Target and bidder reference points have separate and joint effects on merger deals. A firm whose stock price is more distant from its 52-week high reference point is less likely to attract bids but has a greater likelihood of being acquired by its own managers (versus unaffiliated bidders). Firm propensity to submit a bid increases if its prevailing stock price is closer to its 52-week high. When both parties’ reference points are close to their current stock prices, they are more willing to complete a deal. Hostile deals result when the bidder’s stock price is closer to its reference point.
Vol. 50 No. 3 - August 2015
I jointly treat two critical issues in the application of mean-variance portfolios, i.e., estimation risk and portfolio instability. I find that theory-based portfolio strategies known to outperform naive diversification (1/ N ) in the absence of transaction costs, heavily underperform it under transaction costs. This is because they are highly unstable over time. I propose a generic method to stabilize any given portfolio strategy while maintaining or improving its efficiency. My empirical analysis confirms that the new method leads to stable and efficient portfolios that offer equal or lower turnover than1/N and larger Sharpe ratio,even under high transaction costs.
I test Black’s leverage effect hypothesis on a panel of U.S. stocks from 1997 to 2012. I find that negative stock return innovations increase the future volatility of equity returns by about 36% more than positive ones. There is a strong and positive relation between variation in the size of these leverage effects and variation in the firm’s use of debt. I uncover this relation by applying the Fama/French/Carhart 4-factor asset pricing model in the EGARCH mean equation and by using panel data to control for firm- and time-invariant unobservables via first differences and two-way fixed effects.
We derive a dynamic model of the firm in the spirit of the trade-off theory of capital structure that explains firm behavior in terms of firm characteristics. We show our model is consistent with many important findings about the cross-section of firms, including the negative relations between profitability and leverage, and between dividends and investment-cash flow sensitivities. The model also explains the existence of zero-debt firms and their observed characteristics. These results have been used to challenge the trade-off theory and the assumption of perfect capital markets. We revisit these critiques and provide structural explanations for the regularities we replicate.
We find that passive intensity (PI), measured by the passive-linked share of total stock market trading volume, is strongly related to the overall pattern of stock price movements. A one-standard deviation increase in PI is associated with 8 per- cent higher price synchronicity. We further investigate the channels through which this relation is established by separately analyzing its impact on aggregate systematic and idiosyncratic volatility of stock returns. PI has a positive effect on systematic volatility and a negative impact on firm-specific volatility. Consistent with the effect of passive-trading on price dynamics, we find evidence that PI is negatively associated with mutual funds alpha dissimilarity. After controlling for market and idiosyncratic volatility, a one-standard deviation increase in PI corresponds to a 0.20% decrease in fund dissimilarity. Our findings are robust after controlling for various macro and corporate factors known to affect systematic or firm-specific volatility.
We ask if companies can attract foreign equity capital by improving the transparency of their financial statements. Using a large panel of firms across fifty-one countries outside the U.S., we show that the answer is yes, but only in countries with relatively high levels of investor protection. In countries with poor investor protection, unilaterally increasing firm-level transparency has no effect on foreign ownership. Furthermore, our results indicate that in countries with higher levels of investor protection the positive association between transparency and foreign ownership is stronger following a country’s adoption of the International Financial Reporting Standards.
This study presents an improved model for estimating life insurer cost of capital with the inclusion of upside and downside risk factors and controlling for life insurer characteristics. Although various asymmetric measures of market risk have been shown to be priced factors for the broader equity market, life insurer realized equity returns include a much larger premium for bearing downside risk, even after controlling for firm characteristics and other measures of risk. Cross-sectional regression analysis finds a positive (negative) premium for downside (upside) betas, conditional on down and up markets respectively. Coskewness and cokurtosis are also priced factors.
The New York Stock Exchange’s Rule 80A attempted to de-link the futures and equity markets by limiting index arbitrage trades in the same direction as the last trade to reduce stock market volatility. Rule 80A leads to a small but statistically significant decline in intraday U.S. equity market volatility. In addition, the results are asymmetric: volatility is dampened more in a rising market than in a declining one. These results suggest that, to a limited basis, rule restrictions on trading can sufficiently de-link the futures and equity markets enough to reduce the transmission of volatility.