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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 INFORMATION ON CANADIAN 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 , 1973 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN BUSINESS ADMINISTRATION i n t h e F a c u l t y o f B u s i n e s s A d m i n i s t r a t i o n We a c c e p t t h i s t h e s i s as c o n f o r m i n g t o the r e q u i r e d s t a n d a r d THE UNIVERSITY OF BRITISH COLUMBIA August, 19 74 In p resent ing 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 the r e q u i r e m e n t s f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I a g r e e t h a t 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 fo r reference and s t u d y . I f u r t h e r agree t h a t permiss ion for ex tens i ve copying of t h i s t h e s i s fo r s c h o l a r l y purposes may be granted by the Head of my Department o r by h i s r e p r e s e n t a t i v e s . It i s understood that copying or p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l gain s h a l l not be a l lowed without my w r i t t e n p e r m i s s i o n . Depa rtment The U n i v e r s i t y of B r i t i s h Columbia Vancouver 8, Canada A B S T R A C T T h i s paper i n v e s t i g a t e s the e f f i c i e n c y of the Canadian s e c u r i t i e s market; s p e c i f i c a l l y , the r e a c t i o n o f s e c u r i t y p r i ces to a p a r t i c u l a r p i e c e o f new i n f o r m a t i o n was analyzed, t h new i n f o r m a t i o n o f concern b e i n g the i n f o r m a t i o n c o n t a i n e d i n the q u a r t e r l y mutual fund t r a d i n g r e p o r t s p u b l i s h e d i n The Financial Post. As such, the a n a l y s i s c o n s t i t u t e s a t e s t o f the semi-strong form of the e f f i c i e n t markets h y p o t h e s i s . The prime concern o f the a n a l y s i s was the ext e n t and d u r a t i o n o f the p r i c e r e a c t i o n to t h i s new i n f o r m a t i o n . R e s i d u a l a n a l y s i s , f i r s t implemented by Fama, F i s h e r , Jensen and R o l l i n a paper e n t i t l e d "The Adjustment o f Stock P r i c e s to New I n f o r m a t i o n " (2), was conducted on the r e t u r n d a t a to e l i m i n a t e d i f f e r i n g economic c o n d i t i o n s d u r i n g the time h o r i -zon o f the study. By e l i m i n a t i n g the p o r t i o n o f r e t u r n a s s o c i -ated w i t h v a r y i n g economic c o n d i t i o n s , the e f f e c t s of the new i n f o r m a t i o n are impounded i n the r e s i d u a l r e t u r n s . The a n a l y s i s o f the r e s i d u a l r e t u r n s i n v e s t i g a t e d the averages o f these r e s i d u a l r e t u r n s on the date the spe-c i f i c i n f o r m a t i o n became p u b l i c l y a v a i l a b l e and a l s o the trend of the r e s i d u a l r e t u r n s over time. In a d d i t i o n , the r e s i d u a l r e t u r n s were i n v e s t i g a t e d as a f u n c t i o n o f the s i z e of mutual funds net t r a d i n g a c t i v i t y i n t h a t s e c u r i t y . i i i In only one case did i t appear that the Canadian security markets may be i n e f f i c i e n t . However, the general conclusion is that the Canadian security markets are e f f i c i e n t with respect to the new information analyzed by t h i s study. TABLE OF CONTENTS Page LIST OF TABLES v LIST OF FIGURES v i CHAPTER I. INTRODUCTION 1 I I . THE EFFICIENT MARKET HYPOTHESIS 6 I I I . THE DATA 11 IV. METHODOLOGY 16 V. EMPIRICAL RESULTS 21 V I . CONCLUSION 41 BIBLIOGRAPHY 45 i v LIST OF TABLES TABLE Page 1 DATA FOR BUYS <.5 % (69 TRADES) 23 2 DATA FOR SELLS <.5 % (71 TRADES). . . . . . . . . 24 3 DATA FOR BUYS > 1 % (64 TRADES) 25 4 DATA FOR SELLS < 1 % (72 TRADES) 26 v LIST OF FIGURES FIGURE Page 1 API FOR BUYS INVOLVING LESS THAN .5% OF CAPITALIZATION (69 TRADES) 27 2 API FOR SELLS INVOLVING LESS THAN .5% OF CAPITALIZATION (71 TRADES) 28 3 API FOR BUYS INVOLVING MORE THAN \% OF CAPITALIZATION (64 TRADES) 29 4 API FOR SELLS INVOLVING MORE THAN 1% OF CAPITALIZATION (72 TRADES) 30 v i CHAPTER 1 INTRODUCTION In an e f f i c i e n t market, a l l p u b l i c l y a v a i l a b l e i n f o r -mation which i s r e l e v a n t f o r s e c u r i t y v a l u a t i o n i s f u l l y r e -f l e c t e d i n s e c u r i t y p r i c e s . In such a market p r i c e s of s e c u r i t i e s are a c c u r a t e i n d i c a t o r s of the economic value of a f i r m . Since p r i c e s r e f l e c t u n d e r l y i n g economic v a l u e , i n an e f f i c i e n t market, p r i c e s s h o u l d not be a f f e c t e d by i n v e s -t o r a c t i o n s or by i n f o r m a t i o n which has no s i g n i f i c a n c e as to the v a l u e of a p a r t i c u l a r company. A d i r e c t i m p l i c a t i o n o f an e f f i c i e n t market i s t h a t i n v e s t o r s cannot use " 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 ^ 2 to r e a l i z e abnormal r e t u r n s s i n c e a l l such i n f o r m a t i o n i s a l r e a d y impounded i n s e c u r i t y p r i c e s . As a l l p u b l i c i n f o r -mation i s impounded i n s e c u r i t y p r i c e s , observed p r i c e changes must be the r e s u l t of s e c u r i t y p r i c e adjustments to new i n f o r m a t i o n e n t e r i n g the market. The i n t e n t of t h i s study i s to p r o v i d e evidence r e g a r d i n g the e f f i c i e n c y w i t h which " 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 i s a term used to encompass a l l the knowledge which may be of value i n the market's s e c u r i t y p r i c i n g c a l c u l u s . 2 Abnormal 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 which d i f f e r from those which would be o b t a i n e d under e q u i l i brium c o n d i t i o n s . 1 2 i n f o r m a t i o n i s impounded i n Canadian e q u i t y p r i c e s . I f i t can be demonstrated that Canadian e q u i t y p r i c e s do not f u l l y r e f l e c t i n f o r m a t i o n which i s p u b l i c l y known, then the p o s s i b i l -i t y e x i s t s t h a t some t r a d i n g r u l e employing t h i s i n f o r m a t i o n may y i e l d abnormal r e t u r n s to i n v e s t o r s . In a d d i t i o n , i f p r i c e s do not f u l l y r e f l e c t i n f o r m a t i o n , they cannot be c o n s i d e r e d an accurate proxy f o r the u n d e r l y i n g value o f a f i r m , which may r e s u l t i n a non-optimal a l l o c a t i o n of 3 new funds i n the economy. Much has been w r i t t e n on the e f f i c i e n t market hyp o t h e s i s ( i . e . , t h a t s e c u r i t y p r i c e s f u l l y r e f l e c t a l l " 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 ) a n d many t e s t s of i t under-4 taken. The major c o n c l u s i o n of these t e s t s has been t h a t the c a p i t a l markets are e f f i c i e n t i n t h a t p r i c e s do indeed r e f l e c t a l l p u b l i c i n f o r m a t i o n . One f e a t u r e common to most t e s t s o f the e f f i c i e n t market hy p o t h e s i s i s t h a t they concern themselves w i t h the e f f i c i e n c y o f U.S. c a p i t a l markets. Only a few are con-cerned w i t h the e f f i c i e n c y of markets i n oth e r c o u n t r i e s . The t r e n d has been to t e s t the e f f i c i e n t market h y p o t h e s i s ""Non-optimal i n the sense of funds being a l l o c a t e d to areas which may not have the h i g h e s t expected r e t u r n . See i n t r o d u c t i o n of (8) . ^See (3) f o r a comprehensive review of theory and e m p i r i c a l f i n d i n g s . 