• Selected
• Entire List

Abstract:
Which journal articles have the most impact on finance research? Which journals dominate finance research in the 1990s? We answer these and similar questions using a comprehensive sample of journals, an extensive time period, and a new ranking method that avoids problems inherent in the existing literature. Among our findings: six of the ten articles most highly cited by finance journals were published in econometrics or economics journals; Journal of Finance has the most citations, but it accounts for only one of the top ten articles; and Journal of Financial Economics has the highest impact per article.

Research Impact, Journal Ranking, citations

Abstract:
Which journal articles have had the most impact on finance research? Which articles were most cited in each of the last 30 years? Which journals dominated finance research in the 1990s? Did any finance sub-discipline stand out or lag behind in the 1990s? We answer these and similar questions using a comprehensive sample of journals, an extensive time period, and a new ranking method that avoids problems inherent in the existing literature. We find that although six of the ten articles most cited by finance journals were published in econometrics or economics journals, and Journal of Finance accounts for only one of the top ten articles, Journal of Finance still dominates with the article cited most frequently in eight of the last ten years. We also find that methodological papers such as White (1980) and Hansen (1982) are very highly ranked. We use the most influential papers to construct suggested Ph.D. course reading lists.

Research Impact, Journal Ranking, citations

Abstract:
Some bond ratings are solicited by bond issuers, resulting in a relationship between the firm and the rating agencies they hire. Other bond ratings are unsolicited, whereby there is generally no interchange of information between firm and agency, other than that which is already public. We exploit this unique feature of the bond rating industry to examine the production of "soft" versus "hard" information by non-bank intermediaries. Our evidence suggests that when relationships exist, rating agencies rely less on publicly available "hard" information, and are better able to assess "soft" information about bond issuers.

bond rating, soft information, hard information, intermediation

Abstract:
This is a guide for newly minted Ph.D.'s entering the academic finance job market for the first time. The institutional knowledge of how the job market works is lost when students graduate, and advisors are often too busy or too removed from the process to give the finely detailed advice that students need. The knowledge we provide should complement strategy discussions between students and their advisors. We give a detailed timeline for job seekers plus a summary of the most important deadlines. We give advice for academic conferences, conference interviews, and fly-outs. We discuss job offers and what to do if a job seeker does not get one. We also give cautionary job market horror stories and a list of internet job search resources.

Job Market, Finance PhD, Adverse Selection, Conferences

Abstract:
This paper shows that stock market liquidity is an important determinant of the cost of raising external capital. Using 2,387 seasoned equity offerings (SEOs) from 1993-2000, we find that, after controlling for other factors, investment banks charge lower fees to firms with more liquid stocks. We also find that the time to complete an SEO declines with the level of market liquidity. These results imply that stock market liquidity may affect the value of a firm through its effect on flotation costs.

Liquidity, Cost of capital, investment banking

Abstract:
This note supplements our article, "The Academic Job Market in Finance: A Rookie's Guide" (Butler and Crack, 2005). Here we provide additional and updated job-seeking advice to rookies and lightly-seasoned academic job seekers in academic finance.

Job Market, Finance PhD, Adverse Selection, Conferences

Abstract:
Chen and Ritter (2000) show that it is customary in the investment banking industry to charge a gross spread of seven percent for underwriting a moderately-sized firm-commitment initial public offering. However, in a nontrivial number of IPOs, the spread differs from this standard. We examine the effect on offering price of a negotiated spread that differs from seven percent. Negotiations that yield lower (higher) underwriting fees are associated with lower (higher) IPO offering prices on average, indicating marketing efforts expended by investment banks reflect the amounts paid to them.

Investment banking, initial public offering, underwriter fees

Abstract:
An increase in the cost of short selling should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market (Diamond and Verrecchia 1987). We extend the Diamond and Verrecchia model to include short selling against the box and we test the extended model using a natural experiment based around the Taxpayer Relief Act of 1997 (TRA97). TRA97 made short selling more costly for those shorting against the box. Consistent with the implications of our extended model, this increase in short selling costs strengthens the negative relationship between short interest and subsequent stock price performance post-TRA97.

