Pub Date : 2017-02-21DOI: 10.1142/S2010139217400018
R. J. Delisle, N. Walcott
Investors prefer stocks with idiosyncratic skewness in their returns, which may be evidence of behavioral biases. Previous research suggests that skewness is related to the choice of target in corporate acquisitions, which may reflect CEOs’ behavioral biases. However, if the acquiring firms’ stock returns are also skewed, then the acquirer CEOs may rationally use their stock as currency in these deals. We investigate the skewness of the acquiring firm and the method of payment to determine if takeovers involving high skewness stocks are consistent with shareholder wealth maximization. We find that firms with high levels of skewness are more likely to become takeover targets and that takeover premiums increase with skewness, but there is no relation between the target’s skewness level and acquirer announcement returns. We also find that acquirers with high skewness are more likely to pay with stock and have higher announcement returns. We conclude that acquirer CEOs often take advantage of investor preference for skewness when undertaking mergers and acquisitions activity.
{"title":"The Role of Skewness in Mergers and Acquisitions","authors":"R. J. Delisle, N. Walcott","doi":"10.1142/S2010139217400018","DOIUrl":"https://doi.org/10.1142/S2010139217400018","url":null,"abstract":"Investors prefer stocks with idiosyncratic skewness in their returns, which may be evidence of behavioral biases. Previous research suggests that skewness is related to the choice of target in corporate acquisitions, which may reflect CEOs’ behavioral biases. However, if the acquiring firms’ stock returns are also skewed, then the acquirer CEOs may rationally use their stock as currency in these deals. We investigate the skewness of the acquiring firm and the method of payment to determine if takeovers involving high skewness stocks are consistent with shareholder wealth maximization. We find that firms with high levels of skewness are more likely to become takeover targets and that takeover premiums increase with skewness, but there is no relation between the target’s skewness level and acquirer announcement returns. We also find that acquirers with high skewness are more likely to pay with stock and have higher announcement returns. We conclude that acquirer CEOs often take advantage of investor preference for skewness when undertaking mergers and acquisitions activity.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"454 1","pages":"1740001"},"PeriodicalIF":0.7,"publicationDate":"2017-02-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75115926","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-11-21DOI: 10.1142/S201013921650021X
Shinhua Liu
Theories are inconclusive about the various impacts of the introduction of basket securities on the underlying stocks. We explore those effects for the first time around the launch of options on exchange traded funds (ETFs), employing the listing of the options on the S&P 500 Depository Receipts (SPDRs) in January 2005. With known factors controlled respectively, we find that the introduction of the SPDRs options leads to lower trading volume, higher bid–ask spread, higher systematic and total risks, and lower prices for the underlying stocks, consistent with the theory that the advent of basket derivatives alters the mix of various types of portfolio traders in the related markets when they are fully integrated.
{"title":"Are SPDR Options Good for the Underlying Stocks","authors":"Shinhua Liu","doi":"10.1142/S201013921650021X","DOIUrl":"https://doi.org/10.1142/S201013921650021X","url":null,"abstract":"Theories are inconclusive about the various impacts of the introduction of basket securities on the underlying stocks. We explore those effects for the first time around the launch of options on exchange traded funds (ETFs), employing the listing of the options on the S&P 500 Depository Receipts (SPDRs) in January 2005. With known factors controlled respectively, we find that the introduction of the SPDRs options leads to lower trading volume, higher bid–ask spread, higher systematic and total risks, and lower prices for the underlying stocks, consistent with the theory that the advent of basket derivatives alters the mix of various types of portfolio traders in the related markets when they are fully integrated.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"10 1","pages":"1-27"},"PeriodicalIF":0.7,"publicationDate":"2016-11-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81859683","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-08-04DOI: 10.1142/S2010139216500117
Hong Li, Y. Wang
Existing studies have documented a negative relationship between the GIM corporate governance index (which contains anti-takeover provisions) and the corporate cost of debt, which implies that fewer anti-takeover provisions may lead to a larger shareholder expropriation of bondholder wealth. That is, strong corporate governance hurts bondholders (asset substitution hypothesis). However, another stream of research asserts that governance mechanisms may benefit bondholders by paring down agency costs and decreasing information asymmetry between the firm and the lenders (monitoring hypothesis). We reexamine this issue by considering the self-selection effect. We find that both hypotheses can be true, and that firms consider the reduction of cost of debt when self-selecting their governance, and the cost of debt would have been much higher had the alternative governance decision been made.
