Cross-listing effect on information environment of foreign firms: ADR type and country characteristics

We examine sources of improvement in the information environment of foreign firms that cross-listed in the United States as American Depositary Receipts (ADRs) between 1995 and 2005. We analyze changes in the number and dispersion of analyst recommendations on foreign firms following their cross-listing. We find increases in analyst coverage intensity across all four types of ADR programs, especially among firms that were listed on organized exchanges (the listing effect), and those that adopted capital raising ADR programs (the financing effect). Our results suggest that the listing effect is more persistent than the financing effect. On the other hand, reductions in recommendation dispersion are observed mainly for firms that choose non-capital raising ADRs and those from emerging markets. Overall, improvements in information environment are more profound among foreign firms originating from countries with greater information asymmetry, namely, countries with weaker legal tradition and rule of law, and countries that are less familiar to U.S. investors.     

Dynamic Models of Investment Distortions

This paper studies the interaction between corporate financing decisions and investment decisions in a dynamic framework. When the production decision involves an expansion option, the firm trades off tax benefits of debt against two costs of debt financing, namely the investment distortion related to exercise of the expansion option and the loss of a valuable expansion opportunity if the firm defaults. The optimal capital structure is all equity for firms with more value in growth options (or intangible assets) and tends to involve debt financing for firms with more value in tangible assets. JEL Classification: D81, G13, G31, G32     

Investor Protection,Investment Efficiency and Value: The Case of Cross‐Listed Firms

We examine the impact of improved investor protection due to cross‐listing on foreign firms’ investment decisions and firm value. While we find that cross‐listing increases firms’ capital expenditures and mergers and acquisitions activities, cross‐listed firms also invest more in research and development, make better acquisition decisions, and have higher profitability compared to non‐cross‐listed firms. Moreover, cross‐listing is associated with better cash utilization by foreign firms for investments. These improvements in investments and cash utilization are more pronounced for firms cross‐listed on US exchanges and for firms from countries with weak investor protection laws.     

THE MARKET'S PRICING OF DEBT IPOs

Based on the authors' recent study published in the Journal of Financial Economics , this article summarizes new evidence on the first-day and aftermarket price performance of a firm's first public offer of bonds after its equity IPO. Unlike equity IPOs, such bond IPOs are not underpriced on average. However, bonds that are more equity-like (junk bonds) are underpriced at the initial offer whereas high-grade debt is actually overpriced. This finding supports the view that riskier debt issues have a larger equity component and, as a consequence, a higher degree of information asymmetry.
The authors' study also showed that less prestigious underwriters are associated with more underpriced offers, and that the issuer's stock market listing plays an important role in determining the first-day price performance of bond IPOs. The degree of underpricing is lower for bonds issued by firms whose equity is listed on NYSE/AMEX than for bonds issued by firms listed on Nasdaq. Finally, the aftermarket performance for the full sample and various subsamples is consistent with bond market efficiency in the sense that, once prices adjust after the first day of trading, there are no clearly exploitable opportunities for excess returns.     

External financing and earnings management: Evidence from international data

Corporate financing conditions in the external capital market are significantly affected by information asymmetry, while internal financing is not. Given that earnings information influences market perceptions regarding firms’ quality, firms relying on external financing should have incentives to manage earnings to improve their financing conditions. This study investigates the effect of corporate external financing behavior on earnings management. Using a sample comprising 75,790 observations of 12,874 firms in 43 countries, we find that accrual-based and real earnings management are positively associated with firms’ reliance on external financing. This positive relationship holds especially true for firms that rely on equity rather than debt financing. We argue that reliance on external financing (especially equity financing), which is subject to problems arising from information asymmetry, generates a motive for earnings management.     

Gender and corporate finance: Are male executives overconfident relative to female executives?

We examine corporate financial and investment decisions made by female executives compared with male executives. Male executives undertake more acquisitions and issue debt more often than female executives. Further, acquisitions made by firms with male executives have announcement returns approximately 2% lower than those made by female executive firms, and debt issues also have lower announcement returns for firms with male executives. Female executives place wider bounds on earnings estimates and are more likely to exercise stock options early. This evidence suggests men exhibit relative overconfidence in significant corporate decision making compared with women.     

Resolving Information Asymmetry Through Contractual Risk Sharing: The Case of Private Firm Acquisitions

When private firms are acquired, buyers commonly rely on seller financing and earnouts. Using a novel database of private acquisitions, I find that seller financing and earnouts become more common as information asymmetry increases between the acquirer and the target. Financial statement audits of the targets attenuate these results, which suggests that audits decrease information asymmetry in firm acquisitions. Seller-financed acquisitions also close faster and at higher prices, reducing the private firm discount. These findings suggest that these contract structures are an important channel through which privately held firms mitigate adverse selection that arises from information asymmetry.     

