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Abstract:
This paper provides a survey of some existing as well as new evidence of the relation between market prices and fundamentals in the internet sector over the period January 1998 to February 2000. Appealing to results across a broad class of outcomes, we demonstrate a strong, circumstantial case against market rationality. In particular, we investigate (i) the level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to information-based events, (iii) internet-related anomalies, and (iv) the volatility of internet prices. As a potential explanation, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that "optimistic" investors overwhelm "pessimistic" ones, leading to prices not reflecting fundamental values. Empirical support for this model is provided using data from the stock shorting market.

Market efficiency, investments, event study, Internet

Abstract:
After an initial public offering, most existing shareholders are subject to a lock-up period in which they cannot sell their shares for a prespecified time. At the end of the lock-up, there is a permanent and large shift in the supply of shares. The lock-up expiration is a particularly interesting event to study because it is (i) completely known and observable, and (ii) potentially meaningful economically given the existing literature on supply shocks. This paper investigates volume and price patterns around this period, and documents several interesting results. Specifically, even though the event is totally anticipated, there is a 1% -- 3% drop in the stock price, and a 40% increase in volume, when the lock-up ends. Various explanations are considered and rejected, suggesting a new anomalous fact against market efficiency. However, convincing evidence is provided which shows that this inefficiency is not exploitable, i.e., arbitrage is not violated. This aside, the evidence points to a downward sloping demand curve for shares, with the most likely explanation pointing to a permanent, long-run effect.

Abstract:
We study benefits received by target company CEOs in completed mergers and acquisitions. These executives obtain wealth increases with a median of $4 to $5 million and a mean of $8 to $11 million, roughly in line with the permanent income streams that they sacrifice. CEOs receive lower financial gains from those transactions in which they become executives of the buyer, suggesting that tradeoffs exist between the financial and career-related benefits they extract. Regression estimates suggest that target shareholders receive lower acquisition premia in transactions that involve extraordinary personal treatment of the CEO.

Takeovers, acquisitions

Abstract:
This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that "optimistic" investors overwhelm "pessimistic" ones, leading to prices not reflecting fundamental values about cash flows summarized by aggregate beliefs. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv )the eventual fall, or bubble bursting, of internet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.

Abstract:
We find that executives sell shares of previously owned stock after receiving equity-based incentive compensation, counteracting boards' attempts to tie their wealth to firm value. Executives sell stock during years in which they receive new stock options or restricted stock, and some evidence indicates further selling over time if options move into-the-money. When options are exercised, managers sell a large majority of shares acquired. Effects are strongest for executives who already hold many shares, while stock-based compensation does appear to increase the holdings of managers with low ownership. Although valuation theorists who study executive compensation frequently assume that executives cannot hedge the risks of stock-based pay, our research provides evidence to the contrary.

Abstract:
We examine whether firms use foreign currency derivatives for hedging or for speculative purposes. Using the sample of all S&P 500 nonfinancial firms for 1993, we find strong evidence that firms use foreign currency derivatives for hedging; the use of derivatives significantly reduces the exchange-rate risk firms face. We also find that the decision to use derivatives depends on exposure factors (i.e. foreign sales and foreign trade) and on variables largely associated with theories of optimal hedging (i.e., size and R&D expenditures), and that the level of derivatives used depends only on a firm's exposure through foreign sales and trade.

Risk management, Multinationals, Corporate policies, Foreign trade

Abstract:
This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that â¬Soptimisticâ¬? investors overwhelm â¬Spessimisticâ¬? ones, leading to prices not reflecting fundamental values about cash flows summarized by aggregate beliefs. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv) the eventual fall, or bubble bursting, of internet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.

Abstract:
This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agentswith varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that â¬Soptimisticâ¬? investors overwhelm â¬Spessimisticâ¬? ones, leading to prices not reflecting fundamental values about cash flows summarized by aggregate beliefs. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv) the eventual fall, or bubble bursting, of internet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.

Abstract:
This paper explores a model based on agents with heterogeneous beliefs facing short sales restrictions, and its explanation for the rise, persistence, and eventual fall of Internet stock prices. First, we document substantial short sale restrictions for Internet stocks. Second, using data on Internet holdings and block trades, we show a link between heterogeneity and price effects for Internet stocks. Third, arguing that lockup expirations are a loosening of the short sale constraint, we document average, long-run excess returns as low as -33 percent for Internet stocks post lockup. We link the Internet bubble burst to the unprecedented level of lockup expirations and insider selling.