{"title":"How do Corporate Governance Decisions Affect Bondholders","authors":"Hong Li, Y. Wang","doi":"10.1142/S2010139216500117","DOIUrl":"https://doi.org/10.1142/S2010139216500117","url":null,"abstract":"Existing studies have documented a negative relationship between the GIM corporate governance index (which contains anti-takeover provisions) and the corporate cost of debt, which implies that fewer anti-takeover provisions may lead to a larger shareholder expropriation of bondholder wealth. That is, strong corporate governance hurts bondholders (asset substitution hypothesis). However, another stream of research asserts that governance mechanisms may benefit bondholders by paring down agency costs and decreasing information asymmetry between the firm and the lenders (monitoring hypothesis). We reexamine this issue by considering the self-selection effect. We find that both hypotheses can be true, and that firms consider the reduction of cost of debt when self-selecting their governance, and the cost of debt would have been much higher had the alternative governance decision been made.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"33 1","pages":"1650011"},"PeriodicalIF":0.7,"publicationDate":"2016-08-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84064738","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-08-04DOI: 10.1142/S2010139216500105
Yixin Liu, Yilei Zhang, P. Jiraporn
This paper investigates the relationship between CEO visibility and corporate risk-taking. The empirical results show that more visible CEOs tend to take more risk. A one-standard-deviation shock in the CEOs media exposure results in a 6.53% rise in total risk. We further investigate the channels of risk-taking activities and find that more visible CEOs seek more R&D investments. The positive effect of CEO visibility on firm risk policies is clearly of concern to bondholders. Consistent with this view, we report that CEO visibility has a significant negative effect on firm credit ratings. Our results highlight the importance of CEO visibility on a crucial corporate outcome — the extent of corporate risk-taking.
{"title":"Firm Risk-Taking and CEO Visibility","authors":"Yixin Liu, Yilei Zhang, P. Jiraporn","doi":"10.1142/S2010139216500105","DOIUrl":"https://doi.org/10.1142/S2010139216500105","url":null,"abstract":"This paper investigates the relationship between CEO visibility and corporate risk-taking. The empirical results show that more visible CEOs tend to take more risk. A one-standard-deviation shock in the CEOs media exposure results in a 6.53% rise in total risk. We further investigate the channels of risk-taking activities and find that more visible CEOs seek more R&D investments. The positive effect of CEO visibility on firm risk policies is clearly of concern to bondholders. Consistent with this view, we report that CEO visibility has a significant negative effect on firm credit ratings. Our results highlight the importance of CEO visibility on a crucial corporate outcome — the extent of corporate risk-taking.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"7 1","pages":"1650010"},"PeriodicalIF":0.7,"publicationDate":"2016-08-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87859305","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-02-15DOI: 10.1142/S2010139216400024
Kaveh Moradi Dezfouli, L. Kryzanowski
The use and effect of derivatives and short selling by US equity and bond open-end mutual funds are studied using a large and unique database. We find that the likelihood of their use is positively related to fund size, family size, and fund turnover for both fund types except for short selling by equity funds from larger families. Our findings suggest that funds that use derivatives exhibit significantly higher benchmark-adjusted performances based on both gross- and net-of-fees returns. This is done without adversely affecting market betas, net expense ratios (NERs), or brokerage fees as a proportion of total net assets (TNA). We find that for bond funds derivative use is negatively associated with non-systematic risk and short selling use is positively associated with total and systematic risk.
