RISK AND RETURN ON NEWLY LISTED STOCKS: THE POST-LISTING EXPERIENCE

Researchers consistently find that newly listed stocks underperform in the post-listing period. It has been suggested that this anomalous finding may, in part, be explained away if the risk during this period is lower than at other times. Evidence is presented here that the riskiness of newly listed stocks undergoes a seasoning process. Instead of lower risk, riskiness is found to be greater immediately after listing than in later periods. This suggests that the post-listing anomaly is actually worse than has been previously recognized.     

Hierarchical reporting,aggregation, and information cascades

Aggregation is commonly associated with loss of information. In contrast, this paper shows that aggregation can actually enhance information down‐the‐road by deterring information cascades. In particular, when hierarchical tiers forward only aggregate recommendations rather than nitty‐gritty details, it increases the uncertainty faced by subsequent tiers. This makes individuals at higher levels more willing to rely on and convey their own views rather than simply rubber stamping suggestions from lower levels. Copyright © 2006 John Wiley & Sons, Ltd.     

How To Choose a Capital Structure: Navigating the Debt-Equity Decision

In corporate offices as well as the classroom, there continues to be significant debate about the costs and benefits of debt financing. There is also considerable variation in corporate credit ratings, even among companies as large and successful as those that make up the S&P 500. Many companies have been reassessing how they manage their balance sheet and their rating agency relationships; and with the market's generally favorable response to recapitalizations and dividend increases, such financing issues are likely to receive even more attention.
Underlying the diversity of corporate credit ratings is widespread disagreement about the "right" credit rating—a matter that is complicated by the fact that the cost of debt varies widely among companies with the same rating. Although credit ratings are clearly tied to measures of indebtedness such as leverage and coverage ratios, the most important factor in most industries is a company's size. For many mid-sized companies, an investment-grade rating can be attained only by making a large, equity-financed acquisition—or by making minimal use of debt. In this sense, the corporate choice of credit rating can be as much a strategic issue as a financial decision.
Maintaining the right amount of financial fl exibility is a key consideration when determining the right credit rating for a given company (although what management views as value-preserving flexibility may be viewed by the market as value-reducing financial "slack"). A BBB rating will accommodate considerably more leverage (30–60%) in companies with fairly stable cash flows and limited investment requirements than in more cyclical or growth-oriented companies (10–20%). When contemplating taking on more leverage, companies should examine all major operating risks and view their capital structure in the context of an enterprisewide risk management framework.     

The role of budgeting in eliminating tacit collusion

While accounting textbooks emphasize the roles of budgeting in controlling and coordinating agents' activities, the principal-agent literature has focused primarily on the control aspect. Recent papers have studied the coordination aspect of budgeting in settings in which the agents are technologically dependent (sequential or joint production is considered). In this article, we develop a role for budgeting in coordination, despite the agents being technologically independent (individual production is considered). In our model, the principal uses relative performance evaluation to extract information rents from the agents. However, the use of relative performance evaluation results in a multiple equilibria (tacit collusion) problem. The value of budgeting procedures is derived from their ability to coordinate the agents to arrive at the right equilibrium.     

Synergy among Seemingly Independent Activities*

“Synergy” implies that the value of activities undertaken jointly is greater than the sum of the values of the individual activities. Reasons cited for synergy include economies of scale, benefits due to vertical integration, and efficiency gains from shared inputs and skills. This paper shows that incentive (control) reasons alone can make activities synergistic. The result is derived in a model of adverse selection with risk‐neutral participants and linear technology. The linearity in the setting removes any obvious benefits to undertaking activities in tandem. Synergy gains are attributed to a convexity in the principal's payoff introduced by the activities' impact on the production versus rents trade‐off.     

Model specification tests: A simultaneous approach

In econometrics, specification tests have been constructed to verify the validity of one specification at a time. It is argued that most of these tests are not, in general, robust in the presence of other misspecifications, so their application may result in misleading conclusions. Using the Lagrange Multiplier principle we develop efficient test procedures that are capable of testing a number of specifications simultaneously. These tests will ‘confirm’ the validity (or invalidity) of a general model requiring the estimates of the restricted model only. Through an extensive Monte Carlo experiment we study the performance of these tests and some commonly used one-directional tests. We also suggest a Multiple Comparison Procedure, to identify different sources of errors. This, we hope, will lead to a better specification of econometric models.     

Efficient tests for normality,homoscedasticity and serial independence of regression residuals: Monte Carlo Evidence

In this paper we study the performance of various tests for normality (N), homoscedasticity (H) and serial independence (I) of regression residuals (u) under one, two and three directional departures from H_O:u～NHI.