• Selected
• Entire List

Abstract:
This paper examines the trading process outside of normal trading hours. Although after-hours trading volume is small, after-hours trades are more informative than trades during the day, and are associated with significant price discovery. Spread-related trading costs are also more than twice as large after hours than during the trading day. For Nasdaq-listed stocks, we observe two separate trading processes in the after-hours market: larger less-informative trades are negotiated directly with market markers and smaller more-informative trades are executed anonymously on electronic communications networks. Although both trading processes are active after the close and before the open, the non-anonymous liquidity-motivated trades are more prevalent after the close and the anonymous information-motivated trades are more prevalent before the open.

Abstract:
We compare the execution quality of trades with market makers to trades executed on Electronic Communications Networks (ECNs). Average quoted, realized, and effective spreads are smaller for ECN trades than for market-maker trades even though ECN trades are more informative than trades with market makers. Increased trading on ECNs also improves most measures of overall market quality. In the cross section, more ECN trading is associated with lower quoted, effective, and realized spreads, both overall and on trades with market makers. More ECN trading is also associated with less quoted depth.

Abstract:
We relate the value of growth options in the firm's investment opportunity set to the level of debt in the firm's capital structure. Underinestment costs of debt increase and free cash flow benefits fall with additional growth options. Thus, if debt capacity is defined as the amount of debt the firm optimally adds for an incremental project, then the debt capacity of growth options is negative. This result implies that book leverage should fall with the addition of growth options. Our tests, using a large sample of industrial firms, confirm this prediction.

Growth Options, Book Leverage

Abstract:
There are two ways to buy a large-percentage block of stock - from another shareholder or directly from the corporation. Because the traded asset is the same, one might expect the pricing of these transactions to be similar. Block trades, however, are priced at an 11% premium to the post-announcement exchange price, while private placements are priced at a 19% discount. This difference reflects what happens after the transactions. Most block-trade purchasers become involved in management, suggesting that their premiums reflect anticipated private benefits. Most private-placement purchasers remain passive, firm value declines, and there are few acquisitions. This suggests that private-placement discounts often reflect compensation to external blockholders for helping to entrench management.

Negotiated block trades, private placements, block pricing, discounts, premiums

Abstract:
The differences between ECNs and Nasdaq market makers are used to formulate and test several hypotheses about the choice of trading venue and the importance of ECN trades in the price discovery process. Trades are more likely to occur on ECNs when spreads are narrow and when trading volume and stock-return volatility are high. Medium and large trades on ECNs have lower effective spreads than comparable market-maker trades, although this is not the case for small trades unless they occur on noninteger ticks. ECN trades have greater permanent price impacts than market-maker trades implying that informed trades are more likely to occur on ECNs. Overall, more private information is revealed through ECN trades than through market-maker trades even though more trades occur with market makers.

Abstract:
We show that the consolidation of orders is important for producing efficient prices, especially during times of high liquidity demand. The NYSE's centralized opening call market performs better than Nasdaq's decentralized opening process on typical trading days. The NYSE is much better than Nasdaq on witching days, when index arbitrage activity subjects S&P 500 stocks to large, predictable, and mostly informationless order flow around quarterly futures contract expirations. Nasdaq opening price efficiency improves to NYSE levels once Nasdaq initiates a consolidated opening call in November 2004, but prices on the decentralized Nasdaq remain less efficient at other times of day.

Market structure, price discovery, price efficiency, volatility, liquidity

Abstract:
We show that the greater the extent to which a performance measure matches delivered performance, the simpler and more robust are the compensation plans based on it. In some settings stock price changes match delivered performance poorly because they anticipate it. This introduces three problems with price-based plans relative to an earnings-based plan. First, the price-based plans become complex because they require knowing the extent to which prices anticipate the future. Second, price-based plans are less robust to unforeseen events. Third, price-based plans require period-by-period changes in pay-for-performance relationship even when the underlying production function remains unchanged. Earnings-based plans are used in these settings if earnings better match delivered performance.

Abstract:
We re-examine old evidence and provide new evidence on private placements of large-percentage blocks of stock. Our goal is to judge whether the prevailing hypotheses of monitoring and certification explain most private placements. Examining new evidence on events following the private placement and using a much larger sample than previous studies, our findings suggests that private placements are often made to passive investors, thereby helping management solidify their control of the firm. Although monitoring and certification may motivate some private placements, the evidence with respect to placement discounts, stock-price reactions, the post-placement activities of the purchasers, and a comparison with arms-length trades of large blocks of stock favors managerial entrenchment as the explanation for many private placements.

