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Did small investors benefit from the Global Settlement?

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Responding to the allegedly biased research reports issued by large investment banks, the Global Research Analyst Settlement and related regulations went to great lengths to weaken the conflicts of interest faced by investment bank analysts. In this paper, I investigate

Responding to the allegedly biased research reports issued by large investment banks, the Global Research Analyst Settlement and related regulations went to great lengths to weaken the conflicts of interest faced by investment bank analysts. In this paper, I investigate the effects of these changes on small and large investor confidence and on trading profitability. Specifically, I examine abnormal trading volumes generated by small and large investors in response to security analyst recommendations and the resulting abnormal market returns generated. I find an overall increase in investor confidence in the post-regulation period relative to the pre-regulation period consistent with a reduction in existing conflicts of interest. The change in confidence observed is particularly striking for small traders. I also find that small trader profitability has increased in the post-regulation period relative to the pre-regulation period whereas that for large traders has decreased. These results are consistent with the Securities and Exchange Commission's primary mission to protect small investors and maintain the integrity of the securities markets.

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2011

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The disposition effect as a determinant of the abnormal volume and return reactions to earnings announcements

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I examine the degree to which stockholders' aggregate gain/loss frame of reference in the equity of a given firm affects their response to the firm's quarterly earnings announcements. Contrary to predictions from rational expectations models of trade (Shackelford and Verrecchia

I examine the degree to which stockholders' aggregate gain/loss frame of reference in the equity of a given firm affects their response to the firm's quarterly earnings announcements. Contrary to predictions from rational expectations models of trade (Shackelford and Verrecchia 2002), I find that abnormal trading volume around earnings announcements is larger (smaller) when stockholders are in an aggregate unrealized capital gain (loss) position. This relation is stronger among seller-initiated trades and weaker in December, consistent with the cognitive bias referred to as the disposition effect (Shefrin and Statman 1985). Sensitivity analysis reveals that the relation is stronger among less sophisticated investors and for firms with weaker information environments, consistent with the behavioral explanation. I also present evidence on the consequences of this disposition effect. First, stockholders' aggregate unrealized capital gain position moderates the degree to which information-related determinants of trade (e.g. unexpected earnings, firm size, and forecast dispersion) affect abnormal announcement-window trading volume. Second, stockholders' aggregate unrealized capital gains position is associated with announcement-window abnormal returns, consistent with the disposition effect reducing the market's ability to efficiently incorporate earnings news into price.

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2012