We use new hand-collected data from corporate filings to study the drivers of corporate capital structure adjustment. Classifying firms by their adjustment frequencies, we reveal previously unknown patterns in their reasons for financing and the financial instruments used. Some are consistent with existing theory, whereas others are understudied. Many leverage changes are outside of the firm’s control (e.g., executive option exercise) or incur negligible adjustment costs (e.g., credit-line usage). This implies a lower frequency of proactive leverage adjustments than indicated by prior research using accounting data, suggesting that costs of adjustment are higher, or the benefits lower, than previously thought.

We test the relationship between takeover protection and voluntary disclosure in a setting of antitakeover laws in a firm’s state of incorporation. After correcting for the endogeneity of firms’ incorporation choices, we find that firms incorporated in states with more antitakeover laws have higher levels of voluntary disclosure and stock market liquidity. Further tests do not support shareholder demands being the driving force for this association. Our findings are consistent with takeover protection and poor disclosure serving as substitute mechanisms for deterring takeovers. Therefore, as antitakeover statutes mitigate takeover threats, they enhance managers’ incentives to disclose more in order to realize capital market benefits.

We use a threshold-based design to study ex post discretion in lenders’ contractual enforcement of covenant violations. At preset thresholds, lenders enforce contractual breaches only infrequently, but this enforcement is associated with material consequences (e.g., fees and renegotiations). Enforcement varies significantly over time and peaks when credit conditions are tightest, indicating that enforcement is procyclical. Costly coordination reduces enforcement: Syndicates with ex ante restrictive voting requirements enforce at lower rates. Consistent with theories of lender competition and implicit contracting, enforcement rates are lower for borrowers with access to alternative sources of financing and well-reputed lead arrangers.

We show that the U.S. agricultural price support system, and certain other government insurance programs, can be interpreted as the provision of a random number of put options to program beneficiaries. Because the number of puts being supplied is random, the value of the guarantees is no longer given by the standard Black-Scholes put option formula. This paper uses the contingent-claims methodology of modern finance theory to derive an appropriate valuation formula for such programs. We estimate the value to farmers of agricultural price supports for several commodities covered by the U.S. agricultural price support system. Our results indicate that the current system raises the ex ante value of some crops by as much as 9 percent. The method of valuation is applicable to other forms of government guarantees, as well, such as exchange rate insurance and export subsidy guarantees.

This paper explores the implications for the information content of acquisition offers in an economy with asymmetric information. It is shown that mergers can be socially beneficial due to risk reduction and information asymmetry even when there are no productive synergies and when positive premia are paid. The properties of equilibria with and without mergers are derived and contrasted in order to obtain a quantitative bound on potential merger premia. Theory is related to empirical evidence, where our results show that aggregate valuation gains can accrue on a purely informational basis. Moreover, the model developed here has important implications for the reported differences in tender offer and merger studies.

We examine short selling of equity exchange traded funds (ETFs) using the 2008 short-sale ban. Contrasting the previously documented contractions in bearish strategies during the ban, we find a significant increase in short sales of the largest, most liquid ETF, the S&P 500 Spider. We offer evidence suggesting that this upsurge was driven primarily by investors circumventing the ban. We show that the ban’s detrimental effect on stock liquidity was around 30% less severe for the Spider’s constituents. Our results suggest that ETF shorts can substitute for short sales of individual stocks, thereby alleviating short-sale constraints’ adverse effect on liquidity.

Existing research finds little evidence of overinvestment by successfully acquired targets. This paper shows how samples drawn from completed takeovers are biased against finding overinvestment and documents evidence of overinvestment in targets that use a highly leveraged transaction to avoid a takeover. The evidence also suggests that these restructurings create value by mitigating the targets' overinvestment problems.

We investigate an increasingly prevalent CEO succession strategy: recruiting CEOs from the board of directors (director–CEOs). Director–CEOs might be hired in a planned succession because they combine outsiders’ new perspectives with insiders’ firm-specific knowledge. Alternatively, directors may be recruited when the board is unprepared for a leadership change. We find that unplanned successions, in which director–CEOs are appointed as a “quick-fix” solution, result in a negative market reaction, deterioration in performance, and ill-fitting candidates with shorter tenures. Conversely, firms recruiting director–CEOs in planned successions perform similarly to other firms. We find no evidence that poor firm quality drives these results.

The purpose of this paper is to provide evidence on the following question: Are there more banking offices available per person to furnish consumer and business services in branch banking states than in unit banking states? This question is a central part of a broader issue of what limitations should be placed on the ability of individual banks to branch. Indeed, in a recent review of the literature dealing with the branching question, and prepared for the Senate Banking Committee (McIntyre Committee), Guttentag [8] stated: “One of the most pervasive arguments for branch banking is that branch banks provide more office facilities than unit banking.” Yet the available evidence on the question is sparse and existing research contains methodological difficulties which make the findings of questionable value.

In many nonlinear programming applications the objective function has an inherent uncertainty that depends upon a set of random variables that have a known distribution. If one wishes to optimize the expectation of the objective, as suggested by the expected utility theorem, then as is shown here one can often solve such problems by modifying standard nonlinear programming algorithms. To illustrate what is involved, the details and justification for the application of the interior parametric sequential unconstrained maximization technique and the generalized programming method for the solution of such problems are given. Some related problems with stochastic constraints for which the solution method applies are mentioned and an example of a portfolio selection problem is given.

