DOES SPEED MATTER? THE ROLE OF HIGH-FREQUENCY TRADING FOR ORDER BOOK RESILIENCY

We analyze limit order book resiliency following liquidity shocks initiated by large market orders. Based on a unique data set, we investigate whether high-frequency traders are involved in replenishing the order book. Therefore, we relate the net liquidity provision of high-frequency traders, algorithmic traders, and human traders around these market impact events to order book resiliency. Although all groups of traders react, our results show that only high-frequency traders reduce the spread within the first seconds after the market impact event. Order book depth replenishment, however, takes significantly longer and is mainly accomplished by human traders’ liquidity provision.     

LIQUIDITY AND TICK SIZE: DOES DECIMALIZATION MATTER?

The effect of the move to decimalization by the Toronto Stock Exchange, where the minimum tick size was decreased to $0.05 from $0.125, is examined. Liquidity is measured by the price impact of unexpected volume. Results show an unambiguous gain to investors. Effective spreads decrease significantly, but the price impact is unaffected. In addition, evidence indicates an increase in trading activity in absolute terms as well in relation to U.S. exchanges for cross-listed stocks. This is consistent with the observed decrease in transaction costs.     

TO PURCHASE OR TO POOL: DOES IT MATTER?

The recent decision by the Financial Accounting Standards Board to eliminate pooling accounting for acquisitions raises several important questions: Does the choice of “purchase” or “pooling” affect firm valuations? How do differences in goodwill and its amortization affect cash flow and price/earnings multiples? How has the market reacted to purchase and pooling acquisition announcements? The authors' new research suggests that the market already judges mergers and acquisitions based on fundamental economics, not on GAAP earnings. In a study of 1,442 large acquisitions in the 1990s, the authors find that, in the first month after the announcement of pooled transactions, the acquirer's stock fell by an average of almost 4%. By contrast, the market reaction to purchase acquisitions was extremely favorable, with a 3% positive abnormal return in the first month. But what about the ongoing effect of goodwill amortization on values? In the second part of their two-part study, the authors report that the P/E multiples of acquirers reporting increases in goodwill amortization increase significantly following the acquisitions, and that the increases in P/E are large enough to offset the negative impact of goodwill amortization on earnings. Moreover, the authors also tested for and were unable to find any evidence of a market bias against balance sheet goodwill as an indicator of future amortization charges. The authors thus conclude that changes in accounting for acquisitions should not be a concern for acquirers, and that the elimination of pooling should have no lasting impact on corporate strategic decisions or M&A activity. Nevertheless, they do suggest that companies with significant goodwill would benefit from making their amortization transparent in their financial statements by, for example, breaking out amortization from depreciation on their income statements.     

DOES ORGANIZATION MATTER? A STUDY OF PHYSICIANS' IDEAL ORGANIZATION

It is a known phenomenon that it is difficult to make organizational changes within professional organizations. One recurring observation and experience from health care studies is that it is difficult to discuss the last organizational change with professionals because the most recent change is always perceived as the worst. In order to avoid this routine response, the authors of this article asked 56 senior physicians from the Swedish health care sector what their ideal organization looks like. The authors note that there is a strong institutionalized idea among the physicians of how health care should be organized. The image is not particularly complicated: the organization should be based on the meeting between doctor and patient. One conclusion in the article is that professionals dislike change, but nevertheless, they still want it. Actual change is not the problem – only changes that are not in compliance with the professionals' opinions of organization and management.     

DOES FINANCIAL FLEXIBILITY REDUCE INVESTMENT DISTORTIONS?

The average U.S. firm has less leverage than one would expect based on the trade‐off between tax shields and bankruptcy costs. We focus on firms’ financial flexibility and examine whether firms preserve debt capacity to reduce investment distortions in the future. We find that firms with high unused debt capacity invest more in future years than do firms with low unused debt capacity. Furthermore, firms that are reluctant to borrow in unconstrained periods are more likely to issue debt in periods in which access to capital markets is more constrained.     

DO STRATEGY AND MANAGEMENT MATTER IN MUNICIPAL ORGANISATIONS?

In Sweden, a large share of public services are organised, produced and delivered by municipalities, large and small, rich and poor. Contextual conditions (size and location) and economic conditions (efficiency and wealth) differ considerably among these service‐providing organisations. The question raised in this paper is whether a municipality's economic situation is a direct consequence of the contextual situation or the organisation's strategy and management – that is: Do strategy and management matter? Our analysis rests on a resource‐based view of organisation strategy. Both quantitative and qualitative observations have been made. First, cost savings data from 50 municipalities were examined for patterns and relationships between contextual and economic conditions. Second, about 100 representatives – municipal executive board members and leading officials – from 20 municipalities with different characteristics were interviewed. In this paper we outline an analytical framework and propose that sound and sustainable provision of municipal service depends on whether organisational decision‐making is in harmony with work methods and objectives. The results indicate that strategy and management do matter. Among the municipalities included in our study, we identify four prevalent basic strategies. Strategy tends to coincide with the economic situation rather than the contextual situation. A low‐performing municipality tends to have a predominantly outward orientation in its decision‐making, whereas a higher‐performing municipality makes decisions with both inward and outward orientation.     

