Stock price informativeness,cross-listings,and investment decisions

We show that a cross-listing enables firms to obtain, from the stock market, more precise information about the value of their growth opportunities. Thus, cross-listed firms make better investment decisions and trade at a premium. This theory of cross-listings implies that the sensitivity of investment to stock prices is larger for cross-listed firms. Moreover, the cross-listing premium is positively related to the size of growth opportunities and negatively related to the quality of managerial information. The sensitivity of the premium to the size of growth opportunities increases with factors that strengthen the impact of the cross-listing on price informativeness.     

When Analysts Talk,Do Institutional Investors Listen? Evidence from Target Price Changes

We find that institutions trade in the same direction as target price changes based on 6,415 U.S. firms from 1999 to 2011, even after controlling changes in stock recommendations and earnings forecasts. The impact of target price changes on institutional trading is more pronounced for small firms, firms followed by few analysts, and illiquid firms, and is mainly limited to transient institutions. We do not find any outperformance for institutions to follow analysts’ target price forecasts, suggesting that institutions could find it easier to justify their investment decisions by following analyst forecasts, although such trading does not result in outperformance.     

The politics of government investment

This paper investigates the relation between corporate political connections and government investment. We study various forms of political influence, ranging from passive connections between firms and politicians, such as those based on politicians’ voting districts, to active forms, such as lobbying, campaign contributions, and employment of connected directors. Using hand-collected data on firm applications for capital under the Troubled Asset Relief Program (TARP), we find that politically connected firms are more likely to be funded, controlling for other characteristics. Yet investments in politically connected firms underperform those in unconnected firms. Overall, we show that connections between firms and regulators are associated with distortions in investment efficiency.     

THE ROLE OF INVESTMENT BANK REPUTATION AND RELATIONSHIPS IN EQUITY PRIVATE PLACEMENTS

We explore the role of placement agents in equity private placements. Reputable agents are more likely to place shares of firms that have performed better and that have had frequent prior relationships with the agent. Controlling for self‐selection and endogeneity, firms using reputable agents offer smaller price discounts. However, issuers having frequent prior relationships with placement agents incur higher gross spreads. Although the results support the certification role of investment banks in private placements, they also shed light on the costs incurred by issuers that frequently rely on the same investment bank.     

The Influence of a Credit Rating Change on Dividend and Investment Policy Interactions

We examine firms’ alterations in dividend and investment activities following credit rating changes. We find that downgraded firms reduce both dividends and investments more than no‐rating‐change firms. However, a silver lining of this doubly negative impact for shareholders is an increase in investment efficiency in firms that are most likely to overinvest. For upgraded firms, investments increase, but dividend outlays do not, compared to firms without rating changes. Our findings of asymmetric dividend stickiness and symmetric investment changes on a credit shock suggest that dividends and investments should not always be considered competing uses of funds.     

Bankruptcy spillover effects on strategic alliance partners

This paper examines whether a party to a strategic alliance or joint venture suffers from spillover effects when the other partner files for bankruptcy. We find that the non-bankrupt strategic alliance partners, on average, experience a negative stock price reaction around their partner firm's bankruptcy filing announcement. This negative effect is strongest for longer partnerships and those with higher returns at the announcement of the initial alliance formation. Furthermore, horizontal alliance firms in declining industries have lower returns, indicating that industry conditions can exacerbate expected problems for the non-bankrupt firm. Non-bankrupt partners also experience drops in profit margins and investment levels in the subsequent two years with the worst performance concentrated among the longer-term agreements. There is very little impact on the returns or performance for joint venture partners, which suggests that these agreements are more insulating for the partner firm.     

SECURITIES PRICE EFFECTS OF UNIONIZATION LEGISLATION

Prior studies document that firms experience negative stock price effects in response to unionization. We study the economic effects of a radical change in unionization legislation in New Zealand and hypothesize that the stock price effect of unionization is a function of prior unionization status of firms. We provide evidence that legislative events that increase the likelihood of introducing more stringent legislation do not affect stock prices of high‐unionized firms, whereas low‐unionized firms are affected negatively and significantly. Legislative events that signal less stringent unionization legislation result in significant stock price increases for all firms.     