Short interest, Short sale against the box, Taxpayer Relief Act of 1997

Abstract:
An increase in the cost of short selling should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market (Diamond and Verrecchia, 1987). We extend the Diamond and Verrecchia model to include short selling against the box and we test the extended model using a natural experiment based around the Tax Payer Relief Act of 1997 (TRA97). TRA97 made short selling more costly for those shorting against the box. Consistent with the implications of our extended model, this increase in short selling costs strengthened the negative relationship between short interest and subsequent stock performance post-TRA97.

Sort Interest, Short Sale Against the Box, Tax Payer Relief Act of 1997

Abstract:
This paper presents empirical evidence that stock market liquidity is an important determinant of the cost of raising external capital. Because the role of an investment banking syndicate in a public security offering is analogous to that of a block trader, investment banks should charge lower fees to firms with more liquid securities. Using a large sample of seasoned equity offerings, we find that, ceteris paribus, investment banks' fees are significantly lower for firms with more liquid stock. We estimate that the difference in the investment banking fee for firms in the most liquid quintile versus the least liquid quintile, controlling for other factors, is approximately 107 basis points, which represents about 22.3 percent of the average investment banking fee in our sample. Our findings suggest that firms have an incentive to promote the market liquidity of their equity.

Abstract:
Using a sample of municipal bond offerings, I find that “local” investment banks have substantial comparative and absolute advantages over nonlocal counterparts--locals charge lower fees and sell bonds at lower yields. Local investment banks’ strongest comparative advantage is at underwriting bonds with higher credit risk and bonds not rated by rating agencies. These findings suggest that high-risk bonds and nonrated bonds are more difficult to evaluate and market, and that investment banks with a local presence are better able to assess “soft” information and place difficult bond issues.

G24, G28, D80

Abstract:
Using a sample of municipal bond offerings, I find that "local" investment banks have substantial comparative and absolute advantages over non-local counterparts - locals charge lower fees and sell bonds at lower yields. Local investment banks' strongest comparative advantage is at underwriting bonds with higher credit risk and bonds not rated by rating agencies. These findings suggest that high risk bonds and non-rated bonds are more difficult to evaluate and market, and that investment banks with a local presence are better able to assess "soft" information and place difficult bond issues.

municipal bonds, investment bank fees, local underwriters, soft information, geography

Abstract:
Using a large sample of initial public offerings (IPOs) from 1985-2002, we study how the compensation of the investment banks participating in an IPO affects the pricing of the offer. We show that shifting investment bank compensation toward the selling concession (away from management fees and/or underwriting fees) has a significant impact on the offer price of the IPO. That is, redistributing compensation toward the investment banks in the selling group increases the average price revision from the initial filing range. This result is robust to a number of controls and endogeneity concerns, and is statistically and economically significant.

IPO, investment bank, selling concession

Abstract:
Previous studies have found that the share of equity in total new issues (S) is negatively correlated with future equity market returns (in-sample). Researchers have interpreted this finding as evidence that managers are able to predict the systematic component of their stock returns and to issue equity when the market is overvalued. In this paper we show that after controlling for "look-ahead bias", S does not provide real-time predictive power for forecasting market returns. Further, we show that even the in-sample predictive power of S appears to stem from aggregate pseudo market timing as in Schultz (2003) and not from any abnormal ability of managers to time the equity markets.

Abstract:
We use a sample of 86 counties to examine the cross-sectional determinants of sovereign credit ratings. We find that the quality of a country's legal and political institutions plays a vital role in determining these ratings. A one-standard-deviation increase in our legal environment index results in an average credit rating increase of 0.466 standard deviations, even when we control for obvious factors such as GDP per capita, inflation, foreign debt per GDP, previous defaults, and general development. Although part of this effect is due to the legal environment's endogeneity, its relative importance is robust to endogeneity concerns.

Abstract:
Using a sample of 86 counties, we examine the cross-sectional determinants of sovereign credit ratings around the world. We find that the quality of legal and political institutions of a country plays a vital role in determining sovereign credit ratings. A one standard deviation increase in our legal environment index results in an average credit rating increase of 0.466 standard deviations, even when controlling for obvious factors such as GDP per capita, inflation, foreign debt per GDP, previous defaults, and general development. Indeed, the economic magnitude of a change in each of those variables is less than one-third of that for legal environment. Although part of this effect is due to legal environment's endogeneity, the relative importance of legal environment is robust to endogeneity concerns.

