Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study

This study of financing decisions by U.S. corporations examines the issuance of long term debt, issuance of short term debt, maintenance of corporate liquidity, issuance of new equity, and payment of dividends. Given costs and imperfections inherent in markets, a firm's financial behavior is characterized as partial adjustment to long run financial targets. Individual firm data are used so that speeds of adjustment are allowed to vary by company and over time. The results suggest that financial decisions are interdependent and that firm size, interest rate conditions, and stock price levels affect speeds of adjustment.     

Foreign capital raising by Indian firms: An examination of domestic stock price response

We examine the domestic stock price response to foreign capital issuance by Indian firms. Firms have extensively used foreign equity and convertible foreign debt sources since 1994. The role of foreign investment bankers, size of the issue, firm's growth opportunities, and other factors are examined in the cross-sectional analysis of domestic stock price response. We find that firms experience positive stock price response to both equity and debt issues abroad, with greater response to issuance of American Depositary Receipts (ADRs), and financing high corporate growth.     

Secondary Trading Costs in the Municipal Bond Market

Using new econometric methods, we separately estimate average transaction costs for over 167,000 bonds from a 1‐year sample of all U.S. municipal bond trades. Municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency. Also, municipal bond trades are substantially more expensive than similar‐sized equity trades. We attribute these results to the lack of bond market price transparency. Additional cross‐sectional analyses show that bond trading costs increase with credit risk, instrument complexity, time to maturity, and time since issuance. Investors, and perhaps ultimately issuers, might benefit if issuers issued simpler bonds.     

A SEQUENTIAL SIGNALING MODEL OF CONVERTIBLE DEBT ISSUE AND CALL POLICIES

This paper offers a new explanation for why some risk‐averse firms may prefer to issue callable convertible debt. Here, the convertible debt issue and call policies are integrated into a unified financing policy. It is then shown that for firms with relatively low unsystematic risk, convertible debt issuance followed by an appropriate in‐the‐money signaling call policy reduces more unsystematic equity risk than equity, callable straight debt, or their combination. The model is modified to incorporate asymmetric information at the issue stage to explain the stock price behavior at announcements of convertible debt sales.     

The pricing of U.S. IPOs by seasoned foreign firms

We examine the pricing of U.S. initial public offerings (IPOs) by foreign firms that are already seasoned in their domestic countries. Presumably, these equity offers have less downside risk for investors than typical IPOs since domestic share prices can be used to help establish a preoffer value for the firm's equity. In spite of the presumed diminished downside risk, we find that offers by firms from countries that impose foreign ownership restrictions and capital controls are on average underpriced, experiencing an average first-day return in the United States of 12.7%. This result stems in part from the underwriter's failure to price the issue to fully reflect the postoffer premium that often arises for the U.S. shares. In contrast, offers by firms from countries without ownership restrictions have an average first-day return of 0.0%.     

Global equity offerings and access to domestic loan market: U.S. evidence

This study examines whether and to what extend global equity offerings at the IPO stage may affect issuing firms' ability to borrow in the domestic debt market. Tracking bank loans taken by U.S. IPO firms in the domestic syndicated loan market, we observe that global equity offering firms experience more favorable loan price than that offered to their domestic counterparts. This finding holds for a set of robustness tests of endogeneity issues. We also find that, compared with their domestic counterparts, global equity offering firms are less likely to have financial distress, engage more in international diversification, and are more likely to wait a longer time to apply for syndicated loans.     

Investment financing: evidence from Korea

This study examines the relative importance of various forms of capital in financing investments by Korean firms. Our results from the seemingly unrelated regression (SUR) method indicate that, unlike U.S. firms, Korean firms rely substantially on cash holdings to finance investments. These results also suggest that Korean firms use long‐term debt more actively than equity issuance to finance investments. Subgroup analyses show that large firms and Chaebol‐affiliated firms use more long‐term debt but less equity issuance than comparison firms do, suggesting that debt capacity allows firms to reduce the use of equity issuance. However, there is little evidence that financing decisions are driven by information asymmetry. The results from the quantile regression (QR) method suggest that Korean firms tend to use debt capital more than they do equity capital at low and medium levels of investments, while their reliance on equity capital increases at high levels of investments.     

