Tactical Asset Allocation and Stock Issuance in the Korean Stock Market

Stock issuance predicts future stock returns in the Korean market. This creates profitable trading opportunities. Abnormal returns exist in the zero-cost portfolio that short the firms issuing large numbers of shares and longs those issuing small numbers of shares. Their average abnormal return is 12 percent per annum, which is highly significant even after controlling for market, size, value, and momentum factors as well as transaction costs. The authors suggest the possibility of fixed costs in equity market timing. Only the sizable benefit from market timing over fixed costs motivates firms to increase net equity shares.     

Does cross-listing facilitate changes in corporate ownership and control?

This paper examines whether controlling shareholders of foreign firms use a US cross-listing to facilitate changes in ownership and control. Prior to listing, about three quarters of the firms in our sample have a controlling shareholder. After listing, about half of the controlling shareholders’ voting rights decrease, with an average decrease of 24% points that differs significantly from that of the controlling shareholders of benchmark firms that do not cross-list. Large decreases in voting rights are associated with controlling shareholder characteristics, domestic market constraints, and better stock market performance and liquidity. In addition, there is control change in 22% of the firms. Controlling shareholders are more likely to sell control, and are more likely to do so to a foreign buyer, than controlling shareholders of benchmark firms. The results suggest that controlling shareholders who want to sell shares or their control stake can use a US cross-listing to decrease the cost of transferring ownership.     

Share issuance and cross-sectional returns: International evidence

Share issuance predicts cross-sectional returns in a non-U.S. sample of stocks from 41 different countries. Issuance predictability has greater statistical significance than either size or momentum, and is similar to book-to-market. As in the U.S., the international issuance effect is robust across both small and large firms. Unlike the U.S., the effect is driven more by low returns after share creation rather than positive returns following share repurchases. Issuance return predictability is stronger in countries with greater issuance activity, greater stock market development, and stronger investor protection. The results suggest that the share issuance effect is related to the ease with which firms can issue and repurchase their shares.     

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.     

Dynamic ownership and private benefits

We quantify private benefits of control by estimating a structural model of optimal shareholding using data on the ownership dynamics of Italian public companies. In the model, shareholders must maintain a minimum stake in the company to extract control benefits, which leads to infrequent trading of large blocks, and which is consistent with the empirical evidence. We estimate that control benefits account for 2% (4%) of the market value of the equity (block), and controlling shareholders earn a sizeable premium from the block holding on top of the market value of the shares. Also, we provide evidence that large block ownership and ownership persistence are associated with higher stock returns.     

Share issuance and cash savings

Firms increasingly issue shares for the purpose of cash savings. During the 1970s, $1.00 of issuance resulted in $0.23 of cash savings; over the most recent decade, $1.00 of issuance resulted in $0.60 of cash savings. This increase is caused by increasing precautionary motives. Proxies for precautionary motives increase over the sample period, and firm-level increases in these proxies are associated with firm-level increases in share issuance–cash savings. Share issuance–cash savings are inversely related to issuance costs, suggesting that firms issue and save when costs are low, so as to avoid issuing when costs are high. This framework can also help explain patterns and trends in share issuance activity over time. Market timing does not explain these effects, as share issuance–cash savings are not related to post-issuance stock returns.     

Profiting from government stakes in a command economy: Evidence from Chinese asset sales

We examine the market response to an unexpected announcement of the sale of government-owned shares in China. In contrast to earlier work, we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect from the policy's cancellation. We suggest that this results from the absence of a Chinese political transition to accompany economic reforms, so that the benefits of political ties outweigh the efficiency costs of government shareholdings. Companies managed by former government officials have positive abnormal returns, suggesting that personal ties can substitute for government ownership as a source of connections.     

