Foreign issuers in the U.S. PIPE market

We document that the use of private investment in public equity (PIPE) by foreign firms listed on U.S. exchanges is growing even faster than its use by U.S. firms. On average, foreign firm PIPE stock deals represent a similar proportion of the firm's market capitalization to U.S. firm PIPEs, but suffer less of a share price discount than U.S. firm PIPE issuances, a relation that is robust to consideration of exchange, deal size, share turnover and return volatility. We document that hedge funds are only small investors in foreign firm PIPEs issued in the U.S., which tend to be purchased by pensions, government funds and corporations. PIPE, in combination with the reverse merger method of going public, provides a cost-effective means for foreign firms to raise capital in the U.S. capital market.     

A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership

This paper derives a closed-form valuation model in a two-country world in which the domestic investors are constrained to own at most a fraction, δ, of the number of shares outstanding of the foreign firms. When the “δ constraint” is binding, two different prices rule in the foreign securities market, reflecting the premium offered by the domestic investors over the price under no constraints and the discount demanded by the foreign investors. The premium is shown to be a multiple of the discount, the multiple being the ratio of the aggregate risk aversion of the domestic and foreign investors. Given the aggregate risk-aversion parameters, the equilibrium premium and discount are determined by the severity of the δ constraint and the “pure” foreign market risk.     

The consequences of deviating from financial reporting industry norms: Evidence from the disclosure of foreign cash

This study examines how investors respond to firms’ disclosure practices that deviate from the majority of industry peers (i.e., industry norms). The SEC has made repeated calls for the disclosure of foreign cash in order for investors to have more information in determining firms’ liquidity positions. We examine the association between firm value and the non-disclosure of foreign cash in industries where the majority of firms choose to disclose foreign cash. We define partial disclosure as disclosing permanently reinvested earnings (PRE), but withholding the disclosure of foreign cash, and find that when the majority of industry peers disclose foreign cash, investors discount the firm-specific partial disclosure of foreign operations. This finding suggests that investors have similar information demands as the SEC, and that withholding foreign cash results in a valuation discount. We also find that this discount is more pronounced for firms predicted to have higher levels of foreign cash and higher levels of PRE. The discount in firm value is also concentrated among firms with managers who have more career concerns, suggesting that managers shift the cost of partial disclosure to shareholders instead of bearing the personal reputational cost of full disclosure. Our results are robust to multiple matched samples and entropy balancing. While previous literature has considered the valuation implications of foreign cash disclosures, we reveal the consequences of opting to withhold the disclosure of foreign cash. Our findings should be of interest to both managers and policy-setters in forming their disclosure protocols.     

Does Regulation FD work? Evidence from analysts' reliance on public disclosure

We examine how Regulation FD changed analysts' reliance on firms' public disclosure. Regulation FD is associated with a stronger analyst response to earnings announcements, management forecasts and conference calls—that is, analysts respond to these events more quickly, more frequently and with larger forecast revisions after FD. Further, following public disclosure, the decline in analyst forecast dispersion and forecast error accelerates after FD. We find no such changes either for foreign ADR firms or around several confounding events. Overall, Regulation FD levels the playing field between the analysts and individual investors, thereby promoting “fair game” property of the market.     

Voluntary Disclosure and Information Asymmetry: Evidence from the 2005 Securities Offering Reform

In 2005, the Securities and Exchange Commission enacted the Securities Offering Reform (Reform), which relaxes “gun‐jumping” restrictions, thereby allowing firms to more freely disclose information before equity offerings. We examine the effect of the Reform on voluntary disclosure behavior before equity offerings and the associated economic consequences. We find that firms provide significantly more preoffering disclosures after the Reform. Further, we find that these preoffering disclosures are associated with a decrease in information asymmetry and a reduction in the cost of raising equity capital. Our findings not only inform the debate on the market effect of the Reform, but also speak to the literature on the relation between voluntary disclosure and information asymmetry by examining the effect of quasi‐exogenous changes in voluntary disclosure on information asymmetry, and thus a firm's cost of capital.     

