Severity of financing constraints and firms' investments

According to standard investment theory, the current investments of more financially constrained firms should be smaller than those of less constrained firms with similar investment opportunities. In this paper, I develop a dynamic investment model in which the project value and the severity of financing constraints can vary over time. My results contradict standard theory. To preempt further financing risk in the future, severely constrained firms may engage in more active investment behavior even if they face relatively high additional financing costs at the time. My numerical example demonstrates that a relatively low probability of future risk is sufficient to cause such preemptive behavior.     

Accelerated investment effect of risky debt

In this paper we examine a new effect of risky debt on a firm’s investment strategy. We call this effect “accelerated investment”. It stems from a potential loss of investment option in the event of default. The possibility of default reduces the value of the option to wait and provides equity holders with an incentive to speed up investment. As a result, in the absence of wealth expropriation by a levered firm’s debt holders, its shareholders exercise their investment option earlier than the shareholders of an otherwise identical all-equity firm. This result is at odds with the generally accepted intuition that in the absence of potential wealth transfers and taxes the shareholders of a levered firm would follow the same investment policy as that of an unlevered firm. In addition to providing various illustrations of the accelerated investment effect, we relate its magnitude to the presence of competition for investment opportunities.     

Government intervention and investment efficiency: Evidence from China

The extant corporate investment literature has documented that information asymmetry and agency conflicts between managers and outside investors prevent firms from making optimal investment decisions. In this study, we investigate whether government intervention, as another form of friction, distorts firms' investment behavior and leads to investment inefficiency. Using Chinese data, we test this by measuring government intervention at two different levels. First, we compare investment efficiency between SOEs and non-SOEs. We find that the sensitivity of investment expenditure to investment opportunities is significantly weaker for SOEs. Second, we measure government intervention by whether a firm is politically connected through the employment of top executives with a government background. We find that political connections significantly reduce investment efficiency in SOEs. However, we do not find such evidence in non-SOEs. Taken together, our findings suggest that government intervention in SOEs through majority state ownership or the appointment of connected managers distorts investment behavior and harms investment efficiency.     

Industry Expertise,Information Leakage and the Choice of M&A Advisors

This paper examines the impacts of M&A advisors’ industry expertise on firms’ choice of advisors in mergers and acquisitions. We show that an investment bank's expertise in merger parties’ industries increases its likelihood of being chosen as an advisor, especially when the acquisition is more complex, and when a firm in M&A has less information about the merger counterparty. However, due to the concerns about information leakage to industry rivals through M&A advisors, acquirers are reluctant to share advisors with rival firms in the same industry, and they are more likely to switch to new advisors if their former advisors have advisory relationship with their industry rivals. In addition, we document that advisors with more industry expertise earn higher advisory fees and increase the likelihood of deal completion.     

Industry Structure and Corporate Debt Maturity

We examine how industry competition affects firms’ choice of short‐term debt. We find that the percentage of short‐term debt is positively related to industry concentration at low levels of concentration, and inversely related to industry concentration at higher levels of concentration. This nonlinear relation is stronger in industries where firms are either more homogeneous or compete more aggressively. Moreover, we find that firms with shorter‐maturity debt are less aggressive than their rivals in the product market. The overall evidence suggests that although financial contracts alleviate agency problems, they exacerbate the risk of predation.     

Product markets and corporate investment: Theory and evidence

Investment patterns often associated with agency and information problems can emerge as rational responses to product-market rivalry. We illustrate this result when industry players make simultaneous or sequential investment decisions in the face of two negative externalities. One externality arises when all competing firms invest, thus eroding the gains to investment accruing to any one firm. Another externality arises when some firms do not invest and lose out to rivals who do invest. The value of investment therefore depends on the investment’s intrinsic merits and the actions of all competitors. Our analysis can rationalize investment patterns that might appear suboptimal when such externalities are ignored. For instance, our simultaneous model can justify investment levels that might otherwise be interpreted as under- or over-investment. Our sequential model shows that value-maximizing firms might optimally herd in their investment decisions. We present evidence supporting key aspects of both the simultaneous and sequential models.     

Financial expertise of directors

We analyze how directors with financial expertise affect corporate decisions. Using a novel panel data set, we find that financial experts exert significant influence, though not necessarily in the interest of shareholders. When commercial bankers join boards, external funding increases and investment-cash flow sensitivity decreases. However, the increased financing flows to firms with good credit but poor investment opportunities. Similarly, investment bankers on boards are associated with larger bond issues but worse acquisitions. We find little evidence that financial experts affect compensation policy. The results suggest that increasing financial expertise on boards may not benefit shareholders if conflicting interests (e.g., bank profits) are neglected.     

