The valuation effects of stock splits and stock dividends

This study presents evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements. In addition, it documents significantly positive excess returns on and around the ex-dates of stock dividends and splits. Both announcement and ex-date returns were found to be larger for stock dividends than for stock splits. While the announcement returns cannot be explained by forecasts of imminent increases in cash dividends, the paper offers several signalling based explanations for them. These are consistent with a cross-sectional analysis of the announcement period returns.     

The Going-Public Decision and the Development of Financial Markets

This paper explores the linkages between stock price efficiency, the choice between private and public financing, and the development of capital markets in emerging economies. Generally, the advantage of public financing is high if costly information is diverse and cheap to acquire, and if investors receive valuable information without cost. The value of public firms generally depends on public market size, which implies that there can be a positive externality associated with going public, so that an inferior equilibrium can exist where too few firms go public. The model is consistent with empirical observations on financial market development.     

Do Real Estate Prices and Stock Prices Move Together? An International Analysis

The relationship between stock prices and real estate prices has been the subject of substantial debate in both the academic and practitioner literatures. Existing studies have focused on the time series of stock and real estate returns using data from a single country, such as the U.S. By necessity, these studies examine return and price changes over short intervals, creating a bias when property values are smoothed from year to year. Using data from 17 different countries over 14 years, this paper examines the relation between stock returns and changes in property values and rents. Consistent with other country-specific studies, we find that, with the exception of Japan, the contemporaneous relation between yearly real estate price changes and stock returns is not statistically significant. However, when the data are pooled across countries and when we look at longer measurement intervals, a significant relation between stock returns and both rents and value changes becomes apparent. Real estate prices are also found to be significantly influenced by GDP growth rates and provide a good long-term hedge against inflation but a poor year-to-year hedge.     

An Entrepreneur's Guide to Understanding the Cost of Venture Capital

Entrepreneurs who deal with a venture capital firm (VC) for the first time often find themselves unprepared for the experience. The deal structure language used to describe financing terms, and the methods used to value the investment, are unique to the VC world. The authors have two objectives in preparing this entrepreneur's guide to venture capital finance: First, they explain why VCs require rates of return that are considerably higher—even after adjusting for difference in risk—than the returns required by the shareholders of established companies. Their explanation focuses on differences of opinion between overly optimistic entrepreneurs and less sanguine VCs. Second, the authors discuss the difficulty faced by entrepreneurs when trying to understand the actual cost of VC financing (including the dilution of value that occurs when entrepreneurs fail to meet targets or milestones). The problem can be traced to deal structure terms that typically call for the VC to receive preferential treatment in the event the entrepreneur's scenario does not turn out to be accurate. More specifically, entrepreneurs often grant VCs control rights as well as liquidation rights that, when things go wrong, dramatically increase the effective cost to entrepreneurs of venture financing.     

The effect of capital structure on a firm's liquidation decision

A firm's liquidation can impose costs on its customers, workers, and suppliers. An agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm (as the agent) affects other individuals (the customers, workers, and suppliers as principals). The analysis in this paper suggests that capital structure can control the incentive/conflict problem of this relationship by serving as a pre-positioning or bonding mechanism. Appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex-ante value-maximizing liquidation policy.     

Cross-Sectional and Time-Series Determinants of Momentum Returns

Portfolio strategies that buy stocks with high returns overthe previous 3–12 months and sell stocks with low returnsover this same time period perform well over the following 12months. A recent article by Conrad and Kaul (1998) presentsstriking evidence suggesting that the momentum profits are attributableto cross-sectional differences in expected returns rather thanto any time-series dependence in returns. This article showsthat Conrad and Kaul reach this conclusion because they do nottake into account the small sample biases in their tests andbootstrap experiments. Our unbiased empirical tests indicatethat cross-sectional differences in expected returns explainvery little, if any, of the momentum profits.     

Profitability of Momentum Strategies: An Evaluation of Alternative Explanations

This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution.     

Why do firms hold so much cash? A tax-based explanation

US corporations hold significant amounts of cash on their balance sheets. This paper develops and tests the hypothesis that the magnitude of US multinational cash holdings are, in part, a consequence of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms facing higher repatriation taxes hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. In addition, less financially constrained firms and those that are more technology intensive exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.     

Leverage and Corporate Performance: Evidence from Unsuccessful Takeovers

This paper finds that, on average, targets that terminate takeover offers significantly increase their leverage ratios. Targets that increase their leverage ratios the most reduce capital expenditures, sell assets, reduce employment, increase focus, and realize cash flows and share prices that outperform their benchmarks in the five years following the failed takeover. Our evidence suggests that leverage-increasing targets act in the interests of shareholders when they terminate takeover offers and that higher leverage helps firms remain independent not because it entrenches managers, but because it commits managers to making the improvements that would be made by potential raiders.     

A Primer on the Economics of Shale Gas Production Just How Cheap is Shale Gas?

The authors analyze the economics of natural gas production in the U.S. in light of the government's recent dramatic upward revisions in gas reserve estimates as a result of advances in horizontal drilling and fracturing (“fracking”). While some observers believe the U.S. will enjoy very large supplies of low‐priced gas for a long time to come, others are not so sure. Using the data from gas wells completed in the Haynesville shale of northern Louisiana, the authors offer a probabilistic and economic perspective on these newly accessible reserves. Their model and NPV simulations indicate that shale gas exploitation is probably sustainable (with a 60% likelihood), but with some important reservations. NPVs are highly sensitive to gas price assumptions and projected production volumes. The authors' base case assumes the continuation into the foreseeable future of the current gas futures price curve; but the authors also point out that a fall in price of just 17% along that curve would reduce well NPVs to zero. Although it is clear that production from shale wells declines more rapidly than production from conventional wells, engineers have too little history with shale wells to forecast ultimate production with great confidence. Nevertheless, shale gas drilling opportunities also present energy companies with valuable “follow‐on” real options that are not captured in NPV analysis. This additional source of value is inherent in vast shale gas formations in which successful wells tend to lead to more development opportunities.