A SURVEY OF U.S. CORPORATE FINANCING INNOVATIONS: 1970–1997

In the past 30 years, major changes have occurred not only in the kinds of securities issued, but also in the way securities are issued and in the national markets where they are issued. Traditional registered offerings have been partly displaced by shelf registered offerings and Rule 144A private offerings. And once exclusively domestic U.S offerings are increasingly being supplemented by foreign market offerings by U.S. companies, and by simultaneously domestic and foreign offerings. In 1997, for example, 11% of all proceeds raised by U.S. corporations were issued in one or more foreign markets. Of the $105 billion raised in these offerings, $31 billion was denominated in currencies other than the U.S. dollar.
While traditional securities still dominate the market, the authors' research indicates that the pace of innovation in the design of securities also increased markedly during the 1980s and has continued strong throughout the 1990s. In 1997, for example, innovative securities accounted for almost 30% of total domestic offerings. Three of the most common objectives of such securities have been (1) to manage the interest rate (and other financial price) risk faced by investors and issuers; (2) to reduce information costs faced by investors when buying securities from issuers with better information about their own prospects (a condition known as "information asymmetry"); and (3) to increase the tradability of financial assets.     

SEC Regulation Fair Disclosure,information, and the cost of capital

Regulation Fair Disclosure (“Reg FD”), adopted by the U.S. Securities and Exchange Commission in October 2000 was intended to stop the practice of “selective disclosure”, in which companies give material information only to a few analysts and institutional investors prior to disclosing it publicly. Our analysis shows that the adoption of Reg FD caused a significant shift in analyst attention, resulting in a welfare loss for small firms, which now face a higher cost of capital. The loss of the “selective disclosure” channel for information flows could not be compensated for via other information transmission channels. This effect was more pronounced for firms communicating complex information and, consistent with the investor recognition hypothesis, for those losing analyst coverage. Moreover, we find no significant relationship of the different responses with litigation risks and agency costs. Our cross-sectional results suggest that Reg FD had unintended consequences and that “information” in financial markets may be more complicated than current finance theory admits.     

Connected transactions and firm value: Evidence from China-affiliated companies

This paper investigates tunneling through related-party transactions (RPT) using a unique dataset of listed Chinese companies in Hong Kong. While prior findings suggest that investors do not seem to systematically discount tunneling firms, we find that firm value (Tobin's q and market-to-book value) is significantly lower for firms undertaking potentially expropriating transactions. In addition, cumulative abnormal returns (CAR) are lower for RPTs with disclosure exemptions and are negatively related to some RPT types. Our results suggest that firms tunnel using RPTs with disclosure exemptions and that disclosure requirements matter for RPTs. These RPTs could signal firms' corporate-governance quality, as investors substantially discount firms that undertake potentially expropriating transactions.     

Disclosure and liquidity management: Evidence from regulation fair disclosure

We examine the effect of the firm’s information environment on its liquidity policy by exploiting a natural experiment involving Regulation Fair Disclosure (Regulation FD). We find, on average, Regulation FD has a negative impact on firm cash holdings. We also directly evaluate changes in firm disclosure policy and find the negative Regulation FD-cash holdings relation is stronger for firms that increased public disclosure and holds largely for firms that faced lower proprietary costs of public disclosure. Furthermore, we find this negative relation is more pronounced for firms with limited access to the credit market. We capture the medium-term effect of Regulation FD two years before and two years after the implementation. Overall, our results suggest that the change in the amount of information disclosed in response to Regulation FD, an externality effect, affects information asymmetry between firms and outside investors and thus cash holdings.     

Re‐equitizing Corporate Balance Sheets: Choosing Among the Alternatives

Companies are generally reluctant to issue new equity because it can be expensive capital. Among the largest costs of an equity offering are so‐called “market‐impact” costs. To the extent the typically negative market reaction to a stock offering causes an issue to be underpriced, such underpricing dilutes the value of current shareholders. Despite such costs, many companies—particularly financial institutions—are raising equity capital to “delever” balance sheets that have been squeezed by the credit crunch and economic slowdown. And far from transferring value from existing shareholders, these offerings can preserve and even increase the value of highly leveraged companies by shoring up their capital bases and providing the flexibility to get through a difficult period. According to recent studies, announcements of equity offerings by distressed companies have been accompanied by positive stock returns in excess of 5 %. The challenge for CFOs is to determine why and when issuing equity is the value‐maximizing strategy. The kinds of companies that are most likely to benefit from equity offerings are those that score low on credit metrics, have experienced cyclical declines in operating performance, and have growth opportunities as part of their recovery. There are a number of options for raising equity capital, but no set rules for identifying the optimal one. Nevertheless, the author offers a number of suggestions designed to help CFOs make smarter decisions: Communicate clearly to investors the intended uses of the proceeds from the equity offering and how they are expected to create value; Consider judicious cuts to the dividend to preserve capital; Involve current shareholders to minimize dilution, perhaps by considering a rights offering, and strengthen their commitment; Seek out “smart money” such as private equity or SWFs as long‐term investors; Get the offer size right the first time so a second offering can be avoided; and Monetize volatility in uncertain markets by issuing convertible securities.     