Sentiment and stock prices: The case of aviation disasters

Behavioral economic studies reveal that negative sentiment driven by bad mood and anxiety affects investment decisions and may hence affect asset pricing. In this study we examine the effect of aviation disasters on stock prices. We find evidence of a significant negative event effect with an average market loss of more than $60 billion per aviation disaster, whereas the estimated actual loss is no more than $1 billion. In two days a price reversal occurs. We find the effect to be greater in small and riskier stocks and in firms belonging to less stable industries. This event effect is also accompanied by an increase in the perceived risk: implied volatility increases after aviation disasters without an increase in actual volatility.     

INFORMATION AND NOISE IN FINANCIAL MARKETS: EVIDENCE FROM THE E‐MINI INDEX FUTURES

I examine the informational contributions and effects on transitory volatility of trades initiated by different types of traders in three actively traded index futures markets. The results show that trades initiated by exchange member firms account for more than 60% of price discovery during the trading day. These institutional trades appear to be more informative than trades of individual exchange members or off‐exchange traders. I also find that off‐exchange traders introduce more noise into the prices than do exchange members. My findings provide new evidence on the role of different types of traders in the price formation process.     

Conglomerate investment under various capital market conditions

This paper studies the investment of diversified and focused firms under various capital market conditions. When external capital becomes more costly at the aggregate level, investment declines in focused firms but remains unchanged in diversified firms. This investment advantage enjoyed by diversified firms could attribute to both their easy access to external capital and their ability to substitute internal capital markets for costly external markets. Consistent with the internal capital market argument, our findings show that the investment advantage exists for diversified firms even after we control for their easy access to external markets. We also find that the role of internal markets in financing investment is more important for diversified firms that are more financially constrained in external markets. Finally, we find that the segment-level investment becomes more efficient in conglomerates’ internal capital markets under depressed external capital market conditions. Overall, our findings suggest that internal capital allocation functions as a valuable and efficient substitute for diversified firms in a tightened external capital market.     

Mimicking repurchases

We study the tendency of firms to mimic the repurchase announcements of their industry counterparts. We argue that a firm, by repurchasing its shares, sends a positive signal about itself and a negative one about its competitors. This induces the competing firms to mimic the behavior of the repurchasing firm by repurchasing themselves. Using a broad sample of US firms from the period 1984–2002, we show that, in concentrated industries, a repurchase announcement lowers the stock price of the other firms in the same industry. The other firms react by repurchasing themselves to undo these negative effects. Repurchases are chosen as a strategic reaction to other firms’ repurchase decisions and are not motivated by the desire to time the market, i.e., to take advantage of a significantly undervalued stock price. Therefore, repurchasing firms in more concentrated industries experience a lower increase in value in comparison with their counterparts in less concentrated industries in the post-announcement era. Alternative methodologies used to estimate long-term performance confirm that it is only the repurchasing firms in low concentration industries that outperform the market, their non-repurchasing peers, and their counterparts in more concentrated industries by amounts that are economically and statistically significant.     

Information,sell-side research,and market making

The interaction between an investment bank's research and market making arms may have important implications for the trading of a firm's stock. We investigate the impact that research has on the liquidity provided by the bank's market maker. Utilizing a large sample of Nasdaq firms, we show that market makers whose banks also provide research coverage provide more liquidity and contribute more to price discovery than do market makers without such research coverage. Finally, we show that such “affiliated” market makers are less affected by uncertainty following earnings announcements. Our results provide new evidence on the sources of liquidity improvements for Nasdaq firms, and suggest that the information produced by banks in the sell-side research process is beneficial to their market makers.     

Interest rate clustering in UK financial services markets

This study forwards an explanation and empirical investigation of price clustering in retail banking markets. It is proposed that price or interest rate clustering forms in retail markets as firms wish to maximise returns from customers, some of whom have difficulties in recalling and processing price information. This theory is developed and tested using a dataset of retail interest rates from the UK which enables interest rate clustering to be viewed in both lending and investment markets, and at different levels of financial involvement. It is found that interest rate clustering occurs in a manner consistent with firms maximising returns from customers. These findings are viewed to be a key policy concern for financial regulators and firms concerned with consumer protection.     

