Research & Publications

My research focuses on retail and institutional traders, ETFs, and market efficiency. Below is my published work.

2024

Retail and Institutional Trading During a COVID-19 Presidential Press Conference

Matthew Crook, Andrew Lynch, Brian Walkup

Journal of Economics and Finance 48, 544-562

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Abstract: The COVID-19 pandemic substantially impacted many aspects of regular life including financial markets. The increased media attention and slowdown associated with the pandemic provide the opportunity to explore how both institutional and retail traders react to an attention-grabbing event. We examine how the market responded to a unique presidential press conference including CEOs of eight publicly-listed U.S. companies addressing the U.S. response to the pandemic. Using the press conference on March 13, 2020, we examine the effect on the trading volatility and returns for each of the eight companies represented. We find positive abnormal returns for the companies participating in the press conference. Using the Robintrack data aggregated from the Robinhood retail trading platform and intraday TAQ data, we see that both retail and institutional trading volume increased on the press conference day. However, the increase in retail trading approximately doubled the increase in institutional trading. For the two companies with the lowest Robinhood user ownership prior to the press conference, ownership more than doubled within an hour of the press conference. Panel VAR analysis including control firms shows the press conference resulted in significant intraday returns, volume, and buy-order imbalances in participating firms stock.

2021

Intraday Arbitrage between ETFs and their Underlying Portfolios

Travis Box, Ryan Davis, Richard Evans, Andrew Lynch

Journal of Financial Economics 141, 1078-1095

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Abstract: Prior research suggests that nonfundamental exchange-traded fund (ETF) price shocks are transmitted to their portfolios through an arbitrage mechanism. We test this proposition by examining minute-by-minute returns and order imbalances but find little evidence that ETF trading impacts underlying returns. Specifically, panel vector autoregression shows that ETF returns do not lead portfolio prices. Instead, arbitrage opportunities arise from order imbalances and price movements in the underlying securities and are subsequently eliminated by ETF quote adjustments, rather than arbitrage trading. We extend our analysis to a daily frequency but still find little relation between ETF trading and constituent security prices.

2021

Portfolio Choice: Familiarity, Hedging, and Industry Bias

Xin Che, Andre Liebenberg, Andrew Lynch

Journal of Financial and Quantitative Analysis 56, 2870-2893

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Abstract: Investors may underdiversify their portfolios by overweighting securities in which they perceive an informational advantage or by underweighting securities to hedge risks outside the portfolio. We investigate underdiversification in institutional portfolio construction by examining the under/overweighting of industries in U.S. property-liability (PL) insurers equity portfolios. We find that PL insurers underweight both their own industry and highly correlated industries in their portfolios. This underweighting is larger for PL insurers exposed to higher underwriting risk. Although PL insurers have an informational advantage in investing in their peers, their underwriting risk drives them to underweight stocks in their industry.

2017

Proximity to Urban Centers in Mergers and Acquisitions

Patty Bick, Matthew Crook, Andrew Lynch, Brian Walkup

Managerial Finance 43, 1292-1308

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Abstract: Purpose – The purpose of this paper is to examine the impact firm proximity to financial centers has on announcement returns and time to deal completion for mergers and acquisitions. Design/methodology/approach – Using a data set of merger and acquisition activity from 1986 to 2014, target and acquiring firms are classified as rural or urban based on their geographic proximity to major financial centers. The impact of this proximity on short-term acquisition announcement returns and on the amount of time required to complete the transaction are tested. Findings – Markets react more favorably to the acquisition of firms headquartered in a rural area, likely due to increased information advantage on the part of the acquiring firm. Furthermore, the acquisition of a rural firm requires greater time to completion. Practical implications – Acquiring firms may be able to use information asymmetry to their advantage when acquiring firms located in a more rural setting with higher levels of information asymmetry. However, this requires the acquiring firm to generate an informational advantage and will also require a greater time commitment on average to complete the deal. Originality/value – While prior literature has demonstrated that the distance between target and acquirer can affect acquisition returns and time to deal completion, this study adds to the literature by demonstrating that the geographic location of the target firm relative to major financial hubs can have a unique effect on mergers and acquisitions as well.