Going Public: An Empirical Investigation of U.S. Bound Israeli IPOs

Between 1985–2003, more than 120 Israeli companies went public in the U.S., bringing the accumulated number of U.S. bound, Israeli initial public offerings (IPOs) to a figure greater than all other foreign countries combined. In this study, we compare the short and long run performance of Israeli IPOs to that of similar international and U.S. IPOs. Holding all else equal, we find that Israeli IPOs are significantly less underpriced than their local and foreign counterparts. As we examine the characteristics of Israeli issuers, we find that they differ than those of other foreign and local issuers in some important dimensions that compensate investors for information asymmetry and risk. First, compared to their home market capitalization size, U.S. bound Israeli IPOs, are significantly larger than the IPOs conducted by their foreign counterparts. Second, Israeli issuers tend to perform better than other foreign and U.S. local IPOs during our entire period of observation. Third, to a large extent, the Israeli firms in our sample have products, licensing or franchising relationships or venture capital funds with strong roots in the U.S. prior to the IPO. And fourth, the relevant investor community of Israeli IPOs, at least at the early stages, is small and overwhelmingly American. Our findings are consistent with prior studies documenting that firms raising capital outside of their domicile country are typically a select group of high quality firms in need of external financing that cannot be sufficiently provided in their home market.     

EVIDENCE THAT GREATER DISCLOSURE LOWERS THE COST OF EQUITY CAPITAL

The effect of corporate disclosure on the cost of equity capital is a matter of considerable interest and importance to both corporations and the investment community. However, the relationship between disclosure level and cost of capital is not well established and has proved difficult for researchers to quantify. As described in this article, the author's 1997 study (published in The Accounting Review) was the first to measure and detect a direct relationship between disclosure and cost of capital. After examining the annual reports of 122 manufacturing companies, the author concluded that companies providing more extensive disclosure had a lower (forward‐looking) cost of equity capital (measured using Value Line forecasts with an EBO valuation formula that derives from the dividend discount model). For companies with extensive analyst coverage, differences in disclosure do not appear to affect cost of capital. But for companies with small analyst followings, differences in disclosure do appear to matter. Among this group of companies, the firms judged to have the highest level of disclosure had a cost of equity capital that was nine‐percentage points lower than otherwise similar firms with a minimal level of disclosure. Closer analysis of some of the specific disclosure practices also suggests that, for small firms with limited analyst coverage, there are benefits to providing more forward‐looking information, such as forecasts of sales, profits, and capital expenditures, and enhanced disclosure of key non‐financial statistics, such as order backlogs, market share, and growth in units sold. In closing, the article also discusses an interesting new study (by Lang and Lundholm) that suggests there is an important distinction between effective corporate disclosure and “hyping the stock.” The findings of this study show that while higher levels of disclosures are associated with higher stock prices, sudden increases in the frequency of disclosure are viewed with skepticism.     

