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Abstract:
Using a database of more than 8,000 companies from 35 countries, we find that the value of corporate diversification is related to the level of capital market development, integration, and legal systems. Among high-income countries, where capital markets are well developed and integrated, we find a significant diversification discount. By contrast, for the lower income and segmented countries, we find that there is either no diversification discount or a diversification premium. For these firms, the benefits of diversification appear to offset the agency costs of diversification. We also find that a country's legal system and the firm's ownership structure affects the value of corporate diversification among the various countries. In particular, we find that diversification discounts are largest among countries where the legal system is of English origin. We find smaller diversification discounts in countries where the legal system is of German, Scandinavian, or French origin. One interpretation of these results is that internal capital markets generated through corporate diversification are more valuable (or less costly) in countries where there is less shareholder protection and where firms find it more difficult to raise external capital. More generally, our results suggest that the financial, legal, and regulatory environment all have an important influence on the value of diversification, and that the optimal organizational structure and corporate governance may be very different for firms operating in emerging markets than it is for firms operating in more developed and integrated countries.

Abstract:
In recent years, quarterly earnings guidance has been harshly criticized for inducing managerial short-termism and other ills. Managers are, therefore, urged by influential institutions to cease guidance. We examine empirically the causes of such guidance cessation and find that poor operating performance - decreased earnings, missing analyst forecasts, and lower anticipated profitability - is the major reason firms stop quarterly guidance. After guidance cessation, we do not find an appreciable increase in long-term investment once managers free themselves from investors' myopia. Contrary to the claim that firms would provide more alternative, forward-looking disclosures in lieu of the guidance, we find that such disclosures are curtailed. We also find a deterioration in the information environment of guidance stoppers in the form of increased analyst forecast errors and forecast dispersion and a decrease in analyst coverage. Taken together, our evidence indicates that guidance stoppers are primarily troubled firms and stopping guidance does not benefit either the stoppers or their investors.

earnings guidance, voluntary disclosure, managerial myopia, guidance cessation

Abstract:
In recent years, quarterly earnings guidance has been harshly criticized for inducing managerial short-termism and other ills. Managers are, therefore, urged by influential institutions to cease guidance. We examine empirically the causes of such guidance cessation and find that poor operating performance - decreased earnings, missing analyst forecasts, and lower anticipated profitability - is the major reason firms stop quarterly guidance. After guidance cessation, we do not find an appreciable increase in long-term investment once managers free themselves from investors' myopia. Contrary to the claim that firms would provide more alternative, forward-looking disclosures in lieu of the guidance, we find that such disclosures are curtailed. We also find a deterioration in the information environment of guidance stoppers in the form of increased analyst forecast errors and forecast dispersion and a decrease in analyst coverage. Taken together, our evidence indicates that guidance stoppers are primarily troubled firms and stopping guidance does not benefit either the stoppers or their investors.

earnings guidance, voluntary disclosure, analyst following, managerial myopia

Abstract:
We examine how analysts establish target prices for IPO firms and whether comparable firms used to support target prices are helpful in explaining IPO offer prices. From 1996 to 2000, the average target price is set at a level more than twice the offer price that was established less than a month earlier. During the bubble period of 1999 to 2000, the average offer price was set at a 21 percent discount relative to comparable firm valuations. In contrast, we find that the average offer price was set at a 5 percent premium relative to comparables in the pre-bubble period. This dramatic shift appears to hold even after controlling for the differences in the types of firms going public during the bubble period. While our results suggest that underwriters systematically discounted offer prices during the bubble period, an alternative explanation is that the shift arose because underwriters and analysts faced different incentives and legal exposures during the bubble period.