Abstract:
This paper provides one potential explanation for the rise, persistence and eventual fall of internet stock prices. Specifically, we appeal to a model of heterogenous agents with varying degrees of beliefs about asset payoffs who are subject to short sales constraints. In this framework, it is possible that "optimistic" investors overwhelm "pessimistic" ones, leading to prices not reflecting fundamental values about cash flows summarized by aggregate beliefs. Empirical support for this explanation is provided by exploring the behavior of internet stock prices during the period January 1998 to November 2000. In particular, we document four important elements to our story: (i) the high level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to a shift towards potentially optimistic investors, (iii) empirical results consistent with shorting being at its maximum possible level for internet stocks, and (iv) the eventual fall, or bubble bursting, of internet stocks being tied to the increase in the number of sellers to the market via expiration of lockup agreements.

Abstract:
This paper documents a negative relation between current leverage and future growth. This relation holds within and across industries, when leverage is assumed to depend directly on future growth, and irrespective of which variables are used to forecast growth. Its economic significance exceeds the economic significance of the relation between cash flow and future growth documented in the literature. It holds for low q firms but not for high q firms or for firms in high q industries. Therefore, leverage does not reduce growth for firms known to have good investment opportunities but it is negatively related to growth for firms whose growth opportunities are not recognized by the capital markets and for firms whose growth opportunities are not sufficiently valuable to overcome the effects of their debt overhang.

Abstract:
After an initial public offering, most existing shareholders are subject to a lock-up period in which they cannot sell their shares for a prespecifed time. At the end of the lock-up, there is a permanent and large shift in the supply of shares. The lock-up expiration is a particularly interesting event to study because it is (i) completely known and observable, and (ii) potentially meaningful economically given the existing literature on supply shocks. This paper investigates volume and price patterns around this period, and documents several interesting results. Specifically, even though the event is totally anticipated, there is a 1% - 3% drop in the stock price, and a 40% increase in volume, when the lock-up ends. Various explanations are considered and rejected, suggesting a new anomalous fact against market efficiency. However, convincing evidence is provided which shows that this inefficiency is not exploitable, i.e., arbitrage is not violated. This aside, the evidence points to a downward sloping demand curve for shares, with the most likely explanation pointing to a permanent, long-run effect.

Abstract:
We test the prediction that leverage is inversely associated with managerial entrenchment. We examine leverage levels and year-to-year changes for several hundred firms between 1984 and 1991. We find that leverage levels are positively related to CEO stock ownership and CEO stock option holdings, and negatively related to CEO tenure and board of directors size. While generally consistent with less entrenched CEOs pursuing more leverage, these results are subject to alternative interpretations. We therefore analyze year-to-year changes in leverage around exogenous shocks to corporate governance variables. We find that leverage increases after unsuccessful tender offers and â¬Sforcedâ¬? CEO replacements, and under certain conditions after the arrival of major stockholders. These relations have greater magnitude when the sample is restricted to low-leverage firms, even when 80% of firms are defined as low-leverage. The results are consistent with decreases in entrenchment leading to increases in leverage, and with the majority of firms having less debt than optimal.

Abstract:
In this paper, we investigate empirically the well-known put-call parity no-arbitrage relation in the presence of short sale restrictions. We use a new and comprehensive sample of options on individual stocks in combination with a measure of the cost and difficulty of short selling, specifically the spread between the rate a short-seller earns on the proceeds from the sale relative to the standard rate (the rebate rate spread). We find that violations of put-call parity are asymmetric in the direction of short sales constraints, their magnitudes are strongly related to the rebate rate spread, and they are maintained even in the presence of transactions costs both in the options and equity lending market. These violations appear to be related to both the maturity of the option and the level of valuations in the stock market, consistent with a behavioral finance theory that relies on over-optimistic investors in the stock market and segmentation between the stock and options markets. Moreover, the extent of violations of put-call parity and the rebate rate spread for individual stocks are significant predictors of future stock returns. For example, cumulative abnormal returns, net of borrowing costs, over a 2ﾫ-year sample period can exceed 65%.