An Empirical Examination of the Pricing of Seasoned Equity Offerings: A Test of the Signaling Hypothesis

This paper tests the predictions made by Signaling Theory against the competing Price–Irrelevance Hypothesis (Eckbo and Masulis, 1992). Signaling Theory suggests that the issue price of a security provides a signal of quality of the issuing firm. In contrast, the Price–Irrelevance Hypothesis suggests that equity pricing does not possess information content. This paper investigates the pricing of seasoned equity offerings by examining the role of firm quality and relative firm valuation on issue price discounts. Additionally, this paper investigates the relationship between the issue price discount and the market reaction at the issuance of seasoned equity offerings. The results indicate that firm quality does not have a significant impact on the degree of price discounting by the issuing firm. Relative firm market valuation does appear to be a determinant of the magnitude of discounting in setting the issue price. This paper also provides evidence that seasoned equity offerings firms that provide a lower issue-price discount experience a lower stock-price decline following the issuance as compared to firms offering a higher price discount.     

Exchange Rates, Equity Prices, and Capital Flows

We develop an equilibrium model in which exchange rates, stockprices, and capital flows are jointly determined under incompleteforeign exchange (forex) risk trading. Incomplete hedging offorex risk, documented for U.S. global mutual funds, inducesthe following price and capital flow dynamics: Higher returnsin the home equity market relative to the foreign equity marketare associated with a home currency depreciation. Net equityflows into the foreign market are positively correlated witha foreign currency appreciation. The model predictions are stronglysupported at daily, monthly, and quarterly frequencies for 17OECD countries vis-à-vis the United States. Correlationsare strongest after 1990 and for countries with higher equitymarket capitalization relative to GDP, suggesting that the observedexchange rate dynamics is indeed related to equity market development.     

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.     

Policy uncertainty and seasoned equity offerings methods

Based on a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we examine how the choice of equity issuance method changes in response to policy uncertainty. We find that firms subject to high policy uncertainty are less likely to use accelerated offerings rather than other types of traditional seasoned equity offerings. Our results are robust to alternative variable specifications, propensity score matching method, IV approach, and the inclusion of additional controls. Also, the effect of policy uncertainty on accelerated offering decision is weaker for firms with better information environment, earnings quality, and governance structures. Further, policy uncertainty increases the cost of funds and lowers long-run abnormal returns after SEOs for firms subject to high levels of policy uncertainty.     

Does financing influence the sensitivity of cash and investment to asset tangibility?

Research shows that asset tangibility substantially impacts firms’ cash levels and investment. Using the deregulation of equity issuance in the U.S. as an exogenous shock to access to equity markets, we investigate the influence of financing on the dependence of cash and investment on asset tangibility. We show that financing dampens the sensitivity of cash and investment to asset tangibility, and promotes investment and firm growth. Our results suggest that greater access to financing allows financially constrained firms to invest in productive projects that may otherwise not be taken up. This provides evidence that public firms even in well-developed financial markets such as the U.S. benefit from financial deregulation that removes barriers to external financing, shedding light on the role of financial markets in fostering growth.     

SOURCING EQUITY INTERNATIONALLY WITH DEPOSITARY RECEIPT OFFERINGS: TWO EXCEPTIONS THAT PROVE THE RULE

Corporations around the world are now aggressively raising equity capital in the U.S. by crosslisting their shares on major U.S. stock exchanges in the form of depositary receipts (DRs). After describing the process by which companies create DR programs to crosslist their shares in the U.S., this article surveys the existing empirical evidence on the effects of such cross-listings on the companies' cost of capital, global risk exposures, and liquidity.
Among the most notable findings, the article reports that significant positive share price reactions, reductions in risk measures, and increases in liquidity are observed following crossborder listings, though mainly in the case of non-U.S. companies listing for the first time in the U.S. To illustrate these capital-market effects, the article recounts in some detail two recent cases of international capital-raising facilitated by DR offerings: Deutsche Telekom and China's Huaneng Power International.     

Isolating the disaster risk premium with equity options

The US equity risk premium is approximated with a mean unhedged equity return. I utilize out-of-the-money put options to obtain a hedged equity return, which allows me to quantify the disaster risk premium as the difference between the means of unhedged and hedged equity returns. I demonstrate that a substantial fraction of the U.S. equity risk premium over the period from 1996 to 2016 is attributed to disasters defined as stock price depreciations below a pre-specified strike price. Employing alternative hedging schemes increases the contribution of disasters to the equity risk premium.     