3 with U.S, data and g e n e r a l i z e the r e s u l t s to the non-U.S. s i t u a t i o n or to ignore the non-U.S. s i t u a t i o n e n t i r e l y . As a r e s u l t , few r i g o r o u s analyses of non-U.S. c a p i t a l mar-kets are a v a i l a b l e , 5 In s t u d y i n g the Canadian c a p i t a l markets, t h i s study w i l l h o p e f u l l y begin to r e c t i f y t h i s s i t u a t i o n . Although the s t r u c t u r e of the Canadian c a p i t a l markets i s b a s i c a l l y s i m i l a r to t h a t of U.S, c a p i t a l mar-k e t s , s e v e r a l d i f f e r e n c e s e x i s t which may gi v e r i s e to d i f f e r e n c e s i n the degree of market e f f i c i e n c y . The main d i f f e r e n c e s are (1) l e s s s t r i n g e n t c o r p o r a t e r e p o r t i n g laws which r e q u i r e l e s s c o r p o r a t e d i s c l o s u r e than i n the U.S.; and, (2) i l l i q u i d i t y r e s u l t i n g from both the s m a l l e r abso-l u t e c a p i t a l i z a t i o n of the t y p i c a l Canadian f i r m and the lower r e l a t i v e turnover of Canadian e q u i t y s e c u r i t i e s i n the market as compared to U.S. s e c u r i t i e s , ^ T h i s l a t t e r p o i n t i s r e l a t e d to the s u b s t a n t i a l d i r e c t ( e q u i t y ) f o r e i g n i n v e s t -ment i n Canadian firms by m u l t i n a t i o n a l o r g a n i z a t i o n s which r e s u l t s i n the removal o f l a r g e b l o c k s of e q u i t i e s from a c t i v e t r a d i n g . S i nce c o r p o r a t e i n f o r m a t i o n i s l e s s abundant i n Canada as compared to the U.S., there may be a tendency f o r Evans' Study (1) i s one of the few e x c e p t i o n s , 6See ( 1 ) . 4 market p a r t i c i p a n t s to use other types of ( i n d i r e c t ) i n -format i o n , such as the t r a d i n g a c t i v i t y of p r o f e s s i o n a l i n -v e s t o r s i n t h e i r s e c u r i t y purchase d e c i s i o n . I f a s u f f i c i e n t number of market p a r t i c i p a n t s u t i l i z e and r e a c t i n a s i m i l a r manner to t h i s i n f o r m a t i o n , such a c t i v i t y c o u l d i n f l u e n c e s e c u r i t y p r i c e s . T h i s study w i l l examine market e f f i c i e n c y w i t h r e s p e c t to a p a r t i c u l a r p i e c e o f i n d i r e c t i n f o r m a t i o n the i n f o r m a t i o n concerning the q u a r t e r l y t r a d i n g a c t i v i t y of mutual funds. In p a r t i c u l a r , the p r i c e behaviour o f s e c u r i t i e s t r a d e d by mutual funds i s of concern, The p e r i o d of a n a l y s i s i s that p e r i o d s u r r ounding the date when i t be-comes p u b l i c l y known that mutual funds were a c t i v e t r a d e r s i n a s e c u r i t y (the f a c t t h at the mutual funds were a c t i v e t r a d e r s o f a s e c u r i t y i s the new i n d i r e c t i n f o r m a t i o n i n -v e s t i g a t e d i n the study. I t i s the p r i c e r e a c t i o n to t h i s knowledge which i s a n a l y z e d ) . S i n c e t h i s study i s concerned w i t h whether p r i c e s e f f i c i e n t l y a d j u s t to i n f o r m a t i o n , that which f o l l o w s w i l l c o n s t i t u t e a t e s t o f the semi-strong form of the e f f i c i e n t market h y p o t h e s i s . S e v e r a l semi-strong form t e s t s o f the e f f i c i e n t market hypothesis u s i n g U.S. data are a v a i l a b l e i n the l i t e r a t u r e . Fama, F i s h e r , Jensen and R o l l (2) examined the e f f e c t s of stock s p l i t announcements on s e c u r i t y p r i c e s ; 5 Kraus and S t o l l ( 8 , 9 ) studied the effects of block trading and p a r a l l e l trading; Scholes (12) studied the effects of second-ary d i s t r i b u t i o n s on security p r i c e s ; and P e t t i t (10) studied the effects of dividend announcements. These papers are r e l e -vant to this study for two reasons. F i r s t , they provide con-s i s t e n t evidence i n that they a l l conclude the U.S. markets are e f f i c i e n t , providing a comparison for the Canadian s i t u a -t i o n . Second, and more importantly, these studies provide a comprehensive method of investigating the ef f e c t s of new i n -formation on security p r i c e s . The analysis of residuals used i n the aforementioned studies, o r i g i n a l l y developed by Fama, Fisher, Jensen and R o l l (2), w i l l be u t i l i z e d i n this study as well. CHAPTER I I THE EFFICIENT MARKET HYPOTHESIS An e f f i c i e n t market was d e f i n e d i n the p r e v i o u s s e c -t i o n as a market i n w h i c h p r i c e s f u l l y r e f l e c t a l l a v a i l a b l e i n f o r m a t i o n . I n v e s t o r s u s i n g t h i s i n f o r m a t i o n cannot e x p e c t c o n s i s t e n t l y t o r e a l i z e r e t u r n s i n e x c e s s o f tho s e to be o b t a i n e d under e q u i l i b r i u m c o n d i t i o n s , as new i n f o r m a t i o n r e a c h i n g the 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 . ^ I n v e s t o r s , b o t h 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 , buy and s e l l s e c u r i t i e s f o r s e v e r a l r e a s o n s , F i r s t l y t h e y a l t e r t h e i r h o l d i n g s due t o changes i n t h e i r d e s i r e d consump-t i o n p a t t e r n s . 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 p o r t f o l i o r e b a l a n c i n g o p e r a t i o n s , r e f l e c t i n g a change i n 2 the i n v e s t o r s ' r i s k p r e f e r e n c e s . F i n a l l y , the i n v e s t o r may f e e l 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 w h i c h i f " p u b l i c l y a v a i l a b l e " would cause a change i n the e q u i l i b r i u m p r i c e o f s e c u r i t i e s . 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 o f i S e e (3) f o r t e s t s and 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 the e f f i c i e n t markets h y p o t h e s i s i s an a c c u r a t e d e s c r i p t i o n o f p r i c e b e h a v i o u r i n the s e c u r i t i e s market. 2 These reasons were f i r s t s u g g e s t e d by S c h o l e s (12). 6 7 firms which they b e l i e v e d to be overvalued and buy s e c u r i t i e s of f i rms which they b e l i e v e d to be undervalued on the b a s i s o f t h i s i n f o r m a t i o n . Since the e a r l y access to i n f o r m a t i o n may r e s u l t i n abnormal r e t u r n s being r e a l i z e d by i n v e s t o r s , such i n f o r m a t i o n i s a h i g h l y s o u g h t - a f t e r commodity. I t i s t h i s keen co m p e t i t i o n among i n v e s t o r s t h a t leads the e f f i -c i e n t market model t o p r e d i c t t h a t the average v a l u e o f any 3 new i n f o r m a t i o n i s ve r y s m a l l . Thus i t i s u n l i k e l y t h a t any i n v e s t o r o b t a i n s i n f o r m a t i o n which would a l l o w him to generate abnormal r e t u r n s c o n s i s t e n t l y over the long run. Since there are s u b s t a n t i a l c o s t s a s s o c i a t e d w i t h the f i n d i n g s o f i n f o r m a t i o n o f v a l u e , i t may be t h a t p r o f e s -s i o n a l i n v e s t o r s w i t h l a r g e sums o f money which can be a l l o -c ated to r e s e a r c h w i l l have f i r s t access to new i n f o r m a t i o n 4 5 of v a l u e . Thus the t r a d e s o f mutual funds may c o n t a i n 3 I t i s t h i s constant s t r i v i n g f o r more i n f o r m a t i o n which p l a y s 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 r e f l e c t a l l 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 . Although the marginal r e s e a r c h e r ' s work i s o f very s m a l l v a l u e , r e s e a r c h e r s as a whole p l a y a fundamental r o l e i n market 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 are more w i l l i n g to spend l a r g e amounts of money to 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 the 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 performance when l a r g e amounts are i n v e s t e d . ^Mutual fund t r a d i n g r e p o r t s are examined by t h i s study because they r e p r e s e n t the only p r o f e s s i o n a l t r a d i n g re-po 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 of value than the tra d e s o f i n d i v i d u a l i n -v e s t o r s . In c o n j u n c t i o n w i t h the l a r g e c o s t o f new i n f o r -mation, the l e s s s t r i n g e n t c o r p o r a t e r e p o r t i n g laws o f Canada as compared to the U.S. may f o r c e i n d i v i d u a l i n v e s -t o r s to use i n d i r e c t sources o f i n f o r m a t i o n such as the