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Abstract:
This essay surveys the extant literature and adds to the empirical evidence on issuance activity,flotation costs, and valuation effects of security offerings. We focus primarily on public offerings of equity for cash, although we also review and present new evidence on debt offerings and private placements. The essay has four major parts: (1) We review aggregate issue activity in exchange listed securities from 1980 through 2004. Following the IPO, only about one-half of the publicly traded firms undertake a public security offering of any type, and only about one-quarter undertake a SEO. Thus, SEOs are relatively rare, which is consistent with adverse selection costs being an important consideration when raising cash externally. (2) We review the evidence on direct issue costs across security types and flotation methods, including the more recent SEO underpricing phenomenon. A large number of studies provide evidence on the determinants of underwriter compensation, and confirm the importance of variables capturing information asymmetries and underwriter competition. (3) We survey and interpret the valuation effects of security issue announcements. In the period since the Eckbo and Masulis (1995) survey, many studies examining announcement-period stock returns have focused on the effects of flotation method choice and foreign offerings. The well-known negative average announcement effect observed for U.S. SEOs appears to be a somewhat U.S.-specific phenomenon. (4) We review and extend evidence on the performance of issuing firms in the five year post-issue period. The literature proposes either a risk based-explanation or a behavioral explanation for the phenomenon of low average realized returns following IPOs and SEOs. Standard factor model regressions fail to reject the null that the low average returns are commensurate with issuers' risk exposures. Recent theoretical developments suggest that lower risk levels following equity issues may be linked to issuers' investment activity, a promising direction for future research.

Security offering, IPO, SEO, debt offer, flotation method, underwriting, rights offer, private placement, shelf registration, adverse selection, announcement returns, long run performance

Abstract:
We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more anti-takeover provisions experience significantly lower announcement-period stock returns than other acquirers. We also find that acquiring firms operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns. Our results support the hypothesis that managers protected by more anti-takeover provisions face weaker discipline from the market for corporate control and thus, are more likely to indulge in empire-building acquisitions that destroy shareholder value. They provide a partial explanation for why anti-takeover provision indices of Gompers, Ishii and Metrick and others are negatively correlated with shareholder value.

Corporate Governance, Anti-takeover Provisions, Takeover Protection, Market for Corporate Control, Acquisitions, Acquisition Profitability, Agency Problems

Abstract:
We study merger and acquisition (M&A) payment choices of European bidders for publicly and privately held targets in the 1997-2000 period. Europe is an ideal venue for studying the importance of corporate governance in making M&A payment choices, given the large number of closely held firms, and the wide range of capital markets, institutional settings, laws and regulations. The tradeoff between corporate governance concerns and debt financing constraints is found to have a large bearing on the bidder's payment choice. Consistent with earlier evidence, we find that several deal and target characteristics significantly affect the method of payment choice.

Corporate finance, Corporate Governance, M&As

Abstract:
We use a sample of U.S. dual-class companies to examine how the divergence between insider voting rights and cash-flow rights affects managerial extraction of private benefits of control. We find that as the divergence widens at dual-class companies, corporate cash holdings are worth less to outside shareholders, CEOs receive higher levels of compensation, managers are more likely to make shareholder-value destroying acquisitions, and capital expenditures contribute less to shareholder value. These findings support the hypothesis that managers with greater control rights in excess of cash-flow rights are prone to waste corporate resources to pursue private benefits at the expense of shareholders. As such, they contribute to our understanding of why firm value is decreasing in the insider control-cash flow rights divergence.

