SECURITY PRICE REACTIONS AROUND PRODUCT RECALL ANNOUNCEMENTS

This study presents an empirical, event-time analysis of the financial impact of product recall announcements on the equity holders of affected firms. Product recalls convey relevant information to the market at the time the announcement is reported in The Wall Street Journal. Further, security prices continue to react significantly to product recall announcements for approximately two months following the initial news release. No relation between the firm's equity decline and the direct costs of the recall is found, indicating the importance of indirect costs such as litigation or a reduction in future corporate sales due to reputation damage.     

高铁时空压缩效应与公司权益资本成本——来自A股上市公司的经验证据

以往文献大多集中于交通基础设施对一国或地区宏观经济的影响,而较少关注其对资本市场的作用。本文基于信息不对称视角,考察了高铁开通改变地理距离的时空约束后如何影响公司权益资本成本。以2007—2018年A股上市公司为样本,本文研究发现,上市公司所在地开通高铁后,由于内外信息不对称程度的降低,公司权益资本成本显著下降。该现象受到一系列公司特征的影响,与多数投资者聚集地距离越远、业务复杂度越高的公司,权益资本成本受高铁开通影响而下降得更明显。进一步的研究表明,高铁开通后公司股票流动性的提升及信息披露质量的提高是影响权益资本成本的重要路径。     

Public vs. Private Equity*

Many corporate executives view private equity as a last resort, as expensive capital that should be tapped only by companies that don't have access to presumably cheaper public equity. The reality of private equity, however, is more complex, and potentially quite rewarding, for both shareholders and management. This paper surveys some of the academic work on the costs and benefits of public vs. private equity, contrasting the private equity investment process with its public counterpart and exploring how such a process may add value. The importance of public equity, particularly for very large companies and growth companies with large capital requirements, is indisputable. But as investment bankers and other practitioners have noted, under certain circumstances the public markets effectively become “closed” to some public companies. Moreover, the cost of equity raised in public markets involves much more than the direct costs of underwriters, attorneys, and accountants. Some indication of the indirect costs is provided by the market's typically negative reaction to announcements of seasoned equity offerings. Although the negative reaction averages about 3%, in some cases stock prices drop by as much as 10%, thereby diluting the value of existing stockholders. Most academics attribute this reaction to the informational disadvantage of public stockholders. Private equity is designed in large part to overcome this information problem by replacing the monitoring performed by the typical public company board with the oversight of better informed and more highly motivated owners. A growing body of academic research suggests that private equity investors add value to the companies they invest in, and that the best investors are consistently effective in so doing. What's more, even public companies that tap private equity seem to benefit. As the author found in his own research on PIPES (Private Investment in Public Equity Securities) transactions, even though such securities are issued to private equity investors at a discount to the prevailing market price, the average market response to the announcement of such transactions is a positive 10%. In short, the participation of private equity investors is perceived to create value, and some of this value is shared with the rest of the market.     

ACCOUNTING FOR THE COST OF CAPITAL: AN EMPIRICAL EXAMINATION

One of accounting's oldest issues, accounting for interest costs, has become a subject of increased concern in recent years. This study empirically addresses the issue of whether the cost of equity capital should be charged against income. Fourteen measures of the cost of equity capital are examined. The empirical tests involve contemporaneous correlation of accounting betas for each income measure with market betas for a sample of 200 companies. The results of these association tests indicate that income measures, net of the cost of equity capital, may have greater information content than income as presently reported.     

资本市场开放与股权资本成本——基于沪港通、深港通的实证研究

本文基于沪港通和深港通研究资本市场开放对中国内地股权资本成本的影响。研究发现,受政策风险和市场环境等因素所限,沪港通在初始阶段并未对沪市公司的股权资本成本产生显著影响,但随着政策进一步完善、市场逐渐稳定和交易不断活跃,其对股权资本成本的降低效果于实施两年后开始显现;深港通建立在沪港通的制度基础和运行经验上,其在开通后显著降低了标的公司的股权资本成本。本文还进一步分析了资本市场开放影响股权资本成本的竞争渠道和信息渠道,发现深港通对股权资本成本的降低作用主要集中在投资者竞争程度较高,或是公开信息质量较高、信息不对称程度较低的股票样本。     

Labor cost voluntary disclosures and firm equity values: Is human capital information value-relevant?

This study examines the market value relevance of labor cost voluntary disclosures using a valuation model relating firm market values to book values of equity and to disclosed human capital information, such as labor costs, net pension liabilities (NPLs), and estimated average and marginal labor productivity and efficiency indicators. Results indicate that labor cost disclosing companies command higher equity market values in general, and that labor productivity and efficiency measures appear to be undervalued. Both findings suggest that there might be market opportunities for firms with valuable human capital to differentiate themselves from their industry peers, which might encourage further human capital disclosure in the future. More refined measures of human capital assets and investments are needed to assess firms’ human resource management decisions and performance impacts in the capital markets more adequately.     