Investment financing: evidence from Korea

This study examines the relative importance of various forms of capital in financing investments by Korean firms. Our results from the seemingly unrelated regression (SUR) method indicate that, unlike U.S. firms, Korean firms rely substantially on cash holdings to finance investments. These results also suggest that Korean firms use long‐term debt more actively than equity issuance to finance investments. Subgroup analyses show that large firms and Chaebol‐affiliated firms use more long‐term debt but less equity issuance than comparison firms do, suggesting that debt capacity allows firms to reduce the use of equity issuance. However, there is little evidence that financing decisions are driven by information asymmetry. The results from the quantile regression (QR) method suggest that Korean firms tend to use debt capital more than they do equity capital at low and medium levels of investments, while their reliance on equity capital increases at high levels of investments.     

Innovation Success and Capital Structure

This paper analyzes the relationship between firms’ innovation success and their capital structures. I hypothesize that firms’ innovation success reduces the extent of information asymmetry facing them in the equity market, leading to a greater propensity of firms to issue equity rather than debt to raise external financing. Supporting these hypotheses, I show empirically that firms with higher levels of innovation success have lower leverage ratios and a greater propensity to issue equity rather than debt. Further, these firms face a lower extent of information asymmetry in the equity market. I establish causality using instrumental variable analyses, instrumenting for patent grants with patent examiner leniency.     

定向增发新股、整体上市与股票价格短期市场表现的实证研究

定向增发新股成为股权分置改革之后中国上市公司股权再融资的主要工具,本文从理论上解释这种现象,并运用中国证券市场定向增发新股、整体上市的数据,对宣告定向增发新股、定向增发新股实现集团公司整体上市的公司股票价格的短期市场表现进行了实证研究。实证研究结果表明,上市公司宣告定向增发新股和宣告定向增发新股实现集团公司整体上市都有正的财富效应,并且上市公司通过向控股股东或控股股东的关联企业定向增发新股实现集团公司整体上市的宣告效应要好于其他类型的定向增发新股的宣告效应。     

Why firms favour the AIM when they can list on main market?

It is often argued that the popularity of Alternative Investment Market (AIM) in terms of higher number of listings relative to the Main Market (MM) is mainly due to the strict listing requirements in the MM. During the 1995 to 2014 period, 577 out of 1143 AIM listed firms did not qualify for MM listing, but the rest (566) that raised equity in AIM could have joined the MM. This raises the question why firms that meet the heavier regulatory environment of the MM choose the AIM, a lighter regulatory environment. This paper subjects this question to a comprehensive investigation and finds that the market choice is a self-selection decision. The two markets attract companies with different characteristics, and dissimilar post-listing investment and financing priorities. The evidence also shows that smaller and younger companies choose to be listed on the AIM due to lower listing and on-going costs. Heckman Selection models addressing the important question of what would have been the operating performance if AIM companies joined MM indicate that AIM companies would not perform better had they selected to go public in the MM.     

The impact of assets-in-place on corporate financing and investment decisions

In a dynamic setting with asymmetric information we consider firms’ debt-equity choice and investment timing. We extend recent research by adding an abandonment option and assets-in-place and we show that these extensions make debt more attractive. This implies, e.g., that mature firms (with larger assets-in-place) mainly use debt financing, whereas young high-growth firms (without assets-in-place) frequently use equity financing and signal their type by early investment. Simulation analyses confirm this and our model is thus able to explain empirical patterns which contradict the static pecking order theory.     

Monetary policy and regional availability of debt financing

The relative availability of bond and bank financing should affect the firm's external financing and investment decisions. We define a measure that proxies for the regional borrowing inflexibility to substitute between bank and bond financing: “debt inflexibility”. Debt inflexibility tilts the firm's financial structure towards equity and reduces investment. The impact is stronger during the period of tight monetary policy, particularly for smaller firms and firms without banking relationships. Debt inflexibility increases the sensitivity of cash holdings to cash flows, reduces the likelihood of dividend payment and makes the firm more likely to pay equity in mergers and acquisitions.     

Information Asymmetry and Corporate Investment Decisions: A Dynamic Approach

This paper develops a dynamic model of the financing and operating decisions of firms in the presence of information asymmetry. When the value of growth opportunities is not fully recognized, securities are undervalued, thus influencing the financing and investment decisions. The agency‐based underinvestment problem is re‐examined under information asymmetry. For firms with greater growth opportunities, the investment distortion resulting from information asymmetry is especially significant. Information asymmetry also increases the expected bankruptcy cost. The cost of information asymmetry in terms of both the firm value and the information spread under the optimal capital structure could be substantial.     

