Recent research suggests that firm internationalization is associated with greater exchange rate risk and a higher cost of equity capital. However, there is no research on the relation between the level of firm international activity and the cost of debt financing. This study offers the first such empirical evidence using non-provisional public debt. Based on a sample of 2,194 U.S. firm year observations, we find that firms with greater levels of international activity have better credit ratings. We also find that the cost of debt financing is inversely related to the degree of firm internationalization beyond that incorporated in credit ratings. These results suggest that rating agencies do not fully incorporate firm international activity in their analysis resulting in a downward bias in credit ratings for international firms. In aggregate, the results imply that failing to incorporate firm international activity in debt pricing leads to potential omitted variable problems.

Daily pricing of mutual funds provides liquidity to investors but is subject to valuation errors due to the inability to observe synchronous, fair security prices at the end of the trading day. This mayhurt fund investor if speculatior strategiclly seek to exploit mispricing or if the net flow of money into funds is correlated with these pricing eerrors. We show that mutual funds are exposed to speculative traders by using a simple day trading rule that yields large profits in a sample of 391 U.S.-based open-end international mutual funds. We propose a simple “fair pricing” mechanism that alleviated these concerns by correcting net asset values for stale prices. We argue that fund companies and regulatiors should look at alternatives that allow funds to offer fair prciing to investors, which, in turn, decreases the need to resort to monitoring for day traders and redemption penalties.

In a world of asymmetric information in which only the insiders know the quality of the firm, it is claimed that debt, even if it is risky, is more advantageous than outside equity because issuance of debt is less attractive to inferior firms. The advantage to debt arises from the fact that it can keep unprofitable firms out of the market, thus improving the average quality of firms in the market. This advantage exists even if the firms cannot be perfectly sorted in the signaling equilibrium.

We demonstrate analytically that cross-sectional variation in the effects of events, i.e., in true abnormal returns, necessarily produces event-induced variance increases, biasing popular tests for mean abnormal returns in short-horizon event studies. We show that unexplained cross-sectional variation in true abnormal returns plausibly produces nonproportional heteroskedasticity in cross-sectional regressions, biasing coefficient standard errors for both ordinary and weighted least squares. Simulations highlight the resulting biases, the necessity of using tests robust to cross-sectional variation, and the power of robust tests, including regression-based tests for nonzero mean abnormal returns, which may increase power by conditioning on relevant explanatory variables.

Researchers in empirical corporate finance often use bounded ratios (e.g., debt ratios) as dependent variables in their regressions. Using the example of estimating the speed of adjustment toward target leverage, we show by Monte Carlo and resampling experiments that commonly applied estimators yield severely biased estimates, as they ignore that debt ratios are fractional (i.e., bounded between 0 and 1). We propose a new unbiased estimator for adjustment speed in the presence of fractional dependent variables that also controls for unobserved heterogeneity and unbalanced panel data. This new estimator is suitable for corporate finance applications beyond capital structure research.

We proxy for board members’ opinions and values using directors’ ancestral origins and show that diversity has costs and benefits, leading to high performance volatility. Consistent with the idea that diverse groups experiment more, firms with ancestrally diverse boards have more numerous and more cited patents. In addition, their strategies conform less to those of the industry peers. However, firms with greater ancestral diversity also have more board meetings and make less predictable decisions. These findings suggest that diversity may lead to inefficiencies in the decision-making process and conflicts in the boardroom.

We find direct evidence that institutions increase round-trip stock trades, increase average commissions per share, and pay unusually high commissions on some trades in order to send abnormally high commissions to the lead underwriters of profitable initial public offerings (IPOs). These excess commission payments are a particularly effective way for transient investors to receive lucrative IPO allocations. Our results suggest that the underwriter’s concern for their long-term client relationships limits the payment-for-IPO practice. We estimate that abnormal commission payments are large for the most profitable issues, and that an additional $1 excess commission payment to the lead underwriter results in $2.21 in investor profits from allocated shares.

We find that equity mispricing impacts the speed at which firms adjust to their target leverage (TL) and does so in predictable ways depending on whether the firm is over- or underlevered. For example, firms that are above their TL and should therefore issue equity (or retire debt) adjust more rapidly toward their target when their equity is overvalued. However, when a firm is undervalued but needs to reduce leverage, the speed of adjustment is much slower. Our findings support the role of equity mispricing as an important factor that alters the cost of making capital structure adjustments.

Prior studies have reported a positive correlation between insider trading and stock price changes implying that insider (i.e., informed) trades affect price discovery differently than non-insider (i.e., uninformed) trades. Based on these results, various scholars have argued for the legalization of insider trading to facilitate rapid price discovery. We analyze the trading activity of a confessed inside trader, Ivan Boesky, in Carnation's stock just prior to Nestle's 1984 acquisition of Carnation, and find that our tests are unable to distinguish the price effect of Boesky's (i.e., informed) purchases of Carnation's stock from the effect of non-insider (i.e., uninformed) purchases. Our conclusion survives extensive robustness tests and has methodological and public policy implications.