Sovereign credit ratings, legal environment, law and finance

Abstract:
We show that state corruption and political connections have strong effects on municipal bond sales and underwriting. Higher state corruption is associated with greater credit risk and higher bond yields. Corrupt states can eliminate the corruption yield penalty by purchasing credit enhancements. Underwriting fees were significantly higher during an era when underwriters made political contributions to win underwriting business. This pay-to-play underwriting fee premium exists only for negotiated bid bonds where underwriting business can be allocated on the basis of political favoritism. Overall, our results show a strong impact of corruption and political connections on financial market outcomes.

D73, G20, G22, G24, H74

Abstract:
We exploit unique features of the U.S. municipal bond underwriting market to assess how political integrity affects primary financial market outcomes. We show that state corruption and political connections have strong effects on several aspects of municipal bond sales and underwriting. Specifically, we find that higher state corruption is associated with greater credit risk, higher bond yields, greater use of external credit enhancement, and use of lower quality underwriters. States that are more corrupt can eliminate the corruption yield penalty by purchasing credit enhancements, effectively selling integrity-related default risk to an independent financial intermediary. Underwriting fees do not vary with cross-state corruption, but were significantly higher during an era when under writers routinely made political campaign contributions to win underwriting business. Furthermore, this pay-to-play underwriting fee premium exists only for negotiated bid bonds where underwriting business can be allocated on the basis of political favoritism. Overall, our results show a strong impact of state corruption and political connections on economic and financial outcomes.

Political integrity, Corruption, Pay to play, Municipal finance

Abstract:
When calling its convertible bonds, a company must typically give bondholders a notice period of about 30 days to decide whether to convert the bonds. This notice period affects the optimal call policy for convertible bonds. After accounting for the notice period, convertible bonds in our sample would have been optimally called when the stock was at about an 11% premium (median) relative to the conversion price. We show that after properly accounting for the call notice period and other factors, the median excess call premium is less than 4% - substantially less than the 26%-44% call premium previous researchers have documented.

Call policy, convertible bonds

Abstract:
The notice period given to convertible bondholders affects the optimal call policy for convertible bonds. After accounting for the notice period, convertible bonds in our sample would have been optimally called when the stock was at about an 11% premium (median) relative to the conversion price. We find that convertible bonds are, on average, not called later than optimal. The average (median) excess call premium is only 2.65% (1.71%) for those bonds without binding call protection. These values are statistically indistinguishable from zero and are substantially less than the 26%-44% call premium found by previous researchers.

Convertible bonds, call policy

Abstract:
I examine the effect that state-level public corruption has on municipal financing activities in the United States. Corruption has a strong adverse impact on total bond issuance costs and state debt ratings, but not on individual bonds' ratings. This is because corrupt states are more likely to use institutional means to partially mitigate the negative effects of corruption. Strikingly, the impact that corruption has on issuance costs vanishes for credit-enhanced bonds and for locally underwritten bonds, but not for bonds underwritten by high reputation investment banks. These results are useful for understanding the costs of corruption and how institutions can attenuate corruption's negative effects.

Municipal bonds, corruption, certification, bond insurance

Abstract:
This paper provides a rational explanation for the apparent ability of managers to successfully time the maturity of their debt issues. We show that a structural break in excess bond returns during the early 1980s generates a spurious correlation between the fraction of long-term debt in total debt issues and future excess bond returns. Contrary to Baker, Taliaferro, and Wurgler (2006), we show that the presence of structural breaks can lead to nonsense regressions, whether or not there is any small sample bias. Tests using firm-level data further confirm that managers are unable to time the debt market successfully.

Debt maturity, market timing, market efficiency, behavioral finance

Abstract:
This paper shows that, contrary to existing evidence, corporate managers cannot successfully time the maturity of their debt issues to reduce their cost of capital. Our results indicate that the negative correlation between future excess long-term bond returns and the ratio of long-term debt issues to total debt issues is driven by aggregate pseudo market timing. We show that a structural shift in U.S. monetary and fiscal policy during the early 1980s induces a pseudo market timing effect in the in-sample tests of bond return predictability. After accounting for this structural shift, we find no evidence that corporate managers are able to predict future variations in excess long-term bond returns or to strategically choose the maturity of their debt.