Dual class shares, dual class stock, agency costs, conflicts of interest, voting rights and cash flow rights divergence, acquisitions, announcement effects, empire building, executive compensation, CEO compensation, value of cash holdings, capital expenditures

Abstract:
We use a sample of U.S. dual-class companies to examine how the divergence between insider control rights and cash-flow rights affects managerial extraction of private benefits of control. We find that as the insider control-cash flow rights divergence becomes larger, dual-class acquirers experience lower acquisition announcement-period abnormal stock returns, CEOs receive higher levels of compensation, corporate cash holdings are worth less to outside shareholders, and capital expenditures contribute less to shareholder value. These findings are robust to both a wedge and a ratio measure of the control-cash flow rights divergence. They support the hypothesis that managers with greater control rights in excess of cash-flow rights are prone to waste corporate resources to pursue private benefits at the expense of shareholders. As such, they contribute to our understanding of why firm value is decreasing in the insider control-cash flow rights divergence.

Dual class shares, dual class stock, agency costs, conflicts of interest, voting rights and cash flow rights wedge, acquisitions, announcement effects, empire building, executive compensation, CEO compensation, value of cash holdings, capital expenditures

Abstract:
We study IPO pricing when underwriters are venture capital investors in issuers and test three hypotheses concerning the effects of underwriter share ownership on the IPO underwriting and pricing processes. We find that venture investments by underwriters significantly reduce IPO underpricing; and the result is stronger for lead underwriters. This evidence is consistent with both underwriter certification and improved underwriter alignment of interests with issuers. The fall in underpricing is substantially greater when there is greater uncertainty about IPO valuation, which further supports the underwriter certification effect. Controlling for endogeneity effects does not change our conclusions. Finally, lead underwriter venture investment in IPO issuers also reduces underwriter gross spreads. Overall, the evidence is consistent with an underwriter certification effect and to a lesser degree an underwriter-issuer alignment of interest effect and inconsistent with an IPO conflict of interest effect.

Abstract:
Private equity has reaped large rewards in recent years. We claim that one major reason for this success is due to the corporate governance advantages of private equity over the public corporation. We argue that the development of substantial derivative contracts and trading has significantly weakened the governance of public corporations and has created a need for financially sophisticated directors and much closer supervision of management. The private equity model delivers these benefits and allows corporations to be better governed, creating wealth gains for investors.

private equity, corporate governance, contracts, trading, public corporations, subprime

Abstract:
We examine the association of a venture capital (VC) firm’s reputation with the post-IPO long-run performance of its portfolio firms. We find that VC reputation, as measured by the past market share of VC-backed IPOs, has significant positive associations with an array of long-run firm performance measures. While more reputable VCs initially select better quality firms, more reputable VCs continue to be associated with superior long-run performance even after controlling for VC selectivity. More reputable VCs exhibit more active post-IPO involvement in their portfolio firms, and continued VC involvement has a positive influence on post-IPO firm performance.

Venture capital, Reputation, Initial Public Offerings, Post-IPO long-run performance, Post-IPO VC shareholdings and directorships, Corporate governance

Abstract:
We analyze the likelihood of government bailouts of a sample of 450 politically-connected (but publicly-traded) firms from 35 countries over the period 1997 through 2002. We find that politically-connected firms are significantly more likely to be bailed out than similar non-connected firms. Additionally, politically-connected firms are disproportionately more likely to be bailed out when the IMF or World Bank provide financial assistance to the firm's home country. Further, among firms that are bailed out, those that are politically-connected exhibit significantly worse financial performance than their non-connected peers at the time of the bailout and over the following two years. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress. It may also explain prior findings that politically-connected firms borrow more than their non-connected peers.

Political connections, cronism, bailouts

Abstract:
This study analyzes the information transmission mechanism linking oil futures with stock prices, where we examine the lead and lag cross-correlations of returns in one market with the others. We investigate the dynamic interactions between oil futures prices traded on the New York Mercantile Exchange (NYMEX) and U.S. stock prices, which allows us to examine the effects of energy shocks on financial markets. In particular, we examine the extent to which these markets are contemporaneously correlated, with particular attention paid to the association of oil price indexes with the S&P 500 index; 12 major industry stock price indices and 3 individual oil company stock price series. We also examine the extent to which price changes or returns in one market dynamically lead returns in the others and whether volatility spillover effects exist across these markets. Using VAR model estimates for various time series of returns we find that petroleum industry stock index and our three oil company stocks are the only series where we can reject the null hypothesis that oil futures do not lead Treasury Bill rates and stock returns, while we can reject the hypothesis that oil futures lag these other two series. Finally, the return volatility evidence for oil futures leading individual oil company stocks is much weaker than is the evidence for returns themselves.

