Relative to similar firms, targets of completed takeovers issue more debt and repurchase more equity around takeover announcement. We link these leverage adjustments to enhanced target bargaining power in negotiations with bidders over expected merger synergy gains, as debt issuance results in positive abnormal equity returns, with these gains coming at the expense of bidder shareholders. Valuation implications are strongest for debt issuances immediately surrounding takeover announcement. Target firm debt issuance after takeover announcement suggests that relatively low (high) ex ante target (bidder) bargaining power is subsequently adjusted upward (downward) with target debt issuances.
Vol. 52 No. 2 - May 2017
This article presents a dynamic stock-valuation model in an incomplete-information environment in which the unobservable mean earnings growth rate (MEGR), is learned and price is updated continuously. We calibrate our model to the S&P 500 Composite index to empirically evaluate its performance. Of the 8.84% total risk premium we estimate, we find that the earnings growth premium is 4.57%, the short rate risk contributes 3.38%, and the learning-induced risk premium on the unknown MEGR is 0.89% (a nontrivial 10% of the total risk premium). This result highlights the significant learning effect on valuation implying an additional risk premium in an incomplete information environment.
We examine factors that influence decisions by U.S. equity traders to execute a string of orders, in the same stock, in the same direction, around the same time. Order splitting is more likely to occur when traders submit larger-size orders and when market depth and trading activity are lower. Order splitters demand liquidity more and pay higher trading costs, but their overall performance is better. When controlling for execution time, split orders are more informative than single orders. Our results suggest that order splitting arises from a variety of factors, including informational differences, order and trader characteristics, and market conditions.
We contribute to the literature on debt collection agencies on collecting delinquent trade credits in two ways: First, we present an estimation of the collection rates. The distribution of collection rates exhibits a mean of about 65% and a strong bimodality with peaks at the very ends of the distribution. Second, we investigate potential determinants of the collection success. We find that collection rates are positively related to the exposure at default and to prior debtor-specific collection rates. In contrast, the age of the account and if apllicable prior experience with the debtor have a negative impact on collection rates.
The severity and complexity of the recent financial crisis has motivated the need for understanding the relationships between sovereign ratings and bank credit ratings. This is the first study to examine the impact of the “international” spillover of sovereign risk to bank credit risk through both a ratings channel and an asset holdings channel. We find evidence that confirms both channels. In the first case, the downgrade of sovereign ratings in GIIPS countries leads to rating downgrades of banks in the peripheral countries. The second channel indicates that larger asset holdings of GIIPS debt increases the credit risk of cross-border banks and, hence, the probabilities of downgrade.