Qingxi Meng, Shenwei Mo, Xiaofeng Quan, Joseph H. Zhang
In this article, we examine whether and how small investors’ social media activity is associated with subsequent bond credit spreads. We use extensive data from posts/comments on social media 30 days before the bond issuance announcement date to identify their implied power and find that the more posts/comments, the smaller the bond issuance spreads. We further find that information quality improvement of posts increases this negative relation between social media activity and bond cost, and that posts directly related to issuers’ fundamentals and/or debt financing drive our main results. Additional tests show that the effect is more salient when there is a greater demand for information quality or when macroeconomic conditions worsen.
{"title":"Social media and cost of debt financing: Evidence from stock forum text analysis","authors":"Qingxi Meng, Shenwei Mo, Xiaofeng Quan, Joseph H. Zhang","doi":"10.1111/jfir.12413","DOIUrl":"https://doi.org/10.1111/jfir.12413","url":null,"abstract":"In this article, we examine whether and how small investors’ social media activity is associated with subsequent bond credit spreads. We use extensive data from posts/comments on social media 30 days before the bond issuance announcement date to identify their implied power and find that the more posts/comments, the smaller the bond issuance spreads. We further find that information quality improvement of posts increases this negative relation between social media activity and bond cost, and that posts directly related to issuers’ fundamentals and/or debt financing drive our main results. Additional tests show that the effect is more salient when there is a greater demand for information quality or when macroeconomic conditions worsen.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-05-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141196721","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we investigate the role a monitored credit line plays in managing a firm's liquidity needs and influencing the firm's project risk. We develop a theoretical model where a firm finances a risky project that is subject to a liquidity shock. External lenders are imperfectly informed about both project risk and the firm's liquidity, which leads to moral hazard. We identify conditions under which it is optimal for the firm to fund the project using a term loan from a less informed lender and manage liquidity using a line of credit from an informed lender.
{"title":"Project risk and the bank monitored credit line","authors":"Eric Van Tassel","doi":"10.1111/jfir.12411","DOIUrl":"https://doi.org/10.1111/jfir.12411","url":null,"abstract":"In this paper we investigate the role a monitored credit line plays in managing a firm's liquidity needs and influencing the firm's project risk. We develop a theoretical model where a firm finances a risky project that is subject to a liquidity shock. External lenders are imperfectly informed about both project risk and the firm's liquidity, which leads to moral hazard. We identify conditions under which it is optimal for the firm to fund the project using a term loan from a less informed lender and manage liquidity using a line of credit from an informed lender.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-05-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141196656","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Cash holdings are significantly lower for firms with dispersed debt maturity, and this finding is robust to entropy balancing and allowing for the simultaneous selection of dispersion and cash holdings. The relation is strongest for firms with shorter debt maturity and firms that rely on precautionary cash, such as financially constrained firms and firms with volatile cash flows. Markets place a lower value on the cash of firms with high or increasing dispersion, and these firms retain less cash. Collectively, the evidence implies that firms can hedge rollover risk with dispersed debt maturity as an alternative to holding costly cash.
{"title":"Debt dispersion and corporate liquidity","authors":"Goutham Abotula, Douglas (DJ) Fairhurst","doi":"10.1111/jfir.12410","DOIUrl":"https://doi.org/10.1111/jfir.12410","url":null,"abstract":"Cash holdings are significantly lower for firms with dispersed debt maturity, and this finding is robust to entropy balancing and allowing for the simultaneous selection of dispersion and cash holdings. The relation is strongest for firms with shorter debt maturity and firms that rely on precautionary cash, such as financially constrained firms and firms with volatile cash flows. Markets place a lower value on the cash of firms with high or increasing dispersion, and these firms retain less cash. Collectively, the evidence implies that firms can hedge rollover risk with dispersed debt maturity as an alternative to holding costly cash.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-05-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141118067","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, we investigate how the participation of firms’ existing shareholders affects the pricing and valuation of private investments in public equity (PIPEs). Using a large sample of PIPEs issued by Chinese listed firms from 2006 to 2019, we find that the effective discount and long‐term buy‐and‐hold abnormal stock returns of PIPEs with existing shareholder participation are significantly higher than those with only new investor participation, after controlling for heterogeneous types of PIPE investors. However, the superior post‐PIPE stock performance of deals with existing shareholders is not driven by improved operating performance but by tunneling activities such as frequent dividend announcements, related‐party transactions, and positive earnings management during the lock‐up period. Our findings suggest that the effect of existing shareholders’ participation in private equity placements is more consistent with the tunneling hypothesis than the certification hypothesis. We document that the tunneling incentives are stronger when firms face greater financial constraints and can be mitigated when the firm's corporate governance is stronger.
