ContentsDividend Smoothing and Debt RatingsVarouj A. Aivazian, Laurence Booth, and Sean Cleary
Short-Sale Constraints, Differences of Opinion, and Overvaluation
The Economic Impact of Corporate Capital Expenditures: Focused Firms versus Diversified Firms
Earnings Management and Stock Performance of Reverse Leveraged Buyouts
Stock Returns, Implied Volatility Innovations, and the Asymmetric Volatility Phenomenon
The Cross Section of Stock Returns before World War I
Yield Spreads as Alternative Risk Factors for Size and Book-to-Market
Firm Growth and Disclosure: An Empirical Analysis
The Sources of Debt Matter Too
Top Management Incentives and the Pricing of Corporate Public Debt
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Abstracts
Dividend Smoothing and Debt Ratings We find that firms that regularly access public debt (bond) markets are more likely to pay a dividend and subsequently follow a dividend smoothing policy than firms that rely exclusively on private (bank) debt. In particular, firms with bond ratings follow a traditional Lintner (1956) style dividend smoothing policy, where the influence of the prior dividend payment is very strong and the current dividend is relatively insensitive to current earnings. In contrast, firms without bond ratings flow through more of their earnings as dividends and display very little dividend smoothing behavior. In effect, they seem to follow a residual dividend policy.
Short-Sale Constraints, Differences of Opinion, and Overvaluation Miller (1977) hypothesizes that dispersion of investor opinion in the presence of short-sale constraints leads to stock price overvaluation. However, previous empirical tests of Miller's hypothesis examine the valuation effects of only one of these two necessary conditions. We examine the valuation effects of the interaction between differences of opinion and short-sale constraints. We find robust evidence of significant overvaluation for stocks that are subject to both conditions simultaneously. Stocks are not systematically overvalued when either one of these two conditions is not met.
The Economic Impact of Corporate Capital Expenditures: Focused Firms versus Diversified Firms This paper examines the role of focus versus diversification in explaining the economic impact of corporate capital investments. I find that the stock market's responses to announcements of capital investments are more favorable for focused firms than for diversified firms. I also show that focused firms exhibit significantly better post-investment operating performance than diversified firms. The overall findings in this study suggest that the investment opportunities hypothesis dominates the internal capital markets hypothesis in terms of the net economic impact of capital investments on the investing firms.
Earnings Management and Stock Performance of Reverse Leveraged Buyouts This study provides further evidence of earnings management around security offerings. We find positive and significant discretionary current accruals coincident with offerings of reverse LBOs. Issuers in the most aggressive quartile of earnings management have a one-year aftermarket return that is between 15% and 25% less than the most conservative quartile. We also find a negative and significant relation between abnormal accruals and post-issue abnormal returns within the first year after the offering. The relation remains after controlling for book-to-market ratio, firm size, offering size, and involvement of buyout specialists or management. Although earnings management has been used to explain post-issue long-term underperformance of IPOs and SEOs, our study shows that earnings management can explain post-offering returns of reverse LBOs, even in the absence of post-offering underperformance.
Stock Returns, Implied Volatility Innovations, and the Asymmetric Volatility Phenomenon We study the dynamic relation between daily stock returns and daily innovations in option-derived implied volatilities. By simultaneously analyzing innovations in index- and firm-level implied volatilities, we distinguish between innovations in systematic and idiosyncratic volatility in an effort to better understand the asymmetric volatility phenomenon. Our results indicate that the relation between stock returns and innovations in systematic volatility (idiosyncratic volatility) is substantially negative (near zero). These results suggest that asymmetric volatility is primarily attributed to systematic market-wide factors rather than aggregated firm-level effects. We also present evidence that supports our assumption that innovations in implied volatility are good proxies for innovations in expected stock volatility.
The Cross Section of Stock Returns before World War I We examine the cross section of stock returns using an original dataset consisting of annual observations on price, dividends, and shares outstanding for nearly all stocks listed on U.K. exchanges between 1870 and 1913, supplemented with additional information about attrition. The only clear pattern in the historical U.K. data is the high returns of extremely small stocks. Among the largest 99.8% of stocks, the historical U.K. data do not display the pattern found in modern U.S. (CRSP) data of excess returns for small stocks or stocks with poor past performance. Unlike CRSP data, stocks that do not pay dividends do not outperform stocks that pay small dividends during this period. However, as in the modern data, there is a weak relation between dividend yield and performance for stocks that pay dividends.
Yield Spreads as Alternative Risk Factors for Size and Book-to-Market This paper investigates whether the size and book-to-market factors of Fama and French (1993) proxy for the risks associated with business cycle fluctuations. We find that changes in default spread (Δdef) and changes in term spread (Δterm) capture the systematic differences in average returns along the size and book-to-market dimensions in the way that the Fama-French factors do: small stock portfolios have higher loadings on Δdef than large stock portfolios, while high book-to-market portfolios have higher loadings on Δterm than low book-to-market portfolios. Furthermore, in the presence of Δdef and Δterm, the Fama-French factors are superfluous in explaining the size and book-to-market effects. The results suggest that the size and value premiums are compensation for higher exposure to the risks related to changing credit market conditions and interest rates proxied by Δdef and Δterm.
Firm Growth and Disclosure: An Empirical Analysis Extant theoretical research posits that information asymmetry and agency issues affect the cost of external financing and hence impact the ability of firms to finance their growth opportunities. In contrast, the literature on disclosure policy posits that expanded and credible disclosure lowers the cost of external financing and improves a firm's ability to pursue potentially profitable projects. An empirical implication is that disclosure can help firms grow by relaxing external financing constraints, thereby allowing capital to flow to positive net present value projects. This paper empirically evaluates this prediction using firm-level data over an 11-year period. As anticipated by theory, we find a positive relation between firm disclosure policy and the externally financed growth rate, after controlling for other influences.
The Sources of Debt Matter Too This paper examines the effects of different types of private debt on firm cash balances, equity risk, and investment. Firms with more bank loans have more cash and investment, but lower equity risk. Firms with more nonbank private debt have more cash, lower equity risk, and less investment. Firms with more unused credit lines have less cash and lower equity risk, but greater investment. Results suggest that financial intermediaries' monitoring intensity increases with loan size. Depending on type, private debt mitigates information asymmetry or asset substitution, or both. Deposit relations associated with bank borrowing also contribute to banks' information advantage.
Top Management Incentives and the Pricing of Corporate Public Debt This article examines managerial ownership structure and at-issue yield spreads on corporate bonds. There is a positive relation between managerial ownership and borrowing costs, and this relation is weaker at higher levels of ownership. In addition, managerial stock options have a larger effect on yield spreads than stock ownership. These effects exist after controlling for firm and bond characteristics, and are robust to endogeneity and sample selection concerns. The evidence suggests that rational bondholders price new debt issues using the information about a firm's future risk choices contained in managerial incentive structures, and that lenders anticipate higher risk-taking incentives from managerial stock options than from equity ownership. |