Debt maturity, market timing, market efficiency, behavioral finance

Abstract:
We explore a firm's choice between public and private debt in a model where the firm's financing source affects its product market behavior. Debt can promote excessively risky product market strategies, but lender control through restrictive covenants - a characteristic of private debt - can commit the firm to reduce aggressiveness in product markets and increase expected profits (a monitoring effect). Private debt, however, reduces the information about a firm that competitors observe (a confidentiality effect). In our model, firms prefer to precommit to communicate idiosyncratic private information about costs, which they can do through public debt financing. Thus, the firm's choice between public and private debt depends on the tradeoff between the monitoring and confidentiality effects.

product markets, disclosure, monitoring, choice of financing source

Abstract:
Previous studies document that the stock returns of bond issuing firms significantly underperform matched peers over the three to five years following issuance. We revisit this phenomenon and show that the underperformance is the result of an omitted return factor (a bad model problem). Debt issuers have significantly higher stock market liquidity than size and book-to-market matched counterparts, and differences in liquidity are largest for the worst performing groups of issuers. When we additionally match on liquidity or when we include a liquidity factor in the model for expected returns, the evidence of underperformance disappears.

Long run performance, liquidity, debt issues

Abstract:
We investigate investment bank gross spreads for Hong Kong IPOs during 1991-2000 and find pronounced clustering - nearly 94 percent have spreads of exactly 2.5 percent. This clustering is invariant to issue size and decreases through time. We find that SEO spreads cluster as well - at 2.0 percent and at 2.5 percent. We document institutional features that contribute to the low level of spreads, and provide preliminary evidence that the recent arrival of the book-building process for Hong Kong IPOs has increased the level and decreased the clustering of IPO gross spreads.

Initial public offerings, seasoned equity offerings, gross spreads, Hong Kong

Abstract:
In this short note we respond to the argument advanced by Baker, Taliaferro, and Wurgler (2006) that our criticism of the market timing literature is simply a reinterpretation of Stambaugh's (1999) small sample bias. We show analytically how structural breaks in an economic time-series may result in spurious, or nonsense, predictive regressions, whether or not there is any small-sample bias at play. We also provide a simple example showing that the magnitude of this bias could explain the predictive power of certain variables.

Market Timing, Spurious Regressions

Abstract:
We study the relation between access to finance and productivity. Our contribution to the literature is a clean identification of a causal effect of access to finance on productivity. Specifically, we exploit an exogenous shift in demand for a product to expose how producers adapt their productivity in the presence of varying levels of access to finance. We use a triple differences testing approach and find that production increases the most over the sample period in areas with relatively strong access to finance, even in comparison to a control group. This result is statistically significant, and robust to a variety of controls, alternative variables, and tests. The causal effect of access to finance on productivity that we find speaks to the larger role of finance in economic growth.

growth, finance, banking, productivity, crop yields, ethanol

Abstract:
We examine the effects of changes in competitive conditions on the structure of loan contracts. In particular, we present conditions in which greater loan market competition reduces the stringency of contractual collateral requirements, a prediction that is consistent with anecdotal evidence from loan markets. We also analyze the interaction between the degree of competition and the efficiency of contractual renegotiations. Insufficiently competitive markets may lead to bargaining difficulties that reduce the efficiency of renegotiable contracts. At low levels of competition negotiable contracts remain feasible only if collateral levels are set inefficiently low.

contracts, collateral, covenants, bank loans, competition

Abstract:
When local media report news about local companies, they use fewer negative words compared to the same media reporting about non-local companies. One reason for this result is related to local media advertising expenditures — local media have a more positive slant toward companies that have more local advertising expenditures. Stock market investors do not discount this slant: abnormal positive local media slant strongly relates to firm equity values. A one standard deviation increase in local media slant is associated with a 3.59% increase in firm value on average, and the effect is stronger for small firms, firms held predominantly by individual investors, and firms with illiquid or highly volatile stock, low analyst following, or high dispersion of analyst forecasts.