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Abstract:
We study associations between managerial entrenchment and firms capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross-sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment-reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

Abstract:
In this paper, we investigate empirically the well-known put-call parity no-arbitrage relation in the presence of short sale restrictions. We use a new and comprehensive sample of options on individual stocks in combination with a measure of the cost and difficulty of short selling, specifically the spread between the rate a short-seller earns on the proceeds from the sale relative to the normal rate (the rebate rate spread). We find statistically and economically significant violations of put-call parity that are strongly related to the rebate rate spread. Stocks with negative rebate rate spreads exhibit prices in the stock market that are up to 7.5% greater than those implied in the options market (for the extreme 1% tail). Even after accounting for transaction costs in the options markets, these violations persist and their magnitude appears to be related to the general level of valuations in the stock market. Moreover, the extent of violations of put-call parity and the rebate rate spread for individual stocks are significant predictors of future stock returns. For example, cumulative abnormal returns, net of borrowing costs, over a 2½-year sample period can exceed 70%. It is difficult to reconcile these results with rational models of investor behavior, and, in fact, they are consistent with the presence of over-optimistic irrational investors in the markets for some individual securities.

Abstract:
We provide evidence that corporate refocusing are motivated, in part, by the desire to enhance shareholder value, but that it is often necessary for agency problems to be reduced before managers will begin divestiture programs. Diversified firms that refocus have significantly greater value losses from their diversification policies than multisegment firms that do not refocus. Major events of market discipline usually must occur, however, before managers attempt to undo suboptimal diversification programs, whereas the same events occur only rarely for a matched sample of nonrefocusing firms during the same time frame. Refocusing firms have a high frequency of CEO changes, and also often have new outside blockholders, unsuccessful takeover bids, and signs of financial distress in the period preceding their divestitures. Finally, we find that the cumulative abnormal returns over all of the refocusing-related announcements of a refocusing firm average 7.3%, and that these abnormal returns are significantly related to the amount of value that was being destroyed by the refocuser s diversification policy.

Abstract:
We study the precursors and outcomes of refocusing episodes by diversified firms that were not taken over. Those that refocus have more value-reducing diversification policies than those not refocusing. Major disciplinary or incentive-altering events (including management turnover, outside shareholder pressure, changes in management compensation, and financial distress) usually must occur, however, before managers refocus. Consistent with divestitures reversing, at least in part, value destruction from unsuccessful diversification strategies, the cumulative abnormal returns over a firm's refocusing-related announcements average 7.3%, and are significantly related to the amount of value-reduction associated with the refocuser's diversification policy.

Abstract:
This paper provides an analysis of some existing as well as new evidence of therelation between market prices and fundamentals in the internet sector over the period January 1998 to February 2000. Appealing to results across a broad class of outcomes, we demonstrate a strong, circumstantial case against market rationality In particular, we investigate (i) the level of internet stock prices given their underlying fundamentals, (ii) responses of stock prices to information-based events, and (iii) the volatility of internet prices. We review several potential explanations of these phenomena, including one based on heterogenous beliefs across investors who are subject to short sales constraints. We provide a discussion of the empirical evidence supporting this latter explanation.

Abstract:
We investigate whether investors price and the real option to abandon the firm for its liquidation value. Theory prices this real option as an American put with both a stochastic strike price (liquidation value) and a stochastic value of the underlying security (the value of cash flows). The major empirical implications are that firm value increases in liquidation value, after controlling for expected going-concern cash flows, and that more generalizable assets produce more abandonment option value. We use both discounted analyst forecasts of future earnings and industry-median cash flow multipliers to proxy for expected going-concern cash flows, and we rely on prior literature to categorize assets as more or less specialized. Using these measures, we find strong support for the major empirical predictions of abandonment put option theory.

Abstract:
Berger and Ofek (1995) confirm recent evidence by Lang and Stulz (1994) of a value loss from diversification in the 1980s, and use segment-level data to estimate the magnitude of the loss. They find that, during 1986-1991, the average diversified firm destroyed about 15% of the value its lines of business would have had if operated as stand-alone businesses. The evidence that diversification represented a suboptimal managerial strategy suggests that internal control systems do not prevent managers from destroying significant amounts of value. The value destruction does, however, generate large profit opportunities for outsiders. The natural question that arises is thus whether these profit opportunities results in takeovers disciplining the managements of firms with large and persistent value losses from diversification.

