Purpose -This paper aims to propose a method of forecasting the level of informed trading at merger announcements by permitting liquidity traders to adjust their trading based upon signals from informed traders. Informed traders typically take advantage of their knowledge of forthcoming mergers by trading heavily at announcement. For cash mergers, they respond to a positive signal by purchasing stock, and for stock mergers, they respond to a negative signal by selling stock. In response, exchanges (market makers) set wider spreads (charge higher transaction fees) for informed buyers. Uninformed traders are subject to such excessive fees unless they can accurately predict the period during which such fees are charged. Design/methodology/approach -This paper proposes a technique by which uninformed traders may make predictions by creating a vector autoregressive framework that links informed and liquidity trading through price changes. Findings -For cash mergers, transaction fees remained excessive for days 21 to þ 1. For stock mergers, fees remained high on days 21 to þ 1, started declining on days 2 and 3, and vanished on days 4 and 5. Research limitations/implications -Most theoretical models of informed trading have viewed informed trading and liquidity trading as tangentially linked. This study finds a direct link between these two trading activities. Practical implications -Uninformed traders may wish to limit their trading until after day þ 1 for both types of mergers. Originality/value -This paper defines the time period during which transactions costs for traders are at the maximum level. Short sellers have more information about the direction of stock movements and may sell during days of informed selling set forth by this study and repurchase stock afterwards.

We find that option volumes and stock volumes contain differential information in the setting of the final forecasted stock price. For situations in which the forecasted stock price is expected to increase, the upper bound may be established by call buy volumes and the lower bound by put sell volumes. With implicit stock price decreases, we find bounds based on call sell volumes and put buy volumes. Other limits are imposed by the information contained in short sale volumes and the exercise price. Within these limits, market makers use the information contained in stock buy and sell volumes to determine future stock bid and ask quotes.

In the United States, the automobile purchase decision is consequential for both households and car producers. In households, adults typically own their own vehicles for personal use such as commuting to work or college. The need for multiple, safe cars per household represent a significant allocation of household income on an ongoing basis as old vehicles are replaced. Customer needs are represented by groups of demand utility functions which specify the demand for increasingly expensive safety features and styling changes. Auto manufacturers respond to the need for a variety of styles and safety features by producing vehicles in as many as 16 different productmarket segments. They offer multiple financing options such as leases, late models, and stretching out payments to accommodate capital rationing by their customers. The quantity sold in each segment provides the profit per segment which adds across segments to provide the overall profit for the firm. This is a monopolistically competitive environment in which brand loyalty drives sales per segment, with each segment being considerably different from others in vehicle characteristics and customer income. This paper theoretically develops the demand utility functions within each segment, develops the producer's profit function and then equates the supply and demand functions to obtain the optimal quantity per segment. Practical implications are discussed. One such implication is that the quantity of sales may not be realized in any one market, so that sales may have to be realized across markets for auto firms to achieve consistent, long-term profits. Thus, our quantity specification may provide a justification for the globalization of the auto industry.

Mergers may be undertaken by giving shareholders of the target firm the right to exchange their stock for stock in the combined firm. Such stock mergers release the negative signal that the acquiring firm lacks cash. Informed traders seeking immediate gain may short sell acquirer stock or buy puts and sell calls. Liquidity traders, desiring long-term gain, may purchase stock or call options to benefit from lower stock prices, or sell stock or buy put options to maintain liquidity. This paper constructs a theoretical model in which option volume forms the bounds of the final stock price for informed traders while random stock purchase or sale volume establishes the final stock price for liquidity traders.

Purpose -The purpose of the study was to provide empirical support for the Miller model. The paper proposes the use of the ratio of individual to institutional holdings as a proxy for heterogeneous expectations of security returns. Design/methodology/approach -Both bivariate t-tests and regression analysis were used to test whether optimistic valuations existed for stocks with high levels of institutional ownership. Data on open short positions were collected and hypothesized to decrease with the level of institutional holdings. High ratio stocks were compared to glamor stocks and low ratio stocks to value stocks. Findings -For stocks with higher institutional ownership, optimistic valuations dominated resulting in significantly lower future security returns than for stocks with higher individual ownership thereby supporting the Miller model. The results were not sensitive to variations in size, momentum, and book-to-market ratios. Further support for the Miller model was provided by the finding that open short positions decreased with the level of institutional holdings. High ratio stocks resembled glamor stocks and low ratio stocks corresponded to value stocks. Research limitations/implications -This study is limited to the ultra-short term period of one month after portfolio creation. Future research should extend it to the three-to-five year time horizon. Practical implications -Ultra-short term investors should hold value stocks, intermediate three-12 month investors should hold glamor stocks, and long-term investors should hold value stocks. Originality/value -The finding of a new proxy for heterogeneous expectations. The paper also establishes a new methodology for testing the Miller model.