Energy shocks, oil futures, oil price dynamics, stock price index dynamics, VAR model, return volatility

Abstract:
This study presents evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements. In addition, it documents significantly positive excess returns on and around the ex-dates of stock dividends and splits. Both announcement and ex-date returns were found to be larger for stock dividends than for stock splits. While the announcement returns cannot be explained by forecasts of imminent increases in cash dividends, the paper offers several signaling based explanations for them. These are consistent with a cross-sectional analysis of the announcement period returns.

Stock splits, stock dividends, signalling, announcement effects, ex-date effects

Abstract:
Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev earnings accruals model (2002), which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings, we show that poor accounting information quality is associated with higher flotation costs in terms of (1) larger underwriting fees, (2) larger negative SEO announcement effects, and (3) a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.

Seasoned equity offering, SEO, stock offer, stock issue, asymmetric information, accounting information, accruals quality, Dechow and Dichev model, offer size, flotation costs, announcement effect, underwriting fees, gross spread, withdrawn offers, cancelled SEOs

Abstract:
It is well known that historically a larger number of firms issue common stock and the proportion of external financing accounted for by equity is substantially higher in expansionary phases of the business cycle. We show that this phenomenon is consistent with firms selling seasoned equity when they face lower adverse selection costs, which occurs in period with more promising investment opportunities and with less uncertainty about assets in place. Thus, firm announcements of equity issues are predicted to convey less adverse information about equity values in such periods. Empirically, we find evidence that generally supports these predictions. Consistent with historical patterns, firms in recent times have tended to increase equity more frequently in expansionary periods. While business cycle variables are significant explanatory variables, interest rate variables are generally insignificant. The adverse selection effects as measured by the average negative price reaction to seasoned common stock offering announcements is significantly lower in expansionary periods and in periods with a relatively larger volume of equity financing. These offer announcement effects are less negative for smaller stock offerings and for issuers with less uncertainty about assets in place.

Seasoned equity offering, SEOs, common stock offers, business cycles, adverse selection, aggregate stock issuance activity

Abstract:
This study investigates whether financial intermediaries participating in the IPO process appear to play a significant role in restraining earnings management. More specifically, we examine whether earnings management around an IPO is negatively related to the reputations of underwriters and venture capital (VC) investors. We find strong evidence that more reputable investment banks are associated with significantly less earnings management, which is consistent with them implicitly certifying the quality of issuers' financial reporting. In contrast, neither VC investment, nor backing by more reputable VCs significantly restrains earnings management by IPO issuers. These conclusions are invariant to adjustments for potential endogeneity of underwriter reputation and VC-backing.

Underwriting, Venture Capital, IPO, Earnings Management, Propensity Score Matching

Abstract:
The short-run interdependence of prices and price volatility across three major international stock markets is studied. Daily opening and closing prices of major stock indexes for the Tokyo, London, and New York stock markets are examined. The analysis utilizes the autoregressive conditionally heteroskedastic (ARCH family of statistical models to explore these pricing relationships. Evidence of price volatility spillovers from New York to Tokyo, London to Tokyo, and New, York to London is observed but no price volatility spillover effects in other directions are found for the pre-October 1987 period.

