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Abstract:
The average cash to assets ratio for U.S. industrial firms increases by 129% from 1980 to 2004. Because of this increase in the average cash ratio, American firms at the end of the sample period can pay back their debt obligations with their cash holdings, so that the average firm has no leverage when leverage is measured by net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms. It is concentrated among firms that do not pay dividends. The average cash ratio increases over the sample period because the cash flow of American firms has become riskier, these firms hold fewer inventories and accounts receivable, and the typical firm spends more on R&D. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio.

Abstract:
The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase in cash holdings is that at the end of the sample period, the average firm can pay back all of its debt obligations with its cash holdings; in other words, the average firm has no leverage if leverage is measured as net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms, and it is much more pronounced for firms that do not pay dividends and for firms in industries whose cash flows became riskier. The average cash ratio increases over the sample period because firms change: their cash flows become riskier, they hold fewer inventories and accounts receivable, and they are increasingly R&D intensive. The precautionary motive for cash holdings plays an important role in explaining the increase in the average cash ratio; in contrast, in our empirical tests, agency considerations are not successful in explaining the increase.

Abstract:
This paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

Abstract:
This paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

Abstract:
This paper examines how stock options have affected the decision to repurchase shares, the amount repurchased, and the market reaction to the repurchase announcement. I find that firms announce repurchases when executives have large numbers of options outstanding and when employees have large numbers of options currently exercisable. Once the decision to repurchase is made, the amount repurchased is positively related to total options exercisable by all employees, but independent of managerial options. These results are consistent with managers repurchasing both to maximize their own wealth and to fund employee stock option exercises. The market appears to recognize this motive, however, and reacts less positively to repurchases announced by firms with high levels of non-managerial options outstanding.

share repurchase, executive stock options, employee stock options

Abstract:
This paper examines how stock options have affected the decision to repurchase shares, the amount repurchased, and the market reaction to the repurchase announcement. I find that firms announce repurchases when executives have large numbers of options outstanding and when employees have large numbers of options currently exercisable. Once the decision to repurchase is made, the amount repurchased is positively related to total options exercisable by all employees, but independent of managerial options. These results are consistent with managers repurchasing both to maximize their own wealth and to fund employee stock option exercises. The market appears to recognize this motive, however, and reacts less positively to repurchases announced by firms with high levels of non-managerial options outstanding.

share repurchase, executive stock options, employee stock options

Abstract:
We analyze the empirical power and specification of test statistics designed to detect abnormal bond returns in corporate event studies, using monthly and daily data. We find that test statistics based on frequently used methods of calculating abnormal monthly bond returns are biased. Most methods implemented in monthly data also lack power to detect abnormal returns. We also consider unique issues arising when using the newly available TRACE data, and formulate and test methods to calculate daily abnormal bond returns. Using daily bond data significantly increases the power of the tests, relative to the monthly data. Weighting individual trades by size while eliminating non-institutional trades from the TRACE data also increases the power of the tests to detect abnormal performance, relative to using all trades or the last price of the day. Further, value-weighted portfolio matching approaches are better specified and more powerful than equal-weighted approaches. Finally, we examine abnormal bond returns to acquirers around mergers and acquisitions to demonstrate how the abnormal return model and use of daily versus monthly data can affect inferences.

event study, bond returns, TRACE

Abstract:
The impact of all-star analyst turnover on initial public offering market share and the performance of initial public offerings is examined. Overall, we find that neither "winners" nor "losers" in the battle for all-star analysts experience a significant change in market share. In order to offset the loss of a star analyst, investment banks become more aggressive by taking on more speculative deals. The banks gaining the all-stars also take on more speculative issuers. Although forecast accuracy increases following the arrival of a star, forecast optimism does not change, which suggests that analyst objectivity is not affected. Overall, the evidence is not consistent with the commonly held view that analysts have a significant impact on a bank's ability to attract IPO deal flow.