RISK PREMIUM EFFECTS ON IMPLIED VOLATILITY REGRESSIONS

This article provides new insights into the sources of bias of option implied volatility to forecast its physical counterpart. We argue that this bias can be attributed to volatility risk premium effects. The latter are found to depend on high‐order cumulants of the risk‐neutral density. These cumulants capture the risk‐averse behavior of investors in the stock and option markets for bearing the investment risk that is reflected in the deviations of the implied risk‐neutral distribution from the normal distribution. We show that the bias of implied volatility to forecast its corresponding physical measure can be eliminated when the implied volatility regressions are adjusted for risk premium effects. The latter are captured mainly by the third‐order risk‐neutral cumulant. We also show that a substantial reduction of higher order risk‐neutral cumulants biases to predict their corresponding physical cumulants is supported when adjustments for risk premium effects are made.     

Tunneling as an incentive for earnings management during the IPO process in China

Using a sample of 185 Chinese IPO firms listed on the Shanghai Stock Exchange during the period 1999–2001, we show that related-party (RP) sales of goods and services could be used opportunistically to manage earnings upwards in the pre-IPO period. We also provide evidence that such behavior may be motivated by the prospect of tunneling opportunities in the post-IPO period, i.e., exploiting economic resources from minority shareholders for the benefit of the parent company. We provide evidence of one such opportunistic tunneling tool: non-repayment by Chinese parent companies of net outstanding corporate loans made to them by their newly listed subsidiaries. Furthermore, we provide evidence in support of our assertion of an association between such tunneling behavior in the post-IPO period and earnings management via abnormal RP sales in the pre-IPO period. Finally, we demonstrate the apparent failure of investors in Chinese IPOs to perceive the link between the two phenomena. The results enhance understanding of the motives for and consequences of earnings manipulation during the IPO process. They highlight a potential additional investment risk facing foreign investors in China’s capital markets as well as in Chinese firms cross-listed in non-Chinese stock exchanges, and have policy implications for China and other emerging markets which need to improve the protection of minority shareholders’ rights.     

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.     

Do Female Mutual Fund Managers Manage Differently?

We examine the performance and investment behavior of female fixed‐income mutual fund managers compared with male fixed‐income mutual fund managers. We find that male‐ and female‐managed funds do not differ significantly in terms of performance, risk, and other fund characteristics. Our results suggest that differences in investment behavior often attributed to gender may be related to investment knowledge and wealth constraints. Despite the similarities between male and female managers, we find evidence that gender influences the decision making of mutual fund investors. We find that the net asset flows into funds managed by females are lower than for males, especially for the manager's initial year managing the fund.     

Pension risk and corporate investment distortion

Failure to correct for pension risk leads to upward-biased discount rate estimates in firms with pension risk exposure. The result is a negative and economically significant relation between pension risk and corporate investment. The effect is confined to investment decisions that require discount rate estimates. Moreover, it is stronger if project value is more sensitive to such estimates. Because of this bias, firms miss valuable investment opportunities. The results survive robustness tests that address endogeneity concerns and alternative interpretations of the evidence. The general implication is that non-operating risks can distort, if ignored, corporate investment decisions.     

The impact of strategic interaction on earnings expectations associated with corporate product strategies

We examine how strategic interaction in an industry influences the earnings expectations of financial analysts with regard to new product strategies. We find that following announcement of new products, analysts revise earnings forecasts upward more for announcing firms competing in low-strategic interaction industries than for firms competing in high-strategic interaction industries. For value-enhancing (value-reducing) product strategies, earnings forecast revisions are more favorable for rivals competing under a high (low) degree of strategic interaction than for rivals competing under a low (high) degree of strategic interaction. Overall empirical evidence indicates that the nature of strategic competition within the industry is important in assessing the market expectations of earnings for new product announcers and their rivals.     

Going-public vs. private sales: A two-tiered agency approach

This paper models a situation where an entrepreneur with assets in place and uncertain development opportunities decides whether to sell the business to public capital markets or to place it privately to a conglomerate. It finds that the two-tiered managerial hierarchy of a conglomerate is likely to cause more adverse effects of agency problem. Thus, going-public dominates private sales in motivating the entrepreneur to acquire more information about investment opportunities and in the profit performance of the business. The entrepreneur obtains less wealth if he sells the business privately at a price representing its profit potential when the entrepreneur and the manager of the conglomerate have the same managerial interests.     