{"title":"The role of existing shareholders in private equity placements in China","authors":"Yini Liu, Di Lu, Suhua Tian","doi":"10.1111/jfir.12405","DOIUrl":"https://doi.org/10.1111/jfir.12405","url":null,"abstract":"In this article, we investigate how the participation of firms’ existing shareholders affects the pricing and valuation of private investments in public equity (PIPEs). Using a large sample of PIPEs issued by Chinese listed firms from 2006 to 2019, we find that the effective discount and long‐term buy‐and‐hold abnormal stock returns of PIPEs with existing shareholder participation are significantly higher than those with only new investor participation, after controlling for heterogeneous types of PIPE investors. However, the superior post‐PIPE stock performance of deals with existing shareholders is not driven by improved operating performance but by tunneling activities such as frequent dividend announcements, related‐party transactions, and positive earnings management during the lock‐up period. Our findings suggest that the effect of existing shareholders’ participation in private equity placements is more consistent with the tunneling hypothesis than the certification hypothesis. We document that the tunneling incentives are stronger when firms face greater financial constraints and can be mitigated when the firm's corporate governance is stronger.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-05-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140972625","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We theoretically and empirically identify synthetic long stock as an alternative driver of option trading. Our model proves that the use of synthetic long stocks by capital‐constrained traders contributes to at‐the‐money (ATM) option trading. Using an event study based on stock splits, we document empirical evidence consistent with the model's predictions. ATM option trading declines after stock splits, and these declines are more pronounced for stock splits with higher stock split factors and for more illiquid stocks but are less pronounced for more illiquid options. Our study implies that option trading can occur even without information or opinion dispersion.
{"title":"Synthetic long stock and option trading: Evidence from stock splits","authors":"Yifan Liu, Louis R. Piccotti","doi":"10.1111/jfir.12404","DOIUrl":"https://doi.org/10.1111/jfir.12404","url":null,"abstract":"We theoretically and empirically identify synthetic long stock as an alternative driver of option trading. Our model proves that the use of synthetic long stocks by capital‐constrained traders contributes to at‐the‐money (ATM) option trading. Using an event study based on stock splits, we document empirical evidence consistent with the model's predictions. ATM option trading declines after stock splits, and these declines are more pronounced for stock splits with higher stock split factors and for more illiquid stocks but are less pronounced for more illiquid options. Our study implies that option trading can occur even without information or opinion dispersion.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140838335","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine dividend growth predictability and the excess volatility puzzle across a large sample of international equity markets using a mixed‐frequency data sampling (MIDAS) regression approach. We find that accounting for dividend seasonality under the MIDAS framework significantly improves dividend growth predictability compared to simple regressions with annually aggregated data. Moreover, variance bounds tests that allow for nonstationary dividends consistently fail to reject the market efficiency hypothesis across all countries. Our findings suggest that the common rejection of market efficiency in the literature is most likely driven by the annual aggregation of dividend data as well as by the assumption of stationary dividends.
{"title":"MIDAS and dividend growth predictability: Revisiting the excess volatility puzzle","authors":"Enoch Quaye, Radu Tunaru, Nikolaos Voukelatos","doi":"10.1111/jfir.12403","DOIUrl":"https://doi.org/10.1111/jfir.12403","url":null,"abstract":"We examine dividend growth predictability and the excess volatility puzzle across a large sample of international equity markets using a mixed‐frequency data sampling (MIDAS) regression approach. We find that accounting for dividend seasonality under the MIDAS framework significantly improves dividend growth predictability compared to simple regressions with annually aggregated data. Moreover, variance bounds tests that allow for nonstationary dividends consistently fail to reject the market efficiency hypothesis across all countries. Our findings suggest that the common rejection of market efficiency in the literature is most likely driven by the annual aggregation of dividend data as well as by the assumption of stationary dividends.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-05-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140838660","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, we empirically examine the relation between democracy level and stock index returns in a sample of 74 countries. Compared with democracies, autocratic states are characterized by lower returns despite exhibiting higher return volatility. Even though this higher volatility can be mostly attributed to diversifiable country‐specific risk, the capital asset pricing model cannot explain the return differential. Instead, it is the level of investor protection that can fully account for the phenomenon described here. Autocratic leaders may be reluctant to promulgate regulations shielding investors, and the resultant expropriation depresses the returns realized by outsiders.