t r a d -i n g a c t i v i t y o f p r o f e s s i o n a l i n v e s t o r s . ^ As a r e s u l t , the e f f i c i e n t market hy p o t h e s i s would p r e d i c t t h a t when the i n -formation about mutual fund t r a d i n g a c t i v i t y i s made "pub-l i c l y 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 t r aded by mutual funds s h o u l d change by the expected value o f the i n f o r m a t i o n ( i f any) co n t a i n e d i n the t r a d i n g r e p o r t s . Although p r i c e changes i n response to any i n f o r m a t i o n c o n t a i n e d i n mutual fund t r a d i n g r e p o r t s i s c o n s i s t e n t w i t h the e f f i c i e n t markets h y p o t h e s i s , the hy p o t h e s i s i n a d d i t i o n maintains that the adjustment should be i n s t a n t a n e o u s . Hence a sys t e m a t i c p r i c e response over a l o n g p e r i o d o f time to new i n f o r m a t i o n w i l l be i n c o n s i s t e n t w i t h the e f f i c i e n t market h y p o t h e s i s . However, a sy s t e m a t i c p r i c e movement a f t e r the 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 they can g a i n some of the b e n e f i t s of the 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 employing 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 to mutual funds. 7 Systematic p r i c e movement i n response t o a s i n g l e p i e c e of 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 would imply t h a t i n v e s t o r s could earn abnormal r e t u r n s u s i n g only "pub-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 . 9 date that the 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 another e x p l a n a t i o n . P o s s i b l y the new i n f o r -mation p r i o r to the t r a d i n g reports i s c o r r e l a t e d w i t h the t r a d i n g report i n f o r m a t i o n . In such a case, the systematic p r i c e movement would r e f l e c t the market's e f f i -c i e n t p r i c e adjustment to a s e r i e s of c o r r e l a t e d p i eces of in f o r m a t i o n . Hence systematic p r i c e movements do not n e c e s s a r i l y imply 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 t r i g g e r i n t e n s i v e research on the firms of the s e c u r i t i e s traded, i t i s h i g h l y p o s s i b l e that systematic p r i c e movements are i n response to 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 , w i t h the c o n c l u s i o n being t h a t the market i s e f f i c i e n t . The above d i s c u s s i o n of 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 . F i r s t l y , s e c u r i t y returns surrounding the 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 analyzed to determine the extent of the p r i c e adjustment as a r e s u l t of 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 hypothesis would i Fama, F i s h e r , Jensen and R o l l (2) use t h i s argu-ment to account f o r the apparent systematic p r i c e movement p r i o r to the date when a stock s p l i t i s announced. 10 maintain that the adjustment would be small as the compe-t i t i o n for new information would preclude the finding of s i g n i f i c a n t amounts of new information. Also the speed of q adjustment of prices may be an indicator of market e f f i c i e n c y with theory maintaining that the adjustment would be almost instantaneous. Another i n t e r e s t i n g empirical question i s whether or not the value of information contained i n the reports i s a function of the s i z e " ^ of the transaction re-ported. This being subject to the e a r l i e r reservation of s e r i a l c o r r e l a t i o n i n the information flow. Size for the purposes of t h i s study i s defined as the net percentage of c a p i t a l i z a t i o n traded. CHAPTER I I I THE DATA The F i n a n c i a l Post p u b l i s h e s 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 traded by mutual funds, l i s t i n g the number of shares purchased and the number of shares s o l d f o r each s e c u r i t y traded. The reports cover the t r a d i n g a c t i v i t y of some 95 per cent (by net asset value) of a l l Canadian mutual fund a c t i v i t y . These repo r t s are p u b l i s h e d on aver-age nine weeks a f t e r the t e r m i n a t i o n of each calendar quar-t e r . This data was c o l l e c t e d f o r 26 consecutive q u a r t e r s , commencing w i t h the t h i r d quarter i n 1965 and ending w i t h the l a s t quarter o f 1971. In a l l , 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. For each s e c u r i t y traded, the t o t a l number of outstanding shares was a l s o c o l l e c t e d . The number of outstanding shares plus the t r a d i n g volume f i g u r e s provide the r e q u i r e d data f o r the c a l c u l a t i o n of the r e l a t i v e s i z e of 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 . This study uses •""Each time a s e c u r i t y was l i s t e d i n the q u a r t e r l y re-ports 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 Outstanding 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 Toronto Stock Exchange Review. 11 12 the same s i z e v a r i a b l e as the Evans (1) s t u d y , P e r c e n t Im-b a l a n c e o f O u t s t a n d i n g Shares ( h e r e i n a f t e r r e f e r r e d t o as P I 0 S ) and i s d e f i n e d as: PIOS = T P C A P T S (1) where TP and TS are the t o t a l number o f s h a r e s p u r c h a s e d and t o t a l number o f s h a r e s s o l d , r e s p e c t i v e l y , o f a g i v e n s e c u r -i t y d u r i n g a q u a r t e r by mutual f u n d s , and CAP i s the number o f s h a r e s o u t s t a n d i n g a t the end o f the q u a r t e r . A l s o c a l c u l a t e d was a measure o f t h e e x t e n t t o w h i c h 4 mutual funds t e n d t o a c t t o g e t h e r , c a l l e d by Kraus and S t o l l (9) P e r c e n t a g e Net Imbalance^ ( h e r e i n a f t e r r e f e r r e d t o as PNI) and d e f i n e d as: PNI = T P ^ T S (2) T h i s measure was o r i g i n a l l y p r o p o s e d by F r i e n d , Blume and C r o c k e t t ( 5 ) . ^A v a l u e o f PNI e q u a l to 1 i n d i c a t e s t h a t mutual funds were i n complete agreement as a l l mutual f u n d a c t i v i t y i n the 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 to - 1 i n d i c a t e complete s e l l i n g agreement and a v a l u e o f 0 i n d i c a t e s no consensus among t h e mutual f u n d s . ^ T h i s measure was o r i g i n a l l y s u g g e s t e d by Kraus and S t o l l (9) and was m o d i f i e d by Evans ( 1 ) . I t i s the m o d i f i e d v e r s i o n w h i c h i s employed i n t h i s s t u d y . 13 where TP and TS are defined as above and GV i s equal to TP plus TS. From t h i s large sample of 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 subsets 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 involvement i n the f o l l o w i n g quarter's mutual fund t r a d i n g a c t i v i t y . The f i r s t subset was s e l e c t e d u s i n g the c r i t e r i a t h a t the absolute value of PIOS should be gr e a t e r than .01 (more than one per cent o f c a p i t a l i z a -t i o n traded) and that the s e c u r i t y should not be traded 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 of 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 comprises 72 observations when the mutual funds were net s e l l e r s of more than 1 per cent o f the firm's outstanding shares during the q u a r t e r , and 64 observations when the funds were net purchasers of more than 1 per cent of the firm's outstanding shares. 7 The second subset was chosen using the c r i t e r i a t hat the absolute value of PIOS should be l e s s than .005 ( l e s s The i n f o r m a t i o n i s re p o r t e d , on average, nine weeks a f t e r the end of the t r a d i n g q u a r t e r . Since t h i s study i s concerned w i t h the i n f o r m a t i o n r e l a t e d p r i c e behaviour around the r e p o r t i n g date, the 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 re-p o r t i n g quarter 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 Scholes (12), among others. 