GOLBALIZATION, CORPORATE FINANCE, AND THE COST OF CAPITAL

International financial markets are progressively becoming one huge, integrated, global capital market—a development that is contributing to higher stock prices in developed as well as developing economies. For companies that are large and visible enough to attract global investors, having a global shareholder base means having a lower cost of capital and hence a greater equity value for two main reasons: First, because the risks of equity are shared among more investors with different portfolio exposures and hence a different “appetite” for bearing certain risks, equity market risk premiums should fall for all companies in countries with access to global markets. Although the largest reductions in cost of capital resulting from globalization will be experienced by companies in liberalizing economies that are gaining access to the global markets for the first time, risk premiums can also be expected to fall for firms in long-integrated markets as well. Second, when firms in countries with less-developed capital markets raise capital in the public markets of countries (like the U.S.) with highly developed markets, they get more than lower-cost capital; they also import at least aspects of the corporate governance systems that prevail in those markets. For companies accustomed to less-developed markets, raising capital overseas is likely to mean that more sophisticated investors, armed with more advanced technologies, will participate in monitoring their performance and management. And, in a virtuous cycle, more effective monitoring increases investor confidence in the future performance of those companies and so improves the terms on which they raise capital. Besides reducing market risk premiums and improving corporate governance, globalization also affects the systematic risk, or “beta,” of individual companies. In global markets, the beta of a firm's equity depends on how the stock contributes to the volatility not of the home market portfolio, but of the world market portfolio. For companies with access to global capital markets whose profitability is tied more closely to the local than to the global economy, use of the traditional Capital Asset Pricing Model (CAPM) will overstate the cost of capital because risks that are not diversifiable within a national economy can be diversified by holding a global portfolio. Thus, to reflect the new reality of a globally determined cost of capital, all companies with access to global markets should consider using a global CAPM that views a company as part of the global portfolio of stocks. In making this argument, the article reviews the growing body of academic studies that provide evidence of the predictive power of the global CAPM as well as the reduction in world risk premiums.     

A Tale of Two Segmented Markets in China: The Informative Value of Corporate Environmental Information Disclosure for Foreign Investors

Focusing on the unique setting of two segmented stock markets in China and using a sample of Chinese listed firms issuing both A-shares and B-shares during the period of 2007–2014, this study examines the influence of corporate environmental information disclosure on foreign share discount, and further investigates the moderating effect of globalizing the board. The findings show that environmental information disclosure is significantly negatively related to foreign share discount, suggesting that environmental information disclosure provides valuable and incremental information to mitigate information asymmetry between domestic and foreign investors, and thus reduces foreign share discount. Moreover, globalizing the board reinforces the negative relation between environmental information disclosure and foreign share discount. These findings are robust to alternative measures of environmental information disclosure and foreign share discount, and further, these conclusions are still valid after controlling for the endogeneity problem.     

Accounting standard changes and foreign analyst behavior: Evidence from China

This study investigates changes in foreign analyst behavior before and after Chinese New Accounting Standards was implemented during 2007. The empirical results show that after the new accounting standards were implemented, forecast error among foreign analysts decreased in both absolute and relative terms in comparison with domestic analysts, and foreign analysts forecast earnings more frequently than they did before the new accounting standards. These results imply that the implementation of new accounting standards in the Chinese capital market helped mitigate both information asymmetry between listed firms in China and foreign investors, and the “home bias” of foreign analysts. It also increased the attractiveness of listed firms and facilitated international communication and cooperation. This study also has significant implications for how resource allocation efficiency in the Chinese capital market can be raised and how the “introducing in” policy should be assessed.     

Initial Public Offerings on the Unlisted Securities Market: The Impact of Professional Advisers

This paper tests two hypotheses developed in the context of information asymmetry between companies making initial public offerings (IPO) on the Unlisted Securities Market and potential investors. It is argued that the status of the sponsor and audit firm are interpreted by potential investors as signals of an IPO's quality. The results indicate that for IPOs made during 1986–87 the level of discount and the status of the associated auditing firm are significantly related. Higher quality auditing firms are associated with lower levels of discount. A similar relationship for IPOs made during the period 1988–89 is not detected. The paper suggests that there were significant changes in the IPO market between these two periods. No relationship in either period is detected between the level of discount and the status of the sponsor.     

Differential levels of disclosure and the earnings-return association: evidence from foreign registrants in the United States

Foreign companies listing on U.S. exchanges are required to report financial information under U.S. GAAP on form 20-F using either Item 17 or Item 18 disclosure rules. These two disclosure rules differ in that Item 17 allows many exemptions from U.S. GAAP, while Item 18 requires disclosure of all financial information in accordance with U.S. GAAP. This study examines the differential earnings-return association between Item 17 and Item 18 filers.We find significantly higher earnings-return associations for Item 18 filers than for Item 17 filers. While the earnings-return association of Item 18 foreign firms is not different from that of matched U.S. firms (which fundamentally use Item 18 rules), the earnings-return association of Item 17 foreign firms is significantly lower than that of matched U.S. firms. Overall, the results are consistent with the idea that higher levels of disclosure may be related to lower discount rates and higher earnings response coefficients (ERCs).     