{"title":"Derivatives, Short Selling and US Equity and Bond Mutual Funds","authors":"Kaveh Moradi Dezfouli, L. Kryzanowski","doi":"10.1142/S2010139216400024","DOIUrl":"https://doi.org/10.1142/S2010139216400024","url":null,"abstract":"The use and effect of derivatives and short selling by US equity and bond open-end mutual funds are studied using a large and unique database. We find that the likelihood of their use is positively related to fund size, family size, and fund turnover for both fund types except for short selling by equity funds from larger families. Our findings suggest that funds that use derivatives exhibit significantly higher benchmark-adjusted performances based on both gross- and net-of-fees returns. This is done without adversely affecting market betas, net expense ratios (NERs), or brokerage fees as a proportion of total net assets (TNA). We find that for bond funds derivative use is negatively associated with non-systematic risk and short selling use is positively associated with total and systematic risk.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"19 1","pages":"1640002"},"PeriodicalIF":0.7,"publicationDate":"2016-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74184771","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-02-15DOI: 10.1142/S2010139216400036
A. Ngo, H. Duong, Anthony Chen
This study examines the impact of covenant violations on the implied cost of equity capital and the underpricing of seasoned equity offerings (SEOs). Using a novel dataset of 1,028 first-time covenant violations from 1996–2011, we find a higher level of SEO underpricing during the period immediately following covenant violations. This suggests that creditors require violating firms to issue equity to lower leverage and that equity investors interpret the violation negatively. We also find that violating firms experience an average increase of 8.48% in the implied cost of equity capital. By comparing analysts’ earnings forecasts before and after the violations, we conclude that the negative effects on equity owe to the loss of flexibility that accompanies covenant violations, and are not simply a reflection of the deteriorating health of the firm.
{"title":"The Effects of Covenant Violations on the Underpricing of Seasoned Equity Offerings and the Implied Cost of Equity Capital","authors":"A. Ngo, H. Duong, Anthony Chen","doi":"10.1142/S2010139216400036","DOIUrl":"https://doi.org/10.1142/S2010139216400036","url":null,"abstract":"This study examines the impact of covenant violations on the implied cost of equity capital and the underpricing of seasoned equity offerings (SEOs). Using a novel dataset of 1,028 first-time covenant violations from 1996–2011, we find a higher level of SEO underpricing during the period immediately following covenant violations. This suggests that creditors require violating firms to issue equity to lower leverage and that equity investors interpret the violation negatively. We also find that violating firms experience an average increase of 8.48% in the implied cost of equity capital. By comparing analysts’ earnings forecasts before and after the violations, we conclude that the negative effects on equity owe to the loss of flexibility that accompanies covenant violations, and are not simply a reflection of the deteriorating health of the firm.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"18 1","pages":"1-33"},"PeriodicalIF":0.7,"publicationDate":"2016-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88049640","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2016-02-15DOI: 10.1142/S2010139216500014
H. Cao, Dongyan Ye
We describe a rational expectations model in which there is not only asymmetric information about payoffs but also asymmetric information about the preference, proportion and precision of private information of investors. We define this payoff-irrelevant risk as transaction risk, which is described by market state variables unrelated to payoffs. When derivative assets are introduced, the prices of the derivative assets can reveal information about transaction risk. Due to the informational role of derivative-asset prices, introducing derivative assets can increase social welfare and the price of the underlying asset even though no investors are trading in these derivative assets.
{"title":"Transaction Risk, Derivative Assets, and Equilibrium","authors":"H. Cao, Dongyan Ye","doi":"10.1142/S2010139216500014","DOIUrl":"https://doi.org/10.1142/S2010139216500014","url":null,"abstract":"We describe a rational expectations model in which there is not only asymmetric information about payoffs but also asymmetric information about the preference, proportion and precision of private information of investors. We define this payoff-irrelevant risk as transaction risk, which is described by market state variables unrelated to payoffs. When derivative assets are introduced, the prices of the derivative assets can reveal information about transaction risk. Due to the informational role of derivative-asset prices, introducing derivative assets can increase social welfare and the price of the underlying asset even though no investors are trading in these derivative assets.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"65 1","pages":"1650001"},"PeriodicalIF":0.7,"publicationDate":"2016-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74073624","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-12-03DOI: 10.1142/S2010139215500214
Belén Nieto, A. Novales, Gonzalo Rubio
In this paper, we address the issue of how macroeconomic conditions affect corporate bond volatility. We employ the GARCH-MIDAS multiplicative two-component model of volatility that distinguishes the short-term dynamics from the long-run component of volatility. Both the in-sample and out-of-sample analysis show that recognizing the existence of a stochastic low-frequency component captured by macroeconomic and financial indicators may improve the fit of the model to actual bond return data, relative to the constant long-run component embedded in a typical GARCH model.