7 Choosing two subsets 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 traded allows an e m p i r i c a l t e s t o f the hypo-t h e s i s that the value o f in f o r m a t i o n contained i n trades i s a f u n c t i o n of the s i z e o f the tra d e . 14 than h per cent of c a p i t a l i z a t i o n traded) and that the secur-i t y should not be i n v o l v e d i n the f o l l o w i n g quarter'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 quarter-t r a n s a c t i o n s f o r which the mutual funds were net s e l l e r s of l e s s than h per cent of a firm's outstanding 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 which the funds were net purchasers of l e s s than h per cent of a firm's outstanding shares. For each of the s e c u r i t i e s i n v o l v e d i n a quarter-t r a n s a c t i o n of e i t h e r subset, p r i c e and di v i d e n d data were c o l l e c t e d . The date that the 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 the date that 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 . " For the purposes o f t h i s study, 8 the p u b l i s h i n g date has been defined as day 0. P r i c e and d i v i d e n d data on the 60th t r a d i n g day, 30th t r a d i n g day, 20th t r a d i n g day and 15th to 1st t r a d i n g days i n c l u s i v e before day 0 were c o l l e c t e d , as w e l l as the data on day 0 and on the 1st to 15th 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 dividend observations 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 . The p r i c e data was obtained from The Globe and Mail and the dividend data was obtained g Day 0 i s defined 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 uniform across each q u a r t e r - t r a n s a c t i o n , independent of i t s c h r o n o l o g i c a l time. 15 from The Financial Post's yearly dividend record. In addition to c o l l e c t i n g the 37 price and dividend observations, the values of the four Toronto Stock Exchange 9 indices on each of the 37 days were also c o l l e c t e d . These were obtained from the Toronto Stock Exchange Review, The four indices are the I n d u s t r i a l , Gold, Base Metal and O i l s indices. CHAPTER IV METHODOLOGY One of the major problems as s o c i a t e d w i t h the a n a l y s i s of s e c u r i t y returns across time i s that economic c o n d i t i o n s vary from p e r i o d to p e r i o d . Since d i f f e r i n g economic c o n d i t i o n s tend to obscure the p r i c e e f f e c t s of other s p e c i f i c kinds of in f o r m a t i o n , a method of a b s t r a c t i n g from general market movements must be found. The market model of s e c u r i t y re-turns proposed by Sharpe (13,14) i s such a method. This model expresses the r e t u r n on a s e c u r i t y as a l i n e a r func-t i o n of the r e t u r n on the market as:"'" R. = a . + g .R M + a . (3) th where Rj i s the re t u r n on the j s e c u r i t y , R^ i s the r e t u r n 2 of the market, and B. are parameters unique to s e c u r i t y j and £. i s a random disturbance term which i s assumed to s a t i s f y the usual assumptions of 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 study i s a s l i g h t l y modified v e r s i o n of the usual market model. The l o g of the "^See Fama, F i s h e r , Jensen and R o l l (2) f o r t e s t of model s p e c i f i c a t i o n . 2 The r e t u r n on a market index i s t y p i c a l l y used as a proxy f o r market r e t u r n . 17 return on a security is expressed as a linear function of the log of return on four^ market indices^ and is defined as: 4 In R. = a . + E g [ l n Rk ]+ Z . (4) 3 3 k=l J K 3 5 t h 6 where R. is the return on the j security, a . and the J 1 _ 7 Sjk's are parameters unique to security j , the R^'s are the return on the four Toronto Stock Exchange indices (Indus-t r i a l s , Golds, Base Metals and Oils) and Z. is a random distur^ bance term which i s assumed to satisfy the usual assumptions of the linear regression model. Specifically, a. has zero 3 The four indices used are the Toronto Stock Exchange's Industrial, Gold, Base Metal and Oil Indices. 4 A similar approach was employed by Evans (1). "'The logarithmic (natural logs) form was used for two reasons. F i r s t l y , the distribution of the log of R. is more nearly symetric than the distribution of R-, resulting in 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 linear regression model. ^Price relatives were actually used instead of returns. This facilitates the use of the logarithmic formulation. The price relative equals p n R. = t + 1 „ " f 1 = R + 1 t where P , is the price of a security at time t+1, D -i is the dividend paid ( i f any) during the period, and P is the price at time t. Daily closing prices were used. The log of the relative has an economic interpretation as the rate of return over the period, assuming continuous compounding. 7 Using time series data of security returns (R..) and 18 expectation and constant v a r i a n c e , successive 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 i n d i c e s (Rj,) . The market model as formulated here i s assumed to capture 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 while a l l non-market or company s p e c i f i c components of r e t u r n are impounded i n the disturbance term C^j)- Hence any abnor-mal r e t u r n behaviour t h a t i s a r e s u l t o f company s p e c i f i c i n -formation w i l l be ob served i n the behaviour of the disturbance term, £ j . The r e s i d u a l returns (disturbance term) may be d e f i n e d as f o l l o w s : 4 y. t = i n R.t - [a. + ^ 6 j k ( l n R^TJ (5) where y. 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 j ^  8 s e c u r i t y j during p e r i o d t and the estimated e q u i l i b r i u m r e t u r n d u r i n g p e r i o d t . The e f f e c t s of 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 behaviour of y.._. market r e t u r n s (R.,), l e a s t squares was used to estimate a. and 6-^'s i n equation (4) f o r each of the 278 s e c u r i t y "quar-t 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 the expected value of the r e s i d u a l w i l l d eviate from zero i s l a r g e . During the days surrounding 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 to the assumption of the 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 parameters. Thus the observa-t i o n s d u r i n g the f i v e months preceeding and the three months f o l l o w i n g the r e l e a s e of 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 preceeding the pub-l i s h i n g date were removed to avoid the p o s s i b i l i t y of any p r i c e pressure e f f e c t s d u r i n g the t r a d i n g quarter d i s t o r t -ing the e s t i m a t i o n . P e r i o d t i n t h i s study v a r i e s from one t r a d i n g day to 30 t r a d i n g days. 19 Since the general e f f e c t s o f new i n f o r m a t i o n are of concern i n t h i s study and not the e f f e c t s of t h i s i n f o r m a t i o n on s p e c i f i c s e c u r i t i e s , the estimated r e s i d u a l returns are averaged on a c r o s s - s e c t i o n a l b a s i s . The averaged r e s i d u a l 9 r e t u r n f o r p e r i o d t i s d e f i n e d as: N E w i t U - J = 1 3 ( 6 ) UT " N where N i s the number of 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 re-turn 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 c a l c u l a t e d . Such a s e r i e s i s termed an "abnormal performance index" ( h e r e i n a f t e r r e f e r r e d to as API) and may be d e f i n e d as: M API = Z U T (7) M T=-60 where M i s de f i n e d i n r e l a t i o n to the day t h a t the i n f o r -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 J t i s always defined r e l a t i v e to the r e p o r t i n g date (day 0). "^The averaged r e s i d u a l returns 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 of the two previously-mentioned subsets i n t o two smaller samples. One sample contains the net buy quarter-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 firm's c a p i t a l i z a -t i o n , one contains the net s e l l s , another contains the net 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% of the firm's c a p i t a l i z a t i o n and the l a s t one contains the net s e l l s . Thus, four subsets were created. 