This article examines the effect of issuing debt with and without 'poison put' covenants on outstanding debt and equity claims for the period 1988 to 1989. The analysis shows that poison put covenants affect stockholders negatively and outstanding bondholders positively, while debt issued without such covenants has no effect. The study also finds a negative relationship between stock and bond returns for firms issuing poison put debt. These results are consistent with a 'mutual interest hypothesis,' which suggests that the issuance of poison put debt protects managers and, coincidentally, bondholders at the expense of stockholders.

Little is known about the timing and execution of open market repurchases. U.S. firms are under no obligation to disclose when they are trading, and generally report only quarterly changes in shares outstanding. We use 64 firms' supplementally disclosed repurchase trading data to provide the first examination of repurchase timing and execution. Across the days reported in our sample, firms adopted a variety of execution styles ranging from immediate intense repurchasing to delayed and smoothed repurchasing. We find no clear evidence that repurchases are timed to coincide with, precede, or follow, days on which information is released. We benchmark the costs and value of a given repurchase program against naive accumulation strategies achieving the same terminal portfolio. While there is considerable variation across the firms, NYSE firms on average beat their benchmarks, whereas NASDAQ firms do not. Finally, we document the liquidity impact of open market repurchases. We find that repurchasing contributes to market liquidity by narrowing bid-ask spreads and attenuating the price impact of order imbalances on days when repurchase trades are completed.

Douglas O. Cook, Lewis J. Spellman, Firm and Guarantor Risk, Risk Contagion, and the Interfirm Spread among Insured Deposits, The Journal of Financial and Quantitative Analysis, Vol. 31, No. 2 (Jun., 1996), pp. 265-281

Uninformative stock price fluctuations induced by volatile mutual fund flows generate unintended consequences for corporate debt financing. We propose a measure of stock-level passive equity mutual fund flow-induced volatility pressure and find that it positively affects the bond yield spread at issuance through higher perceived risks revealed by increased equity volatility. Although flow-induced volatility is costly to the borrowing firm, in contrast to equity volatility, it has no significant association with future firm fundamental risk. Our study reveals a dark side of passive investing.

Using two dynamic partial adjustment capital structure models to estimate the impact of several macroeconomic factors on the speed of capital structure adjustment toward target leverage, we find evidence that firms adjust their leverage toward target faster in good macroeconomic states relative to bad states. This evidence holds whether or not firms are subject to financial constraints. Our results are robust to an alternative method of calculating states and to omitting zero-debt boundary firms and are not driven by firm size, deviation from target, or leverage definitions.

ABSTRACT This article examines the effect of issuing debt with and without “poison put” covenants on outstanding debt and equity claims for the period 1988 to 1989. The analysis shows that “poison put” covenants affect stockholders negatively and outstanding bondholders positively, while debt issued without such covenants has no effect. The study also finds a negative relationship between stock and bond returns for firms issuing poison put debt. These results are consistent with a “mutual interest hypothesis,” which suggests that the issuance of poison put debt protects managers and, coincidentally, bondholders, at the expense of stockholders.

Little is known about the timing and execution of open market repurchases. U.S. firms are under no obligation to disclose when they are trading, and generally report only quarterly changes in shares outstanding. We use 64 firms' supplementally disclosed repurchase trading data to provide the first examination of repurchase timing and execution. Across the days reported in our sample, firms adopted a variety of execution styles ranging from immediate intense repurchasing to delayed and smoothed repurchasing. We find no clear evidence that repurchases are timed to coincide with, precede, or follow, days on which information is released. We benchmark the costs and value of a given repurchase program against naive accumulation strategies achieving the same terminal portfolio. While there is considerable variation across the firms, NYSE firms on average beat their benchmarks, whereas NASDAQ firms do not. Finally, we document the liquidity impact of open market repurchases. We find that repurchasing contributes to market liquidity by narrowing bid-ask spreads and attenuating the price impact of order imbalances on days when repurchase trades are completed.

Motivated by SEC regulations requiring a majority of independent directors on corporate boards, we examine director informativeness and ability by observing the trading performance of independent directors who serve on multiple boards. As a proxy for informativeness, we find positive trading performance relative to purchases and sales. More impressive, these performance opportunities appear to be available to market participants who observe directors' Form 4 trades. We do not find evidence that diversification motives or busyness affects director trading performance. On the other hand, we do find that audit and compensation committee memberships enhance director trading performance on the sales side but that committee membership does not affect the profitability of director purchases. In comparison, multi-firm directors out-perform single-firm directors and this performance differential seems to be more attributable to superior ability than to better information.