IPO, all-star analyst, market share, underpricing, IPO performance

Abstract:
We examine the accuracy of various approximations of firms' repurchases of common stock used in previous studies, and find that decreases in shares outstanding as reported by CRSP and purchases of common stock and preferred stock (adjusted for changes in preferred stock) are good measures of actual repurchases. We also examine how characteristics such as option usage and the announcement of repurchase programs affect the measures. Compustat purchases of common and preferred stock (adjusted for the change in preferred stock) is the most accurate measure of actual repurchases, particularly for firms with high stock options. Further, the choice of proxy can significantly impact research results. Compustat purchases of common stock is the only estimate of actual repurchases that detects the positive relation between repurchases and employee stock options in a multivariate setting.

stock repurchases, methodology

Abstract:
We examine long-run stock and operating performance following secondary equity offerings. For a subsample of secondary issuers in which the seller is an insider, both three- and five-year post-issue abnormal stock returns are significantly negative. The findings are robust to alternative long-run abnormal return measurement methodologies. The abnormal returns are large relative to the initial market reaction (mean and median five-year abnormal returns of -33.33% and -73.80%, respectively). The operating performance of these firms also declines subsequent to the issue. This supports the hypothesis that the negative performance of secondary equity offerings can be attributed to managers exploiting windows of opportunity by issuing overvalued shares.

secondary equity issues, long-run performance

Abstract:
We examine long-run stock and operating performance following secondary equity offerings. For a subsample of secondary issuers in which the seller is an insider, both three- and five-year post-issue abnormal stock returns are significantly negative. The findings are robust to alternative long-run abnormal return measurement methodologies. The abnormal returns are large relative to the initial market reaction (mean and median five-year abnormal returns of -33.33% and -73.80%, respectively). The operating performance of these firms also declines subsequent to the issue. This supports the hypothesis that the negative performance of secondary equity offerings can be attributed to managers exploiting "windows of opportunity" by issuing overvalued shares.

secondary equity issues, long-run performance

Abstract:
This paper analyzes the characteristics and impact of loans made to executives for purposes of stock purchase, option exercise and relocation. We find that loans made to assist executives in purchasing stock or excercising options are larger and have higher interest rates than relocation loans. All types of loans, however, are issued at below-market interest rates, on average. We also find while stock purchase loans are given to managers with low existing ownership, option exercise loans are given to managers with high existing ownership and high cash compensation. Finally, our results indicate that executive stock ownership increases follwong stock purchase and option exercise loans. For managers as a whole, a loan that enables a manager to buy 100 shares of stock results in only an eight-share increase in ownership. However, the relation between ownership changes and stock purcahse loans is much stronger for low ownership managers.

Abstract:
Although industrial classifications are an important part of financial research, few researchers explicitly recognize the data base they use in classifying industrial structure. There are substantial differences, however, in primary SIC codes for firms on Compustat and CRSP. Over 36% of the classifications disagree at the two-digit level and nearly 80% disagree at the four-digit level. Thus, research results and significance levels based on industry comparisons could differ depending on the source of SIC codes, irrespective of the underlying economics of the problem being analyzed. This research analyzes the impact of industrial classification on financial research. Using approximately 10,000 firms jointly covered by Compustat and CRSP, we simulate a typical research experiment. Specifically, we: 1) examine the extent of agreement between commonly used industrial classifications, 2) examine how SIC codes change over time, and 3) test the specification and power of alternate industrial classifications in typical financial research. Our results document dramatic differences in industrial classifications and analyze the impact of these differences upon statistical inference in finance.

