TAKEOVER EXPOSURE, AGENCY, AND THE CHOICE BETWEEN PRIVATE AND PUBLIC DEBT

We examine how governance characteristics are related to the corporate choice between public and private debt. We find that firms with fewer takeover defenses and larger outside blockholder ownership are more likely to borrow from banks and to issue 144A debt. We also document that public debt cost is more sensitive to takeover exposure than bank debt cost. These results are consistent with the hypothesis that banks mitigate the expected negative effect of takeovers on debt value through covenants and debt renegotiations. Moreover, we show that firms with weaker internal monitoring are less likely to borrow from banks.     

EVIDENCE ON THE MARKET FOR PROFESSIONAL DIRECTORS

Using the temporary increase in the supply of directors associated with successful tender offers, we examine characteristics of directors who are valuable in the market for board seats. We find that after a takeover, professional directors are three times more likely to receive new appointments than other types of directors released from their respective boards. We find that the proportion of professional directors in above‐average performing targets is significantly greater than that in underperforming targets. Our results indicate that professional directors generally have valuable general human capital that more than offsets the costs of multiple directorships.     

MANAGERIAL OWNERSHIP,TAKEOVER DEFENSES,AND DEBT FINANCING

We examine the effect of agency conflicts on debt financing and show that managerial ownership and its interaction with takeover defenses affect these decisions. We find that (1) the relation between leverage and takeover defenses becomes insignificant when we control for the interaction of these defenses with managerial ownership, and (2) firms with large managerial ownership operate at high debt levels unless they have a large number of takeover defenses. Therefore, a two‐dimensional aspect of governance that includes the interaction between managerial ownership and takeover defenses is useful in understanding the effect of agency conflicts on firms' debt financing decisions.     

THE EFFECTS OF BANK CONSOLIDATION ON RISK CAPITAL ALLOCATION AND MARKET LIQUIDITY

We investigate the effects of financial market consolidation on the allocation of risk capital in a financial institution and the implications for market liquidity in dealership markets. An increase in financial market consolidation can increase liquidity in foreign exchange and government securities markets. We assume that financial institutions use risk‐management tools in the allocation of risk capital and that capital is determined at the firm level and allocated among separate business lines or divisions. The ability of market makers to supply liquidity is influenced by their risk‐bearing capacity, which is directly related to the amount of risk capital allocated to this activity.     

MARKET POWER,BANK MEGAMERGERS,AND THE WELFARE OF BANK BORROWERS

We assess the effects on the welfare of corporate borrowers of the recent wave of bank consolidations in the United States that has produced a small number of very large banks. Our evidence from a sample of more than 3,000 commercial borrowers from banks involved in large mergers indicates that the wealth effects on these borrowers are highly negative, statistically significant, and economically important. These negative investor perceptions seem to be driven largely by the expectation of changes in banks’ market power resulting from the mergers.     

TRADING COSTS OF NON‐U.S. STOCKS ON THE NEW YORK STOCK EXCHANGE: THE EFFECT OF INSTITUTIONAL OWNERSHIP,ANALYST FOLLOWING,AND MARKET REGULATION

We investigate the differences in market microstructure between U.S. and non‐U.S. stocks cross‐listed on the New York Stock Exchange using a sample of 316 pairs of matched stocks. We find that non‐U.S. stocks have wider spreads and larger adverse‐selection costs than U.S. stocks even after controlling for macro‐level institutional differences. Regression analysis shows that spreads and adverse‐selection costs are negatively correlated with institutional ownership and analyst followings. Thus, the higher spreads and adverse‐selection costs for non‐U.S. stocks can be partly explained by the lower institutional ownership and analyst following of non‐U.S. stocks. In addition, we find that although the spreads and adverse‐selection costs for non‐U.S. stocks are significantly higher before the implementation of Regulation Fair Disclosure (FD), the differences become even greater after Regulation FD, suggesting that Regulation FD has improved the information environment for U.S. stocks.     

RELATIONSHIPS AND UNDERWRITER SPREADS IN THE EUROBOND FLOATING RATE NOTE MARKET

We examine the role of issuer‐underwriter relationships in determining underwriter spreads for Eurobond floating rate notes from 1992 to 2002. Financial and nonfinancial firms with long‐term relationships pay a higher underwriter spread. Financial issuers that switch underwriters receive a discounted spread that is invariant to the underwriter's reputation and quality of the issue. However, the discount is not evident for nonfinancial firms. For both financial and nonfinancial firms, spreads are higher for noninvestment grade issues and, within investment grade, increase as quality declines. We also find higher spreads when underwriting is syndicated, and a strong negative time trend consistent with increasing competitive pressures.     

SLIPPAGE AND THE CHOICE OF MARKET OR LIMIT ORDERS IN FUTURES TRADING

Retail futures traders face uncertainty regarding the price they will obtain when trading. This price "surprise," known as slippage, can be substantial. Using unique data from an introducing brokerage for Chicago Board of Trade (CBOT) wheat, corn, and soybean futures contracts, we quantify time-to-clear and the magnitude of slippage. We then identify factors that affect these trade quality measures. Finally, we analyze individual trader choice between market and limit orders and find that the likelihood of placing limit orders, where regulations protect traders from slippage, is greater when order and market characteristic indicate that adverse slippage is likely.     

FOREIGN INVESTOR PARTICIPATION IN PRIVATIZATIONS: DOES THE INSTITUTIONAL ENVIRONMENT MATTER?