Non-controlling large shareholders in emerging markets: Evidence from China

Non-controlling large shareholders play an important role in corporate governance in emerging markets where controlling shareholder expropriation is a major concern. We argue that non-controlling large shareholders are faced with two non-conflicting incentives: to take advantage of their information advantage and obtain positive abnormal returns when they trade company shares, and to serve as effective monitors and minimize controlling shareholders' appropriation of company wealth. Using a sample of large shareholders' selling events upon the expiration of the lockup period following the split-share structure reform in China, we find that non-controlling large shareholders successfully time the market, as shown by their positive abnormal returns when selling their shares. Their returns are higher if they have a greater information advantage. Furthermore, the positive returns of the controlling large shareholder are negatively related to non-controlling large shareholders' ownership, suggesting that non-controlling large shareholders play a monitoring role and prevent controlling shareholders from looting the company. We also show that large shareholders affiliated with the controlling shareholders are not subject to as high a level of monitoring as those controlling shareholders are. Furthermore, both firm opaqueness and the severity of agency cost affect the quality of non-controlling large shareholders' monitoring.     

An analysis of majority owner‐managed companies in the UK

This paper investigates the characteristics of 73 UK companies in which managers have an ownership stake of greater than 50 per cent. We find that majority owner‐managed companies make less use of alternative corporate control systems and are less likely to remove their chief executive officer or other board members following poor performance. However, our sample firms actually outperform diffusely held companies of similar size in the same industry. The determinants of majority control appear more closely related to the characteristics of the controlling shareholders rather than the firm's operating environment. Changes in the ownership structure of our sample companies owe more to changes in owner‐specific characteristics and security issuance than they are related to changes in the company's operating environment or company performance. We conclude that despite the obvious agency costs of managerial entrenchment for closely held companies, for the present sample at least the incentive alignment benefits of large director shareholdings are beneficial to outside shareholders.     

Interest rate changes and the timing of debt issues

There is much recent interest in the role of market timing in firm financial decisions. Using a large detailed sample of corporate public debt issues, private placements, Rule 144A issues and bank loans over the period 1970–2006, we investigate the relationship between interest rate changes and issues of floating and fixed-rate debt. Our results indicate that both past and future rates are associated with issuance decisions. We examine whether firms are able to lower their cost of capital by anticipating future rate changes, controlling for firm characteristics and market conditions. Our findings suggest that evidence of timing success is dependent on the time interval and type of debt examined. Over the longest time intervals available in our data, we do not find evidence of timing ability for fixed-rate or floating-rate debt issues.     

Do shareholders benefit from green bonds?

The green bond market has been growing rapidly worldwide since its debut in 2007. We present the first empirical study on the announcement returns and real effects of green bond issuance by firms in 28 countries during 2007–2017. After compiling a comprehensive international green bond dataset, we document that stock prices positively respond to green bond issuance. However, we do not find a consistently significant premium for green bonds, suggesting that the positive stock returns around green bond announcements are not fully driven by the lower cost of debt. Nevertheless, we show that institutional ownership, especially from domestic institutions, increases after the firm issues green bonds. Moreover, stock liquidity significantly improves upon the issuance of green bonds. Overall, our findings suggest that the firm's issuance of green bonds is beneficial to its existing shareholders.     

Significant issuance date returns in seasoned equity offerings: An options-based resolution of a puzzle

The significant negative issuance day returns associated with seasoned equity offerings (SEOs) have been a puzzle. In this paper we provide two explanations for this empirical regularity. First, using an option-based argument, we contend that issuance day returns are negative because of SEO related declines in volatility that reduce the option value of equity. Our empirical examination of US SEOs between 1983 and 2003 strongly supports this contention. Second, we find that the negative issuance date return is also related to market liquidity around the issuance date. Our findings are robust to various sub-samples and the uncertainty resolution argument, and are not driven by SEO buy-sell order imbalances.     

Diversification and ownership concentration

If controlling shareholders can divert profits, equity ownership is more concentrated the higher the stock returns correlation. A higher returns correlation reduces the benefits of diversification, giving rise to both a higher investment by the controlling shareholder in the asset that he controls and a lower investment by the non-controlling shareholders. The empirical analysis supports the predictions of the model: equity ownership is more concentrated in countries where the stock returns correlation is higher; moreover the intensity of the relationship between the stock returns correlation and ownership concentration is amplified by poor investor protection.     

Information and Long‐Term Stock Performance Following Open‐Market Share Repurchases

We find that firm managers have private information when they decide on open‐market share repurchases, and that this information is significantly correlated with announcement period and post‐announcement abnormal returns. We further find that long‐term post‐announcement abnormal returns are related to private information differently for firms that actually repurchase shares when compared to firms that announce a repurchase program but do not acquire shares. Our results indicate that managers’ private information is only ambiguously revealed by the repurchase announcement, and that the market waits for the firm's subsequent actions, such as actual repurchase, to further interpret the private information.     