International Stock Markets, Price and Volatility Spillovers, London Stock Exchange, Tokyo Stock Exchange, New York Stock Exchange, GARCH Model

Abstract:
Two existing theories of insiders on corporate boards posit opposing roles and shareholder wealth effects, while treating inside directors homogeneously. We differentiate inside directors holding outside directorships as more independent relative to other insiders and find they are more frequent when firm-specific information is important and CEOs are less influential. Firms with independent inside directors are associated with better operating performance and higher market-to-book ratios, especially when firm-specific information is highly important. Announcements of inside director appointments to outside boards exhibit shareholder wealth gains, while departure announcements trigger stock declines. Departures of other inside directors have no effect.

board of directors, inside directors, independent directors, corporate governance, manager entrenchment

Abstract:
This study examines common stock price adjustments to announcements of underwritten common stock offerings. On average, a negative stock price change is observed, which is larger for industrials than for public utilities. Combination primary-secondary stock offerings and dual stock-bond offerings exhibit similar negative announcement effects. Combination offerings involving decreases in management shareholdings exhibit significantly larger negative announcement effects. Cross sectional analysis of stock announcement returns indicates a positive relationship to firms' leverage changes, and a negative relationship to prior stock returns and (for industrials) to decreases in management shareholdings.

SEOs, seasoned equity offerings, stock offers, announcement effects, primary offers, secondary offers

Abstract:
Using a comprehensive dataset of 28,039 firms in 45 countries, we investigate the motivations for family-controlled business groups. Contrary to expropriation theories, we find that access to capital plays a critical role in explaining group prevalence at the country level, and that within individual groups, internal equity funding, investment intensity, and firm performance all increase down a pyramidal chain, reflecting the funding advantages that pyramids offer. Controlling for endogeneity in group affiliation shows that certain firm types realize significant benefits from business group membership. Our results highlight important funding and certification support that family groups provide to their members.

business groups, firm value, ownership structure

Abstract:
We develop an analytical framework to explain a firm's choice of equity flotation method and the near disappearance of rights offers by U.S. exchange-listed firms. The choice between uninsured rights, rights with standby underwriting, and firm-commitment underwriting depends on information asymmetries, shareholder characteristics, and direct flotation costs. Underwriter certification and current shareholder takeup of issues are viewed as substitute mechanisms for minimizing wealth transfers between shareholders and outside investors. Uninsured rights create adverse selction effects when shareholder takeup is low. Implications for stock price behavior around issue announcements, shareholder subscription precommitments, and relative issue frequencies are supported by large sample evidence.

Flotation method, seasoned common stock, SEO, stock offer, rights offer, adverse selection

Abstract:
We analyze financial contracting in start-ups backed by corporate venture capitalists (CVCs). CVCs' strategic goals can economically hurt or benefit the start-ups, depending on product market relationships between start-ups and CVC parents. Empirically, start-ups receive funding from both complementary and competitive CVC parents. However, start-up insiders commonly limit the influence of competitive CVCs, awarding them lower board power, while retaining higher board representation for themselves. Second, lead CVCs receive lower board representation, indicating heightened concerns about their greater influence in start-ups' early stages. Finally, start-ups extract higher valuations from competitive CVCs, reflecting greater moral hazard problems. Overall, CVC strategic objectives affect their early inclusion in VC syndicates, their control rights and share pricing.

Venture Capital, Corporate Venture Capital, Financial Contracting, Strategic Investing, Entrepreneurial Companies

Abstract:
We analyze the effects of venture capital (VC) backing on profitability of private firm acquisitions. We find VC backing leads to significantly higher acquirer announcement returns, averaging 3 percent, even after controlling for deal characteristics and endogeneity in venture funding. This leads us to investigate whether some VCs have interests which conflict with other investors. We show that such conflicts arise from VCs having financial relationships with both acquirers and targets, corporate VCs having a dominant strategic focus, and VC funds nearing maturity experiencing pressure to liquidate. Our conclusions follow from examinations of target takeover premia and acquirer announcement returns.