We examine the determinants of foreign investors' participation in the privatization process of developing countries. First, we estimate the probability that foreign investors target privatized firms in a given country. We show that a favorable legal environment where investor protection is higher enhances foreign investors' participation. Foreigners also prefer large, strategic firms from high‐growth economies and socially stable countries with low political risk. Second, we restrict our analysis to privatized firms that foreign investors actually choose and show that the stakes foreigners hold are larger if the firms are privatized by private sales as opposed to public offerings.     

MARKET TIMING IN REGRESSIONS AND REALITY

We compare price‐to‐earnings ratios and dividend yields, which are indirect measures of sentiment, with the bullish sentiment index, which is a direct measure. We find that the sentiment index does better as a market‐timing tool than do P/E ratios and dividend yields, but none is very reliable. We do not argue that market timing is impossible. Rather, we observe that stock prices reflect both sentiment and value, both of which are difficult to measure and neither of which is perfectly known in foresight. Successful market timing requires insights into future sentiment and value, insights beyond those that are reflected in widely available measures.     

IDENTIFYING REGIME CHANGES IN MARKET VOLATILITY

A casual inspection of a graph of volatility indexes over time indicates that volatility has undergone infrequent, but significant, shifts in its average level. The purpose of this article is to test for multiple structural breaks in the mean level of market volatility measured by the VIX and VXO, and to identify statistically the dates of these mean shifts. We find evidence of three distinct periods: pre‐1992, 1992–1997, and post‐1997. We find that the mean volatility, as well as its standard deviation, was lowest during 1992–1997. Our findings provide statistical evidence consistent with popular beliefs that market volatility changes over time.     

THE PRICING OF EQUITY CARVE‐OUTS DURING THE 1990s

We examine the level of underpricing and characteristics of equity carveouts (ECOs) from 1990 to 1998 (the 1990s) and from 1999 to 2000 (the bubble period). For a sample of 458 ECOs, we find a mean initial return of 8.75% for the 1990s and 47.76% for the bubble period. The results suggest that, similar to other initial public offerings (IPOs), ECOs have been more willing to accept underpricing through time because of an increased importance in analyst coverage and the increased use of spinning, the practice where investment bankers allocate IPOs to high‐profile customers to garner potential future business.     

THE INFLUENCE OF FIRM‐ AND CEO‐SPECIFIC CHARACTERISTICS ON THE USE OF NONLINEAR DERIVATIVE INSTRUMENTS

We examine why firms use nonlinear derivatives (e.g., options). Our results suggest that option characteristics in investment opportunities and debt, the payoff structure of incentive compensation, and free cash‐flow agency problems influence the firm's choice. Investment opportunities, internally generated cash flow, business risk, and option compensation positively influence the use of nonlinear currency derivatives. Option feature in bonds positively influence the use of nonlinear interest rate derivatives, whereas bonus and stock compensation, and CEO tenure have a negative influence. In sum, nonlinear cash flow characteristics in investment opportunity, debt, and executive compensation all relate positively to nonlinear derivative usage.     

TIME VARIABILITY IN MARKET RISK AVERSION

We adopt realized covariances to estimate the coefficient of risk aversion across portfolios and through time. Our approach yields second moments that are free from measurement error and not influenced by a specified model for expected returns. Supporting the permanent income hypothesis, we find risk aversion responds to consumption-smoothing behavior. As income increases, or as the consumption-to-income ratio falls, relative risk aversion decreases. We also document variation in risk aversion across portfolios: risk aversion is highest for small and value portfolios.     

MARKET EXPECTATIONS AND THE VALUATION EFFECTS OF EQUITY ISSUANCE

We examine how the wealth effects of equity offers are influenced by investors' expectation of the equity type (public or private) to be issued. Firms deviating to the public market may be issuing when information asymmetry or agency costs are high, and their wealth effects are more negative than for firms that are anticipated to issue equity publicly. Firms deviating to the private market, however, may signal firm undervaluation or monitoring benefits and experience more positive wealth effects than firms that are expected to issue equity privately. For the private issues, public market accessibility appears to influence the wealth effects.     

ORDER PLACEMENT STRATEGIES IN A PURE LIMIT ORDER BOOK MARKET

Using order book information from the Australian Stock Exchange (ASX), we examine whether (and to what extent) the order book affects investors' order placement strategies. We find that the top of the book always affects order submissions, cancellations, and amendments, and the rest of the book mostly affects order cancellations and amendments. The previously documented order submission aggressiveness, given a crowded first step of the book, persists to other price steps and is found in order amendments and cancellations along the book. Finally, investors tend to fill in the large price gaps in the book by submitting or amending orders.     

DIRECT EVIDENCE ON THE MARKET‐DRIVEN ACQUISITION THEORY

We provide direct empirical evidence that share overvaluation is an important motive for firms to make stock acquisitions. We find that more overvalued firms are more likely to acquire with stock, and acquirers are more overvalued in successful stock mergers than in withdrawn mergers. Acquirers' overvaluation, on average, exceeds the targets' premium‐adjusted overvaluation. Shareholders of stock acquirers, whose overvaluation is greater than their targets' premium‐adjusted overvaluation, realize sustained wealth gains from one day before the merger announcement up to three years after the merger completion, as compared with a matching sample of similarly overvalued but nonacquiring firms.