School Of Business Administration: Financial Review

This paper examines whether the identity of a broker involved in transactions contains information. Using a sample of transactions from the Australian Stock Exchange –where broker identity is transparent – we provide evidence that consecutive buyer/seller-initiated transactions by the same broker have a relatively high permanent price impact. This implies that broker identity conveys information to market participants, and that markets in which broker identity is disclosed are likely to be more efficient. We also find that medium-sized trades by the same broker convey greater information than large and small trades, which is consistent with stealth-trading by informed investors.

Keywords: Market Anonymity, Asymmetric Information, Price Impact, Stealth Trading

Preferenced Trading, Quote Competition, and Market Quality: Evidence from Decimalization on the NYSE

Wei Huang, S. Ghon Rhee, and Ning Tang

Abstract

We examine the impact of decimalization on preferenced trading in NYSE-listed stocks and show a significant decline in preferenced trading around decimalization. For the largest NYSE stocks, the total decline is nearly 22%. We also find a negative correlation between the changes in preferenced trading and the changes in quote competition intensity, and a positive correlation between the changes in preferenced trading and the changes in spreads. Consistent with the cream skimming hypothesis, we find that abnormal changes in information asymmetry cost for NYSE trades are positively correlated with the changes in preferenced trading.

Risk Changes around Calls of Convertible Bonds

Luis García-Feijóo, Scott Beyer, and Robet R. Johnson

Abstract

We examine changes in equity and asset betas around convertible bond calls and report two major findings. First, calling firms exhibit an increase in asset betas following the call. We argue that the finding is consistent with the implications of the sequential financing theory but not of the backdoor equity financing theory. Second, abnormal returns at call announcements are negative only for the subsample of firms that also exhibit an increase in equity beta. We conclude that risk changes help explain the market reaction to convertible bond calls.

Keywords: convertible bond; conversion-forcing call; risk change

Syndication in Venture Capital Financing

Daniel N. Deli and Mukunthan Santhanakrishnan

Abstract

We examine syndication in venture capital investments between 1980 and 2005. We argue that VC firms syndicate investments to mitigate human capital and financial constraints within individual VC firms and to reduce uncertainty about firm value. Our results are consistent with those arguments. We find that syndication is more likely for firms in the earliest stage of development and firms in the last stage of development as private firms (when human capital investments are greatest), for firms requiring the largest amounts of financial capital, and for firms with greater growth opportunities (those that are most difficult to value).

Keyword: Venture capital, syndication, financial policy

JEL Classification: G24, G32, D23

Bond Market Access, Credit Quality, and Capital Structure: Canadian Evidence

Usha R. Mittoo and Zhou Zhang

Abstract

We examine the impact of bond market access (measured by having a credit rating) on leverage for Canadian high credit quality (HQ) and low credit quality (LQ) firms, and find that the leverage impact is more pronounced for LQ firms. The results are similar for U.S. firms. Our results are confirmed when we control for the firm’s credit quality, examine the change in leverage around rating initiation, and account for the issue size effect. A similar leverage impact for Canadian and U.S. LQ firms suggests that the Canada-U.S. bond market integration has mitigated the financial constraints for Canadian LQ firms.

JEL Classification: G32; G15

Keywords: Capital Structure; Bond Market Access; Credit Quality

Debt Maturity, Credit Risk, and Information Asymmetry:

The Case of Municipal Bonds

Kenneth Daniels, Demissew Diro Ejara, Jayaraman Vijayakumar

Abstract

Using a system of equations approach, this paper empirically tests the impact of credit quality, asset maturity, and other issuer and issue characteristics on the maturity of municipal bonds. We find that under conditions of lower information asymmetry that prevails in the municipal sector, higher-rated bonds have longer maturities than low-rated bonds. This result differs from that observed in the corporate sector. Overall, our results support the asset maturity hypothesis. In addition, our analysis finds that fundamentals matter. Issue features that provide additional protection or convenience to the investor tend to increase debt maturity.

Keywords: municipal bonds, debt maturity, risk, credit quality, information asymmetry

JEL classifications G110, G120, G140

Industry Structure and Corporate Debt Maturity

Otgontsetseg Erhemjamts, Kartik Raman, Husayn Shahrur

Abstract

We examine how industry competition affects firms’ choice of short-term debt. We find that the percentage of short-term debt is positively related to industry concentration at low levels of concentration, and inversely related to industry concentration at higher levels of concentration. This non-linear relation is stronger in industries where firms are either more homogeneous or compete more aggressively. Moreover, we find that firms with shorter-maturity debt are less aggressive than their rivals in the product market. The overall evidence suggests that although financial contracts alleviate agency problems, they exacerbate the risk of predation.

