The Determinants of Debt Maturity: The Case of Bank Financing in Singapore

This study presents important international evidence by examining the determinants of debt maturity of listed firms in Singapore, a major financial center in Asia. We focus on bank debt because it is the principal source of financing for most Singapore firms. We find that consistent with the contracting-cost hypothesis, firms with greater growth opportunities rely more heavily on short-term bank debt whereas larger firms are more likely to use long-term bank debt. In contrast, we find no strong support for either the tax or signaling hypotheses.     

Bidders’ strategic timing of acquisition announcements and the effects of payment method on target returns and competing bids

Using a sample of acquisition announcements released during trading versus nontrading hours, this study examines how the strategic timing of acquisition announcements determines the impact of the method of payment on target stock returns and competition among bidders. For overnight acquisition announcements, we find that cash payment offers positively and significantly affect acquisition premiums and target returns, yet these results do not hold for daytime announcements. Cash payment offers made during nontrading hours are more likely to deter potential bidders and complete proposed transactions. However, we find no such relationship for daytime announcements. These findings suggest that the timing of acquisition announcements by bidders is important for assessing the effects of payment method as a signal of target valuation and a preemption of competing bids.     

The Determination of the Seniority Structure of Debt: Theory and Evidence

The purposes of this paper are to provide a theory of determining the firm's optimal seniority structure of debt and examine the relation between the firm's seniority structure of debt and its characteristics. Unlike previous studies, we develop a theoretical model which explicitly includes the benefits and costs associated with senior debt financing, corporate taxes, risk-aversion in the capital market, and costs of financial distress. We next show how a value-maximized firm searches for the optimal trade-off among the present values of the tax advantage of debt, loss of tax credits, expected costs of financial distress, costs of senior debt financing, and benefit of limited liability. Numerical analysis results show that the firm's value is not only a strictly concave function of its capital structure (with a unique global maximum), but also a strictly concave function of its mix of senior and junior debts (with a unique global maximum). We then show that a firm's optimal seniority structure of debt (i.e. the market value of senior debt divided by the sum of the market values of senior and junior debts) increases for low levels of asset riskiness and decreases when asset riskiness becomes sufficiently great. Our model also suggests that a firm's optimal seniority structure of debt increases for low levels of growth opportunities and decreases for high levels of growth opportunities. We test the predictions of our model on the relation between the firm's seniority structure of debt and its characteristics by using the data for the firms in COMPUSTAT over the 1972 through 1991 time period. The empirical evidence is consistent with our theoretical predictions.     

Intra-lndustry Effects of Corporate Capital Investment Announcements

We examine how announcements of corporate capital investments by one firm affect the stock prices of its competitors. We find that on average, rivals experience a signifi cantly negative valuation effect. The results suggest that for the sample as a whole, the competitive effect dominates the contagion effect. We further examine various factors that could potentially explain the heterogeneous intra-industry effects of capital investment announcements. We find that rivals' share prices are more adversely affected when the announcer experiences a higher announcement effect or is the first mover in the industry. We also show that rivals experience a greater wealth loss when they have poorer investment opportunities or higher financial leverage.     

The Wealth Effect of Japanese-US Strategic Alliances

We investigate the wealth impact for Japanese and US firms that announce nonequity strategic alliances. We find that on average, both Japanese and US shareholders benefit from the formation of international alliances. We also find that shareholders earn larger abnormal returns in these alliances when the partnering firms are relatively small in size, have higher growth opportunities, or are less profitable. We show that both Japanese and US partnering firms display significant improvements in operating performance over the three-year period subsequent to the formation of international alliances.     

How do sovereign credit rating changes affect private investment?

Sovereign credit rating changes have an influence on real private investment of re-rated countries. We find significant increases in private investment growth following upgrades in sovereign ratings. These increases, however, are transitory. We also find significant, temporary declines in private investment growth following sovereign rating downgrades. The results hold after accounting for re-rated countries’ growth opportunities, endogeneity, and other factors that could affect private investment. The irreversible nature of investment may be the explanation for the temporary changes in the growth rates of physical capital investment associated with revisions in sovereign credit ratings.     

The Impact of Investment Opportunities and Free Cash Flow on Financial Liberalization:A Cross-Firm Analysis of Emerging Economies

This study undertakes firm-level analysis of investment opportunities and free cash flow in an attempt to explain the source of the wealth effect of financial liberalization for 14 emerging countries. We find that the market's responses to stock market liberalization announcements are more favorable for high-growth firms than for low-growth firms, a result that is consistent with the investment opportunities hypothesis. We also demonstrate that firms with high cash flow experience lower announcement-period returns associated with stock market liberalization than do firms with low cash flow. Our findings suggest that the free cash flow hypothesis dominates the corporate governance hypothesis in terms of the net effect of stock market liberalization on a firm's stock returns. We further document similar evidence with regard to banking liberalization. Finally, we demonstrate that stock market liberalization leads to the more efficient allocation of capital.     

Financial constraints and share repurchases

We examine how the financial constraints of repurchasing firms affect their post-buyback performance. By every constraint measure we use, a set of constrained firms repurchase. They display significantly poorer post-buyback abnormal return and operating performance than unconstrained firms. Financial constraints are more important in explaining the performance of share buybacks for firms with high actual repurchase ratios. Constrained firms, especially those with high actual repurchase ratios, experience a significantly greater increase in post-buyback distress risk than unconstrained firms. Managerial hubris could explain why constrained firms buy back shares even if the buybacks do not improve shareholder wealth.     

Nonlinear Models in Corporate Finance Research: Review,Critique, and Extensions

Since the work of Morck, Shleifer and Vishny (1988), nonlinear model specification has gained more attention in corporate finance research. In this paper, we provide a detailed review of the previous studies that have examined nonlinear relations in corporate finance. We review the theory and evidence in these studies and discuss the advantages and disadvantages of the various methodologies used to detect nonlinearity. We also suggest two possible methodological extensions, which we apply in the empirical analysis of R&D investment and firm value.     

Effects of Executive Share Option Plans on Shareholder Wealth and Firm Performance: The Singapore Evidence

The main purpose of our paper is to study the institutional nature and characteristics of executive share option plans (ESOPs) in Singapore, a fast-growing economy and an important investment location in Asia. Our study provides an interesting comparison between the characteristics of ESOPs in Singapore and those in the US. Our paper also investigates the short-term market reaction to ESOP announcements and the long-run stock and operating performance of the sample firms following the adoption of the ESOPs. Results indicate weak evidence of a positive abnormal return on the days surrounding the announcement of the ESOPs. However, there is no evidence of long-term superior stock and operating performance for the ESOP firms relative to benchmarks. The lack of significant incentive effects for the sample firms reflects mainly the unique regulatory environment in Singapore.