Abstract:
We study benefits received by target company CEOs in completed mergers and acquisitions. These executives obtain wealth increases with a median of $4 to $5 million and a mean of $8 to $11 million, roughly in line with the permanent income streams that they sacrifice. CEOs receive lower financial gains from those transactions in which they become executives of the buyer, suggesting that tradeoffs exist between the financial and career-related benefits they extract. We find very high rates of turnover both at the time of the merger and, for those executives who stay, for several years post-merger. Regression estimates suggest that target shareholders receive lower acquisition premia in transactions that involve extraordinary personal treatment of the CEO.

Abstract:
We investigate whether investors price the option to abandon the firm for its liquidation value. Theory prices this real option as an American put with both a stochastic strike price (liquidation value) and a stochastic value of the underlying security (the value of cash flows). The major empirical implications are that firm value increases in liquidation value, after controlling for expected going-concern cash flows, and that more generalizable assets produce more abandonment option value. Using discounted earnings forecasts to proxy for expected cash flows, and relying on prior literature to categorize asset generalizability, we find strong support for abandonment option theory s predictions.

Abstract:
We find that executives sell shares of previously owned stock after receiving equity-based incentive compensation, counteracting boards' attempts to tie their wealth to firm value. Executives sell stock during years in which they receive new stock options or restricted stock, and some evidence indicates further selling over time if options move into-the-money. When options are exercised, managers sell a large majority of shares acquired. Effects are strongest for executives who already hold many shares, while stock-based compensation does appear to increase the holdings of managers with low ownership. Although valuation theorists who study executive compensation frequently assume that executives cannot hedge the risks of stock-based pay, our research provides evidence to the contrary.

Abstract:
We study benefits received by target company CEOs in completed mergers and acquisitions.These executives obtain wealth increases with a median of $4 to $5 million and a mean of $8 to $11 million, roughly in line with the permanent income streams that they sacrifice. CEOs receive lower financial gains from those transactions in which they become executives of the buyer, suggesting that tradeoffs exist between the financial and career-related benefits they extract. Regression estimates suggest that target shareholders receive lower acquisition premia in transactions that involve extraordinary personal treatment of the CEO.

Abstract:
We find that asset sales lead to an improvement in the operating performance of the seller's remaining assets in each of the three years following the asset sale. The improvement in performance occurs primarily in firms that increase their focus; this change in operating performance is positively related to the seller's stock return at the divestiture announcement. The announcement stock returns are also greater for focus-increasing divestitures. Further, we find evidence that some of the seller's gains result from a better fit between the divested asset and the buyer.

Abstract:
We study the precursors and outcomes of refocusing episodes by 107 diversified firms that were not taken over between 1984 and 1993. These firms had more value-reducing diversification policies than diversified firms that did not refocus. However, major disciplinary or incentive-altering events (including management turnover, outside shareholder pressure, changes in management compensation, and financial distress) usually occurred before refocusing took place. The cumulative abnormal returns over a firm's refocusing-related announcements averaged 7.3%, and were significantly related to the amount of value-reduction associated with the refocuser's diversification policy.

Abstract:
We investigate whether investors use balance sheet information to value their option to abandon the continuing business in exchange for the assets' exit value. As opposed to papers that examine the potential for balance sheet disclosures to provide incremental information about the expected level of future going-concern cash flows, our study assesses the extent to which balance sheet information affects firm value given the level of expected going-concern cash flows. Theory prices the abandonment option as an American put with both a stochastic strike price (liquidation value) and a stochastic value of the underlying security (the value of cash flows). The major empirical implications are that firm value increases in exit value, after controlling for expected going-concern cash flows, and that more generalizable assets produce more abandonment option value. Using discounted analysts' earnings forecasts as an input in the construction of a proxy for expected cash flows, and relying on prior literature to categorize asset generalizability, we find strong support for abandonment option theory's predictions.