Earnings Management Surrounding New Debt Issues

Yixin Liu, Yixi Ning, Wallace N. Davidson III

Abstract

We examine whether firms manage earnings before issuing bonds to achieve a lower cost of borrowing. We find significant income-increasing earnings management prior to bond offerings. We also find that firms that manage earnings upward issue debt at a lower cost, after controlling for various bond issuer and issue characteristics. Our results are consistent with studies that report earnings management around equity issuance. The results indicate that, like equity holders, bondholders fail to see through the inflated earnings numbers in pricing new debt.

JEL classification: G32; G34

Keywords: Earnings management, cost of debt, securities offerings

Information Transfer Effects of Bond Rating Downgrades

Philippe Jorion and Gaiyan Zhang

Abstract

This paper investigates information transfer effects of bond rating downgrades measured by equity abnormal returns for industry portfolios. Industry rivals can be subject to two opposing effects, the contagion effect and the competition effect. We find that the net effect is strongly dependent on the original bond rating of the downgraded firm. For investment-grade (speculative-grade) firms, industry abnormal equity returns are negative (positive), which implies a predominant contagion (competition) effect. The analysis reveals a rich pattern of positive and negative correlations across negative credit events, which can be used to improve our understanding of portfolio credit risk models.

JEL: G14, G32

Keywords: bond rating downgrades, industry information transfer, contagion effects, competition effects

Treasury bond Volatility and Uncertainty about Monetary Policy

Ivo J.M. Arnold and Evert B. Vrugt

Abstract

We show that dispersion-based uncertainty about the future course of monetary policy is the single most important determinant of Treasury bond volatility across all maturities. The link between Treasury bond volatility and uncertainty about macroeconomic variables is much stronger than for the more traditional time-series measures of macroeconomic volatility and adds beyond the information contained in lagged bond market volatility. Uncertainty about monetary policy subsumes the uncertainty about future inflation (CPI and the deflator) and economic activity (unemployment, real and nominal GDP and industrial production). In addition, causality clearly runs one way: from monetary policy uncertainty to Treasury bond volatility.

JEL classification: E44, E58, G12

Keywords: Bond market volatility, monetary policy, macroeconomic factors, survey data

SEO Cycles

John S. Howe and Shaorong Zhang

Abstract

Public equity offerings by seasoned firms (SEOs) exhibit similar but less volatile cycles than initial public offerings of newly public firms. Our paper provides a comprehensive examination of the factors that cause variation in the number of firms issuing SEOs. Specifically, we use four factors from studies of IPOs as potential determinants of SEO cycles. We find that whether tested separately or collectively, only the demand for capital and market timing hypotheses receive strong empirical support in explaining SEO volume. Investor sentiment is not an important factor in explaining SEO volume, nor is information asymmetry.

JEL Classifications: G10, G30

Keywords: SEO, IPO, Cycles, Information asymmetry, Investment opportunities, Investor sentiment, Market timing

Partial Price Adjustments and Equity Carve-Outs

Thomas H. Thompson

Abstract

We examine the extent to which market-adjusted ex-date returns reflect public information for 271 equity carve-outs in 1988-2006. Although prior studies focus on ex-post determinants of equity carve-out and IPO returns, our study is the first to explore ex-ante predictors of equity carve-out returns. We use three primary variables: filing range adjustments, the percentage of the offering used to retire subsidiary debt or to pay dividends, and the CBOE Volatility Index (VXO) to predict initial returns. We show that 11%-35% of the variation in market-adjusted equity carve-out returns can be predicted using public information known prior to the offer date.

JEL classification: G32, G34

Keywords: Carve-outs, Spin-offs, Divestitures

Price Movers on the Stock Exchange of Thailand: Evidence from a Fully Automated Order-Driven Market

Charlie Charoenwong, David K. Ding, and Nattawut Jenwittayaroje

Abstract

This study examines which trade sizes move stock prices on the Stock Exchange of Thailand (SET), a pure limit order market, over two distinct market conditions of bull and bear. Using intraday data, the study finds that large sized trades (i.e., those larger than the 75th percentile) account for a disproportionately large impact on changes in traded and quoted prices. The finding remains even after it has been subjected to a battery of robustness checks. In contrast, the results of studies conducted in the United States show that informed traders employ trade sizes falling between the 40th and 95th percentiles (Barclay and Warner 1993; Chakravarty 2001). Our results support the hypothesis that informed traders in a pure limit order market such as the SET, where there are no market makers, also use larger-size trades than those employed by informed traders in the United States.