Timing and Wealth Effects of German Dual Class Stock Unifications

This paper studies the reasons and the costs of separating ownership from control by analysing the decision of German dual class firms to consolidate their share structure from dual to single class equity between 1990 and 2001. We find that the firm value increases significantly by an average 4% on the announcement day. A significant part of the variation in abnormal returns can be explained by the ownership structure and by changes in liquidity. A logit analysis of the unification decision yields that firms are more likely to unify if their controlling shareholder loses only little voting power in a stock unification. Also, firms that are financially constrained are more likely to abolish dual class shares; these firms often issue additional shares after the stock unification.     

The determinants and consequences of IPOs in a regulated economy: Evidence from China

Using a sample of 156 monthly returns over the period of 1996–2008, we find a positive relation between the monthly issuing size and prior market returns, suggesting that the government decides the timing and the size of issuances based on prior market conditions. Different from previous findings, our study finds no evidence of decline in subsequent market returns after initial public offerings (IPOs). However, IPO issuance has a significantly negative impact on the return momentum effect, whereas the degree of impact is indifferent to the issuing size. We conclude that the overall mild impact on the subsequent market results from the government's regulation of the IPO market.     

Determinants of ownership structure: An empirical study of the Korean conglomerates

This study characterizes the ownership structure of multifirm conglomerates in terms of two dimensions; the degree of direct ownership and the amount of family stake. The determinants of the two dimensions are investigated simultaneously using the seemingly unrelated regression model. The results show that the conglomerates with a higher leverage and the bigger proportion of nonmanufacturing businesses tend to have a direct ownership. On the other hand, the conglomerates with a bigger size and a larger proportion of nonvoting shares tend to have a pyramidal ownership. As for the family stake, conglomerates with focused business lines tend to have a larger family stake. However, conglomerates that use more nonvoting shares and have more listed firms tend to have a lower family stake. The empirical results can be interpreted as a rational response of the market participants to the business environment that looks like ‘financing without governance.’     

Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe

This paper hypothesizes that hot convertible debt windows represent periods with lower convertible debt-related financing costs. Supporting this premise, we find that the stock price impact of Western European convertible debt announcements is significantly less negative during hot convertible debt windows. Importantly, this result holds while controlling for equity and straight debt issuance volumes and for macroeconomic conditions. In addition, stockholders are less sensitive to issuer- and issue-specific financing costs during hot convertible debt markets. Overall, these findings indicate that hot convertible debt markets represent windows of opportunity for convertible debt issuance. Firms with high idiosyncratic financing costs act accordingly by timing their convertible debt offering during a hot market.     

Dumb money: Mutual fund flows and the cross-section of stock returns

We use mutual fund flows as a measure of individual investor sentiment for different stocks, and find that high sentiment predicts low future returns. Fund flows are dumb money–by reallocating across different mutual funds, retail investors reduce their wealth in the long run. This dumb money effect is related to the value effect: high sentiment stocks tend to be growth stocks. High sentiment also is associated with high corporate issuance, interpretable as companies increasing the supply of shares in response to investor demand.     

‘Hot’ Debt Markets and Capital Structure

This paper examines the motives of debt issuance during hot‐debt market periods and its impact on capital structure over the period 1970–2006. We find that perceived capital market conditions as favourable, an indication of market timing, and adverse selection costs of equity (i.e., information asymmetry) are important frictions that lead certain firms to issue more debt in hot‐ than cold‐debt market periods. Using alternative hot‐debt market issuance measures and controlling for other effects, such as structural shifts in the debt market, industry, book‐to‐market, price‐to‐earnings, size, tax rates, debt market conditions and adjustment costs based on debt credit ratings, we find that firms with high adverse selection costs issue substantially more (less) debt when market conditions are perceived as hot (cold). Moreover, the results indicate that there is a persistent hot‐debt market effect on the capital structure of debt issuers; hot‐debt market issuing firms do not actively rebalance their leverage to stay within an optimal capital structure range.