Acquisitions, M&A, Venture Capital, Conflicts of Interest, Moral Hazard

Abstract:
We examine IPOs of startups backed by corporate venture capitalists (CVCs) and the propensity of CVC parents to establish strategic alliance with these startup firms. We investigate the differences in the governance structures of venture capital (VC) backed IPO firms. A major difference in objectives between CVCs and traditional venture capitalists (TVCs) is that CVCs often invest for strategic reasons and their parent firms frequently enter into various forms of strategic business relations with their portfolio firms which persist well beyond the IPO. We argue that such strategic alliances can have a significant impact on the governance structure of CVC backed firms, both when they go public and in the following years. Using a sample of VC backed IPOs, we evaluate several hypotheses concerning a CVC's role in the corporate governance of newly public firms. We find that strategic CVC backed IPOs have weaker CEOs and a larger proportion of independent directors on their boards and compensation committees compared to a matched sample of TVC backed IPO firms. CVC backed IPO firms also have a higher frequencies of staggered boards and forced CEO turnovers. Comparing the corporate governance of IPO firms having strategic alliances with CVC parents with TVC backed IPOs with outside strategic alliances, we find strategic CVC investors have a mean ownership stake of 16.4% compared to 2.2% for outside strategic partners and the strategic CVCs hold significantly more board seats than other strategic alliance partners, both pre- and post-IPO. Finally, these two subsamples of IPO issuers have similar frequencies of takeover defenses.

Corporate governance, Strategic alliances, Corporate venture capital, IPOs

Abstract:
Analysis of FTSE 100 stock transactions data reported by the London Stock Exchange shows that trade frequency and average trade size impact price volatility for small trades (i.e. trades of one NMS or less). For large trades, only trade frequency affects price volatility. In further splitting small trades by relative size, trade frequency and average trade size are found to affect price volatility only for trades close to stocks' maximum guaranteed quoted depth. This evidence is consistent with microstructure models of dealer inventory adjustment and strategic behavior by informed traders, where dealers and uninformed traders face adverse selection costs.

Trading size, trading frequency, price volatility, London Stock Exchange, transactions data, informed trading, market microstructure models

Abstract:
Over the 1993-2000 period, a majority of U.S. venture-backed IPOs have venture backing by financial institutions. Each class of financial institutions has its own asset expertise, investment criteria and access to proprietary information on private firms, which we exploit evaluating whether venture investments by commercial banks, investment banks and insurance companies have independent effects on the equity underwriting process. We also examine whether these effects are a function of investment size and whether the effects differ for debt (loans) and equity investments. We find that each class of financial institutions making venture investments in a firm going public is associated with evidence of lower adverse selection risk; namely reduced underpricing and absolute offer price revisions and stronger long-term operating performance. The impacts of debt or equity investments by separate classes of financial institutions are largely additive. Moreover, the size of financial institution ownership in an issuer is more informative than the presence of financial institution investors. This body of evidence is consistent with equity holdings and loans by each class of financial institutions providing independent certification of issuer quality.

IPO, Underpricing of Stock Offers, Venture Capital, Financial Institutions, Certification Hypothesis, Conflict of Interest, Underwriting

Abstract:
The 'new issues puzzle' is that stocks of common stock issuers subsequently underperform nonissuers matched on size and book-to-market ratio. With 7000 seasoned equity and debt issues, we document that issuer underperformance reflects lower systematic risk exposure for issuing firms relative to the matches. A consistent explanation is that, as equity issuers lower leverage, their exposures to unexpected inflation and default risks decrease, thus decreasing their stocks' expected returns relative to matched firms. Equity issues also significantly increase stock liquidity (turnover), again lowering expected returns relative to nonissuers. We conclude that the 'new issue puzzle' is explained by a failure of the matched-firm technique to provide a proper control for risk. This conclusion is robust to issue characteristics and the choice of factor model framework.