Abstract:
We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross- sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment-reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

Abstract:
Despite the weakening disciplinary role of the takeover market, there has been a rash of divestiture and split-up announcements recently by such prominent firms as AT&T, ITT, W.R. Grace, and many others. In this paper we examine refocusing decisions by diversified firms that have not been taken over, with the goal of closing some of the gaps in our understanding of the workings of different sources of management discipline. We study the effect on refocusing likelihood of four factors: The diversification program's impact on shareholder value; the characteristics of the diversification program; events of market discipline such as management turnover, outside shareholder pressure, and financial distress; and corporate governance variables such as CEO option holdings, CEO tenure, and board independence. In contrast to the lessons learned from studying reorganizations that follow takeovers, which are extreme events in the life of a corporation, the insights from this study are more representative of the broader set of factors that lead to divisive reorganizations.We find that concerns about shareholder value do affect refocusing decisions, with diversified firms that refocus having significantly greater value losses from their diversification policies than multisegment firms that do not refocus. Several characteristics of diversification that have been argued to contribute to, or reduce, the value- reduction from pursuing a diversification strategy are found to have separable effects on the likelihood of refocusing. More relatedness among the firm's business lines reduces the chance of restructuring, whereas greater cross-subsidies from profitable to unprofitable lines and higher levels of central overhead expenses increases the probability of divestitures. Despite the importance of shareholder value considerations, major events of market discipline usually must occur before managers attempt to undo value-reducing diversification programs, whereas the same events occur only rarely for a matched sample of nonrefocusing firms during the same time frame. A significant minority of refocusing firms make their divestitures without the prodding of events of market discipline, and without facing unusually high probabilities that such events are about to occur. The internal incentive mechanism inducing CEOs to restructure voluntarily is CEO option ownership, implying that providing CEOs with forms of performance-based incentive compensation that increase risk tolerance can help to reverse suboptimal diversification policies. Finally, consistent with divestitures reversing, at least in part, value destruction from unsuccessful diversification strategies, the cumulative abnormal returns over a firm's refocusing-related announcements average 7.3%, and are significantly related to the amount of value that was being destroyed by the refocuser's diversification policy.

Abstract:
This paper examines the use of foreign currency derivatives by S&P 500 nonfinancial firms during 1992-1993 and the potential impact on exchange-rate risk. The extent to which firms use foreign currency derivatives is positively related to the ratios of foreign sales to total sales and total foreign trade to total production. Including these factors substantially reduces the explanatory power of variables previously found to be important in a firm's decision to hedge foreign currency exposure. Firms also use foreign debt as an alternative to or in conjunction with foreign currency derivatives, although to a smaller extent. Similarly, the level of foreign debt use is positively related to the ratio of foreign sales to total sales. Consistent with a risk-reduction motive to use foreign currency derivatives, we find that the use of foreign currency derivatives significantly reduces the exchange-rate risk that corporations face.

Abstract:
This paper examines the use of foreign currency derivatives by S&P 500 nonfinancial firms during 1992-1993 and the potential impact on exchange-rate risk. The extent to which firms use foreign currency derivatives is positively related to the ratios of foreign sales to total sales and total foreign trade to total production. Including these factors substantially reduces the explanatory power of variables previously found to be important in a firm's decision to hedge foreign currency exposure. Firms also use foreign debt as an alternative to or in conjunction with foreign currency derivatives, although to a smaller extent. Similarly, the level of foreign debt use is positively related to the ratio of foreign sales to total sales. Consistent with a risk-reduction motive to use foreign currency derivatives, we find that the use of foreign currency derivatives significantly reduces the exchange-rate risk that corporations face.

Abstract:
We examine whether the value loss from diversification affects takeover and break-up probabilities. We estimate diversification's value effect by imputing stand-alone values for individual business segments and find that firms with greater value losses are more likely to be taken over. Moreover, those acquired firms whose losses are greatest are most likely to be bought by LBO associations, which frequently break-up their targets. For a subsample of large diversified targets: (1) higher value losses increase the extent of post-takeover bustup; and (2) post-takeover bustup generally results in divested divisions being operated as part of a focused, stand-alone firm.

Abstract:
We estimate the effect that value-destroying diversification has on the probabilities of takeover and break-up. Recent papers show that unrelated diversification decreased firm value, that the value loss is reversible, that bidder gains from takeovers are higher when their targets' managers have destroyed more value, and that break-ups and selloffs are a common result of takeovers. Considering these findings together leads us to hypothesize that as the amount of value destroyed by a firm's diversification strategy increases, so does its probability of being taken over and broken up. We find that the value loss from diversification is related to the probabilities of future takeover and of break-up. We show that LBOs are more likely than other acquirers to target value-destroying diversified targets. Finally, for a subsample of large diversified targets, half are broken-up after they are acquired, and the mean value effect of diversification is -22% to -33% for these firms. In contrast, the half not broken-up after takeover have a mean valuation effect from diversification of -3% to 6%.