The impact of rights issues of convertible debt in Australian markets

Australian convertible debt issues are rights issues of non-callable securities and are issued in a market characterised by thin trading, significant institutional investor participation rates and a high number of resource firms. However, this study documents a significant negative announcement effect for rights issues of convertible debt, similar to international evidence. An analysis of the determinants of the announcement effect supports variants of the information asymmetry and agency cost hypotheses. The results do not support the convertible debt models of Kim [Kim, Y., 1990. Informative conversion ratios, a signalling approach. Journal of Financial and Quantitative Analysis 25, 229–243], Brennan and Kraus [Brennan, M., Kraus, A., 1987. Efficient financing under asymmetric information. Journal of Finance 42, 1225–1243], Green [Green, R.C., 1984. Investment incentives, debt and warrants. Journal of Financial Economics 13, 115–136] but some support is found for Stein's [Stein, J., 1992. Convertible bonds as backdoor equity financing. Journal of Financial Economics 32, 3–22], convertible debt model and Mayers [Mayers, D., 1998. Why firms issue convertible bonds: the matching of financial and real investment options. Journal of Financial Economics 47, 83–102], sequential financing model. However, support is found for Brous and Kini [Brous, P.A., Kini, O., 1994. The valuation effects of equity issues and the level of institutional ownership: evidence from analysts’ earnings forecasts. Financial Management 23, 33–46], equity issue based external monitoring model and Eckbo and Masulis [Eckbo, B., Masulis, R., 1992. Adverse selection and the rights offer paradox. Journal of Financial Economics 32, 292–332], rights issue adverse selection model.     

Information asymmetry and firms’ credit market access: Evidence from Moody's credit rating format refinement

I exploit Moody's 1982 credit rating refinement to examine its effects on firms’ credit market access, financing decisions, and investment policies. While firms’ ex ante yield spread can partially predict the direction of refinement changes, firms with refinement upgrades experience an additional decrease in their ex post borrowing cost compared with firms with downgrades. The former subsequently also issue more debt and rely more on debt financing over equity than the latter. Lastly, upgraded firms have more capital investments, less cash accumulation, and faster asset growth than downgraded firms. These findings show that credit market information asymmetry significantly affects firms’ real outcomes.     

How do firms finance their investments?: The relative importance of equity issuance and debt contracting costs

This paper examines the financing decisions of firms in response to changes in investments and profits. We find that information frictions play important roles in firms' financing decisions. However, we find no evidence that asymmetric information about the value of a firm's assets causes equity to be used only as a last resort. Indeed equity is the predominant source of finance in situations, such as profit shortfalls, investment in intangible assets, and internally generated growth opportunities, where informational asymmetries and agency costs are likely to be high. We also find that firms respond asymmetrically to positive and negative profit shocks. In financing fixed assets, high asymmetric information firms use more short-term debt and less long-term debt, whereas firms with high potential agency problems use significantly more equity and less long-term debt and cash.     

Financing uncertain growth

We examine interactions between investment and financing decisions in a dynamic model where the firm can alter the mix of debt and equity financing and exercise a randomly arriving and potentially short lived growth option. The firm will typically finance the exercise of the growth option with equity and may wait years before recapitalizing to a higher debt level. The lack of coordination between the timing of investment and debt financing helps explain a number of findings in the empirical literature, including violation of the financing pecking order, debt conservatism, apparent market timing of security issues, and more pronounced underperformance following equity issues than debt issues.     

Equity issues and temporal variation in information asymmetry

We investigate the intertemporal relation between information asymmetry and equity issues, and particularly focus on which firms drive this relation. We find that when information asymmetry for a particular firm is low compared to the recent past, the firm is more likely to issue equity as opposed to debt. Importantly, this intertemporal association is driven by firms with high levels of information asymmetry. These firms are more prone to adverse selection costs and thus have more to gain by issuing equity after a narrowing of the information gap between managers and investors. Our findings are robust to various firm-specific proxies for information asymmetry.     

An application of the two-stage Bivariate Probit–Tobit model to corporate financing decisions

Most of the previous studies on the firms’ debt-equity choice utilize the standard single equation Probit (or Logit) model as if firms face a single dichotomous decision to issue debt or equity, but not both. The main purpose of this study is to use a two stage Bivariate Probit–Tobit model to examine the factors affecting the choice between internal and external funding and between debt and equity as well as the size of issues. Our results indicate that the Bivariate-Probit estimation is more efficient than that of two independent Probit equations. An examination of factors that affect the choice of financing form and the size of issue support the predictions of trade-off theory. The pecking order’s prediction that, if external funding is needed, firms issue debt first and then equity finds no support in this study as firms with higher information asymmetry have propensity to issue equity rather than debt. While information asymmetry affects the choice between debt and equity, we find no evidence that it influences the size of issue.