JEL Classifications: G12; G14; G15

Keywords: informed traders; pure limit order market; trade size; bull and bear markets; Thailand

Prior Payment Status and the Likelihood to Pay Dividends: International Evidence

Mia Twu

Abstract

By using the signaling model and the life-cycle theory, I examine the importance of prior payment status in determining the likelihood to pay dividends. I categorize firms into those that paid dividends previously and those that did not. My results show that strong dividend stickiness exists and the determinants to pay differ significantly for the two groups of firms. High growth and low insider holdings make prior payers more likely to pay but prior non-payers less likely to pay. Furthermore, prior payers are more sensitive to profitability and earned/contributed equity mix, while prior non-payers are more sensitive to risk and dividend premiums. Finally, taking the prior payment status into account eliminates the problem of overestimating the portion of payers put forth by previous studies.

Key words: dividend stickiness, likelihood to pay, prior payer, prior non-payer, determinants

JEL classification: G32, G35

Corporate Hedging Policy and Equity Mispricing

J. Barry Lin, Christos Pantzalis, and Jung Chul Park

Abstract

We show that firms’ use of derivatives is negatively associated with stock mispricing. This result is consistent with the notion that hedging improves the transparency and predictability of firms’ cash flows resulting in less misvaluation. Furthermore, we show that the negative relationship between mispricing and hedging is particularly strong when market value is below fundamental value, which is consistent with prior evidence that hedging has a positive impact on firm valuation. Finally, we provide evidence that a “spread-out” hedging policy that entails the use of a variety of derivative contracts can be more effective in reducing mispricing.

Keywords: financial risk management, equity mispricing

JEL Classification: G12, G14, G32

Restructuring Using Operating Asset Exchanges: Issues and Evidence

Kaysia Campbell and James E. Owers

Abstract

This study examines restructuring in which a firm divests an operating asset in exchange for another operating asset. Since liquidity, capital structure, and distributional issues are not immediately associated with tax-free asset-for-asset exchanges, they are well suited for examining the competing hypotheses related to divestitures. We find that the abnormal returns associated with asset exchanges are generally smaller than those associated with other divestiture restructurings except when indications of value are provided. Our analysis identifies positive valuation effects for firms undertaking focus-enhancing exchanges, but a dominating consideration is whether the value of the units traded is indicated.

JEL Classification: G34

Keywords: Asset Exchanges; Corporate Restructuring

What are the capital structure determinants for tax-exempt organizations?

Geoffrey Peter Smith

Abstract

I study the determinants of capital structure in the absence of tax incentives. I find that debt use is positively related to asset tangibility, growth, and size, and negatively related to age, liquidity, and profitability. Tax-exempt sector-specific findings indicate that debt is also positively related to the efficacy of state laws against the misuse of assets and to the percentage of decision makers that are paid and negatively related to decision-maker compensation and to charitable contributions. Religious organizations most commonly borrow from internal sources, those in education use tax-exempt bonds, while human services organizations use mortgages and notes payable.

Keywords: Capital structure, Tax-exempt organizations, Agency cost theory, Pecking order theory, Trade-off theory

JEL classification: G32, H25, L30

Political Risk and Purchases of Privatized State Owned Enterprises

Mina C. Glambosky, Kimberly C. Gleason, and Jeff Madura

Abstract

We assess the valuation effects and risk for acquirers of privatized state owned enterprises (SOEs). The valuation effects of purchasers are positive and significant, they increase for purchasers that have recent high performance, better access to capital, and have engaged in larger acquisitions. The acquirer valuation effects are lower when the selling government is more corrupt, more bureaucratic and a weaker financial performer. Acquirer’s total and unsystematic risk increases, indicating that purchasers of SOEs realize diversification benefits. Systematic risk increases for purchasers when the government is characterized by high political risk.

JEL Classification: G14, G15, G18

Keywords: acquisitions, privatization, political risk

The University of Mississippi: School of Business Administration