资本市场开放与股权资本成本——基于沪港通、深港通的实证研究

本文基于沪港通和深港通研究资本市场开放对中国内地股权资本成本的影响。研究发现,受政策风险和市场环境等因素所限,沪港通在初始阶段并未对沪市公司的股权资本成本产生显著影响,但随着政策进一步完善、市场逐渐稳定和交易不断活跃,其对股权资本成本的降低效果于实施两年后开始显现;深港通建立在沪港通的制度基础和运行经验上,其在开通后显著降低了标的公司的股权资本成本。本文还进一步分析了资本市场开放影响股权资本成本的竞争渠道和信息渠道,发现深港通对股权资本成本的降低作用主要集中在投资者竞争程度较高,或是公开信息质量较高、信息不对称程度较低的股票样本。     

权益资本成本的行业特征研究

以2004~2011年沪深A股上市公司为样本,研究权益资本成本的行业差异以及行业特征对权益资本成本的影响。研究发现:行业门类层面和制造业次类层面的权益资本成本差异显著,这种差异在时序上较为稳定。行业竞争程度越低,权益资本成本越小,体现了产品市场竞争的特质性风险效应,行业收益波动和行业成长性分别对权益资本成本产生显著的正向影响和负向影响。企业会计准则的改革强化了行业因素对权益资本成本的影响。     

The reaction of firm ex ante cost of equity capital to the resolution of shareholder class action lawsuits

Existing research provides evidence that providers of capital (banks, public debt, and equity) all increase the expected return on securities after the initiation of a shareholder lawsuit. Many of these lawsuits are dismissed or settled with trivial monetary penalties, which suggests that an across-the-board permanent increase in the cost of capital is misguided. After estimating the probable outcome of a shareholder lawsuit using only information available at the time the shareholder lawsuit is filed, we study the resolution of shareholder lawsuits to determine if market participants adjust their expected return after a case is resolved. We find an increase (decrease) in the ex ante cost of equity capital when there is a surprise settlement (dismissal), which is consistent with an efficient market. Further, we present evidence consistent with equity market participants monitoring the progress of shareholder lawsuits prior to resolution. Overall, our results suggest that firm ex ante cost of equity capital only changes after the resolution of a shareholder lawsuit if the outcome of the case is different than initially predicted.     

Agency Cost,Dividend Policy and Growth: The Special Case of REITs

Dividend distribution enhances information transmission, and mitigates agency conflicts by restricting managers’ access to free cash flow, and exposing firms to the scrutiny and monitoring by market participants when raising external capital. The reduction in agency costs and improvement in information dissemination reduce the cost of funds, and investment at more competitive cost of capital enhances firm value. For REITs, because of the mandated high dividend distribution, growth depends on the availability of external capital at competitive rates, such that mitigation of agency costs is critical to sustain growth. We examine the relation between dividends and growth with a sample of U.S. equity REITs. Our data reveal a significantly positive relation between externally financed growth and dividend payments. The relation is stronger among REITs with more growth opportunities, and REITs that issue new equity and debt. We interpret this evidence as consistent with the notion that by reducing agency costs and facilitating capital raising, dividends enhance growth.     

Investment Adjustment Costs: An Empirical Assessment

We evaluate the empirical evidence for costs that penalize changes in investment using U.S. industry data. In aggregate models, such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena. So far no attempt has been made to estimate these costs directly at a disaggregated level. We consider an industry model with investment adjustment costs and estimate its parameters using generalized methods of moments. The findings indicate small costs associated with changing the flow of investment at the industry level. The weighted average of the industry elasticities with respect to the shadow price of capital, which depends inversely on the adjustment cost parameter, is eight times larger than the largest estimate reported in Levin et al. (2006) . We examine a variety of factors that may account for this discrepancy, but a substantial part of it remains unexplained. Our results therefore suggest that more caution is needed when giving policy advice that hinges on a structural interpretation of large investment adjustment costs.     

The Rule 415 Experiment: Equity Markets

Rule 415 allows a firm to register all the securities it reasonably expects to sell over the next two years and then, at the management's option, to sell those securities over these two years whenever it chooses. This paper examines whether equity offerings made under Rule 415 (shelf offerings) differ in issuing costs from equity offerings not sold under this rule. We find that shelf offerings cost 13% less for syndicated issues and 51% less for nonsyndicated issues. We also investigate the empirical relevance of the market overhang argument which suggests that shelf registrations depress the price of the registering firm's shares more than traditional registrations. Our data does not support the market overhang argument.     

EXTERNAL GOVERNANCE AND THE COST OF EQUITY FINANCING

We examine whether and how competitive pressure in the product market influences the cost of equity capital. Using a large panel of U.S. public firms, we find that intensification of product market competition results in lower equity financing costs. Our results are statistically significant and economically sizable. In line with the view of the disciplinary role of product market competition, we show that corporate governance, payout policy, and investment policy are channels through which competitive pressure influences the cost of equity capital.     