DO BANK RELATIONSHIPS MATTER IN PUBLIC DEBT OFFERINGS?

Finance theorists have argued that banks have a comparative advantage over public debtholders and other suppliers of debt both in gathering information about and in monitoring corporate borrowers. Although underwriters of public debt issues and private placements have access to inside information when executing specific transactions, commercial bankers have ongoing relationships with their corporate borrowers that have often been built up over years. Perhaps more important, banks are also often in a better position and have stronger incentives than a dispersed collection of bondholders to keep tabs on what the borrowers do after receiving the capital.
This theoretical argument received striking empirical support from a study by Chris James published in 1987 in the Journal of Financial Economics. Entitled Some Evidence on the Uniqueness of Bank Loans, the study documented that announcements of new bank lending aggreements by public firms are received positively, on average (and in a large majority of cases) by the stock market. This finding offered a pointed contrast to the neutral to sharply negative stock-price responses that accompany announcements of almost all other kinds of securities offerings, including private placements of debt and public offerings of straight debt.
In this article, the authors discuss their own recently published study that provides another piece of evidence of the value added by banking relationships. Specifically, the authors report that the first public debt offerings of companies with bank relationships carry spreads that are 85 basis points less than the spreads of initial debt issues by comparable firms without bank relationships. As the authors interpret their findings, a banking relationship not only helps to certify the value of corporate borrowers to their stockholders, but also provides other lenders with valuable cross-monitoring benefits that are reflected in lower borrowing costs.     

THE FUTURE OF STATE INSURANCE REGULATION: CAN IT SURVIVE?

Abstract: As Congress continues to debate the future of financial services affiliations, state insurance regulators are faced with blurred lines of regulatory authority and the opportunity of federal banking regulators to preempt their decisions and their enforcement of consumer protection statutes. This article attempts to remind readers of the history and significance of state insurance regulation and provide clear evidence of its continued importance in the future of the conglomerated financial services marketplace.     

DOES VENTURE CAPITAL REQUIRE AN ACTIVE STOCK MARKET?

The United States has both an active venture capital industry and well-developed stock markets. Japan and Germany have neither. The authors argue that this is no accident— that venture capital flourishes especially, and perhaps only , when venture capitalists can exit from successful portfolio companies through initial public offerings (IPOs), which in turn require an active stock market.
Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers, particularly (1) the importance of exit by venture capitalists and (2) the implicit contract over control between venture capitalists and entrepreneurs created by the possibility of exit through an IPO. This possibility gives entrepreneurs a valuable option that, in the event they are successful, allows them to reacquire control of their enterprises from venture capitalists.     

DO MULTIPLE LARGE SHAREHOLDERS PLAY A CORPORATE GOVERNANCE ROLE? EVIDENCE FROM EAST ASIA

We examine the governance role of multiple large shareholder structures (MLSS) to determine their valuation effects in a sample of 1,252 publicly traded firms from nine East Asian economies. We find that the presence, number, and size of multiple large shareholders are associated with a significant valuation premium. Our results also show that the identity of MLSS influences corporate value and that the valuation effects of MLSS are more pronounced in firms with greater agency costs. Our results imply that MLSS play a valuable monitoring role in curbing the diversion of corporate resources.     

DOES IT PAY TO DISCLOSE MANAGERIAL EARNINGS INFORMATION EARLY?

Does it pay to voluntarily disclose the manager's private information about the firm's earnings prospects before the mandatory announcement date? This question has been a subject of much debate because prior research establishes both benefits and costs of early information disclosure. We provide evidence on the net effect of such disclosure by examining its impact on firm value. Using a large sample and correcting for self‐selection bias, we find that early disclosure of the manager's private earnings information enhances the end‐of‐period value of the firm.     

HOW WELL DO MARKET TIMING,CATERING, AND CLASSICAL THEORIES EXPLAIN CORPORATE DECISIONS?

An important debate in corporate finance is whether chief executive officers (CEOs) exploit equity mispricing. In this article I construct a measure of the unexplained change in the CEO's stockholdings of the firm to empirically test the contrasting predictions of market timing, catering, and classical theories of corporate decisions. Consistent with the predictions of classical theories, I find that the firm increases its investments and even uses expensive capital to finance investments when there is an unexplained increase in the CEO's stockholdings. However, I find no empirical support for catering predictions and weak empirical support for market timing predictions.     

DOES PRIVATIZATION FOSTER CHANGES IN THE QUALITY OF LEGAL INSTITUTIONS?

We analyze the effect of privatization on the quality of legal institutions of governance. Our findings suggest that large-scale privatization (in terms of progress and volume) increases the risk of corruption in developing countries but has no effect on the legal institutions of governance (i.e., law and order and investor protection). The method of privatization (public share issues versus private sales) helps curb corruption and improve the quality of law enforcement and of investor protection. In developed countries, the progress and volume of privatization reduce the risk of corruption, and the method of privatization enhances the quality of law enforcement.