Abstracts
Market Response to European Regulation of Business Combinations
Nihat Aktas, Eric de Bodt, and Richard Roll
Acquisitions, mergers, and other business agreements face increasing
regulatory scrutiny, even when they involve firms domiciled outside the
territory of regulatory authorities. Recent examples include mergers
between American firms that were approved by American regulators but
blocked by European regulators. Regulatory reciprocity seems a likely
future trend. There are obvious consequences for the successful completion
of future business combinations. This paper explains the regulatory
procedures of the European Commission with respect to business
combinations, documents the price reactions of subject firms on dates from
the initial announcement to the final regulatory decision, and studies
whether European regulators tend to shield European firms from foreign
competition. Our main results are: i) the market clearly reacts to
European regulatory intervention even when the subject firms are
non-European, ii) the probability of intervention is not related to the
nationality of the bidder, however, iii) when intervention does occur, the
market anticipates it will be more costly when the bidder is non-European,
so protectionism cannot be rejected outright, and iv) regulatory
interventions are anticipated by investors, so they affect the initial
announcement returns.
Predictive Regressions: A Reduced-Bias Estimation Method
Yakov Amihud and Clifford M. Hurvich
Standard predictive regressions produce biased coefficient estimates in
small samples when the regressors are Gaussian first-order autoregressive
with errors that are correlated with the error series of the dependent
variable. See Stambaugh (1999) for the single regressor model. This paper
proposes a direct and convenient method to obtain reduced-bias estimators
for single and multiple regressor models by employing an augmented
regression, adding a proxy for the errors in the autoregressive model. We
derive bias expressions for both the ordinary least-squares and our
reduced-bias estimated coefficients. For the standard errors of the
estimated predictive coefficients, we develop a heuristic estimator that
performs well in simulations, for both the single predictor model and an
important specification of the multiple predictor model. The effectiveness
of our method is demonstrated by simulations and empirical estimates of
common predictive models in finance. Our empirical results show that some
of the predictive variables that were significant under ordinary least
squares become insignificant under our estimation procedure.
Bullish/Bearish Strategies of Trading: A Nonlinear Equilibrium
Ramdan Dridi and Laurent Germain
We study a financial market where risk-neutral traders are endowed with a
signal that perfectly reveals the direction (but not the exact amount) of
the liquidation value of a normally distributed risky asset. The impact of
order flow on prices is nonlinear with a bullish/bearish information
structure, which is broadly consistent with empirical evidence. Also,
private information is revealed quicker than in a strategic oligopoly.
Risk Premia and Preemption in R&D Ventures
Lorenzo Garlappi
I analyze the impact of competition on the risk premia of R&D ventures
engaged in a multiple-stage patent race with technical and market
uncertainty. After solving in closed form for the case of a two-stage race
in continuous time, I show that a firm's risk premium decreases as a
consequence of technical progress and increases when a rival pulls ahead.
Compared to the case where firms collude, R&D competition erodes the
option value to mothball a project, reduces the completion time and the
failure rate of R&D, and causes higher and more volatile risk premia.
Numerical simulations reveal that competition can generate risk premia up
to 500 annual basis points higher and up to three times more volatility
than in a collusive industry.
Managerial Entrenchment and Payout Policy
Aidong Hu and Praveen Kumar
Building on the managerial entrenchment literature, we develop and test a
novel perspective on payout policy that integrates the influence of
internal governance mechanisms, investment opportunities, management
compensation, and monitoring by large shareholders. Our study incorporates
both dividend payments and share repurchases, and examines the
determinants of the likelihood and the level of payouts. Our model
performs well in both in-sample and out-of-sample predictions on a sample
of 2,081 firms during 1992-2000. We find that both the likelihood and the
level of payouts are significantly and positively (negatively) related to
factors that increase (decrease) executive entrenchment levels, even when
controlling for size, leverage, and the proportion of tangible to total
assets. We identify factors that significantly affect the likelihood but
not the level of payouts (or vice versa), and show that entrenchment has
an asymmetric influence on dividend vs. shares repurchase policy.
Executive Loans
Kathleen M. Kahle and Kuldeep Shastri
This paper analyzes the characteristics and impact of loans made to
executives for stock purchase, option exercise, and relocation. We find
that loans made to assist executives in purchasing stock or exercising
options are larger and have higher interest rates than relocation loans.
All types of loans, however, are issued at below-market interest rates, on
average. We also find that while stock purchase loans are given to
managers with low existing ownership, option exercise loans are given to
managers with high existing ownership and high cash compensation. Finally,
our results indicate that executive stock ownership increases following
stock purchase and option exercise loans. For managers as a whole, a loan
that enables a manager to buy 100 shares of stock results in only an
eight-share increase in ownership. However, the relation between ownership
changes and stock purchase loans is much stronger for low ownership
managers.
The Allocation and Monitoring Role of Capital Markets: Theory and
International Evidence
Solomon Tadesse
Capital markets perform two distinct functions: provision of capital and
facilitation of good governance through information production and
monitoring. I argue that the governance function has more impact on the
efficiency with which resources are utilized within the firm. Based on
industry-level data across 38 countries, I present evidence suggesting a
positive relation between market-based governance and improvements in
industry efficiency. The measures of governance are also positively
correlated with productivity improvements and growth in real output.
Furthermore, while governance affects efficiency, the capital provision
services induce technological change. The evidence underscores the role of
capital markets as a conduit of socially valuable governance services as
distinct from capital provision.
Capital Investments and Stock Returns
Sheridan Titman, K. C. John Wei, and Feixue Xie
Firms that substantially increase capital investments subsequently achieve
negative benchmark-adjusted returns. The negative abnormal capital
investment/return relation is shown to be stronger for firms that have
greater investment discretion, i.e., firms with higher cash flows and
lower debt ratios, and is shown to be significant only in time periods
when hostile takeovers were less prevalent. These observations are
consistent with the hypothesis that investors tend to underreact to the
empire building implications of increased investment expenditures.
Although firms that increase capital investments tend to have high past
returns and often issue equity, the negative abnormal capital
investment/return relation is independent of the previously documented
long-term return reversal and secondary equity issue anomalies.
Abnormal Returns from the Common Stock
Investments of the U.S. Senate
Alan J. Ziobrowski, Ping Cheng,
James W. Boyd, and Brigitte J. Ziobrowski
The actions of the federal government can have a profound impact on
financial markets. As prominent participants in the government decision
making process, U.S. Senators are likely to have knowledge of forthcoming
government actions before the information becomes public. This could
provide them with an informational advantage over other investors. We test
for abnormal returns from the common stock investments of members of the
U.S. Senate during the period 1993--1998. We document that a portfolio
that mimics the purchases of U.S. Senators beats the market by 85 basis
points per month, while a portfolio that mimics the sales of Senators lags
the market by 12 basis points per month. The large difference in the
returns of stocks bought and sold (nearly one percentage point per month)
is economically large and reliably positive.