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 suggested by Scholes (12). I t can be regarded as the r e t u r n an in v e s -to r would r e a l i z e i f he had contracted to r e c e i v e only the non-market r e t u r n of the 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 to i n -v e s t i g a t e the e f f e c t ( i f any) of new i n f o r m a t i o n contained i n mutual fund t r a d i n g r e p o r t s . The r e s i d u a l terms w i l l capture any abnormal r e t u r n behaviour a s s o c i a t e d w i t h the d i s c l o s u r e of 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 the abnormal re t u r n s from p e r i o d to p e r i o d and the API w i l l provide a measure o f the cumulative abnormal returns over time. The API w i l l i n d i c a t e the average abnormal r e -turns an i n v e s t o r would have r e a l i z e d i f he had purchased the stock at some p o i n t i n time and s o l d them at some l a t e r p o i n t (gross of 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 of the e f f i c i e n t market hypothesis w i l l be t e s t e d i n t h i s s e c t i o n . The f i r s t t e s t w i l l c o n s i s t of the c a l c u l a t i o n of the average r e s i d u a l r e t u r n s , the ab-normal performance index and the standard d e v i a t i o n of the r e s i d u a l returns f o r each day r e l a t i v e to the 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 r e s i d u a l values i s a l s o c a l c u l a t e d . The e f f i c i e n t market hypothesis pre-d i c t s that any p r i c e adjustment should occur i n s t a n t a n e o u s l y thus e l i m i n a t i n g the p o s s i b i l i t y of i n v e s t o r s , using "pub-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 , earning abnormal r e t u r n s . How-ever, as pointed out e a r l i e r , a systematic movement of the r e s i d u a l r eturns 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 not confirm t h e i r e x i s t e n c e . The methodology of the previous s e c t i o n was a p p l i e d to the 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 four sub-samples.* The sample was segregated on the ba s i s of percentage of c a p i t a l i z a t i o n traded and on the See footnote 10, Chapter IV. 21 22 bas i s of the q u a r t e r - t r a n s a c t i o n being a net s e l l or net buy. Table 1 presents 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 mutual funds were net purchasers of l e s s than h per cent of a company's c a p i t a l i z a t i o n ; Table 2 presents the r e s u l t when mutual funds were net s e l l e r s of l e s s than h per cent of a company's c a p i t a l i z a t i o n ; ' Table 3 presents the r e s u l t s when mutual funds were net purchasers of more than 1 per cent of a company's c a p i t a l i z a t i o n and Table 4 presents the r e s u l t s when mutual funds were net s e l l e r s of more than 1 per cent of 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 of the a n a l y s i s . The f i r s t column references the day r e l a t i v e to the p u b l i s h -ing date; column 2 presents the average r e s i d u a l s (Urr.) , column 3 presents the abnormal preference index (API) f o l l o w e d by the standard d e v i a t i o n of the average r e s i d u a l s and the f r a c t i o n of negative p r e d i c t i o n e r r o r s f o r each day. Figures 1 to 4 present the p l o t s of the APIs f o r each of the fou r samples. The API f o r the buys l e s s than .5 per cent (Table 1, Figure 1) s t a r t s from a value of 0,0 s i x t y days before the p u b l i s h i n g day (day 0) and r i s e s to 0,0208 s i x t y days a f t e r the p u b l i s h i n g date. 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 a v a i l a b l e " (day 0 ) , the API r i s e s by .017491. In other words, an i n v e s t o r who purchases TABLE 1 DATA FOR BUYS <.5% (69 TRADES) S.D. OF FRACTION DAY RESIDUALS API RESIDUALS NEGATIVE -3 0 0.01700706 0.01700706 0.08635147 0.43 -20 0.00254916 0.01955621 0.05507232 0.41 -15 -0.00351869 0.01603752 0.03721555 0.58 -14 -0.00136763 0.01466990 0.01650077 0.46 -13 0.00539494 0.02006484 0.02449351 0.45 -12 -0.00314722 0.01691762 0.03592209 0.52 -11 -0.00445990 0.01245772 0.02252960 0.55 -10 -0.00462693 0.00783079 0.02213993 0.48 - 9 -0.00001750 0.00781329 0.01745364 0.51 - 8 -0.00064729 0.00716599 0.02197565 0.52 - 7 0.00039908 0.00756508 0.01988939 0.62 - 6 -0.00189296 0.00567212 0.01917287 0.51 - 5 -0.00389117 0.00178098 0.01959960 0.59 - 4 0.00272234 0.00450328 0.02396635 0.52 - 3 -0.00424555 0.00025773 0.03046453 0.48 - 2 0.00469341 0.00495114 0.02962745 0.45 - 1 0.00063014 0.00558127 0.03007776 0.59 0 -0.00231557 0.00326570 0.01730960 0.55 1 -0.00200711 0.00125858 0.02283154 0.52 2 -0.00366915 -0.00241057 0.01676413 0.55 3 0.00115534 -0.00125522 0.02462704 0.52 4 -0.00579443 -0.00704965 0.01961305 0.62 5 -0.00106123 -0.00811087 0.03249728 0.49 6 0.00503649 -0.00307438 0.02330141 0.46 7 -0.00333040 -0.00640478 0.02251926 0.57 8 0.00226473 -0.00414005 0.02098338 0.43 9 -0.00196526 -0.00610531 0.01983270 0.59 10 -0.00179930 -0.00790461 0.04099449 0.42 11 0.00605153 -0.00185309 0.03990309 0.49 12 -0.00028565 -0.00213873 0.01730587 0.48 13 0.00036226 -0.00177647 0.01779130 0.46 14 -0.00010110 -0.00187757 0.01637287 0.42 15 0.00340286 0.00152529 0.02106362 0.41 20 0.00349852 0.00502381 0.04114929 0.43 30 0.00022062 0.00524443 0.05681460 0.52 60 0.01551243 0.02075685 0.10425699 0.45 TABLE 2 DATA FOR SELLS <.5%- (71 TRADES) DAY S.D. OF FRACTION RESIDUAL API RESIDUALS NEGATIVE -3 0 0.01883212 0.01883212 0.11596266 0.41 -2 0 0.00756704 0.02639916 0.06077943 0.48 -15 0.00458829 0.03098745 0.05261097 0.44 -14 -0.00068381 0. 03030364 0.02280519 0.48 -13 0.00016688 0.03047052 0.01981027 0.54 -12 0.00342122 0.03389174 0.03766895 0.52 -11 -0.00703876 0.02685298 0.02351599 0.65 -10 0.00076451 0.02761749 0.03145003 0.48 - 9 -0.00177598 0.02584151 0.03068079 0.63 - 8 0.00167187 0.02751338 0.02654762 0.39 - 7 0.00768181 0.03519519 0.02668534 0.41 - 6 -0.00411364 0.03108155 0.02039453 0.54 - 5 0.00143955 0.03252110 0.02066826 0.48 - 4 -0.00147511 0.03104599 0.02340262 0.39 - 3 -0.00138670 0.02965929 0.02123473 0.56 - 2 -0.00110380 0.03076309 0.02810166 0.45 - 1 . -0.00288657 0.02787652 0.02734012 0.65 0 0.00503765 0.03291417 0.02214389 0.37 1 -0.00139812 0.03151605 0.02518797 0.52 2 0.00132364 0.03283968 0.02375467 0.51 3 0.00344213 0.03628181 0.01811880 0.39 4 -0.00016982 0.03611200 0.02907861 0.48 5 -0.00119093 0.03492107 0.02673435 0.56 6 -0.00386009 0.03106098 0.03339327 0.61 7 0.00449911 0.035560.0 0.02250652 0.41 8 0.00400635 0.03956645 0.02444840 0.46 9 -0.00117455 0.03839190 0.02056179 0.52 10 0.00087992 0.03927182 0.02980136 0.44 11 -0.00028367 0.03898815 0.02416601 0.55 12 0.00258380 0.04157195 0.02031546 0.45 13 -0.00158214 0.03998981 0.02187825 0.52 14 -0.00236248 0.03762733 0.02489848 0.51 15 -0.00541812 0.03220921 0.02129969 0.56 20 -0.00114709 0.03106212 0.03858364 0.51 30 0.00197736 0.03303949 0.07238082 0.41 60 -0.02079549 0.01224399 0.12356547 0.49 TABLE 3 DATA FOR BUYS >1% (64 TRADES) S.D. OF FRACTION DAY RESIDUAL API RESIDUALS NEGATIVE -30 0.01731868 0.01731868 0.12735217 0.38 -20 0.00856176 0.02588043 0.06678567 0.42 -15 0.00434699 0.03022743 0.05520237 0.58 -14 0.00277747 0.03300489 0.02244667 0.45 -13 -0.00217537 0.03082952 0.02879809 0.50 -12 -0.00086485 0.02996467 0.02865840 0.56 -11 -0.00384963 0.02611504 0.02294684 0.58 -10 -0.00507104 0.02104400 0.02223914 0.67 - 9 -0.00195614 0.01908786 0,02276094 0.56 - 8 -0.00015550 0.01893236 0.02823260 0.47 - 7 0.00463010 0.02356246 0.02592978 0.44 - 6 0. 