Why do firms repurchase stock to acquire another firm?

This study investigates firms that repurchase their stock to finance an acquisition. Since research shows that cash-financed acquisitions perform better than stock-financed acquisitions, why do firms that have available cash initiate the extra transactional step. I find these firms are well compensated for their efforts, especially in the long run. On average, these firms have negative abnormal returns prior to their repurchase announcements and thus may choose repurchasing to signal undervaluation. Furthermore, the stock acquisition step allows these firms to share risk, counteract the negative effects of dilution, and enjoy a tax advantage for their efforts.

Why do companies delist voluntarily from the stock market?

We analyse the motives and market valuation of voluntarily delisting from the London Stock Exchange. We show that firms that delist voluntarily are likely to have come to the market to rebalance their leverage rather than to finance their growth opportunities. During their quotation life, their leverage and insider ownership remained very high, they did not raise equity capital, and their profitability, growth opportunities, and trading volume declined substantially. They also generate negative pre-event and announcement date excess returns. These results hold even after controlling for agency, asymmetric information, and liquidity effects, and suggest that firms delist voluntarily when they fail to benefit from listing. Overall, these firms destroyed shareholder value and they should not have come to the market.     

Why do individuals not participate in the stock market?

We use a representative survey to study economic and non-economic factors that affect stock market participation. We find that many individuals suffer from inertia in the sense that they do not want to take the time and effort to invest in stocks. Inertia also explains stock market participation in addition to earlier documented factors such as actual and perceived financial literacy, trust, and the personal equity risk premium (PERP). A high percentage of non-investors (66%) assert that they will never invest in stocks. We find that inertia affects this assertion both directly and indirectly through factors such as age and gender.     

Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation

Over recent years, a substantial fraction of US convertible bond issues have been combined with a stock repurchase. This paper explores the motivations for these combined transactions. We argue that convertible debt issuers repurchase their stock to facilitate arbitrage-related short selling. In line with this prediction, we show that convertibles combined with a stock repurchase are associated with lower offering discounts, lower stock price pressure, higher expected hedging demand, and lower issue-date short selling than uncombined issues. We also find that convertible arbitrage strategies explain both the size and the speed of execution of the stock repurchases.     

Risk profiles: how do they change when stock markets collapse?

This paper has two main objectives: the first is to unveil the relative importance of global versus local risk factors in influencing excess returns in the emerging country stock markets; the second is to analyse how the observed risk profiles change when markets undergo a major crisis. Our main country of focus is Mexico, but we also analyse six Asian countries which went through the 1997 Asian crisis. Our findings indicate that during stable periods investors are mainly concerned about global risk factors, whereas close to a crisis they also include local factors in their information sets in forming expectations about future excess returns.     

How do share repurchases affect ownership concentration?

We study how share repurchases affect the ownership stake of outside blockholders in 950 publicly-traded US corporations from 1996 through 2001, using a control function approach to address the possible endogeneity of repurchases. We find that share repurchases tend to make outside ownership less concentrated: repurchasing 1% of outstanding common equity decreases the fraction owned by large shareholders by around one and a half percentage points. This may decrease outside shareholders' influence over firm decision-making. Our results are confirmed when we restrict the sample to institutional owners, but not to individual owners.     

Why do analysts issue forecast revisions inconsistent with prior stock returns? Determinants and consequences

We examine the informativeness of analyst forecast revisions that are directionally inconsistent with prior stock price movements (sign‐inconsistent revisions). Sign‐inconsistent revisions represent approximately one‐half of the forecast revisions from 1995 through 2010. Our tests indicate that sign‐inconsistent revisions are less informative than are sign‐consistent revisions. Sign‐inconsistent revisions are less likely to be closer to actual earnings realizations and they generate smaller stock price reactions. We also find evidence that sign‐inconsistent revisions are associated with analysts' economic incentives to generate trading volume and their behavioural limitations related to information uncertainty. These results suggest that sign‐inconsistent revisions do not necessarily benefit investors.     

Why do companies issue sukuk?

This paper investigates the determinants for firms to choose sukuk over conventional bond. We investigate the potential impact of information asymmetries through moral hazard and adverse selection to explain why firms prefer using sukuk. We perform logit regressions of the choice of debt type to determine which characteristics lead a firm to issue a sukuk rather than a bond. We use a dataset of sukuk and conventional bond issuances in Malaysia from 2004 to 2013. We find evidence of the influence of information asymmetries and adverse selection on the choice of the sukuk market.     

Why do accruals predict earnings?

Higher accruals are associated with lower subsequent earnings. We show this phenomenon can be explained by the way sales, profits, and working capital respond to changes in a firm's product markets. Empirically, high accruals predict high subsequent sales growth but a long-lasting drop in both profits and profitability. Accruals also predict an increase in future competition, suggesting that accruals are correlated with abnormally high—and, in equilibrium, transitory—true profitability that attracts new entrants to the industry. Overall, the predictive power of accruals is better explained by product-market effects than by measurement error in accruals or diminishing returns from investment.     

Why do intermediaries divert search?

We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). We identify two original motives for diverting search (i.e., inducing consumers to search more than they would like): (i) trading off higher total consumer traffic for higher revenues per consumer visit; and (ii) influencing stores’ choices of strategic variables (e.g., pricing). We characterize the conditions under which there would be no role for search diversion as a strategic instrument for the intermediary, thereby showing that it occurs even when the contracting space is significantly enriched. We then discuss several applications related to online and brick‐and‐mortar intermediaries.     

When do high stock returns trigger equity issues?

One of the most prominent stylized facts in corporate finance is that equity issues tend to follow periods of high stock returns. We document that firms exhibit such timing behavior only in response to high returns that coincide with strong institutional investor demand. When not accompanied by institutional purchases, stock price increases have little impact on the likelihood of equity issuance. The results highlight the importance of market reception for the timing of equity issues.     

