This study investigates whether managers influence credit ratings via voluntary disclosures. I find that firms near a rating change have a higher incidence of a disclosure regarding product and business expansion plans. This finding is more evident for firms that are subject to lower proprietary costs of disclosures, which implies that managers do trade off both the benefits and costs of the disclosures. I find no evidence that firms close to a rating change selectively release good news or suppress bad news on product and business expansion. Overall, my results suggest that firms generally exhibit a credible commitment to maintaining disclosure transparency for a desired credit rating.
A longstanding concern for municipal bond investors is the lack of timely financial statement disclosures. Municipalities are held to lower disclosure standards than corporations. Using continuing disclosure dates for audited financial statements, we find bond issuers with slower disclosure have higher secondary market yields and spreads, less frequent secondary market trading, and are less likely to issue new bonds. We observe that future disclosure is largely predictable based on past disclosure and that disclosure often improves prior to new bond issuances. When municipalities do not capitalize on the benefits of timely disclosure, economic consequences are imposed on bondholders and taxpayers.
Firms receiving shareholder proposals are 16% more likely to become a target of acquisition. Such companies earn approximately 7.2% lower acquisition returns compared to gains for targets with no proposals. Higher acquisition likelihood and lower target returns are primarily associated with proposals drawing a larger proportion of favorable votes, larger voter turnout, as well as with proposals submitted shortly before takeover announcements, and motivated by the removal of antitakeover provisions. Our findings suggest that shareholder proposals can assist bidders in the identification of targets or signal the willingness of target shareholders to accept bids with lower premiums.
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.
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.
We find that institutions trade in the same direction as target price changes based on 6,415 U.S. firms from 1999 to 2011, even after controlling changes in stock recommendations and earnings forecasts. The impact of target price changes on institutional trading is more pronounced for small firms, firms followed by few analysts, and illiquid firms, and is mainly limited to transient institutions. We do not find any outperformance for institutions to follow analysts’ target price forecasts, suggesting that institutions could find it easier to justify their investment decisions by following analyst forecasts, although such trading does not result in outperformance.