n g  information  in security p r i c e s .  form of the  S p e c i f i c a l l y the semi-strong  e f f i c i e n t market hypothesis was tested. maintains  This  hypothesis  that s e c u r i t y p r i c e s r e f l e c t a l l "obviously pub-  l i c l y a v a i l a b l e " information and that when new information i s unconvered prices adjust instantaneously to r e f l e c t the present value of t h i s information.  Since new information i s  valuable to investors, the market competition is very keen.  f o r information  As a r e s u l t , the e f f i c i e n t market hypothesis  states that the value of new information w i l l be small as i t i s unlikely that any one analyst w i l l discover some very s i g n i f i c a n t information which was overlooked by a l l other analysts before him. As a consequence o f the less stringent corporate reporting laws i n Canada as compared to the U.S., and of the fact that i n s t i t u t i o n s have larger amounts of funds to devote to research than most i n d i v i d u a l s , i t was argued that the trading a c t i v i t y of mutual funds i s l i k e l y to be i n response to information which, i f "publicly a v a i l a b l e " would r e s u l t i n a 41  42  price adjustment.  Hence i t was  mutual fund trading may  f e l t that the reports of  contain information of value to i n -  dividual investors which could be u t i l i z e d to r e a l i z e abnormal returns.  In addition i t was  suggested that perhaps the  value of the information possessed  by the funds was  a direct  function of the net amount of c a p i t a l i z a t i o n traded and degree of unanimity among mutual funds. the i n e f f i c i e n t information flow  This may  the  be termed  hypothesis.  The r e s u l t s of the preceeding  analyses indicates that  the e f f i c i e n t markets hypothesis does provide a r e l a t i v e l y good d e s c r i p t i o n of the price behaviour of Canadian equity s e c u r i t i e s with respect to the information examined.  In only  one s i t u a t i o n (the s e l l i n g of greater than one per cent of a firm's c a p i t a l i z a t i o n by mutual funds) did the quarterly mutual fund trading reports appear to contain valuable i n f o r mation.  In this case the prices of the s e c u r i t i e s f e l l almost  continuously r e l a t i v e to the market over the e n t i r e time h o r i zon examined. strong evidence  This systematic decline of prices was of market i n e f f i c i e n c i e s .  the only  It appears that  mutual funds are able to obtain valuable information and information does appear to disseminate  this  slowly throughout the  marketplace. As for the results of the rest of the sample, no apparent market i n e f f i c i e n c i e s were observed.  There did not appear  to be any systematic  movement of prices a f t e r the publish-  ing day and i n addition there were no unusually  large price  movements on the day that the reports were published.  This  suggests that any information used by the funds i n t h e i r trading decisions must have been or became " p u b l i c l y a v a i l able" before the publishing day The  (day 0).  fact that the mutual funds did not appear to have  "superior" information  for the remaining sample of quarter-  transactions tend to suggest that possibly they did not have "superior" information other explanation  for any of the sample.  Perhaps some  exists for the observed market i n e f f i c i e n -  cies . One provide  possible explanation  i s that possibly i n s t i t u t i o n s  a large amount of the trading volume i n a security  and that i n d i v i d u a l investors follow the funds lead.  Hence  a lack of i n t e r e s t by the entire market with the r e s u l t being the emergence of a two  t i e r market such as the one  ly exists i n the U.S.  Consequently, the decline of s e c u r i t y  prices r e l a t i v e to the market may  that current-  be a d i r e c t r e s u l t of secur-  i t i e s being out of favour with i n s t i t u t i o n s . research i s necessary to confirm t h i s  However, more  hypothesis.  