Knowledge that Transforms

Do taxes affect corporate debt policy? This paper tests whether the incremental use of debt is positively related to simulated firm-specific marginal tax rates that account for net operating losses, investment tax credits, and the alternative minimum tax. The simulated marginal tax rates exhibit substantial variation due to the dynamics of the tax code, tax regime shifts, business cycle effects, and the progressive nature of the statutory tax schedule. Using annual data from more than 10,000 firms for the years 1980–1992, I provide evidence which indicates that high-tax-rate firms issue more debt than their low-tax-rate counterparts.

This paper studies the relation between the premiums in takeover bids involving exchange-listed target firms from 1975-91 and the pre-announcement stock price runups. The evidence shows that the pre-bid runup and the post-announcement increase in the target's stock price (the ‘markup’) are generally uncorrelated. With little substitution between the runup and the markup, the runup is an added cost to the bidder. This finding has important implications for assessing the costs of insider trading. It also raises interesting questions about the role of information from public capital markets in private takeover negotiations.

Underwriters have an incentive to overstate investor interest in order to persuade some investors to purchase shares at a price in excess of their initial estimate of the fair value. We show that this incentive is eliminated when the underwriter commits to secondary market price stabilization. Destroying the underwriter's incentive to overstate interest reduces the total surplus captured by initial investors in initial public offerings. Further efficiency gains are associated with penalty bid systems that permit the underwriter to make the stabilization commitment selectively. Price stabilization can thus be viewed as a bonding mechanism that improves the efficiency of the primary equity market.

From 1986 to 1993, the United Shareholders Association (USA) provided a conduit through which small shareholders could unite and attempt to influence the governance of large US corporations. We show that the USA targeted large firms that underperformed the market, that its influence increased from 1990 to 1993, and that USA-Sponsored proposals were more successful when the target firm was a poor performer with high institutional ownership. The announcement of 53 USA-negotiated agreements is associated with an average abnormal return of 0.9% or a total shareholder wealth gain of $1.3 billion, suggesting that USA-sponsored shareholder activism enhanced shareholder value.

This paper is an econometric analysis of the information content of automated orders arriving at the NYSE. The model captures the joint behavior of automated orders and also the return on the stock index future and the futures-spot basis. The results indicate that orders contain information useful in predicting stock returns beyond the information contained in the reported trades. Furthermore, program and index-arbitrage orders contain information beyond that available from the futures return and basis, suggesting that these orders are not merely passive conveyors of common-factor information. Nonprogram, program, and index-arbitrage orders have roughly similar price impacts.

This paper examines the correlation between the returns on individual stocks and the yield changes of individual bonds issued by the same firm, and finds that they are negatively and contemporaneously correlated. This suggests that individual stocks and bonds are driven by firm-specific information that is predominantly related to the mean, rather than the variance, of the firm's underlying assets. Furthermore, I find that lagged stock returns have explanatory power for current bond yield changes, while current stock returns are unrelated to lagged bond yield changes. This shows that stocks lead bonds in reflecting firm-specific information.

This paper focuses on how best to measure the corporate marginal tax rate, which is an important input into financial analysis of the cost of capital, financing policy, corporate hedging, and corporate reorganizations. The results indicate that the simulated tax rate used by Shevlin (1990) and Graham (1996), although difficult to calculate, is the best available proxy for the ‘true’ marginal tax rate. If the simulated rate is unavailable, an easy-to-calculate trichotomous variable or the statutory marginal tax rate (which captures the progressivity in the tax schedule) are reasonable alternatives, better than most commonly used tax variables.

Despite empirical evidence pointing to a strong similarity between lease contracts and junk bonds, the theoretical modeling of equilibrium lease determination has been confined primarily to default-free leases. This paper provides a unified framework for determining the equilibrium credit spread on leases subject to default risk. The model is flexible enough to be applied to a wide variety of real-world leasing structures, including security deposits, required up-front prepayments, embedded lease options, leases indexed to use, and lease credit insurance contracts.