School Of Business Administration: Financial Review

This paper examines the negative market impact that resulted from the insurance regulators’ potential reclassification of 140 hybrid capital securities in spring and summer 2006. It illustrates how financial contagion can spring from a regulatory policy change that lacks transparency. We investigate the impact of the uncertainty surrounding the regulators’ true classification criteria by measuring the effect of the reclassification announcements on hybrid new issue volume, cumulative average abnormal returns, bid-ask spreads, and yield spreads. The financial contagion adversely affected the entire hybrid capital securities market for six months. The effect was most pronounced among those hybrids that were eventually reclassified as common equity equivalents. It was greater for Yankee Tier 1 hybrids, which had been more popular with insurance firm investors prior to the reclassifications, than among non-Tier 1 hybrids.

Why is Convertible Debt Subordinated? An Investment-Based Agency Theory

Assaf Eisdorfer

Abstract

This paper offers an agency-based explanation for the junior priority status of convertible bonds. Using a simple economic model, I show that when convertible and straight debt have equal priority, shareholders can prefer value-decreasing projects, which results in wealth transfers from bondholders to shareholders; and I prove that this problem is solved when convertible debt is subordinated. Empirical evidence supports the theory. I find that firms with greater potential for investment-based agency conflicts are more likely to issue subordinated convertible debt, and firms with senior convertible debt are more likely to deviate from the optimal investment policy.

Can Commercialization Improve the Performance of Stock Exchanges Even without Corporatization?

Erin Oldford and Isaac Otchere

Abstract

We examine the performance of mutual, demutualized, and publicly listed exchanges and find evidence of improved performance along the exchange governance continuum, with publicly traded exchanges exhibiting better operating performance than demutualized exchanges. However, our robustness test, focusing on the corporatized exchanges that have gone through the three phases of the governance structure, shows that the listed exchanges do not exhibit evidence of incremental gains in efficiency and profitability beyond what they achieved at the demutualization phase. We conclude that commercialization provides sufficient freedom for exchanges to exploit monopoly rents before going public, while corporatization brings about proper valuation of the exchanges’ franchise.

Quote Competitiveness, 100-share Quotes, and Decimalization

Ning Tang, Andriy Shkilko and Gregory Stone

Abstract

The finance literature documents a significant post-decimalization decline in intermarket quote competitiveness. We show that this result is due primarily to the decline in 100-share NBBO-matching quotes posted by NASDAQ. After decimalization, such quotes decline by more than 90%. At that time, the intermarket trading system (ITS) regards 100-share quotes as meaningless; these quotes are exempt from the trade-through rule and are generally ignored by ITS participants. We therefore argue that the major decline in quote competitiveness observed by previous research is largely nominal, and that decimalization had a much lesser impact on quote competitiveness than previously believed.

How Does National Culture Impact Internalization Benefits in Cross-Border Mergers and Acquisitions?

Tanja Steigner and Ninon K. Sutton

Abstract

We examine how cultural differences between bidder and target countries impact internalization benefits in cross-border takeovers. The value of internalizing intangible assets may increase if cultural differences create high transaction costs. On the other hand, integration difficulties between culturally distant acquirers and targets may reduce the value of internalization. Our results show that greater cultural distance (CD) has a positive influence on the long-run performance of bidders with high intangibles, suggesting that significant internalization benefits from technological know-how are realized when CD is great. These findings highlight the importance of national culture when examining internalization benefits in cross-border mergers.

Liquidity Changes around Seasoned Equity Issuance: Public Offerings versus Private Placements

Hong Qian

Abstract

I investigate whether firms that issue equity, in public offerings or private placements, have improved on liquidity in the secondary market. Transaction costs, price impacts, and trading activity are examined. Results show that public offering stocks become considerably more liquid in all three dimensions. For private placement stocks, there is some evidence that trading volume increases, but effective spread and temporary price impact decline less than market-wide changes. Furthermore, I study the behaviors of participants in the newly issued equity market. Analyses indicate that underwriters, analysts, and market makers all contribute to liquidity changes, but in different aspects.

Are Chinese Stock Market Cycles Duration Independent?

Haiqiang Chen, Terence Tai-Leung Chong and Zimu Li

Abstract

This paper studies the duration properties of the Chinese stock market cycle. We find evidence for duration dependence in both A-share and B-share markets for whole cycles. The results reject the random-walk hypotheses for both markets. For half cycles, evidence of duration dependence for expansions in the Shanghai A-share market is found. For the Shenzhen B-share market, there is little evidence of duration dependence for half cycles. Although the B-share market is less liquid as compared to the A-share market, the results of this study suggest that the B-share market is more efficient than the A-share market. An important implication is that the quality of market participants plays an important role in the duration property of the Chinese stock market.

Oil Risk Exposure: The Case of the U.S. Oil and Gas Sector

Sunil K. Mohanty and Mohan Nandha

Abstract

We estimate oil price risk exposures of the U.S. oil and gas sector using the Fama-French-Carhart's four-factor asset pricing model augmented with oil price and interest rate factors. Results show that the market, book-to-market, and size factors, as well as momentum characteristics of stocks and changes in oil prices are significant determinants of returns for the sector. Oil price risk exposures of U.S. oil and gas companies in the oil and gas sector are generally positive and significant. Our study also finds that oil price risk exposures vary considerably over time, and across firms and industry subsectors.

The University of Mississippi: School of Business Administration