IPO, analysts, recommendations, target prices

Abstract:
This paper examines the evolution of risk in the U.S. financial sector using firm-level equity market data from 1975 to 2005. We find that over the past three decades, financial sector volatility has steadily increased, particularly from 1998 to 2002. Increased volatility, driven by common shocks and rising cross-industry correlations within the financial sector, suggests that the financial services industry has indeed become riskier. At a fundamental level, this likely reflects the deregulation and financial innovation that have enabled financial institutions to evolve towards a greater mix of riskier assets with common exposures as they exploit their diversification gains. This upward trend in volatility was exacerbated by a series of large shocks from 1998 to 2002. The period since 2002, however, has been relatively quiescent and suggests the extraordinary volatility from 1998 to 2002 had an important transitory component.

We also examine how the evolution of the financial sector compares to the rest of the market. In addition to growing in relative importance, we show that the volatility of the financial sector has increased in both absolute and relative terms. The correlation between the financial sector and non-financial sector, however, has been declining. This suggests that financial shocks have not been transmitted to the rest of the economy, which is consistent with the classical view that finance is primarily a "veil" that has little effect on the real economy. This suggests that shocks to the financial sector, while not unimportant, may not have the severe negative consequences that some fear.

Despite the recent decline in volatility, our results offer some cause for concern. Even as firms become more diversified, the U.S. financial sector appears riskier than in the past as larger firms are increasingly exposed to common shocks. This raises the possibility of systemic risk if all firms respond similarly to market events and makes the collapse of a major financial institution more likely to lead to a more significant financial crisis, i.e., the tail event described by Rajan (2005). While such a scenario is not likely in any given year, the economy may be more vulnerable to this type of widespread financial crisis.

Financial Services and Risk

Abstract:
We examine the global geography and pricing of the syndicated loan market using a sample of more than 13,000 loan packages issued to 4,713 firms headquartered across 10 countries during the 1998 to 2004 sample period. Our results provide insights into the relative importance of information costs, cross-country differences in legal and regulatory costs, and cross-country competition in bank lending. Consistent with Carey and Nini's (2006) pricing puzzle, we find that, on average, loans to European firms are significantly cheaper than loans to North American firms by approximately 40 basis points. However, we find that the price differences between these markets holds primarily for those firms that do not have complete access to European capital markets. That is, firms headquartered in North America with significant assets or sales in Europe get the European discount by using a European lead lender. At the same time, we find that large firms often pay lower rates when borrowing from a foreign lender. Interestingly, this result holds for both North American firms borrowing in Europe as well as for European firms borrowing in North America. Therefore, it appears that global competition has helped reduce borrowing costs for those firms that have greater access to global lending markets. Our finding that discounting on foreign loans to large firms occurs in a similar fashion in both Europe and North America also suggests that European lenders do not have a persistent competitive or regulatory advantage.

Loan pricing, Global lending markets, Syndicated Loans

Abstract:
We investigate the factors influencing international bank flows from 26 source countries to 120 recipient countries over the past two decades and consider the implications of these flows. Controlling for other factors, we find that the bank flows are positively related to the quality of institutions such as the level of creditor rights protection, the level of property right protection, and the level of information sharing within the recipient country, and that geographical and cultural differences between countries limit the flow of bank capital. Additionally, we consider whether cross-country differences in regulations affect the flow of capital. Using the world-wide bank regulation datasets compiled by Barth, Caprio and Levine (2008), we find evidence suggesting that a type of “regulatory arbitrage” takes place, where banks are more likely to transfer funds to markets with fewer banking regulations. In one positive respect, our results indicate that countries can help obtain foreign capital by establishing strong protection for creditors and limited regulation. At the same time, the existence of regulatory arbitrage raises the concerns posted by Acharya, Wachtel, and Walter (2009), and reinforces the need for global coordination in banking regulation. Finally, we present evidence suggesting that international bank flows help reduce external financing constraints among borrowing firms. These results are more pronounced for smaller firms in less developed countries.