2017

The Effects of Big Baths on Bank Opacity

K. Stephen Haggard, John Howe, Andrew Lynch

Journal of Financial Research 40, 433-454

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Abstract: Information asymmetry in the banking sector is important to regulators, analysts, and investors. We examine the change in the information environments of banks following large nonrecurring write-downs (baths) and find a reduction in information asymmetry in the three years following a bath. This result is conditional on the type of asset being written down. Loan-related baths result in a permanent decrease in information asymmetry, but merger-related baths are associated with a transitory increase in information asymmetry. Conversely, baths not related to either loans or mergers result in increased opacity. Consistent with a permanent decrease in information asymmetry, we find an increase in earnings responsiveness in the three years following loan-related baths.

2017

Does Distance Matter in Mergers and Acquisitions?

Patty Bick, Matthew Crook, Andrew Lynch, Brian Walkup

Journal of Financial Research 40, 33-54

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Abstract: Using a sample of mergers and acquisitions from 1985 to 2014, we examine the impact of proximity between target and acquirer as a measure of information asymmetry. We find geographic distance has a significant impact on acquisitions premiums and time to completion, conditional on the size of the target firm. Small targets receive lower premiums and have a faster time to completion the closer they are to their acquirer. Conversely, large targets have a slower time to deal completion the closer their proximity. We conclude geographic distance has a substantial impact on acquisitions.

2015

Do Baths Muddy the Waters or Clear the Air?

K. Stephen Haggard, John Howe, Andrew Lynch

Journal of Accounting and Economics 59, 105-117

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Abstract: We examine the information environments of firms following large, non-recurring charges (baths). We test competing hypotheses about the consequences of a bath—a bath either improves the information environment (the transparency hypothesis) or degrades it (the opacity hypothesis). Difference-in-differences analysis suggests that after a bath (1) earnings become smoother, (2) firm-level information asymmetry decreases, and (3) stock returns become more responsive to unexpected earnings. We interpret these findings as supportive of the transparency hypothesis. We also document that the relative improvement in the information environment is greater for baths that are not voluntary, consistent with managerial obfuscation prior to the bath.

2014

Institutions and the Turn-of-the-Year Effect: Evidence from Actual Institutional Trades

Andrew Lynch, Andy Puckett, Sterling Yan

Journal of Banking and Finance 49, 56-68

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Abstract: Using a large proprietary database of institutional trades, we investigate whether institutional investors drive the turn-of-the-year (TOY) effect. Institutions that engage in window dressing, tax-loss selling, or risk shifting will contribute to the TOY effect by selling small, poorly performing stocks at the end of December and/or buying those same stocks at the beginning of January. We find abnormal pension fund selling in small stocks with poor past performance during the final trading days in December, providing some support for the window dressing hypothesis. However, we find little evidence that institutional tax-loss selling or risk-shifting trading strategies contribute to TOY returns. Furthermore, stocks with no institutional trading around the year-end exhibit considerably stronger TOY return patterns than stocks in which institutions trade. Taken together, our results suggest that institutions play a limited role in driving the TOY effect.

2014

Aggregate Short Selling, Commonality, and Stock Market Returns

Andrew Lynch, Biljana Nikolic, Han Yu, Sterling Yan

Journal of Financial Markets 17, 199-229

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Abstract: Using a comprehensive data set of short-sale transactions, we find strong evidence of commonality in daily shorting flows of individual stocks. More importantly, we find that aggregate shorting forecasts market returns. A one standard deviation increase in daily aggregate shorting is associated with a decrease in market excess return by up to 36 bps over the following 10 trading days (9% annualized). In addition, we find modest evidence that short sellers are informed about future aggregate earnings news, macroeconomic news, and investor sentiment. Overall, our results are consistent with short sellers possessing superior short-term market-wide information.

2012

Are Short Sellers Informed? Evidence from REITs

Dan W. French, Andrew Lynch, Sterling Yan

Financial Review 47, 145-170

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Abstract: This paper uses intraday short sale data to examine whether short sellers of Real Estate Investment Trusts (REITs) are informed. We find strong evidence that short selling predicts future returns of REITs. Heavily shorted REITs significantly underperform lightly shorted REITs by approximately 1% over the following 20 trading days. This predictive relation holds for both small and large trades, but is stronger for large short trades. We also document a positive relation between shorting activity and volatility.

2012

Aggregate Short Selling during Earnings Seasons

Paul Brockman, Andrew Lynch, Andrei Nikiforov

Handbook of Short Selling (Elsevier Inc.)

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Abstract: This paper examines aggregate short selling during earnings seasons. Using a comprehensive dataset of short-sale transactions, we find evidence of commonality in shorting activity and its relationship to earnings announcements.

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