Using a sample of syndicated loans to private equity (PE)-backed IPO companies, we examine how a third-party bank relationship influences the syndicate structure of a loan. We find that a stronger relationship between the lead bank and the borrower’s PE firm enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE-bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank’s relationship with a large equity holder of the borrower facilitates information production in lending.
Analyzing a sample of hedge fund daily returns from Bloomberg, we find a seasonal pattern in their risk taking. During earlier months of a year, poorly performing funds reduce risk. The reduction is stronger for funds with higher management fees, shorter redemption periods, and recently deteriorating performance, consistent with a managerial aversion to early fund liquidation. Towards the end of a year, poorly performing funds gamble for resurrection by increasing risk. It is largely achieved by increasing exposure to market factors, and can be linked to stronger indirect managerial incentives during the second half of a year.
We propose a dynamic version of the dividend discount model, solve it in closed-form, and assess its empirical validity. The valuation method is tractable and can be easily implemented. We find that our model produces equity value forecasts that are very close to market prices, and explains a large proportion of the observed variation in share prices. Moreover, we show that a simple portfolio strategy based on the difference between market and estimated values earns considerably positive returns. These returns cannot be simply explained neither by the Fama French 3-factor model (even after adding a momentum factor) nor the Fama French 5-factor model.
Robert Shiller shows that Cyclically Adjusted Price to Earnings Ratio (CAPE) is strongly associated with future long-term stock returns. This is often interpreted as evidence of market inefficiency. We present two findings contrary to such an interpretation. First, if markets are efficient, stock returns should be higher than the riskfree rate. We find that even when CAPE is in its ninth decile, future 10-year stock returns, on average, are higher than future returns on 10-year U.S. Treasurys. Thus, the results are largely consistent with market efficiency. Second, consistent with a risk-return tradeoff, we find that CAPE is negatively associated with future stock market volatility.
This paper studies a dynamic investment model with moral hazard. The moral hazard problem implies an endogenous financial constraint on investment that makes the firm’s investment sensitive to cash flows. I show that the production technology and the severity of the moral hazard problem substantially affect the dependence of the investment-cash-flow sensitivity on the financial constraint. Specifically, if the production technology exhibits almost constant returns to scale in capital or the moral hazard problem is relatively severe, the dependence is negative. Otherwise, the pattern is reversed to some extent. Moreover, the calibrated benchmark model can quantitatively account for the negative dependence of investment and Tobin’s Q on size and age observed in the data.
cash flow sensitivity
This paper explores the wealth effects associated with a bidder’s decision to solicit a fairness opinion in a takeover transaction. Using a hand-collected sample with bidders’ filing proxy statements, this paper finds that the use of fairness opinions does not negatively affect bidder shareholders’ wealth, a finding that contradicts prior studies’ findings. In addition, I find a positive wealth effect associated with bidder use of fairness opinions in the post–Rule 2290 period. Collectively, these results are consistent with a fairness opinion being used by bidder management as a means to facilitate transactions rather than a mechanism to entrench management.
The literature has documented a negative relation between investor recognition and expected returns. This negative relation is consistent with the prediction in Merton (1987). This paper investigates whether the changes in investor recognition of acquirers around the time of the acquisitions can explain the post-acquisition under-performance of acquirer stocks. Using a large sample of U.S. acquisitions from 1980 to 2010, this paper finds that investor recognition, proxied by the number of institutional investors and the number of common shareholders, increases significantly during acquisitions. Once the increases in investor recognition are controlled for, the “puzzling” long-run under-performances of acquirers disappears.
We examine the effects of cultural differences on the outcome of takeover contests. Our main focus is on individuality, which we posit to have an effect on firm behavior in international takeover contests. In a sample of international acquisitions with bidders from multiple countries, we find that individuality positively relates to the probability of placing the winning bid. We further find that takeover contest winners with high individuality scores experience lower announcement returns. Our results are consistent with the literature that links individuality to overconfidence. Our evidence suggests that firms should control culture-related behavioral biases in their M&A activity.
ly chain relationships are sometimes detrimental to the partnering firms, and short sellers recognize this before the rest of the market. Suppliers and customers that are in linked, close supply chain relationships have higher short interest on average. Further, higher short interest increases the likelihood of large, linked customers reporting negative earnings surprises, whereas suppliers with high short interest are more likely to report negative earnings surprises, irrespective of the supply chain structure. Short selling is informative to capital markets because these suboptimal relationships eventually lead to dependent suppliers being delisted from a stock exchange for financial distress reasons.