G32, G34

Abstract:
We examine theories of leverage and debt maturity, focusing on the impact of a firm's investment opportunity set and regulatory environment in determining these policies. Using results on strategic complementarities, we identify sufficient conditions for the theory to have testable implications for reduced-form and structural-equation regression coefficients. Obtaining testable implications for structural-equation regression coefficients requires less from the theory but more from the data than the reduced-form specification since it requires an instrumental-variables approach. Thus, we highlight tradeoffs between theory and statistical methods. We provide tests using two decades of data for over 5,000 industrial firms.

Abstract:
It is widely held that for tax reasons corporate shareholders are the only shareholders that prefer dividends to capital gains. This has led to clientele models where corporate blockholders migrate to firms paying dividends and use their voting power to increase dividends in these firms. We use panel data and trades of large blocks of stock to investigate these propositions. Although one-third of firms have corporate blockholders, we find no evidence that dividends are higher in these firms; that corporate blockholders are attracted to dividend-paying-firms; or that dividends increase after a corporation buys a large block of stock.

Abstract:
Corporations uniquely have a tax preference for cash dividends. Nevertheless, dividends do not increase following trades of large-percentage blocks of stock from individuals to corporations. Moreover, although one-third of firms have corporate blockholders, 68% of these firms pay no dividends, and ownership is not clustered at levels that increase the tax benefits of dividends. These findings are not driven by the investing firms' tax rates or by agency problems. Instead, operating companies expand the target firms and pursue joint ventures. Dividends are lower with these investors. Financial investors are not attracted to dividend-paying firms and tend to be passive.

Dividends, Corporate Blockholders, Taxes

Abstract:
We show that the greater the extent to which a performance measure matches delivered performance, the simpler and more robust are the compensation plans based on it. In some settings stock price changes match delivered performance poorly because they anticipate it. This introduces three problems with price-based plans relative to an earnings-based plan. First, the price-based plans become complex because they require knowing the extent to which prices anticipate the future. Second, price-based plans are less robust to unforeseen events. Third, price-based plans require period-by-period changes in pay-for-performance relationship even when the underlying production function remains unchanged. Earnings-based plans are used in these settings if earnings better match delivered performance.

Abstract:
Extant theories of capital structure assume myopic financial managers. So they have hard time to explain the financing behavior of seasoned equity offering (SEO) firms. In contrast with the pecking order theory, SEO firms typically are financially healthy companies with significant cash balances, low leverage, and unused debt capacity. At odds with the tradeoff theory, SEOs often move firms away from, rather than closer to, their target leverage ratios. SEOs appear to be driven by capital needs associated with large investment projects rather than by market timing considerations. Firms issue debt following the SEO to finance investment further and to increase leverage toward the target. We propose a broader theory of strategic financial management, in which rational CFOs manage capital structure strategically rather than myopically. They consider the firm's current and target leverage, long-term capital needs and cash flows as well as the costs and benefits of alternative sequences of financing transactions. This new framework well explains the financing and leverage behavior of SEO firms.

Capital Structure, Seasoned Equity Offerings

Abstract:
Corporations uniquely have a tax preference for cash dividends. Nevertheless, dividends do not increase following trades of large-percentage blocks of stock from individuals to corporations. Moreover, although one-third of firms have corporate blockholders, 68% of these firms pay no dividends, and ownership is not clustered at levels that increase the tax benefits of dividends. These findings are not driven by the investing firms’ tax rates or by agency problems. Instead, operating companies expand the target firms and pursue joint ventures. Dividends are lower with these investors. Financial investors are not attracted to dividend-paying firms and tend to be passive.

G30, G32, G35

Abstract:
We provide an empirical examination of the determinants of corporate debt maturity. Our evidence offers strong support for the contracting-cost hypothesis. Firms that have few growth options are large, or are regulated have more long-term debt in their capital structure. We find little evidence that firms use the maturity structure of their debt to signal information to the market. The evidence is consistent, however, with the hypothesis that firms with larger information asymmetries issue more short- term debt. We find no evidence that taxes affect debt maturity.

Abstract:
We study the effects of changes in bid-ask spreads on the prices and trading volumes of stocks that move from Nasdaq to the NYSE or Amex, and stocks that move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in spreads is larger when Nasdaq market makers avoid odd-eighth quotes. When stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transaction costs significantly reduce trading volume, but do not have a significant effect on prices.