{"title":"Macroeconomic and Financial Determinants of the Volatility of Corporate Bond Returns","authors":"Belén Nieto, A. Novales, Gonzalo Rubio","doi":"10.1142/S2010139215500214","DOIUrl":"https://doi.org/10.1142/S2010139215500214","url":null,"abstract":"In this paper, we address the issue of how macroeconomic conditions affect corporate bond volatility. We employ the GARCH-MIDAS multiplicative two-component model of volatility that distinguishes the short-term dynamics from the long-run component of volatility. Both the in-sample and out-of-sample analysis show that recognizing the existence of a stochastic low-frequency component captured by macroeconomic and financial indicators may improve the fit of the model to actual bond return data, relative to the constant long-run component embedded in a typical GARCH model.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"12 1","pages":"1-41"},"PeriodicalIF":0.7,"publicationDate":"2015-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"72709445","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-10-04DOI: 10.1142/S2010139215500123
Ola Bengtsson, S. Ravid
This paper shows that several contractual equilibria coexist in the US venture capital (VC) contracts. Our database is larger than that of previous studies and includes 1,804 contracts. Our main finding is that California-based entrepreneurs receive less harsh contract terms. In particular, investors subject to California-based or California style contracts have less downside protection. This “California effect” remains large and significant even after we include all the previously discovered controls which determine contract design. We find a similar effect if the VC is located in California, or if a non-California VC had a large exposure to the California market. We do not find evidence that VCs are substituting cash flow contingencies for control rights or for performance-based CEO compensation contracts. We also document several other new contractual features of VC contracts. In particular, we find that better companies and more experienced VCs receive better contract terms, whereas older companies receive harsher contracts. We also confirm the role of concentration and proximity in financial contracts.
{"title":"Location Specific Styles and US Venture Capital Contracting","authors":"Ola Bengtsson, S. Ravid","doi":"10.1142/S2010139215500123","DOIUrl":"https://doi.org/10.1142/S2010139215500123","url":null,"abstract":"This paper shows that several contractual equilibria coexist in the US venture capital (VC) contracts. Our database is larger than that of previous studies and includes 1,804 contracts. Our main finding is that California-based entrepreneurs receive less harsh contract terms. In particular, investors subject to California-based or California style contracts have less downside protection. This “California effect” remains large and significant even after we include all the previously discovered controls which determine contract design. We find a similar effect if the VC is located in California, or if a non-California VC had a large exposure to the California market. We do not find evidence that VCs are substituting cash flow contingencies for control rights or for performance-based CEO compensation contracts. We also document several other new contractual features of VC contracts. In particular, we find that better companies and more experienced VCs receive better contract terms, whereas older companies receive harsher contracts. We also confirm the role of concentration and proximity in financial contracts.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"29 1","pages":"1-40"},"PeriodicalIF":0.7,"publicationDate":"2015-10-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82639267","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-09-07DOI: 10.1142/S2010139216500087
Saiying Deng, David A. Rakowski
We examine the relationship between the geographic location of mutual fund managers and fund performance using the unique setting of single-state municipal-bond mutual funds. We find that local managers underperform non-local muni-bond fund managers. Furthermore, we document that local muni-bond fund managers perform relatively better in states with more local funds, consistent with knowledge spillovers, business connections and networking effects associated with those areas. Locals also perform relatively better in states with higher levels of political integrity, consistent with less political pressure on local fund managers in these locations. Our results are robust to several sensitivity checks.
{"title":"Geography and Local (Dis)advantage","authors":"Saiying Deng, David A. Rakowski","doi":"10.1142/S2010139216500087","DOIUrl":"https://doi.org/10.1142/S2010139216500087","url":null,"abstract":"We examine the relationship between the geographic location of mutual fund managers and fund performance using the unique setting of single-state municipal-bond mutual funds. We find that local managers underperform non-local muni-bond fund managers. Furthermore, we document that local muni-bond fund managers perform relatively better in states with more local funds, consistent with knowledge spillovers, business connections and networking effects associated with those areas. Locals also perform relatively better in states with higher levels of political integrity, consistent with less political pressure on local fund managers in these locations. Our results are robust to several sensitivity checks.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"94 12 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2015-09-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87669073","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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