New issues puzzle, long-run performance, factor risk, seasoned public offerings, equity issuer

Abstract:
We review the theory and statistical evidence concerning the causes and effects of seasoned public offerings of common stock. We focus in particular on results and findings that post-date the well known survey by Smith (1986). In fact, recent studies now provide at least partial answers to several of the "unresolved issues'' listed by Smith at the end of his survey. These include (i) to what extent does the market reaction to issue announcements depend on the flotation method; (ii) the conditions that lead issuers to select uninsured rights or rights with standby underwriting over a firm commitment underwritten offer; (iii) why rights issues continue to be the predominant flotation method in many foreign jurisdictions while they have become virtually extinct in the U.S.; and (iv) the determinants of direct and indirect flotation costs across flotation methods. In addition, we review (v) recent trends in aggregate issue activity; (vi) the timing of individual equity issues; and (vii) market microstructure effects of equity offers.

Seasoned equity offering, SEO, flotation costs, flotation method choice, underwriting, firm commitment offers, best effort, rights offer, standby rights offer, quality certification, shareholder takeup, adverse selection, market timing, aggregate issue activity, market microstructure effects

Abstract:
We investigate the importance of bid-ask spread induced biases on event date returns as exemplified by seasoned equity offerings by NYSE listed firms. We document significant negative return biases on the offering day which explain a large portion of the negative event date return documented in the literature. Buy/sell order flow imbalance is prominent around the offering and induces a relatively large spread bias. If order imbalances are suspected, the researcher can use returns calculated from the midpoint of the closing bid and ask quotes, instead of returns calculated from closing transaction prices, to avoid this return bias.

Seasoned equity offering, market microstructure, bid-ask bounce, order flow imbalance

Abstract:
Announcements of stock repurchase tender offers are examined as a source of information to the market on the firm's future earnings prospects and market risk level. We find positive average earnings surprises and equity systematic risk reductions following tender offers but not, in most instances, preceding them. We find positive stock price reactions to tender offer announcements to be positively correlated with earnings surprises over the concurrent and subsequent two years, and negatively correlated with changes in equity and firm market risk. Finally, stock price reactions to quarterly earnings announcements are more strongly correlated with time-series based earnings surprises in the year prior to the tender offer than during the subsequent year, consistent with tender offer announcements conveying earnings information to the market.

Tender offer, stock repurchase, earnings announcement, earnings surprise, systematic risk, beta

Abstract:
This paper examines daily open-to-close returns of major stock market indices on the New York Stock Exchange, Tokyo Stock Exchange and the London Stock Exchange over the 1985-1990 period, which encompasses the October 1987 Stock Market Crash. We estimate volatility spillover effects across the 24 hour day using a GARCH-M model. We find evidence that volatility spillover effects emanating from Japan have been gathering strength over time, especially after the 1987 Crash. This may reflect a growing awareness by domestic investors of the economic interdependence of international financial markets since the 1987 Stock Market Crash.

International Stock Markets, Price and Volatility Spillovers, London Stock Exchange, Tokyo Stock Exchange, New York Stock Exchange, Stock Market Crash, GARCH, Financial Integration

Abstract:
This study examines the impact of changing dealer competition and order flow across the 24 hour day on bid-ask spreads in the foreign exchange (FX) market. Using one year of tick-by-tick data in the spot Deutschmark-Dollar FX market, trading information is aggregated into 15 minute intervals over the trading day. Dealer competition is approximated by the number of individual dealers revising their quotes in each 15 minute interval. Bid-ask spreads, dealer activity and volatility are jointly modeled in a 3 equation VAR system, taking into account major market microstructure theories of spread determination which focus on adverse selection risk and inventory costs. Model estimation is by GMM, and takes into account a rich set of seasonal patterns and strong serial correlation in the dependent variables. Consistent with market microstructure theory, bid-ask spreads decrease as predicted dealer activity rises and as predicted FX volatility falls. Dealer competition is strongly time-varying and highly predictable, reflecting changing business activity over the 24-hour trading day as major Asian, European and North American markets open and close. Model estimates show that an expected addition of another dealer lowers average quoted spreads by 1.7%, while a 10% rise in FX volatility raises average quoted spreads by 10%.