Broadly speaking there are two models to the problem of asset valuation under uncertainty and aversion to risk. Under one, the certaintyequivalent method, each future return is converted to its certainty equivalent and discounted at the pure rate of interest. Under the other, the risk-adjusted discount rate method, each future return is discounted at an appropriate discount rate. The interrelation and validity of these models of asset valuation have come under discussion in two important works on stock valuation.

Yitzhaki [19] recently developed two portfolio selection criteria (EG and EΓ) based on the mean and Gini's mean difference. Similar to mean-variance(EV), the EG criterion uses two summary statistics to describe the probability distribution of a risky prospect, the mean and one-half Gini's mean difference. Gini's mean difference is defined as the average of the absolute differences between all possible pairs of observations of a random variable. Yitzhaki's development concentrated on the theoretical aspects of EG and EΓ and the theoretical relationships among EG, EΓ, EV, and stochastic dominance (SD) selection criteria. He did not address either the empirical properties of EG and EΓ or the relationship between the empirical efficient sets of EG and EΓ and other portfolio selection criteria. Yitzhaki suggested that the next step in the development and application of his proposed selection criteria should be an empirical investigation of how the EG and EΓ criteria compare with other selection criteria.

This paper investigates the effect on shareholder wealth of two events that change management's choice between negotiated and competitive underwritten equity offerings. These two events are the suspension and termination of suspension of Rule 50. (This rule is based on the Public Utility Holding Company Act of 1935 and requires certain utilities to use the competitive method.) The results indicate that the shareholders of the affected utilities experience an abnormal negative return on the announcement of the suspension of Rule 50, and an abnormal positive return on the announcement of the termination of suspension. This evidence is consistent with the joint hypothesis: (i) competitive offerings are less costly than negotiated offerings, and (ii) manager-shareholder agency costs are a determinant of the corporate choice between these two methods of raising equity.

Though short sellers on average succeed at identifying overvalued equity, firms often signal disagreement with short sellers by repurchasing stock when short interest increases. We investigate whether this disagreement reflects a myopic defense of inflated prices, or positive private information. These repurchases appear motivated by managers’ private information, not agency issues, even when managerial benefits to short-termism are enhanced or monitoring is weaker. Managers’ informational advantage relates to subsequent news, earnings, and risk, but is attenuated if activists target management or insiders sell. A trading strategy based on our findings earns 7.5% annually.

Hedge fund activists transfer relevant prior work experience to their activism campaigns. Categorizing activists based on past employment at investment banks (generalists), private equity or special situations partnerships (specialists), or other firms (nonfinancial experts), we relate activists’ prior work experience to their choices and outcomes. Both generalists with codifiable skills and specialists with tacit skills contribute to successful outcomes, but differences in these skills lead to differences in activism processes. Activist choices, market responses, target firm responses, and procedural aspects of activism vary with activist identity. Our analysis examines activists’ heterogeneous skills and highlights their importance in shaping activist interventions.

We develop an international asset pricing model to measure the impact of investability constraints on asset pricing. For a sample of 18 emerging markets, we use Standard & Poor’s investable weight factor (IWF) to show a 26.33% reduction in the cost of equity capital when non-investable firms become partially investable, with a further 12.51% reduction when partially investable firms become unrestricted. We demonstrate the generality and usefulness of the IWF by examining stocks with global/American depositary receipts and foreign institutional holdings as alternate investability proxies. Our results provide strong evidence of the economic benefits of market liberalization policies.

We consider a Lucas-type exchange economy with two heterogeneous stocks (trees) and a representative investor with constant relative risk aversion. The dividend process for one stock follows a geometric Brownian motion with constant and known parameters. The expected dividend growth rate for the other tree is stochastic and in general unobservable, although there may be a signal from which the investor can learn about its current value. We find that the equilibrium quantities in our model significantly depend on the information structure and on the level of risk aversion. While an observable stochastic drift mainly makes the economy more risky, a latent expected growth rate process with learning significantly changes the equilibrium price-dividend ratios, price reactions to dividend and drift innovations, expected returns, volatilities, correlations, and differences between the stocks. These effects are the more pronounced the more risk averse the representative investor.

We model how a rent-protection motive drives the choice of flotation method in new equity issuance between two polar cases: rights issues and cash offers. Unexpected new blockholders would emerge in control-diluting cash offers and share in jealously guarded control benefits. But rights issues help the incumbent controlling shareholders avoid control dilution and safeguard their private benefits. Under asymmetric information about private benefits, the choice of flotation method can convey information about hidden private benefits and hence firm value. Our model can explain even a negative announcement effect of rights issues, and it supports not just one but three important equilibriums.

We study what determines catering through the payout policy and how catering affects firm value. We create a catering index, measuring how the firm caters to its investors’ payout preferences. The index is based on the revealed payout preferences of mutual funds holding the firm’s stocks. Catering is constrained by market segmentation and dispersion in investor payout preferences. It is also associated with positive value effects: Firms increasing their catering index also experience an increase in value. Furthermore, greater catering ability is associated with a more positive market reaction to corporate announcements of equity issues and dividend payouts.

Efficiency analysis is concerned with isolating the efficient subset of investments (portfolios) for all investors belonging to a specified group. In order to construct a meaningful efficiency criterion, i.e., one which holds for more than one investor, care must be exercised to ensure that the investors' efficient set is independent of their wealth.