00263630 0.02619876 0.02481457 0.42 - 5 -0.00209028 0.02410848 0.02388122 0.52 - 4 -0.00046005 0.02364843 0.02362101 0.53 - 3 0.00526354 0.02891197 0.02878783 0.47 - 2 -0.00220519 0.02670678 0.02363963 0.56 - 1 -0.00149798 0.02520880 0.02207682 0.53 0 0.00530009 0.03050889 0.02721044 0.47 1 -0.00013600 0.03037289 0.02974554 0.47 2 -0.00412656 0.02624633 0.03120975 0.53 3 0.00515346 0.03139979 0.02518629 0.52 4 -0.00610339 0.02529640 0.03229820 0.56 5 -0. 00318350 0.02211290 0.02700366 0.53 6 0.00293038 0.02504328 0.02744620 0.42 7 -0.00208339 0.02295989 0.02111214 0.52 8 -0.00361884 0.01934105 0.03881546 0.59 9 -0.00316142 0.01617963 0.02836756 0.59 10 0.00165104 0.01783067 0.02390649 0.50 11 -0.00253539 0.01529529 0.02654562 0.44 12 0.00075932 0.01605461 0.02492798 0.53 13 -0.00260311 0.01345150 0.02201768 0.59 14 -0.00059128 0.01286022 0.02570937 0.47 15 0.00467407 0.01753429 0.02310118 0.42 20 -0.00778001 0.00975428 0.05725984 0.63 30 0.00579639 0.01555067 0.07410582 0.55 60 -0.00399654 0.01155414 0.11552134 0.55 26 TABLE 4 DATA FOR SELLS >1% (72 TRADES) S.D. OF FRACTION DAY RESIDUAL API RESIDUALS NEGATP - 3 0 - 0 . 0 3 5 3 7 7 6 6 - 0 . 0 3 5 3 7 7 6 6 0 . 1 7 5 8 1 3 7 3 0 . 5 3 - 2 0 - 0 . 0 0 1 0 7 0 9 8 - 0 . 0 3 6 4 4 8 6 4 0 . 0 6 2 8 9 7 7 6 0 . 4 7 - 1 5 - 0 . 0 1 3 0 8 1 2 5 - 0 . 0 4 9 5 2 9 8 9 0 . 0 6 9 5 1 8 8 0 0 . 6 1 - 1 4 0 . 0 0 1 3 2 2 8 0 - 0 . 0 4 8 2 0 7 0 9 0 . 0 2 8 6 3 2 6 7 0 . 4 6 - 1 3 - 0 . 0 0 6 0 1 3 3 1 - 0 . 0 5 4 2 2 0 4 0 0 . 0 3 5 1 6 8 3 8 0 . 5 4 - 1 2 - 0 . 0 0 3 2 4 8 0 9 - 0 . 0 5 7 4 6 8 4 9 0 . 0 2 4 2 0 1 3 2 0 . 5 7 - 1 1 0 , 0 0 2 7 0 0 5 1 - 0 . 0 5 4 7 6 7 9 8 0 . 0 4 8 8 4 6 4 5 0 . 4 9 - 1 0 - 0 . 0 0 2 8 8 8 0 3 - 0 . 0 5 7 6 5 6 0 1 0 . 0 3 7 4 3 8 1 2 0 . 5 8 - 9 0 . 0 0 0 1 7 8 7 8 - 0 . 0 5 7 4 7 7 2 3 0 . 0 3 4 3 3 4 3 6 0 . 5 8 - 8 - 0 . 0 0 1 8 4 4 4 1 - 0 . 0 5 9 3 2 1 6 4 0 . 0 3 5 2 2 5 9 1 0 . 5 4 - 7 - 0 . 0 0 2 3 7 4 8 1 - 0 . 0 6 1 6 9 6 4 5 0 . 0 2 7 3 1 7 1 3 0 . 6 0 - 6 - 0 . 0 0 2 1 0 0 5 6 - 0 . 0 6 3 7 9 7 0 2 0 . 0 3 1 9 0 2 1 7 0 . 5 6 - 5 - 0 . 0 0 3 9 8 7 6 1 - 0 . 0 6 7 7 8 4 6 2 0 . 0 3 7 9 2 2 7 9 0 . 6 3 - 4 - 0 . 0 0 1 3 2 6 3 1 - 0 . 0 6 9 1 1 0 9 4 0 . 0 3 4 0 7 1 3 5 0 . 4 6 - 3 - 0 . 0 0 3 9 7 4 2 1 - 0 . 0 7 3 0 8 5 1 5 0 . 0 3 4 5 6 7 8 1 0 . 5 7 - 2 0.01205889 - 0 . 0 6 1 0 2 6 2 6 0 . 0 4 4 3 4 0 6 9 0 . 5 0 - 1 0 . 0 0 0 9 3 2 5 2 - 0 . 0 6 0 0 9 3 7 4 0 . 0 2 8 7 7 0 2 6 0 . 5 1 0 0 . 0 0 5 5 7 7 9 8 - 0 . 0 5 4 5 1 5 7 6 0 . 0 4 0 3 4 5 2 7 0 . 5 1 1 0 . 0 0 0 1 2 4 8 3 - 0 . 0 5 4 3 9 0 9 3 0 . 0 3 5 4 6 1 6 8 0 . 5 7 2 0 . 0 0 3 5 9 8 8 9 - 0 . 0 5 0 7 9 2 0 5 0 . 0 3 2 1 6 0 5 6 0 . 4 7 3 - 0 . 0 0 4 4 7 5 7 5 - 0 . 0 5 5 2 6 7 8 0 0 . 0 2 8 9 0 1 4 8 0 . 5 1 4 0 . 0 0 0 7 2 2 8 4 - 0 . 0 5 4 5 4 4 9 6 0 . 0 3 2 5 5 8 2 4 0 . 5 6 5 0 . 0 0 4 4 4 8 0 6 - 0 . 0 5 0 0 9 6 8 9 0 . 0 3 3 1 6 0 0 2 0 . 5 4 6 - 0 . 0 0 7 2 3 8 6 3 - 0 . 0 5 7 3 3 5 5 2 0 . 0 2 4 1 7 9 5 7 0 . 5 7 7 - 0 . 0 0 9 8 8 3 2 4 - 0 . 0 6 7 2 1 8 7 7 0 . 0 3 1 0 0 0 5 9 0 . 6 0 8 - 0 . 0 0 0 6 2 0 1 0 - 0 . 0 6 7 8 3 8 8 7 0 . 0 2 6 7 5 7 4 7 0 . 4 7 9 - 0 . 0 0 3 7 0 9 6 1 - 0 . 0 7 1 5 4 8 4 8 0 . 0 3 1 0 4 4 0 3 0 . 6 1 10 - 0 . 0 0 1 7 5 0 6 4 - 0 . 0 7 3 2 9 9 1 2 0 . 0 3 1 5 2 2 5 0 0 . 5 4 11 0 . 0 0 2 8 6 0 5 3 - 0 . 0 7 0 4 3 8 5 9 0 . 0 2 6 0 4 3 9 0 0 . 5 1 12 - 0 . 0 0 9 1 1 4 3 3 - 0 . 0 7 9 5 5 2 9 2 0 . 0 2 4 8 5 1 6 1 0 . 6 8 13 0 . 0 0 3 8 7 1 6 3 - 0 . 0 7 5 6 8 1 3 0 0 . 0 2 9 5 7 4 9 0 0 . 5 3 14 - 0 . 0 0 0 2 2 5 3 8 - 0 . 0 7 5 9 0 6 6 8 0 . 0 2 6 0 3 9 4 3 0 . 4 7 15 - 0 . 0 0 3 4 7 7 3 2 - 0 . 0 7 9 3 8 4 0 0 0 . 0 2 6 9 0 7 2 7 0 . 5 7 20 - 0 . 0 1 1 6 7 8 5 7 - 0 . 0 9 1 0 6 2 5 6 0 . 0 6 4 1 0 8 3 7 0 . 63 30 0 . 0 0 6 4 9 8 5 9 - 0 . 0 8 4 5 6 3 9 7 0 . 0 6 5 4 9 4 2 5 0 . 4 7 60 - 0 . 0 1 5 6 3 4 6 8 - 0 . 1 0 0 1 9 8 6 6 0 . 1 1 3 4 2 7 6 6 0 . 5 8 CO OC Z 5 V-U J o r C O C O L U o X LU - . 0 5 U -.10 - 6 0 - 4 0 - 2 0 0 20 40 DAY RELATIVE TO PUBLISHING DATE 60 F I G . I . A P I F O R B U Y S I N V O L V I N G L E S S T H A N . 5 % O F C A P I T A L I Z A T I O N . ( 6 9 T R A D E S ) C O z o r h -U J o r in L U o X L U - 6 0 - 4 0 - 2 0 0 20 40 DAY RELATIVE TO PUBLISHING DATE 60 F I G . 2. A P I F O R S E L L S I N V O L V I N G L E S S T H A N .5% O F C A P I T A L I Z A T I O N ( 7 1 T R A D E S ) 00 F I G . 3 . A P I ( 6 4 FOR BUYS INVOLVING MORE THAN 1 % OF CAPITALIZATION TRADES) ho -60 -40 -20 0 20 40 60 DAY RELATIVE TO PUBLISHING DATE FIG.4. API FOR SELLS INVOLVING MORE THAN 1% OF CAPITALIZATION ( 72 TRADES) 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 evidence which suggests the presence 2 of market i n e f f i c i e n c i e s . But when t r a n s a c t i o n costs are i n c l u d e d the extent of the i n e f f i c i e n c y i s not great enough to y i e l d i n v e s t o r s ' abnormal r e t u r n s . Thus, the market appears e f f i c i e n t w i t h i n the bounds of the known i n e f f i -c iency t r a n s a c t i o n c o s t s . This tends to support the e f f i -c i e n t markets hypothesis. The API f o r the s e l l s l e s s than .5 per cent (Table 2, Figure 2) s t a r t s ^rom a value of 0,0 s i x t y days p r i o r to the p u b l i s h i n g day and r i s e s to 0,01224 s i x t y days a f t e r t h i s day. From day 0 to day 60 the API f a l l s from .00503 to -0.02079. An i n v e s t o r who had s o l d these s e c u r i t i e s short on day 0 and covered 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 cent before t r a n s -a c t i o n c o s t s . Again i t appears that 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 stock. The percentage cost of t r a n s -a c t i o n s increases as the p r i c e of the stock decreases and decreases as the p r i c e of the stock i n c r e a s e s . 3 This i s not to suggest that the i n f o r m a t i o n i s v a l u e l e s s . For an i n v e s t o r who has a c e r t a i n amount of funds to commit w i l l pay t r a n s a c t i o n s cost r e g a r d l e s s of which stocks he purchases. 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 expected 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 able to 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 the i n f o r m a t i o n i s not s u f f i -c i e n t to y i e l d i n v e s t o r s abnormal returns a f t e r t r a n s a c t i o n 4 c o s t s . This f i n d i n g i s again i n support of the e f f i c i e n t market hypothesis which maintains t h a t the value of new i n -formation i s very low as a consequence of the 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 greater than 1 per cent (Table 3, Figure 3) s t a r t s at a value of 0.0 s i x t y days p r i o r to the p u b l i s h i n g day and r i s e s to .011554 s i x t y days subse-quent to day 0. However, the API f a l l s from .030508 on day 0 to .011554 on day 60. 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 -ing day would have l o s t 1.8954 per 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 ain, however, t h i s i n f o r -mation i s of no value when t r a n s a c t i o n costs are considered. This 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 the value of i n f o r m a t i o n contained i n mutual fund t r a d i n g r e p o r t s was as expected. That i s , the buying a c t i v i t y of funds should serve 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 to 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 of the funds should serve 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 to s e l l . This f o l l o w s from the ex p e c t a t i o n 4 See footnote 2. A l s o , the t r a n s a c t i o n costs on short s a l e s are higher because of margin requirements. 5See Scholes (12, p. 183). 