Although the e f f i c i e n t market hypothesis cannot be tested d i r e c t l y , i t s implications can. This paper has one  such empirical test supporting  the hypothesis.  As  provided the  44  body of supporting empirical evidence"  1  increases, researchers  believe that the v a l i d i t y of the model w i l l be "established" (3, pp. 404).  Hopefully t h i s paper has added to the  However, much remains to be done.  evidence.  Although the mar-  ket appears to be r e l a t i v e l y e f f i c i e n t with respect to the information set examined by this study, many other types of information generating events remain to be examined.  A  few  examples are the announcement of stock s p l i t , quarterly earnings, block trading, and dividend changes.  It i s only then  that we w i l l be able to speak of the Canadian equity markets as being e f f i c i e n t or i n e f f i c i e n t . A major benefit of this research w i l l be that i n e f f i c i e n c i e s w i l l be discovered and hopefully become p u b l i c 2 l y known  so that market action can correct the s i t u a t i o n , the  result being a greater degree of market e f f i c i e n c y i n Canada in the long run.  """At present a body of supporting empirical evidence i n favour of the e f f i c i e n t market hypothesis in Canada i s very small. However the evidence r e f u t i n g the hypothesis i s l i k e wise small. It w i l l take much more time and research before a substantive conclusion can be reached. 2  It i s possible that a discovered i n e f f i c i e n c y w i l l y i e l d the discoverer excess returns in which case he may not be anxious to p u b l i c i z e his discovery.  B I B L I O G R A P H Y  [ 1]  Evans, J . L. Mutual Fund Trading and the E f f i c i e n c y of Canadian Equity Markets, Working Paper #214, U n i v e r s i t y o f B r i t i s h Columbia, F a c u l t y o f Commerce and B u s i n e s s A d m i n i s t r a t i o n , 1974.  [.2 1  Fama, E. , L. F i s h e r , M. Jensen and R. R o l l . "Adjustment o f Stock P r i c e s t o New I n f o r m a t i o n , " International Economic Review, 10 (February, 1969), pp.  1-21.  [ 33  Fama, E. " E f f i c i e n t C a p i t a l Markets: Theory and E m p i r i c a l Work," Journal  25 (May, 1970), pp. 383-417.  [ 4]  A Review o f of Finance,  Fama, E. " R i s k , Return and E q u i l i b r i u m : Some C l a r i f y i n g Comments," Journal of Finance, 23 (March, 1968), pp.  29-40.  [ 5]  F r i e n d , I r w i n , M. Blume and J . C r o c k e t t . Mutual Funds and Other I n s t i t u t i o n a l Investors: A New Perspective. New York: McGraw-Hill I n c . , 1970.  [ 6]  Jensen, M. Markets.  [7 ]  Kaplan, R. and R. R o l l . " I n v e s t o r E v a l u a t i o n o f Accounti n g I n f o r m a t i o n : Some E m p i r i c a l E v i d e n c e , " Journal of Business, 45 ( A p r i l , 1972), pp. 225-257.  [8 ]  Kraus, A. and H. S t o l l . " P r i c e Impacts o f B l o c k T r a d i n g on the New York Stock Exchange," Journal of Finance, 27 (June, 1972), pp. 569-588.  [9 1  Kraus, A. and H. S t o l l . " P a r a l l e l T r a d i n g by I n s t i t u t i o n a l I n v e s t o r s , " Journal of Financial and Quantitative Analys i s , 7 (December, 1972), pp. 2107-2138.  (Ed.). Studies in the Theory New York: Praeger, 1972.  45  of  Capital  46  [ 10]  P e t t i t , R. " D i v i d e n d Announcements, S e c u r i t y Performance, and C a p i t a l Market E f f i c i e n c y , " Journal of Finance, 27 (December, 1972), pp. 993-1008.  [ 11]  Q u i r i n , G. D., and W. R. Waters. A Study of the Canadian Mutual Fund Industry. 'I'crronto: The Canadian Mutual Funds A s s o c i a t i o n , 1969.  [ 12 ]  S c h o l e s , M. "The Market f o r S e c u r i t i e s : Substitution V e r s u s P r i c e P r e s s u r e and the E f f e c t s on I n f o r m a t i o n on Share P r i c e s , " Journal of Business 45 ( A p r i l , 1972), pp. 179-211. 3  ( 13 ]  Sharpe, W. "Capital Asset Prices: A Theory o f Market E q u i l i b r i u m Under C o n d i t i o n s o f R i s k , " Journal of Finance, 19 (September, 1964), pp. 425-442.  [ 14 ]  Sharpe, W. P o r t f o l i o Theory and Capital York: McGraw-Hill I n c . , 1970.  Markets.  New  

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