{"title":"Democracy and stock market returns","authors":"Xun Lei, Tomasz Piotr Wisniewski","doi":"10.1111/jfir.12402","DOIUrl":"https://doi.org/10.1111/jfir.12402","url":null,"abstract":"In this article, we empirically examine the relation between democracy level and stock index returns in a sample of 74 countries. Compared with democracies, autocratic states are characterized by lower returns despite exhibiting higher return volatility. Even though this higher volatility can be mostly attributed to diversifiable country‐specific risk, the capital asset pricing model cannot explain the return differential. Instead, it is the level of investor protection that can fully account for the phenomenon described here. Autocratic leaders may be reluctant to promulgate regulations shielding investors, and the resultant expropriation depresses the returns realized by outsiders.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-04-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140811510","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, we examine the relation between independent directors with past military service and merger activity. We find that firms with a greater proportion of independent directors with military experience complete fewer mergers, and the deals are of smaller value. Our results are robust to instrumental variable estimation. The reduction in merger and acquisition activity is concentrated in firms with weak CEOs, suggesting independent directors with military service do not improve firm agency problems.
{"title":"Military independent directors and merger activity","authors":"Zhe Li, Megan Ramsey","doi":"10.1111/jfir.12401","DOIUrl":"https://doi.org/10.1111/jfir.12401","url":null,"abstract":"In this article, we examine the relation between independent directors with past military service and merger activity. We find that firms with a greater proportion of independent directors with military experience complete fewer mergers, and the deals are of smaller value. Our results are robust to instrumental variable estimation. The reduction in merger and acquisition activity is concentrated in firms with weak CEOs, suggesting independent directors with military service do not improve firm agency problems.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-04-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140800126","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Target prices often draw criticism because of their optimistic nature and lack of substantial investment value. I provide evidence that removing predictable time‐series biases in target prices significantly improves the information content of these estimates. Empirical tests do not support that these benefits stem from market underreaction to predictable biases. Instead, evidence indicates the informativeness of unbiased estimates about priced risk factors beyond common factors. Unbiasing target prices may improve their ability to capture time‐series momentum. Finally, I delve into the methodological facets of the unbiasing procedure, leading to the development of frameworks that possess tangible practical relevance.
{"title":"Predictable time‐series biases in analyst target prices and stock returns","authors":"Ahmadreza Vafaeimehr","doi":"10.1111/jfir.12400","DOIUrl":"https://doi.org/10.1111/jfir.12400","url":null,"abstract":"Target prices often draw criticism because of their optimistic nature and lack of substantial investment value. I provide evidence that removing predictable time‐series biases in target prices significantly improves the information content of these estimates. Empirical tests do not support that these benefits stem from market underreaction to predictable biases. Instead, evidence indicates the informativeness of unbiased estimates about priced risk factors beyond common factors. Unbiasing target prices may improve their ability to capture time‐series momentum. Finally, I delve into the methodological facets of the unbiasing procedure, leading to the development of frameworks that possess tangible practical relevance.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-04-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140613036","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Research shows that year‐over‐year growth in a firm's assets is associated with a negative stock return premium. A possible explanation for this premium is based on mispricing correction, due in part to investors' overvaluation related to investment. In this article, we argue that a correction of any type is more likely to occur when stock prices are further away from their 52‐week high. To the extent that the 52‐week high acts as a viable anchor, when stocks are closer to this anchor, investors might become less inclined to contribute to the typical downward correction for these types of growth firms. In several tests, we find that stocks that are furthest away exhibit the strongest return premium. The return premium, however, begins to disappear as stocks approach their 52‐week high. These results are robust to various risk factors and cross‐sectional tests that include several firm‐specific characteristics.
{"title":"The asset growth return premium and anchoring on the 52‐week high","authors":"Benjamin M. Blau, Brad Cannon","doi":"10.1111/jfir.12399","DOIUrl":"https://doi.org/10.1111/jfir.12399","url":null,"abstract":"Research shows that year‐over‐year growth in a firm's assets is associated with a negative stock return premium. A possible explanation for this premium is based on mispricing correction, due in part to investors' overvaluation related to investment. In this article, we argue that a correction of any type is more likely to occur when stock prices are further away from their 52‐week high. To the extent that the 52‐week high acts as a viable anchor, when stocks are closer to this anchor, investors might become less inclined to contribute to the typical downward correction for these types of growth firms. In several tests, we find that stocks that are furthest away exhibit the strongest return premium. The return premium, however, begins to disappear as stocks approach their 52‐week high. These results are robust to various risk factors and cross‐sectional tests that include several firm‐specific characteristics.","PeriodicalId":47584,"journal":{"name":"Journal of Financial Research","volume":null,"pages":null},"PeriodicalIF":3.5,"publicationDate":"2024-04-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140560714","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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