New or used? Investment with credit constraints

Used capital is cheap up front but requires higher maintenance payments later on. We argue that the timing of these investment cash outflows makes used capital attractive to financially constrained firms, since it is cheap when evaluated using their discount factor. In contrast, it may be expensive from the vantage point of an unconstrained agent. We provide an overlapping generations model and determine the price of used capital in equilibrium. Agents with less internal funds are more credit constrained, invest in used capital, and start smaller firms. Empirically, we find that the fraction of investment in used capital is substantially higher for small firms and varies significantly with measures of financial constraints.     

Asset liquidity,corporate investment,and endogenous financing costs

We analyze how the liquidity of real and financial assets affects corporate investment. The trade-off between liquidation costs and underinvestment costs implies that low-liquidity firms exhibit negative investment sensitivities to liquid funds, whereas high-liquidity firms have positive sensitivities. If real assets are not divisible in liquidation, firms with high financial liquidity optimally avoid external financing and instead cut new investment. If real assets are divisible, firms use external financing, which implies a lower sensitivity. In addition, asset redeployability decreases the investment sensitivity. Our findings demonstrate that asset liquidity is an important determinant of corporate investment.     

Are investment and financing anomalies two sides of the same coin?

It is commonly believed that the negative financing-return anomaly is associated with the negative investment-return anomaly. The purpose of this research is to thoroughly investigate this issue to answer the question of whether the return predictabilities based on investment and financing activity are interrelated and share the same underlying cause. We find that investment and financing activities are only weakly correlated and that the profitability profiles surrounding these two activities differ. After controlling for the book-to-market ratio, high investment firms are more profitable than low investment firms, while high financing firms are less profitable than low financing firms. In addition, the investment-return relation weakens after controlling for financing, while the financing-return relation remains significant after controlling for investment. Our evidence suggests that the investment-return relation does not explain the external financing anomaly.     

Control-ownership wedge and investment sensitivity to stock price

This study examines whether insiders’ incentives for private control benefits affect investment sensitivity to stock price. While Chen et al. (2007) link stock price informativeness to firms’ learning from the stock market, we offer an alternative agency-cost based explanation. Using a total of 2822 firms from 22 countries in East Asia and Western Europe, we document a strong negative association between control-ownership wedge and investment-q sensitivity, suggesting that insiders’ incentives for private control benefit reduce their propensity to listen to the market. Furthermore, the negative impact of wedge on investment-q sensitivity is primarily driven by sub-optimal investments. Overall, we provide evidence that agency problem is an important factor that determines the learning from the stock market in capital allocation.     

Market Feedback,Investment Constraints,and Managerial Behavior

This paper examines the joint role of market feedback and investment constraints on managerial behavior. Using a sample of UK fixed price initial public offerings, we show that underperformance of share returns at the IPO significantly affects managerial investment decisions in the period after the offering. Firms with better investment opportunities and proportionately lower fixed (higher intangible) assets are more sensitive to negative market feedback. Over the longer term, the more responsive firms perform significantly better than their non‐responsive counterparts. The findings contribute to the debate on the informational advantage of managers over investors and present strong evidence that the market, on aggregate, can provide a superior assessment of a firm's opportunities. Managers who are able to respond to negative market feedback can significantly improve their firm's future prospects.     

Do small shareholders count?

We hypothesize that age similarity among small shareholders acts as an implicit coordinating device for their actions and, thus, could represent an indirect source of corporate governance in firms with dispersed ownership. We test this hypothesis on a sample of Swedish firms during the 1995-2000 period. Consistent with our hypothesis, we find that compared with shareholders of differing ages, same-age noncontrolling shareholders sell more aggressively following negative firm news; firms with more age-similar small shareholders are more profitable and command higher valuation; and an increase (decline) in a firm's small shareholder age similarity brings a significantly large increase (decline) in its stock price. The last effects are more pronounced in the absence of a controlling shareholder.     

Does the stock market affect firm investment in China? A price informativeness perspective

This paper investigates the empirical relationship between firm-level investment and the stock market in China from a price informativeness perspective. We find that firm investment does not significantly respond to the stock market valuation, because stock prices contain very little extra information about the future operating performance of firms. This finding is further supported by the relative investment response test and the relative price information content test based on the informativeness proxy of price non-synchronicity combined with firm information transparency.