33 that 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 access to more info r m a t i o n as they have much more money to spend on o b t a i n -ing i n f o r m a t i o n . Thus, the above f i n d i n g s suggest t h a t , on average, the i n f o r m a t i o n contained i n mutual fund t r a d i n g r e p o r t s i s counter to e x p e c t a t i o n s . A p o s s i b l e e x p l a n a t i o n of the above f i n d i n g may be that the p u b l i s h i n g day occurs c l o s e to the peak of the p r i c e - p r e s s u r e e f f e c t observed by Evans (1). While the market may be e f f i c i e n t w i t h respect to the i n f o r m a t i o n contained i n mutual fund t r a d i n g r e p o r t s , the observed i n c o n s i s t e n c y i n e x p e c t a t i o n may be the r e s u l t s of a p r i c e - p r e s s u r e e f f e c t which has c a r r i e d over from the t r a n s a c t i o n - q u a r t e r . The API f o r s e l l s g r e a t e r than 1 per cent (Table 4, Figure 4) s t a r t s at 0.0 s i x t y days p r i o r to the p u b l i s h -ing day and f a l l s to -.100198 s i x t y days subsequent to t h i s day. I f i n v e s t o r s had s o l d these s e c u r i t i e s short on day 0 and covered t h e i r p o s i t i o n 60 days l a t e r , they would have ex-perienced an abnormal r e t u r n of 4.5683 per cent over the 60-day p e r i o d . C l e a r l y , t h i s suggests the presence of market i n e f f i c i e n c i e s . Indeed, even on an a f t e r t r a n s a c t i o n s cost b a s i s , the systematic p r i c e movement a f f o r d s i n v e s t o r s an opportunity to r e a l i z e an abnormal r e t u r n . ^ This i s a d i r e c t Investors can r e a l i z e an abnormal r e t u r n only 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 efficient market hypothesis which main-tains that price mpvements resulting from new information should be almost instantaneous. In Figure 4 one can observe the systematic movement from day 0 to day 60. Interestingly, this price movement (from day 0 to day 60) is proceeded by a similar period of negative abnormal returns from day -60 to day 0 although the abnormal return is positive during the period from day -3 to day 0. One pos-sible explanation for the phenomenon is that mutual funds do indeed have early access to new information due to inefficient information flows in the market. As this information flows into the marketplace a systematic price response may result. Another pos s i b i l i t y is that mutual funds are superior pre-dictors of future price movements although this p o s s i b i l i t y 7 is not supported by mutual fund earnings reports. Perhaps this behaviour can be explained as a result of these securities losing favour with investors similar to the so-called "two tier market" in the U.S. Unfortunately, none of these price is 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 gener-ate returns greater than the TSE industrial index over the period from October 1, 1968 to September 30, 1973. 35 explanations can be empirically tested; thus one can only speculate about the extent of the influence of each. Scholes (12) suggested that perhaps the value of the information is a function of the size of the transaction. However, when he tested this hypothesis he found no associ-ation between his size variable and subsequent price perfor-mance. This hypothesis w i l l be tested as i t is 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 efficient market, prices w i l l . r e f l e c t a l l in-formation as soon as the information becomes "publicly avail-8 able." Hence the price adjustment should occur on the pub-lishing day (day 0) and be reflected in the residual return data. If the size of a transaction is a function of the value of the information then large transactions should be accom-panied by large residual returns on day 0. This hypothesis was tested by regression analysis. The residual returns (dependent variable) on day 0 for a l l security quarter-transactions were regressed on the percent-age of capitalization trade; the percentage of capitalization traded being the size variable for the purposes of this study. For purposes of this study, i t is assumed that the information becomes "publicly available" on the publishing day. 36 The resulting fit t e d equation i s : U.n = .0034 + .0010 PIOS R2 = .0000 J U (1.979) (.013) where PIOS is the percentage of the j security traded. Clearly no s t a t i s t i c a l l y significant relationship appears to exist between the price adjustment on day 0 and the size of the transaction. Thus i t appears that the value of the information contained in mutual fund trading reports is not a function of the size of the transaction. Perhaps, in addition to the size variable used above, a measure of the degree of unanimity of opinion among the mutual funds may help to explain the variance in the resid-ual returns on day 0. 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 relation resulted: U.n = .0034 + .0831 PIOS - .0031 PNI (1.98) (.869) (1.366) R2 = .0000 Again, no s t a t i s t i c a l l y significant relationship is detected by the regression analysis. The values in parentheses beneath the equation are t-statistics. A value (value of 2.0) greater than twice its standard error is taken here to be significant. 37 The lack of a significant relationship between the size variable and the unanimity of opinion variable supports the efficient market hypothesis. The efficient market hypo-thesis would predict that the value of any new information would be small (this being a result of the keen competition among market participants for new information) and not a func-tion of the size of mutual fund transactions. The fact that the constant term i s not significant implies a higher degree of efficiency. It implies that prices fu l l y reflect the in-formation contained in mutual fund trading reports on the day that these reports become "publicly available" 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 capitalization, are motivated by a portfolio rebalancing considerations,*^ the inclusion of these trades in the above analysis may obscure the hypothe-sized relationships. As a result the above analysis was re-peated but this time the smaller trades were deleted from the analysis. The following two relationships resulted: Scholes f i r s t suggested that the smaller transactions may be in response to portfolio 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 J O . 00545 + (1.813) .00956 POIS (.103) T* = .0000 U.n = .00543 + .02048 POIS - .00044 PNI r 2 = .0001 J U (1.797) (.125) (. 080) Once again, none of the coefficients are significant which can be taken as evidence in support of the ef f i c i e n t markets hypothesis. If the market is not completely effic i e n t in a l l respects, the possibility exists that new information may not be f u l l y reflected in security prices immediately. Perhaps the market requires time to evaluate the flow of new infor-mation and thus prices responds in 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 re-spond in a systematic fashion to new information. These hypo-theses may explain the lack of significance of the above co-efficients as the price adjustment may not occur on day 0 but at some later date or systematically over many days. The aforementioned hypotheses are tested via the u t i l -ization of the same regression analysis except that the depend-ent variables the residual returns on day 0 are replaced by the predicted residual returns for the period from day 0 to day 60. Using a l l the data the following two relationships resulted: 39 API j,0-60 -.00989 - .042POIS. (1.350) (.131) 3 r2 = .0000 API j,0-60 -.00988 - .65057 POIS. + (1.361) (1.609) 3 .02329 PNI. (2.425) 3 r 2 = .0212 Of the coefficients, only the one for PNI in the second equation is significant. Thus i t would appear that the degree of unanimity of opinions of mutual funds is of value when searching for possible investment opportunities. This result tends to be inconsistent with the efficient mar-ket hypothesis in two respects. F i r s t l y , i t would appear that prices do not instantaneously reflect information when i t be-comes "publicly available" as illustrated in the insignificance of the coefficient when residual returns for day 0 were used and the significance of the coefficient when returns over a sixty trading day period were used. Secondly, in situations where mutual funds have common expectations, i t appears that they have access to information which is not currently re-flected in security prices. This conclusion is supported by the s t a t i s t i c a l significance of PNI when regressed on A P I j , 0 - 6 0 ' As done previously, the