CONVERTIBLE DEBT AND RISK‐SHIFTING INCENTIVES

I argue that convertible debt, in contrast to its perceived role, can produce shareholders’ risk‐shifting incentives. When a firm's capital structure includes convertible debt, every investment decision affects not only the distribution of the asset value but also the likelihood that the debt will be converted and thereby the distribution of the firm's leverage. This suggests that managers can engage in risk‐increasing projects if a higher asset risk generates a more favorable distribution of leverage. Empirical evidence using 30 years of data supports my argument.     

Optimal Investment Decisions for Two Positioned Firms Competing in a Duopoly Market with Hidden Competitors

This paper extends the literature dealing with the option to invest in a duopoly market for a leader‐follower setting. A restrictive assumption embodied in the models in the current literature is that investment opportunities are semi‐proprietary in that the two identified or positioned firms are guaranteed to hold at least the follower's position. More competition is realistically captured in our model by introducing the concept of hidden rivals so that the places in the market can be taken not only by positioned firm but also by these hidden competitors. The value functions and the optimal triggers for the positioned firms differ materially in settings with(out) the presence of hidden rivals. Unlike existing models, our model allows for (a)symmetric market shares and investment costs for the leader and the follower. Cooperative entrance by the two positioned firms is also modelled.     

Tangibility and investment irreversibility in asset pricing

Zhang (2005) and Cooper (2006) provide a theoretical risk‐based explanation for the value premium by suggesting a nexus between firms’ book‐to‐market ratio and investment irreversibility. They argue that unproductive physical capacity is costly in contracting conditions but provides growth opportunities during economic expansions, resulting in covariant risk between firms’ investment in tangible assets and market‐wide returns. This article uses the Australian accounting environment to empirically test this theory – a test that is not possible using US data. Consistent with the theoretical argument, tangibility is priced in equity returns, and augmenting the Fama and French three‐factor model with a tangibility factor increases model explanatory power.     

The Dark Side of International Cross‐Listing: Effects on Rival Firms at Home

We analyse the stock price impact of firms' US cross‐listing on home‐market rival firms. Using an empirical event study approach we find negative cumulative average abnormal returns for the rival firms around both the listing and announcement of listing dates. The evidence suggests both positive and negative spillover effects on rival firms, where the dominant effect is that investors see rivals at a relative disadvantage to the cross‐listing firm. As firms cross‐list in the US and commit to the increased disclosure and investor protection associated with the US listing, they are better able to take advantage of growth opportunities relative to their non cross‐listing counterparts, and this results in negative spillover effects on rival firms. Our results are consistent with the idea that firms cross‐list as a means to reduce agency costs of controlling shareholders and thus are able to exploit growth opportunities as they have better access to external finance.     

U.S. takeovers in foreign markets: Do they impact emerging and developed markets differently?

We investigate the effect that U.S. acquisitions of targets in emerging and developed countries have on the targets' rivals by measuring their stock price reaction to the acquisition announcement. On average, emerging market rivals react positively to these acquisitions while the reaction in developed markets is insignificant. In developed markets, the main factors explaining the reaction of rival firms are individual rival characteristics such as rival size, efficiency, growth opportunities, and leverage. In contrast, in emerging markets, country, industry, and acquisition characteristics such as economic development, shareholder protection, and the target's public status, industry, and percent acquired, play a more important role.     

Intra-industry transfer effects of credit risk news: Rated versus unrated rivals

We examine the information transfer effect of bond-rating adjustments on industry rivals. Our research is based on the premise that the transfer effect is influenced by the rated status of rivals, i.e., whether the rival’s debt is rated by any credit rating agency. The results reveal that credit rating adjustments induce different/stronger effects. First, the intra-industry transfer effects (on returns and risk) are stronger on rated rivals than on unrated rivals. Second, the credit risk news produces lower co-movements between the returns of the two types of rivals. Third, the differential effect is stronger in the manufacturing industry, in the riskiest industries and in the industries with the lowest competition levels. Interestingly, our results suggest that credit rating news is more relevant for rivals with access to the public debt market (such as re-rated firms) than for rivals that focus on other sources of funding.