Media Slant, Location, Media, Advertising, Firm Value

Abstract:
We use the venture capital market to examine how companies and their financial intermediaries match together, focusing on the tradeoff between the costs (due to agency problems) and benefits (due to comparative advantage in information production) of matches. Inexperienced VC firms - those with the largest potential for agency problems - tend to match with young and small companies within close proximity, presumably to enhance soft information production. This finding suggests a tradeoff between the benefits of better information production and costs of agency conflicts between company and financial intermediary. We then quantify an outcome, IPO initial return, from matching that demonstrates this tradeoff. We show empirically that, (only) after controlling for endogeneity in the choice of the intermediary, venture-backed companies that are close to their lead VC firm have substantially lower first day initial returns. Our findings thus rationalize why companies choose to finance through inexperienced venture capitalists that pose high agency costs (those with incentives to grandstand), despite the large expected costs of doing so.

Venture capital, soft information, IPO, grandstanding

Abstract:
When portfolio managers trade the stocks of companies run by people with whom they have social connections, these trades earn better returns than trades in companies with whom they have no connections (Cohen et al., 2008). We look at the effects of social connections from the firm's side, examining the compensation of firm executives. Executive compensation in connected firms is substantially higher than in unconnected firms. The channel through which this result occurs appears to be share voting-connected funds are more likely to vote against shareholder-initiated proposals on executive compensation, thereby protecting their cronies from the discipline of corporate governance. The evidence is consistent with higher compensation being the quid pro quo for information flow from firm to fund.

executive compensation, social connections, share voting

Abstract:
This paper presents empirical evidence on the importance of market timing relative to an investment-based explanation of corporate financing decisions. Market timing and investment-based theories both predict underperformance following an increase in net financing, but only market timing theories predict that the composition of firms' financing (equity compared to debt) should also forecast returns. In regressions of future excess returns on both the amount and composition of net financing, we find that the level of net financing is important in explaining subsequent underperformance, but the composition is not. Our results are consistent with changes in investment policy affecting expected returns and inconsistent with successful market timing.

Market Timing, Financing Decisions, Investment Policy

Abstract:
We quantify the statistical robustness and economic importance of many different determinants of IPO initial returns. Standard empirical techniques are inadequate for this task because of the high correlations between many variables common in the literature. Using the methodologies developed in Leamer (1985), Levine and Renelt (1992), and Sala-i-Martin (1997), we run over a million regressions to examine the robustness of 44 commonly used explanatory variables during different periods from 1993 through 2006. We show that the characteristics of firms going public and the sensitivity of initial returns to various characteristics dramatically changed over our sample period. Nevertheless, we produce a parsimonious list of statistically robust explanatory variables and rule out certain explanations of IPO underpricing.

IPO, initial returns, underpricing, underwriting, going public

Abstract:
We run a horse race between two competing hypotheses about the relationship between market returns and managers' decisions to issue or retire equity: that managers are successfully forecasting (timing) subsequent market returns versus reacting to prior market returns. Our empirical framework allows the timing and reaction stories compete for explanatory power in our tests. We show that managers react to prior equity market returns in deciding when to transact equity, but they cannot successfully forecast subsequent equity market returns. Evidence from equity issues, filings, and repurchases all supports these conclusions. In industry level tests, we find that managers consistently react to industry level returns, and what little timing ability they may have is confined to the narrowest industry classifications.

Abstract:
We show that there are strong interactions between firm fundamental characteristics and market conditions on a firm's decision to issue equity. Good market conditions can overcome even severe deficiencies in firm fundamentals in the equity issuance decision. For instance, a firm whose fundamentals are among the worst 10% of sample firms, but whose recent stock return is in the highest quintile is as likely to issue equity as a firm whose fundamentals are among the best 10% but whose recent stock return is only at the median. Overall our results suggest that good market conditions could mitigate "bad" issuers' adverse selection problems.

Abstract:
When a company calls its convertible bonds, it typically must give the convertible bondholders a notice period of approximately 30 days to decide whether to convert the bonds. This important institutional detail substantially affects the optimal call policy for convertible bonds. When the company calls the bonds, it fixes the price at which bondholders can redeem them, effectively giving bondholders a 30-day put option. The optimal time to call the convertibles minimizes the value of the conversion option net of the put option. This optimization problem is solved here, and a simple decision rule for the company results. This solution contains those of previous researchers as a special case.