International Bank Flow, Institutional Distance, Regulatory Arbitrage

Abstract:
In recent years, quarterly earnings guidance has been harshly criticized for inducing managerial short-termism and other ills. Managers are, therefore, urged by influential institutions to cease guidance. We examine empirically the causes of such guidance cessation and find that poor operating performance - decreased earnings, missing analyst forecasts, and lower anticipated profitability - is the major reason firms stop quarterly guidance. After guidance cessation, we do not find an appreciable increase in long-term investment once managers free themselves from investors' myopia. Contrary to the claim that firms would provide more alternative, forward-looking disclosures in lieu of the guidance, we find that such disclosures are curtailed. We also find a deterioration in the information environment of guidance stoppers in the form of increased analyst forecast errors and forecast dispersion and a decrease in analyst coverage. Taken together, our evidence indicates that guidance stoppers are primarily troubled firms and stopping guidance does not benefit either the stoppers or their investors.

earnings guidance, voluntary disclosure, managerial myopia, guidance cessation

Abstract:
Using detailed information on the debt structure of 250 publicly traded U.S. firms over the 1980-93 period, we find that the sensitivity of investment to internally generated funds increases with a firm's reliance on bank financing. Bank-dependent firms also hold larger stocks of liquid assets and have lower dividend payout rates. However, the greater cash sensitivity of investment for bank-dependent firms arises only for the largest capital expenditures (relative to assets). For most levels of investment spending, bank-dependent firms appear to be slightly less cash-flow constrained than firms with access to public debt markets.

Abstract:
Do federal bank examinations add value to the market's supervisory process? To address this question, we investigate whether Federal Reserve inspections of bank holding companies have affected the association between banks' reported book values and the market value of their equity. Using data from the fourth quarters of 1988 and 1990, we find that government examinations significantly affected the market's interpretation of reported book values, although the particular effects vary between years and according to a bank's size and capitalization. In 1988, on-site examinations raised bank market values significantly (except for banks with low capitalization), while the 1990 exams had no significant effect on the average bank's market value. While our results imply that examinations can be valuable within the current institutional environment, we recognize that the same benefits could perhaps be realized through other mechanisms, such as increased use of private auditors or other forms of market discipline. In this respect, the social value of holding company inspections remains an open question.

Abstract:
This paper provides an explanation for why firms may choose to simultaneously issue multiple debt claims with varying maturities. The optimal mix of short- and long-term debt allows the firm to precommit to a more efficient liquidationpolicy. Even in risk-neutral settings, the optimal mix hinges critically on the mean and the variability of the firm's liquidation value. Determining the optimal mix of debt is more complex than just weighing the costs of issuing short- or long-term debt exclusively. The implications of alternate priority structures, informational settings, interest rate uncertainty, and maturity matching strategies are also considered.

Abstract:
This paper considers the extent to which loan commitments mitigate the problem of information monopolies that arise when the firm contracts with a private lender. Loan commitments in conjunction with short-term debt often provide the firm with superior investment incentives by influencing both the states in which bargaining occurs as well as the outcomes from bargaining. Commitment contracts are particularly valuable when there is a high likelihood that information about the firm will be publicly revealed ex post. We also identify circumstances under which the firm foregoes commitment financing, relying on short-term debt instead.

Abstract:
Do federal bank examinations add value to the market's supervisory process? To address this question, we investigate whether Federal Reserve inspections of bank holding companies affect the association between banks' reported book value and the market value of their equity. Using data from the fourth quarters of 1988 and 1990, we find that the market is aware of bank examinations and takes them into account when valuing bank stocks. Apart from the obvious value they provide to regulators, examinations affect market values in several ways. In some instances, they provide useful certifying information which reduces risk and increases market value. In other instances, examinations induce additional regulatory risk which may reduce market value. The net effect of these results appears to vary over time, and across different types of banks.

Abstract:
We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal results. This result is difficult to explain outside of an adverse selection framework.

Abstract:
This paper examines the determinants of the mix of private and public debt using detailed information on the debt structure of 250 publicly traded corporations from 1980 through 1990. We find that the relationship between bank borrowing and the importance of growth opportunities depends on the number of banks the firm uses and whether the firm has public debt outstanding. For firms with a single bank relationship, the reliance on bank debt is negatively related to the importance of growth opportunities. In contrast, among firms borrowing from multiple banks, the relationship is positive.