This paper presents an empirical analysis of firms that are delisted from a major stock exchange. The delisting process is described and stock price movements surrounding delisting are analyzed. For firms with prior announcements, equity values decline by approximately 8.5 percent on announcement day. For firms without prior announcements, a similar adjustment takes place between the last day of trading in the initial market and the close of the first day of trading in the new market. Four hypotheses concerning the decline in firm value are examined. These are the liquidity hypothesis, the management signalling hypothesis, the exchange certification hypothesis, and the downward sloping demand curve hypothesis. Evidence consistent with the liquidity hypothesis is presented in the paper. Unlike evidence on stock exchange listings, returns in the post-delisting period do not appear to be anomalous.

The purpose of this article is to extend both theoretical and empirical knowledge on: 1) the relation between accounting-based and market-based measures of systematic risk; and 2) the effect of financial structure on systematic risk.

We investigate the effect of information asymmetry on corporate tax avoidance. Using a difference-in-differences matching estimator to assess the effects of changes in analyst coverage caused by broker closures and mergers, we find that firms avoid tax more aggressively after a reduction in analyst coverage. We further find that this effect is mainly driven by firms with higher existing tax-planning capacity (e.g., tax-haven presence), smaller initial analyst coverage, and a smaller number of peer firms. Moreover, the effect is more pronounced in industries where reputation matters more and in firms subject to less monitoring from tax authorities.

We use data from 2005–2009 that uniquely identify categories of traders to test how speculators such as hedge funds and swap dealers relate to volatility and price changes. In examining various subperiods where price trends are strong, we find little evidence that speculators destabilize financial markets. To the contrary, hedge fund position changes are negatively related to volatility in corn, crude oil, and natural gas futures markets. Additionally, swap dealer activity is largely unrelated to contemporaneous volatility. Our evidence is consistent with the hypothesis that hedge funds provide valuable liquidity and largely serve to stabilize futures markets.

We analyze the effects of venture capital (VC) backing on profitability of private firm acquisitions. We find that VC backing leads to significantly higher acquirer announcement returns, averaging 3%, even after controlling for deal characteristics and endogeneity of venture funding. This leads us to investigate whether some VCs have interests that conflict with those of other investors. We show that such conflicts arise from VCs having financial relationships with both acquirers and targets, corporate VCs having a dominant strategic focus, and VC funds nearing maturity experiencing pressure to liquidate. Our conclusions follow from examinations of target takeover premia and acquirer announcement returns.

Using a unique sample of newly privatized firms from 59 countries, this article provides new evidence about the agency costs of state ownership and new insight into the corporate governance role of country-level institutions. Consistent with agency theory, we find strong and robust evidence that state ownership is positively related to corporate cash holdings. Moreover, we find that the strength of country-level institutions affects the relation between state ownership and the value of cash holdings. In particular, as state ownership increases, markets discount the value of cash holdings more in countries with weaker institutions.

We examine how information-processing cost affects investors’ acquisition of firm-specific information using a natural experiment resulting from a recent mandate requiring U.S. firms to adopt eXtensible Business Reporting Language (XBRL) when submitting filings to the U.S. Securities and Exchange Commission (SEC). XBRL filings make financial data standardized, tagged, and machine readable. We find that XBRL adoption reduces firms’ stock return synchronicity. The reduction in synchronicity mainly applies to filings under the mandatory program as opposed to the voluntary program. Furthermore, such an effect is more pronounced for opaque and complex firms. Finally, we find that XBRL adoption also reduces price delay.

U.S. equity mutual funds, on average, prefer realization of capital losses to capital gains. Nevertheless, a substantial fraction exhibits the disposition effect of realizing gains more readily than losses. My analysis suggests that learning effects have reduced the manifestation of the disposition effect over time, implying that academic research has influenced industry practices. When funds experience outflows and are managed by teams of portfolio managers, they are more susceptible to selling disproportionately more winners than losers. Disposition-driven behavior affects investment style, causing lower market betas and characteristics of value-oriented and contrarian styles, but has no observable effect on fund performance.

This paper provides evidence on managerial motives for raising equity by examining long-run performance and insider trading around canceled and completed seasoned equity offerings (SEOs). Insider selling increases prior to competed and canceled SEOs, but declines afferward only for canceled offerings. For completed SEOs, pre-filing insider trading is related to long-run performance after completion. For Canceled sEOs, pre-filing insider trading is related to stock performance between filing and cancellation. Finally, changes in dence is consistent with insiders exploiting windows of opportunity by attempting to issue overvalued equity and by canceling the issue when the market reaction to the announcement eliminates the overvaluation.

We document the wide dispersion of private equity investment returns and examine performance determinants using a newly constructed database of 7,500 investments worldwide. One in 10 investments does not return any money, whereas 1 in 4 has an internal rate of return (IRR) above 50%. Quick flips are associated with the highest returns. Performance does not appear scalable: Investments held by private equity firms in periods with a high number of simultaneous investments underperform substantially. Results are consistent with the theoretical literature on organizational diseconomies linked to firm structure. Private equity firms’ actions do not appear to be mechanical or easily scalable.

The Capital Asset Pricing Model of Sharpe [10, 1964], Lintner [8, 1965], and Mossin [9, 1966] showed how it was possible to derive under fairly stringent assumptions the conditions for equilibrium in a market for risky assets. Recent work has been directed at relaxing these assumptions, and this paper extends the progress made thus far by deriving some properties of capital market equilibrium when investors are faced with divergent borrowing and lending rates and when these rates may vary among investors.