The Rise of Accelerated Seasoned Equity Underwritings

Seasoned equity offerings (SEOs) executed through accelerated underwritings have recently seen significant increases in global market share, and now account for a majority of the proceeds from both U.S. and European SEOs. Based on their study of over 30,000 global SEOs during the period 1991‐2004, the authors conclude that accelerated offerings occur more rapidly (as their name suggests), raise more capital, and require fewer underwriters than conventional fully marketed SEOs. Accelerated transactions also typically involve larger, better‐known companies that tend to be selling substantial amounts of secondary as well as primary secondary shares (whereas traditional SEOs consist almost entirely of primary shares). Besides speed of execution, the growing popularity of accelerated deals is also attributed to lower spreads, the reduced price risk for issuers resulting from the brief underwriting period, and “market‐impact” costs that are no larger than those that accompany traditional SEOs. Indeed, according to the authors' estimates, accelerated deals reduce the total issuance costs of U.S. issuers—in the form of lower spreads, market‐impact costs, and underpricing—by 250 basis points, on average, while the cost reduction for European sellers is said to be close to 400 basis points. The authors also present an analysis of SEO investment banking syndicates that illustrates that accelerated deals yield much smaller, more capital‐intensive, and presumably riskier underwriting syndicates that generate comparable revenues over much shorter transactions periods. In so doing, they enable larger, more reputable banks to “buy” market share and league table rankings. The authors' findings underscore three major trends that are shaping global investment banking. First, the fact that accelerated deals are marketed almost exclusively to institutional investors, and that these underwriting methods are gaining market share, suggests the declining importance of retail investors in equity markets everywhere. Second, the rise of accelerated deals both promotes and reflects increasing concentration in the investment banking industry, since only the largest banks have the capital base and risk tolerance required to buy large share blocks outright and assume all or most of the price risk of later resale. Finally, the increasing use of accelerated underwritings for SEOs provides another case of the “commoditization” of financial transactions characterized by relatively low asymmetric information. Since ATs can be employed for shares of only large and well‐known companies, these offerings are executed very quickly and cheaply—in much the same way plain vanilla corporate bonds are sold—and with minimal need for the placement and marketing services that investment banks use for IPOs and other non‐transparent security offerings.     

Large capital infusions,investor reactions,and the return and risk-performance of financial institutions over the business cycle

We examine investors’ reactions to announcements of large capital infusions by U.S. financial institutions (FIs) from 2000 to 2009. These infusions include private market infusions (seasoned equity offerings (SEOs)) as well as injections of government capital under the Troubled Asset Relief Program (TARP). The sample period covers both business cycle expansions and contractions, and the recent financial crisis. We present evidence on the factors affecting FIs’ decisions to raise capital, the determinants of investor reactions, and post-infusion risk-taking of the recipients, as well as a sample of matching FIs. Investors reacted negatively to the news of private market SEOs by FIs, both in the immediate term (e.g., the two days surrounding the announcement) and over the subsequent year, but positively to TARP injections. Reactions differed depending on the characteristics of the FIs, and the stage of the business cycle. Smaller, more financially constrained non-bank institutions were more likely to have raised capital through private market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be riskier and more levered. In the case of TARP recipients, they appeared to finance an increase in credit risk with more stable financing sources such as core deposits, which lowered their liquidity risk. However, we find no evidence that banks’ capital adequacy increased after the capital injections.     

Capital inflows,equity issuance activity,and corporate investment

This paper uses issuance-level data to study how equity capital inflows that enter emerging market economies affect equity issuance and corporate investment. It shows that foreign inflows are strongly correlated with country-level issuance. The relation especially reflects the behavior of large firms. To identify supply-side shocks, capital inflows into each country are instrumented with exogenous changes in other countries’ attractiveness to foreign investors. Shifts in the supply of foreign capital are important drivers of increased equity inflows. Instrumented contemporaneous and lagged capital inflows lead large firms to raise new equity, which they use to fund investment.