When Labor Has a Voice in Corporate
Governance
pp. 489-510
Olubunmi Faleye, Vikas Mehrotra, and Randall Morck
Equity ownership gives labor both a fractional stake in a
firm’s residual cash flows and a voice in corporate
governance. Relative to other firms, labor-controlled publicly
traded firms deviate more from value maximization, invest less in
long-term assets, take fewer risks, grow more slowly, create
fewer new jobs, and exhibit lower labor and total factor
productivity. Therefore, we propose that labor uses its corporate
governance voice to maximize the combined value of its
contractual and residual claims, and that this often pushes
corporate policies away from, rather than toward, shareholder
value maximization.
Does Emerging Market Exchange Risk Affect Global Equity
Prices?
pp. 511-540
Francesca Carrieri, Vihang Errunza, and Basma
Majerbi
This paper conducts empirical tests in a conditional setting for
10 developed and 12 emerging markets to determine whether
emerging market currency risk is priced and if it spills over
into developed market assets. Our empirical model is based on
real exchange rate measures and it allows currency risk to
compete with broader economic and political risks. We find that
emerging market currency risk is priced separately from other
local risk factors and that it represents a significant component
of equity returns in both developed and emerging markets. We also
find that the spillover impact is heightened during emerging
market crisis episodes and affects the expected compensation for
global risks.
Investor Protection and Real Investment by U.S.
Multinationals
pp. 541-572
Eric Kelley and Tracie Woidtke
In spite of the growing research concerning investor protection,
the relation between investor protection and real investment by
foreign multinationals is largely unexplored. Recognizing this
relation, however, is especially important in light of the surge
in cross-border activity in recent decades and the potential
impact cross-border investment can have on a country’s
economic development. We find that U.S. multinational foreign
investment is significantly greater both when shareholder
protection is poor and when creditor protection is poor.
Consistent with existing literature, our results suggest that
U.S. firms have greater comparative advantages when local firms
in poor investor protection countries either i) invest
suboptimally due to agency problems or ii) have constrained
access to debt capital. The increased investment by U.S.
multinationals in poor investor protection countries is of
particular interest, because it suggests an important way in
which adverse outcomes related to poor investor protection may be
mitigated.
Divergence of Opinion and Equity Returns
pp. 573-606
John A. Doukas, Chansog (Francis) Kim, and Christos
Pantzalis
In this paper, we examine the relation between
stock returns and analysts’ heterogeneous expectations. We
find that stock returns are positively associated with divergence
of opinion. Our evidence provides no support for Miller’s
(1977) overvaluation hypothesis, which predicts lower (higher)
future returns for high (low) divergence of opinion stocks in the
presence of short-selling constraints. Our findings are based on
the use of the diversity measure, which is free from the
confounding effects of uncertainty in analysts’ forecasts
and is therefore a more accurate measure of divergence of opinion
than dispersion. Our results refute the view that dispersion in
analysts’ forecasts reflects divergence of opinion. Our
evidence is robust to the use of alternative measures of
short-selling constraints, time intervals, optimism in
analysts’ forecasts, and herding in analysts’
behavior.
Mimicking Portfolios with Conditioning
Information
pp. 607-635
Wayne Ferson, Andrew F. Siegel, and Pisun (Tracy) Xu
Mimicking portfolios have long been useful in asset pricing
research. In most empirical applications, the portfolio weights
are assumed to be fixed over time, while in theory they may be
functions of the economic state. This paper derives and
characterizes mimicking portfolios in the presence of
predetermined state variables, or conditioning information. The
results generalize and integrate multifactor minimum variance
efficiency (Fama (1996)) with conditional and unconditional
mean-variance efficiency (Hansen and Richard (1987), Ferson and
Siegel (2001)). Empirical examples illustrate the potential
importance of time-varying mimicking portfolio weights and
highlight challenges in their application.
The Declining Information Content of Dividend
Announcements and the Effects of Institutional
Holdings
pp. 637-660
Yakov Amihud and Kefei Li
We propose an explanation for the “disappearing
dividend” phenomenon: a decline in the information content
of dividend announcements, which reduces the propensity of firms
to use dividends as a costly signal. A reason for a decline in
the information content of dividends is the rise in holdings by
institutional investors that are more sophisticated and informed.
Indeed, we find a decline in CAR at dividend change announcements
since the mid-1970s. Across firms, CAR is a decreasing function
of institutional holdings. Institutional investors exploit their
superior information and buy before dividend increases. In
addition, dividends are less likely to rise in firms with high
institutional holdings.
Organizational Complexity and Succession
Planning
pp. 661-683
Lalitha Naveen
This study uses a large sample of firms to examine how human
capital considerations affect the process of CEO succession.
Costs and benefits of succession planning are affected by a
firm’s level of operational complexity and human capital
requirements; firms that are more complex incur greater costs to
transferring firm-specific knowledge and expertise to an
outsider, and should be more likely to groom an internal
candidate for the CEO position. Consistent with this, I find that
a firm’s propensity to groom an internal candidate for the
CEO position is related to firm size, degree of diversification,
and industry structure. My results also suggest that succession
planning is associated with a higher probability of inside
succession and voluntary succession and a lower probability of
forced succession. I also provide evidence that horizon problems
are mitigated to some extent by having a succession plan.
Mean Reversion in G-10 Nominal Exchange
Rates
pp. 685-708
Richard J. Sweeney
According to conventional wisdom, industrial country floating
exchange rates contain unit roots. SUR tests on panels of monthly
Group of Ten (G-10) log nominal rates reject the null of unit
roots for various samples over the current float with
significance levels from 0.5% to 15%. On average, in
out-of-sample forecasts mean reversion models beat random walks
significantly in some forecast periods. For monthly data, the
range of expected USD-DEM appreciation rates exceeds 15% per year
in the mean reversion model. Mean reversion places strong
restrictions on international models: over the sample period, the
G-10 had to run monetary policies consistent with stable long-run
nominal rates.
Leasing and Debt Financing: Substitutes or
Complements?
pp. 709-731
An Yan
Traditional finance theories typically treat leases and debt as
substitutes. However, the empirical findings on the relation
between leases and debt are mixed. This paper reinvestigates this
relation. I present a model to incorporate different theories on
the substitutability and complementarity between leases and debt,
and I test the model implications empirically in a GMM framework
that simultaneously controls for endogeneity problems and
firms’ fixed effects. The findings suggest that leases and
debt are substitutes instead of complements. I also investigate
the variation in the substitutability between leases and debt,
and find that in those firms with more growth options or larger
marginal tax rates, or in those firms paying no dividends, the
substitutability is more pronounced, i.e., the cost of new debt
increases to a larger degree with extra leases.