Abstract:
We examine the accuracy of various estimates of firms' repurchases of common stock used in earlier studies, and find high error rates in the most commonly used estimators. We also find that the procedure used to estimate open market share repurchases can significantly impact results. The Compustat-based measure, which is the most accurate, deviates from the actual number of shares repurchased by more than 30% in about 16% of the cases. We conclude that many studies should be revisited now that the SEC mandates disclosure of precise information about share repurchases in Forms 10-Q and 10-K.

stock repurchases, share repurchases

Abstract:
Insider acquisitions of shares are supposed to align the interests of managers and shareholders. Thus, they are typically viewed as positive signals. However, if the transactions do not put insiders' wealth at risk, perhaps this conclusion is a bit premature. We focus on loan financing of insider share acquisitions to test this idea. Our results indicate that loan financed insider purchases and option exercises earn smaller profits than non loan-financed counterparts. Our results also suggest that loan-financed insider purchases are an additional method to move an executive quickly to a target level of incentives. Based on these results, we conclude that (a) not all insider trades are alike, (b) insiders recognize when they are "playing with other people's money," and (c) loan-financed purchases play an important role in incentive alignment.

Executive Loans, Insider Trading, Option Exercise

Abstract:
SEO underpricing has increased dramatically since the early 1980s. Many of the firms that went public during this period have high insider ownership after the IPO and implement follow-on SEOs soon after. Therefore, we suggest that the higher discounts are partially due to temporary price pressure in recent IPOs with thin public float. We find that the effect of insider ownership on SEO underpricing is twofold. First, insider ownership reduces float, thereby increasing price pressure and SEO underpricing. Second, the greater the percentage of secondary shares offered, the lower the underpricing, suggesting that managers pressure banks to reduce underpricing when their personal wealth is at stake.

seasoned equity offerings, follow-on offerings, underpricing, float, marketing of securities, ownership

Abstract:
We analyze the empirical power and specification of test statistics designed to detect abnormal bond returns in corporate event studies, using monthly and daily data. We find that test statistics based on frequently used methods of calculating abnormal monthly bond returns are biased. Most methods implemented in monthly data also lack power to detect abnormal returns. We also consider unique issues arising when using the newly available daily bond data, and formulate and test methods to calculate daily abnormal bond returns. Using daily bond data significantly increases the power of the tests, relative to the monthly data. Weighting individual trades by size while eliminating noninstitutional trades from the TRACE data also increases the power of the tests to detect abnormal performance, relative to using all trades or the last price of the day. Further, value-weighted portfolio-matching approaches are better specified and more powerful than equal-weighted approaches. Finally, we examine abnormal bond returns to acquirers around mergers and acquisitions to demonstrate how the abnormal return model and use of daily versus monthly data can affect inferences.

G12, G14

Abstract:
This paper analyzes the characteristics and impact of loans made to executives for purposes of stock purchase, funding of options exercised and relocation. We find that loans made to assist executives in purchasing stock or exercising options tend to be larger and have higher interest rates than relocation loans. On the other hand, all loans are issued at below-market interest rates. We also find evidence that loans made for the purpose of purchasing stock or exercising options result in an increase in executive stock ownership. When looking at managers as a whole, a loan that enables a manger to buy 100 shares of stock results in an eight-share increase in ownership. However, the relation between ownership changes and stock purchase loans is one-to-one for low ownership managers.

Loans, Managerial Stock Ownership, Stock Options

Abstract:
Using approximately 10,000 firms jointly covered by Compustat and CRSP from 1974-1993, we find substantial differences in the SIC codes designated by the two databases. Over 36% of the classifications disagree at the two-digit level and nearly 80% disagree at the four-digit level. We examine the impact of these differences upon financial research in several ways. First, we show that the classification of utilities, financial firms, and conglomerate acquisitions are affected by the choice of CRSP versus Compustat SIC codes. Second, we show that industry classification matters in financial research by illustrating that size and industry matched comparisons are more powerful than pure size matches. Third, we test the specification and power of Compustat versus CRSP classifications by simulating a typical financial experiment in which sample firms are matched to control firms by industry. We find that: (1) Compustat matched samples are more powerful than CRSP matched samples in detecting abnormal performance, (2) non-parametric tests outperform parametric tests, and (3) four-digit SIC code matches are more powerful than two-digit SIC code matches. These results are robust to the inclusion or exclusion of extreme values, and hold for both NYSE/AMEX and Nasadaq firms.