Do firms lease to hedge? CEO risk-taking and operating lease intensity

Operating leases are used extensively for financing, but their ability to separate ownership and use also creates hedging opportunities. We investigate whether firms recognize such opportunities by examining the relation between chief executive officer (CEO) risk-taking incentives and the use of operating leases. Consistent with firms using operating leases to hedge, we find higher CEO risk-taking incentives lower operating lease intensity. To address endogeneity, we use the adoption of Statement of Financial Accounting Standards 123R as an exogenous shock to option compensation, dynamic panel generalized method of moments, simultaneous equations, and change regressions. Our results are robust to placebo and alternative tests.     

Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets

Using two newly available ultrahigh-frequency datasets, we investigate empirically how frequently one can sample certain foreign exchange and U.S. Treasury security returns without contaminating estimates of their integrated volatility with market microstructure noise. Using the standard realized volatility estimator, we find that one can sample dollar/euro returns as frequently as once every 15 to 20 s without contaminating estimates of integrated volatility; 10-year Treasury note returns may be sampled as frequently as once every 2 to 3 min on days without U.S. macroeconomic announcements, and as frequently as once every 40 s on announcement days. Using a simple realized kernel estimator, this sampling frequency can be increased to once every 2 to 5 s for dollar/euro returns and to about once every 30 to 40 s for T-note returns. These sampling frequencies, especially in the case of dollar/euro returns, are much higher than those that are generally recommended in the empirical literature on realized volatility in equity markets. The higher sampling frequencies for dollar/euro and T-note returns likely reflect the superior depth and liquidity of these markets.     

Trader Anonymity, Price Formation and Liquidity

Using data from the Frankfurt Stock Exchange we analyze priceformation and liquidity in a non-anonymous environment withsimilarities to the floor of the NYSE. Our main hypothesis isthat the non-anonymity allows the specialist to assess the probabilitythat a trader trades on the basis of private information. Heuses this knowledge to price discriminate. This can be achievedby quoting a large spread and granting price improvement totraders deemed uninformed. Consistent with our hypothesis wefind that price improvement reflects lower adverse selectioncosts but does not lead to a reduction in the specialist's profit.Further, the quote adjustment following transactions at thequoted bid or ask price is more pronounced than the quote adjustmentafter transactions at prices inside the spread. Our resultsindicate that anonymity comes at the cost of higher adverseselection risk. JEL Classification: G10.     

How Do Investors' Expectations Drive Asset Prices?

Based on an extension of the process of investors' expectations to stochastic volatility we derive asset price processes in a general continuous time pricing kernel framework. Our analysis suggests that stochastic volatility of asset price processes results from the fact that investors do not know the risk of an asset and therefore the volatility of the process of their expectations is stochastic, too. Furthermore, our model is consistent with empirical studies reporting negative correlation between asset prices and their volatility as well as significant variations in the Sharpe ratio.     

EXPRESS LANE OR TOLLBOOTH IN THE DESERT? THE SEC'S FRAMEWORK FOR SECURITY ISSUANCE

U.S. companies that need capital may choose between selling securities in the private and public markets. These venues differ in terms of direct issuance costs, the required information disclosed, the liability incurred, and the mechanics of the capital-raising process itself. During the last two decades, the Securities and Exchange Commission (SEC) has deregulated private offerings by broadening their investor base and increasing secondary market liquidity. At the same time, SEC policy has bifurcated the offering process in the public market into two distinct segments based largely on company size and seasoning. Large public issuers have seen a gradual deregulation and acceleration of their capitalraising processes. Important changes for issuers include allowing them to incorporate information into registration statements by reference to Exchange Act reports, to use shelf registration to speed up offers, and to place securities offshore with less regulatory uncertainty. Though small issuers enjoy some of the benefits of these changes, deregulation of their offerings has been somewhat less pronounced. In a Commission report and a subsequent concept release, the SEC indicates it may restructure and unify these three disparate strands of capital raising through an innovative schema of registering companies rather than securities.     

Trader Anonymity, Price Formation and Liquidity

Using data from the Frankfurt Stock Exchange we analyze price formationand liquidity in a non-anonymous environment with similarities to thefloor of the NYSE. Our main hypothesis is that the non-anonymity allows the specialist to assess the probability that atrader trades on the basis of private information. He uses this knowledgeto price discriminate. This can be achieved by quoting a large spread and granting price improvement to traders deemed uninformed.Consistent with our hypothesis we find that price improvement reflects loweradverse selection costs but does not lead to a reduction in the specialist's profit. Further, the quote adjustmentfollowing transactions at the quoted bid or ask price is more pronounced than the quote adjustment aftertransactions at prices inside the spread. Our results indicate that anonymity comes at the cost ofhigher adverse selection risk.     

Efficiency and Market Power Gains in Bank Megamergers: Evidence from Value Line Forecasts

This paper examines whether gains in bank megamergers occur due to efficiency improvements or the exercise of market power using financial statement line item forecasts from Value Line to infer the effect of the merger on prices and quantities. The average megamerger is associated with cost‐efficiency improvements. In the cross‐section, efficiency gains are limited to market expansion mergers while market overlap mergers and Too‐Big‐To‐Fail (TBTF) mergers exhibit monopoly gains. Efficiency gains dissipate when the resulting megabank size exceeds $150 billion in assets or 1.5% of gross domestic product indicating that banks thought to be TBTF are likely to be “Too‐Big‐To‐Be‐Efficient.”     

The economic effects of the 1920 eight-hour working day reform in Sweden

In 1920, the working day in Swedish manufacturing and services was cut from 10 to 8 hours without wages being cut correspondingly. Since workers demanded and got the same daily wage working 8 hours as they had with 10, real hourly wages increased dramatically; they were about 50% higher in 1921–1922 than they had been in 1919. This is the largest wage push in Swedish history, and this paper studies the consequences for profits, investments, capital intensity and unemployment. In traded manufacturing employers responded by increasing capital intensity and did not compensate for rising wages by raising prices, which led to a combination of jobless growth and low profit rates in the 1920s. Firms in non-traded manufacturing and services could raise prices and conserve profitability to a higher degree. In total, the effects of the reform were pro-labour. We discuss the implications for our understanding of interwar wages and employment, the literature on the decrease in inequality found in most industrial countries around 1920 and the rise of the ‘Swedish model’ in the 1920s and 1930s.     

Dividend Stickiness,Debt Covenants,and Earnings Management

Consistent with the notion that dividends are very sticky, Daniel, Denis, and Naveen ( 2008 ) report evidence that firms manage earnings upward when pre‐managed earnings are expected to fall short of dividend payments. However, we find that this evidence is not robust when controlling for firms' tendency to manage earnings upward to avoid reporting earnings declines; only firms with high leverage exhibit a statistically weak tendency to manage earnings to close deficits of pre‐managed earnings relative to dividends. We further report that the decision to cut dividends depends on whether reported earnings fall short of past dividends, but not on earnings management that eliminates a shortfall in pre‐managed earnings relative to dividend payments. Overall, our evidence suggests that firms that face dividend constraints are more likely to cut dividends than to manage earnings to avoid dividend cuts.