We studied repeated acquirers in Federal Deposit Insurance Corporation (FDIC) assisted acquisitions. Using a sample of 128 FDIC assisted acquisitions and 387 non-assisted acquisitions, we found that FDIC assisted acquirers, on average, produced positive abnormal returns. This result was driven by repeated acquirers. First-time acquirers did not profit in these assisted acquisitions. In a logit analysis, we found that the FDIC repeated acquirer improved its profiting chances by reducing the winning bid and the number of bids. This evidence is consistent with the suggested experience/information effect based on theory and FDIC practices.

We examine whether insiders’ pledging of company stock as collateral for personal loans influences a company’s debt contracting. We attempt to identify causality through difference-in-differences analyses of an unexpected legislative change that exogenously reduced board directors’ pledging incentives. We find that firms with higher initial pledging levels, which subsequently experienced a significant decline in pledging ratios due to the regulation, benefited from lower loan spreads and less stringent non-price loan terms. We further hypothesize and provide evidence that the positive impact of insider pledging on corporate borrowing costs is less pronounced in closely held firms. Examining the mechanisms, we find that share pledging is positively related to earnings management, firm risk-taking behaviors, and agency problems. Overall, these findings suggest that banks perceive insider share pledging as engendering significant risks.

This study investigates market price integration by testing per-share trade execution price or cost (TEP/C) differentials for matched intraday trades for a sample of Canadian shares cross-listed in the U.S. The TSE trade price advantage over the entire time period changed significantly after both the TSE's own minimum quotation increment reduction and that of its U.S. competitors. We show that the differential TEP/C is equivalent to the international effective spread differential and that market quality comparisons, which benchmark using the National instead of the International BBO, need to compare both national effective half-spread and midspread differences. Our cross-sectional regression results support our predictions that TEP/C differentials can be explained by differences in national midspreads and by ex ante proxies of national effective half-spreads. The TEP/C differentials vary inversely with increasing levels of our measure of signed market nonfragmentation.

This paper tests the overreaction hypothesis using monthly data for stocks listed on the Toronto Stock Exchange over the 1950–1988 period. Unlike De Bondt and Thaler (1985), (1987), it finds statistically significant continuation behavior for the next one (and two) year(s) for winners and losers, and insignificant reversal behavior for winners and losers over longer formation/test periods of up to ten years. While the systematic risks of the winners decrease significantly over all test periods, the systematic risks of the losers increase significantly for only the 12-month formation/test periods (unlike Chan (1988)). The only significant change in variance from the formation to test periods occurs for the losers for the 12-month formation/test periods. The findings are robust for January versus non-January and size-based portfolios (unlike Zarowin (1989), (1990)). The findings are robust for various performance measures (specifically, market-adjusted CAR, and the Jensen (1968) and Sharpe (1966) portfolio performance measures).

This study examines the impact of auditor quality on financial covenants in debt contracts. We conjecture that high‐quality auditors have two related effects on these debt covenants: (i) they encourage fewer and less restrictive covenants by providing assurance to lenders at contract inception and, consequently, (ii) they ensure a lower probability of eventual covenant violations. Consistent with the conjectures, we find that auditor quality is negatively associated with the intensity and tightness of financial covenants. Specifically, high‐quality auditors are associated with fewer covenants (especially performance covenants) and less binding covenants. Additionally, we find that auditor quality is negatively associated with the likelihood of covenant violations. In an ancillary test, we provide evidence that high‐quality auditors mitigate the detrimental effect of covenant violations on the cost of borrowing. Together, these findings highlight the important role of auditors in debt contracting.

We find an overall negative relation between CEO inside debt holdings and the cost of equity capital. Such a negative relation holds in an instrumental-variable analysis, a test using changes in variables due to CEO turnover events, a test using seasoned equity offering (SEO) underpricing as an alternate cost of equity measure, and a difference-in-differences test based on the implementation of Internal Revenue Code Section 409A Final Regulations. Additionally, the negative relation between inside debt and the cost of equity capital is nonlinear, suggesting the existence of optimal inside debt compensation that can minimize cost of capital. The negative relation is less pronounced in firms with pre-funded executive pension plans and in firms that provide executives with the pension lump-sum option. We also provide evidence that inside debt lowers the cost of equity more for excessively levered firms. Collectively, these findings suggest that shareholders value the beneficial role of CEO debt-like compensation in constraining excessive managerial risk taking.

In this study we analyze how CEO risk incentives affect the efficiency of research and development (R&D) investments. We examine a sample of 843 cases in which firms increase their R&D investments by an economically significant amount over the period of 1995–2006. We find that firms with higher sensitivity of CEO compensation portfolio value to stock volatility (vega) are more likely to have large increases in R&D investments. More importantly, we find that high-vega firms experience lower abnormal stock returns and lower operating performance compared to their low-vega counterparts following the R&D increases. Our main results hold in a variety of robustness tests. The results are consistent with the conjecture that high-vega compensation portfolios may induce managers to overinvest in inefficient R&D projects and therefore hurt firm performance.

Not all corporate bailouts are the same. We study corporate bailouts from around the world during 1987–2005. Among these bailed-out firms, some firms are economically distressed while others are financially distressed. Some firms are bailed out with cash (either as equity or as loans) while others are bailed out with debt relief. Some firms are bailed out by the government while others are bailed out by other stakeholders. We examine these firms’ operating performance before and after their bailouts, but specifically across different bailout types, and we also measure their stock returns surrounding their bailout announcements.

This paper extends prior work on the links between political patronage and capital structure in developing economies. Three proxies of political patronage are developed and applied to a group of Malaysian firms over a 10-year period. We find a positive and significant link between leverage and each of the three measures of political patronage. We also find evidence of an indirect link between political patronage and capital structure through firm size and profitability.