quarter-transactions involv-ing securities which mutual funds traded less than .5 per cent of their capitalization were dropped from the analysis and the regressions were rerun producing the following two 40 relationships: API. n fin = .01563 - .0929 PIOS. r 2 = .0006 3,u-ou (1 .477) (.285) J A P I - n fin = .01476 - .77931 PIOS. + .02768 PNI. J ' U " D U (1.668) (1 .363) J (1.456) 3 r 2 = .0163 Again, none of the regression coefficients are s t a t i s t i c a l l y significant which provides additional evidence in support of the effici e n t market hypothesis. Interestingly,the coefficient of PNI loses i t s sig-nificance when the quarter-transactions involving less than .5 per cent of the firm's capitalization are deleted. Since the equation in Which the coefficient is significant explains such a small amount of the variation in the residual returns ( R / = .0212) plus the fact that the sign of the coefficient of the PIOS is the opposite of the expected sign, the indi-cated inefficiency is probably very minor. Thus the only strong evidence which tends to indicate market inefficiencies is the large abnormal returns that an astute investor could realize by selling short the securities which mutual funds sold greater than one per cent of the firm's capitalization. Except for this one situation, the Canadian securities market appear to be efficient within the bounds of known inefficien-cies (transactions costs). CHAPTER VI CONCLUSION The purpose of this study was to determine the extent of the security market's efficiency in reflecting information in security prices. Specifically the semi-strong form of the efficient market hypothesis was tested. This hypothesis maintains that security prices reflect a l l "obviously pub-l i c l y available" information and that when new information is unconvered prices adjust instantaneously to reflect the present value of this information. Since new information is valuable to investors, the market competition for information is very keen. As a result, the efficient market hypothesis states that the value of new information w i l l be small as i t is unlikely that any one analyst w i l l discover some very significant information which was overlooked by a l l other analysts before him. As a consequence of the less stringent corporate re-porting laws in Canada as compared to the U.S., and of the fact that institutions have larger amounts of funds to devote to research than most individuals, i t was argued that the trad-ing activity of mutual funds is lik e l y to be in response to information which, i f "publicly available" would result in a 41 42 price adjustment. Hence i t was f e l t that the reports of mutual fund trading may contain information of value to in-dividual investors which could be u t i l i z e d to realize abnor-mal 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 capitalization traded and the degree of unanimity among mutual funds. This may be termed the inefficient information flow hypothesis. The results of the preceeding analyses indicates that the efficient markets hypothesis does provide a relatively good description of the price behaviour of Canadian equity securities with respect to the information examined. In only one situation (the selling of greater than one per cent of a firm's capitalization by mutual funds) did the quarterly mutual fund trading reports appear to contain valuable infor-mation. In this case the prices of the securities f e l l almost continuously relative to the market over the entire time hori-zon examined. This systematic decline of prices was the only strong evidence of market inefficiencies. It appears that mutual funds are able to obtain valuable information and this information does appear to disseminate slowly throughout the marketplace. As for the results of the rest of the sample, no appar-ent market inefficiencies were observed. There did not appear to be any systematic movement of prices after the publish-ing day and in 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 in their trading decisions must have been or became "publicly avail-able" before the publishing day (day 0). The 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 for any of the sample. Perhaps some other explanation exists for the observed market ineff i c i e n -cies . One possible explanation is that possibly institutions provide a large amount of the trading volume in a security and that individual investors follow the funds lead. Hence a lack of interest by the entire market with the result being the emergence of a two t i e r market such as the one that current-ly exists in the U.S. Consequently, the decline of security prices relative to the market may be a direct result of secur-i t i e s being out of favour with institutions. However, more research is necessary to confirm this hypothesis. Although the efficient market hypothesis cannot be tested directly, its implications can. This paper has provided one such empirical test supporting the hypothesis. As the 44 body of supporting empirical evidence"1 increases, researchers believe that the validity of the model w i l l be "established" (3, pp. 404). Hopefully this paper has added to the evidence. However, much remains to be done. Although the mar-ket appears to be relatively efficient 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 earn-ings, block trading, and dividend changes. It is only then that we w i l l be able to speak of the Canadian equity markets as being efficient or inefficient. A major benefit of this research w i l l be that in-efficiencies w i l l be discovered and hopefully become public-2 ly known so that market action can correct the situation, the result being a greater degree of market efficiency in Canada in the long run. """At present a body of supporting empirical evidence in favour of the ef f i c i e n t market hypothesis in Canada is very small. However the evidence refuting 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 inefficiency w i l l yield the discoverer excess returns in which case he may not be anxious to publicize 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, University of B r i t i s h Columbia, Faculty of Commerce and Business Administration, 1974. [.2 1 Fama, E. , L. Fisher, M. Jensen and R. R o l l . "Adjust-ment of Stock Prices to New Information," Inter-national Economic Review, 10 (February, 1969), pp. 1-21. [ 3 3 Fama, E. " E f f i c i e n t C a p i t a l Markets: A Review of Theory and Empirical Work," Journal of Finance, 25 (May, 1970), pp. 383-417. [ 4 ] Fama, E. "Risk, Return and Equilibrium: Some C l a r i f y i n g Comments," Journal of Finance, 23 (March, 1968), pp. 29-40. [ 5 ] Friend, Irwin, M. Blume and J . Crockett. 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 Inc., 1970. [ 6 ] Jensen, M. (Ed.). Studies in the Theory of Capital Markets. New York: Praeger, 1972. [7 ] Kaplan, R. and R. R o l l . "Investor Evaluation of Account-ing Information: Some Empirical Evidence," Journal of Business, 45 ( A p r i l , 1972), pp. 225-257. [8 ] Kraus, A. and H. S t o l l . "Price Impacts of Block Trading 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 Trading by I n s t i t u t i o n a l Investors," Journal of Financial and Quantitative Analy-s i s , 7 (December, 1972), pp. 2107-2138. 45 46 [ 10] P e t t i t , R. "Dividend Announcements, Security Perform-ance, 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] Quirin, G. D., and W. R. Waters. A Study of the Canadian Mutual Fund Industry. 'I'crronto: The Canadian Mutual Funds Association, 1969. [ 12 ] Scholes, M. "The Market for S e c u r i t i e s : Substitution Versus P r i c e Pressure and the E f f e c t s on Information on Share Pr i c e s , " Journal of Business3 45 ( A p r i l , 1972), pp. 179-211. ( 13 ] Sharpe, W. "Capit a l Asset P r i c e s : A Theory of Market Equilibrium Under Conditions of Risk," Journal of Finance, 19 (September, 1964), pp. 425-442. [ 14 ] Sharpe, W. P o r t f o l i o Theory and Capital Markets. New York: McGraw-Hill Inc., 1970. 

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