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Abstract:
This paper models the real investment and financial portfolio decisions of a regulated utility, selling power at fixed prices to consumers and buying power in an unregulated spot market. Consumer demand is stochastic and subject to large shocks. Utilities can either meet consumers' demand by buying power on the spot market or by adding capacity. The risk associated with a surge in consumer demand can be hedged by trading in a financial derivatives market. Solving for the optimal policy for an individual utility, we show that, as power shortfalls increase, the optimal hedge position is a nonlinear mixture of price risk and quantity risk hedging. We then examine the aggregate impact of these hedging positions and show that the spot price process shifts from a marginal-cost-based regime to a regime based on aggregate financial capacity of the power industry. Although individual utilities, acting as price takers, can lower their expected power shortfalls by hedging with derivatives, derivative demand in the aggregate increases spot price volatility when power default occurs, and may thus increase the number of power defaults. At the same time, punitive regulatory penalties for power defaults may actually increase aggregate defaults by encouraging utilities to hedge outage risks through derivative markets rather than through increased capacity.

Utilities, Risk Management, Capacity choice, Contagion effect

Abstract:
We provide evidence of a link between firm dividend policy and stock market liquidity. In the cross-section, owners of less (more) liquid common stock are more (less) likely to receive cash dividends. Predictions of the proportion of dividend payers based on 1963-1977 cross-sectional estimates account for most of the declining propensity of firms to pay dividends documented by Fama and French (2001). Furthermore, historic liquidity is an important determinant of dividend initiations and omissions. Finally, we show that sensitivity of firm value to aggregate liquidity declines after dividend initiations, suggesting that investors view stock market liquidity and dividends as substitutes.

Payout policy, Payout choice, Dividends, Liquidity, Trading costs

Abstract:
We provide evidence of a link between firm dividend policy and stock market liquidity. In the cross-section, owners of less (more) liquid common stock are more (less) likely to receive cash dividends. Over time, the notable increase in US stock market liquidity explains most of the declining propensity of firms to pay dividends documented by Fama and French (2001). We further show that past liquidity is an important determinant of dividend initiations and omissions for individual firms. Extending our analysis, we find evidence that sensitivity of firm value to innovations in aggregate liquidity declines after dividend initiations.

Payout policy, Payout choice, Dividends, Liquidity, Trading costs

Abstract:
In this paper, we develop a dynamic model of institutional share dumping surrounding control events. Institutional investors sometimes dump shares, despite trading losses, in order to manipulate share prices and trigger activism by "relationship" investors. These institutional investors are motivated to trade not only by trading profits but also by a desire to protect the value of their inventory and to disguise the quality of their own information. Relationship investor profit from targeting firms both by improving firm performance and by generating private information.

Strategic trading, Ownership structure, Corporate governance

Abstract:
In this paper, we develop a dynamic model of institutional share dumping surrounding control events. Uninformed institutional investors dump shares, despite trading losses, in order to manipulate share prices and trigger activism by activist "relationship" investors. Nonactivist institutional investors, who have private information regarding both firm value and the quality of their own information, are motivated to trade not only by trading profits but also by a desire to protect the value of their inventory and to disguise the quality of the information underlying their trades. Relationship investors, who use price and volume information to identify target firms, profit both from improving firm performance and from their private information about their own targeting activity. In addition to explicating recent empirical results on the relationship between institutional investor trading and corporate control events, the paper provides a number of new insights into the interaction between market microstructure and corporate governance, including predictions regarding the effect of share volume on subsequent governance activity, the relationship between the trading patterns of activist and nonactivist strategic investors, the effect of order flow on subsequent shareholder activism, and the effect of institutions' portfolio positions on the informativeness of their trading activity.

Capital and Ownership Structure and Corporate Governance

Abstract:
This study finds a significant and pervasive decline but not an elimination of CEO optionbased compensation after the corporate governance scandals around 2000-2001 centered on executive option compensation. Some, but not all, of the drop is predicted by changes in the characteristics of firms, CEOs, boards of directors, and markets. In the cross-section, the change in CEO options is positively related to firm size, growth opportunities, ownership by large pension funds, and CEO experience and negatively related to firm age, board size, and "fair" value expensing of options. The findings provide significant support for the hypothesis that CEO options are affected by optimal contracting considerations, the hypothesis that CEO power is a significant determinant of CEO options, and, to some extent, the hypothesis that differences in perceived and actual costs of CEO options are important. Overall, however, the optimal contracting hypothesis is most able to explain the cross-sectional variation in the decline in options after the scandals.

Executive stock options, Executive compensation, Corporate governance

Abstract:
We study the relation between liquidity costs and the kurtosis of daily stock returns for size-based portfolios of NYSE/AMEX stocks from 1964 to 2003. We document a robust, positive, and significant relation between the liquidity costs of trade and the kurtosis of daily stock return distributions. This relation holds for most standard measures of liquidity costs, as well as with simple proxies for liquidity costs such as stock price and firm size. The relation is also confirmed by the shift in kurtosis accompanying stock splits and by the relation between kurtosis and stock splits observed in non-U.S. stock markets.