Foreign Exchange, FX Trading, Market Microstructure Models, Tick-by-Tick Trades, 24 Hour Trading, Dealer Competition, Market Making, Dealer Market, Bid-Ask Spread, FX Volatility, VAR model, GMM

Abstract:
This paper explores implications of differential personal taxation for corporate investment and dividend decisions. The personal tax advantage of dividend deferral causes shareholders to generally prefer greater investment in real assets under internal as opposed to external financing. Furthermore, dividend deferral is shown to be costly at the corporate level, causing shareholders in different tax brackets at times to disagree over optimal investment and dividend policies under internal financing. The profitability of internally-financed security investment is shown to depend on a security's tax status and shareholders' tax brackets. However, externally-financed security purchases are unprofitable from a tax standpoint.

Dividends, Investment, Personal Taxation, Corporate Taxation, Internal Financing, External Financing, Tax Brackets, Taxes, Shareholder Conflicts of Interest

Abstract:
We examine the relation between brokerage firm research coverage and their equity ownership in IPO issuers due to earlier venture investments. A major concern of investors and regulators is that these combined activities can compromise the accuracy of analyst reports by giving brokerage firms incentives to support the IPOs of issuers in which they are ventures investors. Alternatively, equity ownership could enhance the credibility of affiliated analysts with investors and discourage affiliated analysts from providing booster shots to issuer stock prices. Equity ownership could also align the interests of brokerage firms and IPO issuers by inducing affiliates to provide research coverage, especially by Institutional Investor all star analysts. Our results indicate that offering venture investment and analyst research under one roof benefits both issuers and IPO investors and does not create serious conflicts of interest between affiliated firms and investors. The recommendations of affiliated analysts are less overly optimistic and produce larger abnormal announcement returns, especially for issuers with greater information asymmetry. Our results also yield several implications for the recent NASD and NYSE rules changes regarding equity ownership of IPO firms and affiliated analysts.

stock recommendations, sell-side analyst, equity ownership, universal banking, financial institutions

Abstract:
This study uses transactions data to compare the speed of price adjustments to seasoned equity offering announcements by NYSE/AMEX and NASDAQ stocks. We find that price adjustments following offering announcements are significantly faster on NASDAQ than on the NYSE/AMEX and that the difference in reaction times can be as much as one hour. This result is not due to differences in issuer characteristics or the size of announcement effects across the markets. Further analysis suggests that the faster price reaction of NASDAQ stocks is due to several differences in market structure. We find evidence that greater risk-taking by NASDAQ dealers, more rapid electronic order execution on NASDAQ, a more potent information trading threat (SOES bandits) on NASDAQ, stale limit orders on the NYSE/AMEX and a less efficient price discovery mechanism at the open of the NYSE/AMEX, all contribute to more rapid NASDAQ stock price adjustments.

Price adjustment, Market structure, Equity Offering Announcements

Abstract:
We explore the time series properties of overnight and daytime returns on the London Stock Exchange's primary stock market index, the FTSE-100 on the over the 1984-1991 period. We use a modified GARCH model to specify daytime and overnight return dynamics where (a) intra-day returns can have different impacts and persistence on stock return volatility, (b) return effects on volatility can be asymmetric and (c) intra-day returns can follow conditional distributions with different fourth moments. We uncover important changes in return dynamics and conditional fourth moments following the stock exchange's major restructuring called "Big Bang", which merged broker and dealer functions and after the1987 stock market crash.

Stock Return Dynamics, London Stock Exchange, GARCH, Exchange Restructuring, Big Bang, Stock Market Crash

Abstract:
This paper addresses the question of whether economic incentives exist for mortgage lenders to avoid or to minimize mortgage originations in neighborhoods inhabited primarily by low-income racial minorities. The Option Pricing Model is utilized to determine what mortgage borrower characteristics affect the market value of the mortgage contracts. It is found that existing laws do not enable mortgage lenders to vary either origination prices or mortgage terms so as to adjust for differences in the market values of mortgages. As a result, incentives are created for both the mortgage lender and the mortgage insurer to avoid originations and underwritings in areas with relatively high default probabilities. Various changes in mortgage lending regulations are suggested to eliminate these incentives, and the effects of alternative programs to subsidize mortgage borrowers with relatively high default probabilities are considered.