Abstract:
This paper provides additional evidence on the relation between bid-ask spreads and the avoidance of odd-eighth quotes on NASDAQ by examining 472 firms that moved from NASDAQ to the NYSE or Amex. When NASDAQ market makers avoid odd-eighth quotes, bid-ask spreads are large and decline dramatically with exchange listing. When market makers use both odd and even eighths, bid-ask spreads are smaller and decline only slightly with exchange listing. After exchange listing, there is little difference between these groups. The large spreads observed when NASDAQ market makers avoid odd-eighth quotes cannot be explained entirely by firm-specific characteristics. Instead, the results support the claim that the avoidance of odd-eighth quotes by NASDAQ market makers increases bid-ask spreads beyond the competitive level.

Abstract:
Open-end mutual funds realize a large fraction of their capital gains every year and pass them through to investors as taxable distributions. This behavior is surprising since the funds' existing shareholders would prefer to defer realization of the gains as long as possible. We examine the question of why mutual funds realize such a large fraction of their capital gains realizations illustrating that both fund managers and investors might prefer early realization of capital gains in a long-run, steady-state equilibrium. Unrealized capital gains in the funds portfolio increase the likely magnitude of future taxable distributions and therefore increase the expected present value of a new investor's tax liability. Thus, even though existing shareholders would prefer that gains be deferred as long as possible, potential new investors will be attracted to funds with a smaller overhang of unrealized capital gains. Consequently, managers have incentives to reduce the overhang to attract new investors. Our model explains some of the cross-sectional variation in capital gains realization policies. As predicted by our model, overhangs are negatively correlated with the funds growth-rate volatility, and the funds cash balances.

Abstract:
We examine choices of leverage and debt maturity, focusing on the impact of investment opportunity sets and regulatory environments. Using the mathematics of strategic complementarities, we derive conditions under which firms choose facets of capital structure that re monotonic in their investment opportunity sets and regulatory environments. Growth-options firms choose lower leverage and shorter debt maturities than assets-in-place firms; regulated firms choose higher leverage and longer debt maturities than regulated firms. We discuss implications for empirical work and provide tests using COMPUSTAT data for over 5,000 industrial firms between 1974 and 1995.

Abstract:
We study the effects of changes in bid-ask spreads on the prices and trading volumes of stocks that move from Nasdaq to the NYSE or Amex, and stocks move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in spreads is much larger when Nasdaq market makers avoid odd-eighths quotes. When stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is much larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transaction costs (bid-ask spreads) significantly reduce trading volume, but do not have significant effects on prices.

Abstract:
On January 20, 1997, the Securities and Exchange Commission began requiring Nasdaq market makers to execute or display customer limit orders. In addition, Nasdaq began displaying quotes placed by market makers to execute or display customer limit orders. In addition, Nasdaq began displaying quotes placed by market makers in Electronic Communication Networks (ECN). We assess the impact of these new rules on various measures of trading costs, including quoted and effective spreads. We also use individual dealer quotes to examine the strategic response of market makers to their increased ability to post wider spreads (through a relaxation in the Excess Spread Rule) and to offer minimum quote sizes of 100 rather than 1,000 or 500 shares. Our results indicate that trading costs fell dramatically in the presence of these new rules. Trade sizes have also fallen significantly, particularly among trades executed through the Small Order Execution System. However, the net effect of incorporating limit orders and ECN quotes translates into savings of approximately $1.6 million per day among the first 100 stocks traded under the new rules.

Abstract:
We show that compensation contracts based on measures of Delivered performance are less costly to shareholders. We compare stock-price changes, earnings, and cash flows as performance measures, and predict that each measure's use in contracts will increase in its contemporaneous correlation with delivered performance. We discuss settings in which each measure has higher contemporaneous correlation with delivered performance than the others. Earnings-based compensation plans are sometimes superior to price-based plans because prices confound delivered performance with expected future performance, and they are sometimes inferior to price-based plans because earnings can lag delivered performance. If mark-to-market accounting causes these expectations to be incorporated in book values, then accounting numbers will be less useful for contracting purposes.

Abstract:
Accounting earnings are often criticized for being manipulable by managers. However, earnings-based compensation plans are ubiquitous. Our theoretical model evaluates net cash flows, accounting earnings, and stock prices as potential performance measures and shows that earnings are often better matched with delivered performance than the other two. Thus it provides an explanation for the popularity of earnings-based compensation plans.