Asset pricing anomalies, daily return, kurtosis, liquidity costs, transaction

Abstract:
We present a model in which underwriters ¿buy¿ early holding of IPO shares with underpricing and test the model's empirical implications. Issuers hire underwriters to price IPOs and allocate the shares to obtain benefits from holding. Buying institutions receive payment in two installments: revenues from flipping part of their initial allocations and gains from the future sale of remaining shares. The model suggests that IPOs with more reputable institutional buyers have larger holdings, greater price revisions, and more underpricing, as do IPOs underwritten by reputable underwriters. Our model also explains many of the major stylized facts about underpricing, and thus empirically dominates a number of theories found in the literature. We report several results that agree with the holding explanation.

Initial public offerings, Going public, Investment banking, Underpricing, Institutional investors, Underwriters

Abstract:
In this paper we develop an analytical model that characterizes the structure of price dispersion observed in electronic markets. Findings of our model are consistent with empirical evidence in these e-markets. We show that when different types of buyers' have different search costs, firms follow noncompetitive pricing strategies. Also, our model shows that price dispersion may actually increase if search costs falls, challenging the common belief that price dispersion decreases as search costs fall. We derive multiple price dispersion equilibria, with differing levels of welfare implications. These results are generated without the need for assumption of asymmetric information, and heterogeneity amongst buyers and/or firms. Our results show that the process of search alone may generate price dispersion, and highlight the importance of processes of search not only on prices, but also on the efficiency of e-markets.

Price dispersion, e-commerce, search costs

Abstract:
This paper models the real investment and financial portfolio decisions of a regulated utility, selling power at fixed prices to consumers and buying power in an unregulated spot market. Consumer demand is stochastic and subject to large shocks. Utilities can either meet consumers' demand by buying power on the spot market or by adding capacity. The risk associated with a surge in consumer demand can be hedged by trading in a financial derivatives market. Solving for the optimal policy for an individual utility, we show that, as power shortfalls increase, the optimal hedge position is a nonlinear mixture of price risk and quantity risk hedging. We then examine the aggregate impact of these hedging positions and show that the spot price process shifts from a marginal-cost-based regime to a regime based on aggregate financial capacity of the power industry. Although individual utilities, acting as price takers, can lower their expected power shortfalls by hedging with derivatives, derivative demand in the aggregate increases spot price volatility when power default occurs, and may thus increase the number of power defaults. At the same time, punitive regulatory penalties for power defaults may actually increase aggregate defaults by encouraging utilities to hedge outage risks through derivative markets rather than through increased capacity.

Utilities, Risk Management, Capacity choice, Contagion effect

Abstract:
We empirically analyze the cross-country differences in IPO underpricing among 18 countries between 2000 and 2006. In particular, we study the impact of cross-country differences in shareholders' legal protection and disclosure laws (henceforth, SPDL), level of information asymmetry, litigation risk and domestic bias on IPO underpricing. We use domestic bias as a proxy for the costs of block holding - higher the domestic bias, lower the costs of block holding. Following Stoughton and Zechner (1998) model we find that lower costs of block holding reduce IPO underpricing. Following Tinic (1988) we find that an accessible and effective legal system (we use as a proxy for litigation risk) tends to increase IPO underpricing. Also, we find that the level of information asymmetry has positive and significant effect on IPO underpricing. Contrary to our conjecture we find that SPDL has no impact on IPO underpricing. We argue that effective SPDL brings about an amelioration of informational asymmetries and thus, there exists an endogeneity between these two variables. Hence, we use two-stage regression technique to capture the impact of SPDL on IPO underpricing via its effect on information asymmetry. We find a large negative impact of SPDL on IPO underpricing - better SPDL tend to reduce information asymmetry by providing a level playing field for all investors. This informational symmetry tends to reduce the level of discount necessary for participating in the IPO market - the IPO underpricing.

International Finance, IPO Underpricing, Information Asymmetry, Legal Protection, Domestic Bias

Abstract:
We study the relation between liquidity costs and the kurtosis of daily stock returns for NYSE/Amex stocks from 1983 to 2007. We develop a analytical model connecting market microstructure effects to the kurtosis in return distribution and we provide empirical evidence linking the liquidity costs of trade to the kurtosis in daily stock return distribution. This association holds regardless of controls for size, price, volume, time series volatility and risk; and we find robust results regardless using Fama-MacBeth regression specifications and test controlling for endogeneity bias.

Asset pricing anomalies, daily return, kurtosis, liquidity costs, transaction costs

Abstract:
Behavioral differences between men and women have been well documented in social science as well as bioscience literature. Scientists attribute these behavioral differences mainly to two hormones: male hormones testosterone and female hormone estrogen. In this paper we analyze the effects of women board members on firms' corporate governance standards. We find that firms with at least one female member on their board pay higher dividends. We also find that companies with women board members tend to issue more debt relative to companies with all men board. We find women board member are associated with lower merger and acquisition activities. Our results are inconclusive of the effects of women board members on market-based firm performance, but the presence of women board members significantly improves operating performance of firms. All our findings seem to point that women participation in corporate boards tend to improve the governance standard.

Board composition, Corporate governance, Mergers & Acquisition, Payout policy