We distinguish among the signaling, free cash flow, and wealth transfer hypotheses in explaining the stock price reaction to specially designated dividend (SDD) announcements. In a direct test of the signaling power of SDDs, we find both a larger stock price reaction and a significant upward revision of earnings forecasts for firms with Tobin's q less than one, but not for other firms. Our results support the conditional signaling hypothesis, which predicts greater effects of favorable information for low q firms. Taken together, our results for stock price effects and earnings forecast revisions do not support either the free cash flow or wealth transfer hypotheses.

Abstract This study provides further evidence of earnings management around security offerings. We find positive and significant discretionary current accruals coincident with offerings of reverse LBOs. Issuers in the most aggressive quartile of earnings management have a one-year aftermarket return that is between 15% and 25% less than the most conservative quartile. We also find a negative and significant relation between abnormal accruals and post-issue abnormal returns within the first year after the offering. The relation remains after controlling for book-to-market ratio, firm size, offering size, and involvement of buyout specialists or management. Although earnings management has been used to explain post-issue long-term underperformance of IPOs and SEOs, our study shows that earnings management can explain post-offering returns of reverse LBOs, even in the absence of post-offering underperformance.

We conduct an empirical study of the impact of consumer price search on the shifting of cigarette excise taxes to consumer prices. We use novel data on the prices that smokers report paying and document substantial price dispersion. We find that cigarette taxes are shifted at lower rates to carton buyers and, especially, smokers who buy cartons of cigarettes in a state other than their state of residence. We also find evidence that taxes are shifted at somewhat lower rates to the prices paid by heavier smokers and at somewhat higher rates to the prices paid by smokers of light cigarettes.

A more generous consumer bankruptcy system provides greater insurance against financial risks but may also raise the cost of credit. We study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which increased the costs of filing for bankruptcy. We identify the effects of BAPCPA on borrowing costs using variation in the effects of the reform across credit scores. We find that a one-percentage-point reduction in bankruptcy filing risk decreased credit card interest rates by 70–90 basis points. Conversely, BAPCPA reduced the insurance value of bankruptcy, with uninsured hospitalizations 70 percent less likely to obtain bankruptcy relief after the reform. (JEL D18, G15, I13, K35)

This study investigates how economic policy uncertainty (EPU) affects venture capital (VC) contract terms. Using a unique database of contracts between VCs and entrepreneurial firms in China, we provide evidence that EPU positively affects the presence of investor-friendly covenants in VC contracts. Our mechanism analysis shows that screening for high-quality startups and VCs’ increased bargaining power are potential channels. Furthermore, we find that including more investor-friendly covenants mitigates the negative effect of EPU on VC exit performance.