Forthcoming Articles

Are Buybacks Good for Long-Term Shareholder Value? Evidence from Buybacks around the World

Alberto Manconi, Urs Peyer, and Theo Vermaelen

Using a sample of over 9,000 buyback announcements from 31 non-U.S. countries, we find support for the results of studies based on U.S. data: on average, share repurchases are associated with significant positive short-term and long-term excess returns. However, excess returns depend on the likelihood of undervaluation and the efficiency and liquidity of equity markets. In contrast to findings in U.S. markets, we do not find that these long-term excess returns are simply a compensation for takeover risk or have become less significant in recent years.

New Evidence on Conditional Factor Models

Ilan Cooper and Paulo Maio

We estimate conditional multifactor models over a large cross-section of stock returns matching 25 CAPM anomalies. Using conditioning information associated with different instruments improves the performance of the Hou, Xue, and Zhang (2015, HXZ) and Fama and French (2015, 2016, FF) models. The largest increase in performance holds for momentum, investment, and intangibles-based anomalies. Yet, there are significant differences in scaled models? performance: HXZ clearly dominates FF in explaining momentum and profitability anomalies, while the converse holds for value-growth anomalies. Thus, the asset pricing implications of alternative investment and profitability factors (in a conditional setting) differ in a non-trivial way.

 

CEOs and the Product Market: When Are Powerful CEOs Beneficial?

Minwen Li, Yao Lu, and Gordon Phillips

We examine whether industry product market conditions are important in assessing the benefits and costs of CEO power. We find that firms are more likely to have powerful CEOs in high demand product markets where firms are facing entry threats. In these markets, investors react more favorably to the announcements of granting more power to CEOs and CEO power is associated with higher market value, sales growth, investment and advertising, and the introduction of more new products. Our results remain significant when addressing the endogeneity of CEO power by instrumenting CEO power with past non-CEO executive and director sudden deaths.

Does Political Uncertainty Increase External Financing Costs? Measuring the Electoral Premium in Syndicated Lending

Olivia S. Kim

This paper investigates the impact of political uncertainty on contractual lending terms using a large sample of syndicated loans and a within-firm estimation approach to achieve identification. Firms pay 7 basis points more on loans originated when their lenders are undergoing an election relative to when their lenders are not undergoing an election. Lenders from less financially developed countries are more likely to pass-through political uncertainty costs to borrowers. Consistent with electoral uncertainty driving this premium, the most contested elections have the largest impact (17 bps). Overall, political uncertainty leads to a tangible increase in firms’ financing costs.

Do Mutual Funds Have Decreasing Returns to Scale? Evidence from Fund Mergers

Ping McLemore

Using mergers as shocks to fund size, I analyze the return-to-scale property of mutual funds. I find that acquiring funds’ performance deteriorates after experiencing a positive shock in size resulting from mergers, and liquidity plays an important role in the negative relationship between size and performance. I also find that the decline in performance is not due to higher performance prior to the merger, nor driven by higher integration costs after the event. These findings are consistent with mutual funds having decreasing returns to scale, and thus provide empirical evidence that supports the theoretical model of Berk and Green (2004).

Financial vs. Strategic Buyers

Marc Martos-Vila, Matthew Rhodes-Kropf, and Jarrad Harford

This paper introduces the impact of debt misvaluation on merger and acquisition activity. We show the potential for debt misvaluation to help explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). Fundamental differences in governance and project co-insurance between the two types of acquirer would interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.

Two Trees with Heterogeneous Beliefs: Spillover Effect of Disagreement

Bing Han, Lei Lu, and Yi Zhou

In a model where investors disagree about the fundamentals of two stocks, the state price density depends on investor disagreements for both stocks, especially the larger stock. This implies that disagreement among investors in a large firm has a spillover effect on the pricing of other stocks owned by these investors. The pricing effects of investor disagreements crucially depend on the average belief biases. Empirical findings support the novel model prediction of a disagreement spillover effect and help reconcile some mixed evidence in the literature.

Pension Deficits and the Design of Private Debt Contracts

Balasingham Balachandran, Huu Nhan Duong, and Van Hoang Vu

We find a positive relation between the amount of pension deficits and the cost of bank loans. The effect of pension deficits on the costs of bank loans is driven by financial constraints, information asymmetry problems, and higher pension investment risk. Banks tighten lending terms for firms with larger pension deficits by requiring collateral, increasing the number of loan covenants and shortening loan maturity. Borrowers with larger pension deficits are also more likely to violate covenants in the future. Collectively, these findings indicate that pension deficits represent an additional source of risk priced by banks.