Mortgages, default, option pricing, mortgage insurance, redlining, price controls

Abstract:
Using a comprehensive sample of M&A offers over 1990-2008, we find that more reputable law firms significantly affect M&A offer outcomes, even after controlling for offer, bidder and investment bank characteristics. Top bidder legal advisors are associated with significantly higher deal completion rates than other legal advisors. In contrast, top target legal advisors are associated with significantly higher deal withdrawal rates than other legal advisors. Top bidder and target law firms are both associated with significantly higher takeover premia in completed deals than less prominent law firms. Our interpretation is that top bidder law firms have incentives to complete deals even in the face of higher takeover premia, while top target law firms have incentives to obtain higher takeover premia in completed M&A deals. These offer outcomes appear to be associated with certain offer characteristics that law firms can influence: (a) the incidence of target termination fee provisions, which are significantly associated with both top bidder and target legal advisors and (b) tender offers, which top bidder legal advisors are significantly associated with compared to less prominent legal advisors. Perhaps in anticipation of higher premia, bidder announcement-period stock-price reactions are significantly more negative for offers involving a top bidder or target legal advisor. Interestingly, we do not find evidence to suggest that bidder announcement effects significantly influence deal completion rates; but top M&A law firms do.

Law firms, M&A, reputation, law firm reputation, M&A law firms, deal lawyers, mergers, acquisitions, M&A legal advisors, market shares, league tables, deal completion, takeover premium, announcement period return, acquisition premium

Abstract:
In this paper a joint capital asset pricing model and option pricing model is considered and applied to the derivation of an equity's value and its systematic risk. We first analyze the propreties of the two models and present some newly found properties of the option pricing model. We then investigate the effects of these properties on firm securityholders with less than perfect "me first" rules. We show how unanticipated changes in firm capital and asset structures can differentially affect a firm's debt and equity. In the final section we consider a number of theoretical and empirical implications of the joint model. These include investment policy as well as the causes and effects of non-stationarity in the systematic risk of levered equity and risky debt.

Option pricing, wealth expropriation, nonstationary risk, leverage, investment decisions, financing decisions, conglomerate mergers, mergers, risky debt, levered equity

Abstract:
In this paper, a model of corporate leverage choice is formulated in which corporate and differential personal taxes exist and supply side adjustments by firms enter into the determination of equilibrium prices of debt and equity. The presence of corporate tax shield substitutes for debt such as accounting depreciation, depletion allowances, and investment tax credits is shown to imply a market equilibrium in which each firm has a unique interior optimum leverage decision (with or without leverage-related costs). The optimal leverage model yields a number of interesting predictions regarding cross-sectional and time-series properties of firms’ capital structures. Extant evidence bearing on these predictions is examined.

Capital Structure, Corporate Taxes, Personal Taxes, Bankruptcy Costs, Non-debt Tax Shields, Leverage

Abstract:
During the period of 1998 to 2006, over 13% of large U.S. public corporations have independent directors domiciled in foreign countries. We find that firms appointing foreign independent directors (FIDs) experience significantly negative announcement-period abnormal stock returns and the presence of FIDs leads to significant lower firm performance and value. Further analyses reveal that FIDs are more likely to miss board meetings than U.S. based directors and firms with FIDs on board give their CEOs excessively high compensation and are more prone to commit financial misreporting that requires future restatement. Overall, our findings support the conjecture that FIDs’ geographic location creates significant logistical and informational problems hindering their ability to engage in the governance of firms, and as a result, they undermine board effectiveness and lead to more agency problems and poor firm performance. We find only limited evidence that firms benefit from the international perspective and expertise of FIDs.

Corporate governance, boards of directors, foreign directors