When do investors gamble in the stock market?

Recent studies have uncovered gambling-motivated trading activities in financial markets in which investors seek lottery-type payoffs by using financial assets. Building on prospect theory, this study provides an important complement to prior research and investigates what period that investors make gambling-motivated trading in the stock market. Examining data from the Chinese stock market, investors are revealed to have asymmetric gambling preferences in gain and loss domains. Investors' gambling motivations are more easily triggered when the market is experiencing a loss. In such periods of time, investors may preferentially opt for lottery-type stocks that offer them a small chance to earn an extreme return at the risk of a likely small loss, simply due to their ‘aversion to a sure loss’.     

Why do traders choose dark markets?

We examine U.S. equity trader use of dark and lit markets. Marketable orders executed in the dark have lower information content and smaller fill rates. Dark orders take longer to execute, but they execute at more favorable prices. Traders are more likely to go dark when the bid-ask spread is wider and those with higher dark participation are more sophisticated. Although market regulators have expressed concern over the rise in dark trading, our results indicate that dark markets provide important benefits to traders that lit markets do not.     

Why do private firms adopt IFRS?

Do private firms voluntarily adopt IFRS? If so, why? Answers to these questions have been very limited so far, mainly due to the absence of financial data on private firms. In this paper, I exploit the German setting where the financial statements of private firms are widely available. I estimate multi-period logit regressions on the choice between national GAAP and IFRS for the consolidated financial statements of nearly 3000 German private firms with more than 14,000 firm-years in the period 1998–2010. My results suggest that the expected net benefits of IFRS adoption vary substantially across the group of private firms, depending on their financing needs, governance system, and organizational and informational complexity. Specifically, I find that private firms using IFRS have more growth opportunities, are more leveraged, are externally rated, seek to raise external capital by issuing public bonds or equity, are registered as a stock corporation, are characterized by private equity (PE) involvement, have more international sales and operations, and have a Big Five auditor. These insights should be of great interest to both preparers and regulators in the current debate about the future of financial reporting in private firms.     

Will temperature change reduce stock returns? Evidence from China

The continuous rise in temperature, on the one hand, will increase the frequency of extreme weather events and disrupt a company's normal production order; on the other hand, it will cause changes in environmental protection policies, leading to increased production costs and even the suspension of business for rectification. Therefore, the continuous rise in temperature is a risk factor that listed companies cannot ignore. This paper uses temperature data at the locations of listed companies in China from 2007 to 2019, as well as stock price data and financial data of listed companies, to study the impact of the continuous rise in temperature on listed companies and the determinants and mechanism of the impact. The empirical results show that a continuous rise in the temperature where a listed company is located will cause a significant negative shock to the listed company, and when the company's size is smaller, the book-to-market ratio is higher, and the consequences of this negative shock are more obvious.     

Why do fund managers increase risk?

This paper examines the relationship between the increase in fund risk and subsequent cash flows. We attempt to test the hypothesis that an increase in fund risk actually increases the net flows of equity funds, which is a basic assumption of risk shifting. We find that a change in fund risk has a positive and convex relationship with the fund's net flows. The effect of risk changes on net flows is a natural consequence of its effects on inflows and outflows. This paper's empirical results are robust to return frequency, fund age, and fund size. Our findings create incentives for managers to shift risk as documented in the mutual fund literature.     

When do stock analysts find bond rating changes informative?

Credit rating agencies (CRAs) have considerable privileged access to corporate management and are therefore a potentially important source of information to the equity market. We study how stock analysts incorporate bond ratings in their earnings forecasts. We develop an economic framework to explain why equity analysts might look to CRAs as an information source, especially after Regulation Fair Disclosure. Using this framework, we characterize the association between ratings changes and earnings forecast revisions surrounding these changes. We examine whether the extent to which equity analysts glean information from ratings changes is related to the extent and importance of information conveyed in the ratings change and analysts’ information uncertainty. We find that characteristics we examine are strongly related to stock analysts’ use of information in rating downgrades.     

What do insiders know? Evidence from insider trading around share repurchases and SEOs

We examine the nature of information contained in insider trades prior to corporate events. Insiders' net buying increases before open market share repurchase announcements and decreases before seasoned equity offers. Higher insider net buying is associated with better post-event operating performance, a reduction in undervaluation, and, for repurchases, lower post-event cost of capital. Insider trading also predicts announcement returns and long-term abnormal returns following events. Overall, our results suggest that insider trades before corporate events contain information about changes both in fundamentals and in investor sentiment.     

Why do privatized firms pay higher dividends?

We examine state income and reputation incentives to account for the high dividends of privatized firms. Consistent with these agency-cost based incentives, we show strong and robust evidence that the extent of state ownership is positively related to corporate dividends. We distinguish between the empirical importance of these incentives using variation in the rule of law to protect minority shareholders, the fiscal deficit and the political orientation of the state. Our findings show that an incentive to enhance the state's reputation with minority shareholders can account for the high dividends of privatized firms.     

Why do bank-dependent firms bear interest-rate risk?

I document that floating-rate loans from banks, particularly important for bank-dependent firms, drive most variation in firms’ exposure to interest rates. I argue that banks prefer to supply floating-rate loans, due to their finite ability to transform short-duration deposit liabilities into long duration assets. Three key findings support this argument: banks with more floating-rate liabilities make more floating-rate loans, hold more floating-rate securities, and quote lower prices for floating-rate loans. Intermediary funding structures therefore help determine what types of contracts non-financial firms use. Banks transmit rising policy rates to firms by contractually raising interest rates on existing loans, not just by reducing the supply of new loans.