The Structure of External Financing Costs and the Economies of Scale View: New Evidence from Seasoned Equity Offerings in Germany

This paper is focused on the cost of raising equity capital in Germany. In the spirit of AltinkiliÇ and Hansen (2000) it challenges the conventional wisdom that flotation costs are characterised by economies of scale. For a sample of 120 SEOs on the German capital market over the years 1993–98 it is found that average total flotation costs amount to 1.61% of gross proceeds, while average underwriting fees are about 1.32%. Moreover, it turns out that flotation costs rise the larger the free float of the company is and the larger the share of stocks offered within a firm commitment cash offering is. As far as the economies of scale view is concerned, we do not find clear evidence in favour of decreasing marginal flotation costs. Moreover, fixed costs seem not to be very high in that they account on average for not more than 14–24% of total flotation costs or total underwriting fees, respectively.     

Comparing the Impact of News: A Tale of Three Health Care Sectors

Abstract:   This paper examines the impact of news on the volatility of equity returns in three sectors of the health care industry – health care service providers, producers of drugs and supplies, and third‐party payors. The news impact is found to be asymmetric in that bad news (i.e., a negative shock) has a significantly greater effect on volatility than good news. Intra‐industry differences in health care equity market performance are documented and are consistent with the fundamental attributes of these sectors including the degree of price and cost pressures facing firms, the physical capital requirements of firms, the search behavior of health care customers, and the presence of alternative market opportunities.     

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.     

Hedge Fund Involvement in Convertible Securities

Convertible arbitrage hedge funds combine long positions in convertible securities with short positions in the underlying stock. In effect, hedge funds use their knowledge of the borrowing and short‐sale market to hedge themselves while distributing equity exposure to a large number of well‐diversified investors through their short positions. The authors argue that many “would‐be” equity issuers that would otherwise pay high costs in a secondary equity issue choose instead to issue convertible debt to hedge funds that in turn distribute equity exposure to institutional investors. This allows companies to receive “equity‐like” financing today at lower cost than a secondary equity offering. The authors' findings also suggest that more convertibles will be privately placed with hedge funds when issuer and market conditions suggest that shorting costs will be lower.     

The Global CAPM and a Firm's Cost of Capital in Different Currencies

In an integrated global market, a firm's cost of capital expressed in one currency should be consistent with its cost of capital expressed in another currency. This article presents and illustrates a process for estimating consistent costs of capital in different currencies for a U.K. based multinational. In so doing, it uses a simple, easy-to-use version of the global CAPM that attempts to incorporate the effect of uncertain exchange rates by calculating exchange rate "betas." As argued in the previous article, at least part of a company's currency exposure is systematically related to the global market and thus should be treated as a component of the firm's systematic equity risk.
For example, the U.K. firm featured in this article is shown to have an exchange rate beta of 0.20 from the perspective of a U.S. investor. This implies that a 10% return on the global market in U.S. dollars tends to be associated with a 2% change in the U.S. dollar value of the British pound. One interesting consequence of incorporating exchange risk in this fashion is that two firms with identical U.S. global betas and costs of equity will have different expected returns expressed in another currency if they have different exposures to that currency.     

Corporate derivatives use and the cost of equity

We investigate the relation between derivatives use and corporations’ cost of equity capital. Using a large sample of non-financial firms, we compute and analyze (i) the relative cost of equity of firms that use derivatives and those that do not; and (ii) the change in cost of equity experienced by firms initiating derivatives programs. We find that the cost of equity of derivatives users is lower than non-users by 24-78 basis points. Our results are robust to specifications that account for potential endogeneity related to a firm’s derivatives use and capital structure decisions. We further find that the reduction in the cost of equity is attributable to both lower market beta and SMB beta, suggesting that firms use derivatives to reduce their financial distress risk and that this distress risk has a systematic component that is priced in the market. Finally, the observed reductions in the cost of equity tend to be largest for smaller firms and for firms utilizing currency and interest rate derivatives.     

A NEW APPROACH TO CAPITAL BUDGETING FOR FINANCIAL INSTITUTIONS

The classic approach to capital budgeting based on the standard Capital Asset Pricing Model (CAPM) says that the hurdle rate (or cost of capital) for any new project or investment should depend only on the riskiness of that investment. Thus, the hurdle rate, and hence the expected value of the investment, should not be affected by the financial policy of the company evaluating the project. Nor should the hurdle rate be influenced by the company's risk management policy, or by the kind of assets it already has on the balance sheet. This article argues that such a “singlefactor” model may be inappropriate for banks and other financial institutions for two main reasons:

• ? it is especially costly for banks to raise new external funds on short notice;
• ? it is costly for banks to hold a buffer stock of equity capital on the balance sheet, even if this equity is accumulated over time through retained earnings.

The single-factor CAPM ignores such costs and, in so doing, understates the true economic costs of “illiquid” bank investments. Illiquid investments require special treatment because they impose risks that, although “diversifiable” by shareholders, cannot be readily hedged by the bank and therefore require it to hold more equity capital. The authors accordingly propose a “two-factor” model for capital budgeting— one in which banks' investment decisions are linked to their capital structure and risk management decisions. One of the key implications of the two-factor model is that a bank should evaluate new investments according to both their correlation with the market portfolio and their correlation with the bank's existing portfolio of unhedgeable risks. The authors describe several potential applications of their model, including the evaluation of proprietary trading operations and the pricing of unhedgeable derivatives positions. They also compare their approach to the RAROC methodology that has been adopted by a number of banks.