School Of Business Administration: Financial Review

We provide some examples of how quantile regression can be used to investigate heterogeneity in pay-firm size and pay-performance relationships for U.S. CEOs. For example, do conditionally (predicted) high-wage managers have a stronger relationship between pay and performance than conditionally low-wage managers? Our results using data over a decade show, for some standard specifications, there is considerable heterogeneity in the returns-to-firm performance across the conditional distribution of wages. Quantile regression adds substantially to our understanding of the pay-performance relationship. This heterogeneity is masked when using more standard empirical techniques.

KEYWORDS

executive compensation • quantile regression • pay and performance

Signaling, Free Cash Flow and "Nonmonotonic" Dividends

Kathleen Fuller, Benjamin M. Blau

Many argue that dividends signal future earnings or dispose of excess cash. Empirical support is inconclusive, potentially because no model combines both rationales. This paper does. Higher quality firms pay dividends to eliminate the free cash-flow problem, while firms that outsiders perceive as lower quality pay dividends to signal future earnings and reduce the free cash-flow problem. In equilibrium, dividends are nonmonotonic with respect to the signal observed by outsiders; the highest quality firms pay smaller dividends than lower perceived quality firms. The model reconciles the existing literature and generates new empirical predictions that are tested and supported.

KEYWORDS

dividend signaling models • agency conflicts • monotonicity condition • payout policy • cash-flow uncertainty

Dividends versus Share Repurchases Evidence from Canada: 1985–2003

Maher Kooli, Jean-Francois L’Her

This paper provides out-of-sample evidence on the payout policy in Canada during the 1985–2003 period. First, we show that the proportion of nonfinancial firms paying dividends has decreased, while the proportion initiating repurchase programs has increased. We also show that Canadian firms paying dividends and repurchasing shares are extremely concentrated. Second, we focus on the factors that could affect the choice between repurchases and dividends. We find that dividends and repurchases are used by different types of firms. While we do not confirm the financial flexibility hypothesis, our results are consistent with the substitution hypothesis after controlling for selection bias and endogeneity.

KEYWORDS

payout policy • share repurchases • dividends

The Ex-dividend Day: Action On and Off the Danish Exchange

Umid Akhmedov, Keith Jakob

We examine ex-dividend day behavior on the Copenhagen Stock Exchange. We report price-drop ratios of 32% and 18% for close-to-close and close-to-open samples, respectively, well below the ratios observed in the United States. Our findings are generally consistent with limit order adjustment explanations from recent literature. In Denmark, a unique average price trading opportunity makes it possible for investors to capture dividends without directly altering supply or demand in the regular market, and therefore not necessarily driving the price-drop ratios toward one.

KEYWORDS

ex-dividend day • average price trading • dividend arbitrage • dividend capture trade • illiquid markets

Debt Issuance in the Face of Tax Loss Carryforwards

Anne-Marie Anderson, Nandu Nayar

We examine the market impact of issuances of public and private debt by firms with sizeable tax loss carryforwards (TLCFs). Public issuances are met with a significantly negative stock price reaction, while private placements are associated with a positive marginally significant stock price reaction. After controlling for asymmetric information proxies, the stock price reaction to the debt issuance is more negative, the larger the TLCF. The evidence suggests that debt financing is suboptimal when issuers have large TLCFs, which in turn, supports the relevance of taxes for debt usage.

KEYWORDS

asymmetric information • capital structure • corporate debt offering • event studies • nondebt tax shields • taxes

Investors' Use of Historical Forecast Bias to Adjust Current Expectations

Seung-Woog (Austin) Kwag, Ronald E. Shrieves

We explore the extent to which investor response to earnings information differs in the presence of historical bias in earnings forecasts. Overall, the results are consistent with the notion that investors take historical forecast bias into account when interpreting information in earnings announcements and that the market's reaction to forecast errors is larger (less negative) when forecasts are historically more optimistic and suggests that the functional form commonly used in the earnings response literature does not appropriately capture the effect of real unexpected earnings information (i.e., investors' expectation errors as opposed to analysts' forecast errors) on stock returns.

KEYWORDS

earnings forecasts • investor expectation • historical bias • market reaction

Changes in the Information Efficiency of Stock Prices: Additional Evidence

Richard A. DeFusco, Suchi Mishra, K. Raghunandan

Previous research shows, using data from three quarters after the implementation of regulation fair disclosure (Reg FD), that there is an improvement in the informational efficiency of stock prices after Reg FD. We compare the informational efficiency of stock prices in four pre-Reg FD quarters (1999–2000) and 12 post-Reg FD quarters (2002–2005). The improvement in the informational efficiency of stock prices previously reported in the immediate aftermath of Reg FD persists in later periods.

KEYWORDS

regulation FD • information asymmetry • earnings announcements • SEC regulations • stock market efficiency

Predictability in Consumption Growth and Equity Returns: A Bayesian Investigation

Alex Paseka, George Theocharides

We use a Bayesian method to estimate a consumption-based asset pricing model featuring long-run risks. Although the model is generally consistent with consumption and dividend growth moments in annual data, the conditional mean of consumption growth (a latent process) is not persistent enough to satisfy the restriction that the price-dividend ratio be an affine function of the latent process. The model also requires relatively high intertemporal elasticity of substitution to match the low volatility of the risk-free return. These two restrictions lead to the equity volatility puzzle. The model accounts for only 50% of the total variation in asset returns.

KEYWORDS

consumption-based asset pricing • consumption growth predictability • return predictability • equity volatility puzzle

A Note on Affordability and the Optimal Share Price

William T. Chittenden, Janet D. Payne, J. Holland Toles

Despite the increase in institutional ownership, decreased trading costs, and increased real personal savings, we find that the average stock price is lower today than it was in the 1920s. In the aggregate, the propensity to split is a function of recent market performance, personal savings, and the desirability of appearing to be a small firm. Our results indicate that, after decades of inflation and the average stock price falling, splitting stocks to return to an "affordable" trading range must be rejected as an explanation. This suggests that other economic forces are behind splits, whether traditional or behavioral in nature.

KEYWORDS

stock price • stock splits • real stock price • diversification

The University of Mississippi: School of Business Administration