What do equity issuances signal? A study of equity issuances in the UK before and during the financial crisis

The financial crisis provides an ideal setting to study how quality signalling by firms, and information asymmetries, might explain the stock price reactions around seasoned equity offerings. The heightened information asymmetry levels during the GFC should have increased the importance of issuance quality and information asymmetries in explaining announcement returns. However, we document new and, in some cases, surprising findings, using a sample of 700 UK seasoned equity offerings between 2003 and 2012: (1) Contrary to expectations, announcement returns during the crisis were driven less by signalling and asymmetric information effects and more by macroeconomic conditions and general uncertainty. (2) In constrained capital markets, firms that were able to move more quickly to raise significant amounts of capital, made the capital-raising environment more challenging for firms that followed, such that the latter had to incur additional costs. (3) Contrary to the traditional view that the low book-to-market ratios may proxy for overvaluation and thus lower announcement returns, we found a negative relationship during the crisis period. The latter is consistent with the view that book-to-market ratios may also proxy for a distressed firm effect which may have dominated the conventional ‘market timing’ effect during the GFC. (4) Announcement returns were strongly positive for many firms at the peak of the crisis, possibly because the market was relieved to see that equity issues might potentially save firms from insolvency; an equity issuance could, in such circumstances, be a positive signal, even though equity issues are conventionally seen as negative signals. Overall, our paper documents fresh and surprising results about equity capital-raising during the GFC, and also offers insights for corporate finance that are of interest beyond the current crisis.     

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.     

Cross-country effects of regulatory capital arbitrage

One reason for the recent asset price bubbles in many developed countries could be regulatory capital arbitrage. Regulatory and legal changes can help traditional banks to move their assets off their balance sheets into the lightly regulated shadows and thus enable regulatory arbitrage through the securitized sector. This paper adopts a global vector autoregression (GVAR) methodology to assess the effects of regulatory capital arbitrage on equity prices, house prices and economic activity across 11 OECD countries/regions. A counterfactual experiment disentangles the effects of regulatory arbitrage following a change in the net capital rule for investment banks in April 2004 and the adoption of the Basel II Accord in June 2004. The results provide evidence for the existence of an international finance multiplier, with about half of the countries overshooting U.S. impulse responses. The counterfactual shows that regulatory arbitrage via the U.S. securitized sector may enhance the cross-country reallocation of capital from housing markets towards equity markets.     

U.S. Equity Investment in Emerging Stock Markets

This article examines U.S. equity flows to emerging stock marketsfrom 1978 to 1991 and draws three main conclusions. First, despitethe recent increase in U.S. equity investment in emerging stockmarkets, the U.S. portfolio remains strongly biased toward domesticequities. Second, of the fraction of the U.S. portfolio thatis allocated to foreign equity investment, the share investedin emerging stock markets is roughly proportional to the shareof the emerging stock markets in the global market capitalizationvalue. Third, the volatility of U.S. transactions in emerging-marketequities is higher than in other foreign equities. The normalizedvolatility of U.S. transactions appears to be falling over time,however, and we find no relation between the volume of U.S.transactions in foreign equity and local turnover rates or volatilityof stock returns.     

The long-run performance of firms that issue convertible debt: an empirical analysis of operating characteristics and analyst forecasts

Many firms issue hybrid securities, such as convertible debt, instead of standard securities like straight debt or common equity. Theoretical arguments suggest that convertible debt minimizes costs for firms facing high debt- and equity-related external financing costs. Theory also suggests that an appropriately designed convertible security provides efficient investment incentives. We show, however, that firms on average perform poorly following the issuance of convertible debt. The empirical evidence suggests that the efficient investment decisions predicted by theory are not in fact achieved by the actual design and issuance of convertible debt securities. An alternative interpretation of convertible debt offers is that investors ration the participation of some issuers in the seasoned equity market.     

University of Texas Roundtable on Financing and Managing Energy Investments in a Low‐Price Environment

During the past 18 months, the U.S. oil industry has seen oil prices plunge from well over $100 a barrel to under $30. In a session that was part of a recent Private Equity Conference at the University of Texas in Austin, the CEO of a small independent producer and a representative of a large global oil and gas company discussed the challenges of financing and operating energy companies in today's low‐price environment with the director of energy research at a brokerage firm, the senior partner responsible for the natural resource investments of a well‐known private equity firm, and the head of the oil and gas restructuring practice of a national law firm. The panelists appeared to reach a consensus on at least the following three arguments:

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