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Gradual Incorporation of Information into Stock Prices: Empirical Strategies

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  • Sara Fisher Ellison
  • Wallace P. Mullin

Abstract

This paper explores environments in which either the revelation or diffusion of information, or its incorporation into stock prices, is gradual, and develops appropriate estimation techniques. This paper has implications both for event study methodology and for understanding the process by which stock prices incorporate information. Two environments are highlighted. First, information is often not revealed in one announcement but rather through a process of gradual public revelation, which may not be completely observable by a researcher. We examine the effect of the evolution of the Clinton health care reform proposal on pharmaceutical stock prices. We estimate the expected path of market-adjusted pharmaceutical prices over September 1992- October 1993 by isotonic regression, and find that the major portion of the decline in stock prices occurred gradually, and did not correspond to identified news events. Second, the trading process itself may incorporate private information into stock prices gradually. That is an implication of the Kyle (1985) model, in which one or a small number of informed traders use their market power over their private information to maximize profits dynamically. We use the functional form predictions from Kyle in our estimation, and the results from a sample of targets of tender offers are consistent with the model.

Suggested Citation

  • Sara Fisher Ellison & Wallace P. Mullin, 1997. "Gradual Incorporation of Information into Stock Prices: Empirical Strategies," NBER Working Papers 6218, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6218
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    References listed on IDEAS

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    1. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
    2. Salinger, Michael, 1992. "Standard Errors in Event Studies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 39-53, March.
    3. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. " Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-270, March.
    4. Willard, Kristen L & Guinnane, Timothy W & Rosen, Harvey S, 1996. "Turning Points in the Civil War: Views from the Greenback Market," American Economic Review, American Economic Association, vol. 86(4), pages 1001-1018, September.
    5. Hausman, J. A. & Abrevaya, Jason & Scott-Morton, F. M., 1998. "Misclassification of the dependent variable in a discrete-response setting," Journal of Econometrics, Elsevier, vol. 87(2), pages 239-269, September.
    6. Keown, Arthur J & Pinkerton, John M, 1981. "Merger Announcements and Insider Trading Activity: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(4), pages 855-869, September.
    7. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    8. Mandelker, Gershon, 1974. "Risk and return: The case of merging firms," Journal of Financial Economics, Elsevier, vol. 1(4), pages 303-335, December.
    9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    10. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. " The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, vol. 47(4), pages 1605-1621, September.
    11. Jarrell, Gregg A & Poulsen, Annette B, 1989. "Stock Trading before the Announcement of Tender Offers: Insider Trading or Market Anticipation?," Journal of Law, Economics, and Organization, Oxford University Press, vol. 5(2), pages 225-248, Fall.
    12. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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