The announcement of the sale of equity in a wholly owned subsidiary of a corporation is received by the market as good news about the value of the existing equity in the parent corporation. This is in stark contrast to announcements of other forms of public equity financing . The authors show that the apparent inconsistency between the market response to equity carve-out announcements and other forms of equity financing can be easily understood in the Myers and Majluf (1984) framework. It is shown that firms that resort to an equity carve-out will be firms that, on average, are being undervalued by the market.

We analyze the incentives of investment banks to develop innovative products. We show that client characteristics and market structure affect these incentives significantly. Investment banks with larger market shares have greater incentives to innovate and smaller banks are likely to share their innovations with the largest bank. Innovation incentives increase in volatile environments and regulatory scrutiny actually encourages loophole exploitation activity. Our predictions are consistent with stylized facts and the analysis has broad testable implications for innovative activity in other markets similarly characterized by a lack of comprehensive protection for intellectual property rights, for example, the software industry.

[We propose that it is precisely because firms' repurchases of their own stock through tender offers are associated with large stock-price increases that repurchases are unattractive as a means of distributing cash. As a result, firms distribute some cash in the form of dividends--despite the tax disadvantage--and carry the rest to future periods. However, when their stock is sufficiently undervalued, firms distribute all accumulated cash through stock repurchases. We show that dividends are smoothed and are positively related both to earnings innovations and to previous period's dividends. Also, the stock-price reaction to a repurchase announcement, of a given size, is increasing in the previous period's dividends.]

[When a security trades at multiple locations simultaneously, an informed trader has several avenues in which to exploit his private information. The greater the proportion of liquidity trading by "large" traders who can split their trades across markets, the larger is the correlation between volume in different markets and the smaller is the informativeness of prices. We show that one of the markets emerges as the dominant location for trading in that security. When informed traders can use their information for more than one trading period, the timely release of price information by market makers at one location adversely affects the profits informed traders expect to make subsequently at other locations. Market makers, competing to offer the lowest cost of trading at their location, consequently deter informed trading by voluntarily making the price information public and by "cracking down" on insider trading.]

[We analyze whether risk shifting by a hedge fund manager is related to the manager's incentive contract, personal capital stake, and the risk of fund closure. We find that the propensity to increase risk following poor performance is significantly weaker when incentive pay is tied to the fund's high-water mark and when funds face little immediate risk of liquidation. Risk shifting is also less prevalent when a manager has a significant amount of personal capital invested in the fund. Overall, high-water mark provisions, managerial stake, and low risk of fund closure appear to make a hedge fund manager more conservative with regard to risk shifting.]

In a takeover contest, the presence of bidders' existing debtholders, if they can be expropriated by issuing new debt with equal or senior priority, allows bidders to commit to bid more than their valuation of the target. Such commitment can be beneficial because it deters potential entry by subsequent bidders and may allow a first bidder to acquire the target at a bargain price. The cost is that if entry by subsequent bidders does nevertheless take place, because the first bidder has committed himself to bid high premia, a bidding war ensues resulting in offers that may involve excessive premia, i.e., bids that are larger than the bidders' valuation of the target.

The authors investigate the potential for manipulation due to the interaction between secondary market trading prior to a seasoned equity offering and the pricing of the offering. Informed traders acting strategically may attempt to manipulate offering prices by selling shares prior to the seasoned equity offering, and profit subsequently from lower prices in the offering. The model predicts increased selling prior to a seasoned equity offering, leading to increases in the marketmaker's inventory and temporary price decreases. Further, sinc e manipulation conceals information, the ratio of temporary to permane nt components of the price movements is predicted to increase.

We argue that internal capital market imperatives of business groups i.e., reallocation of capital across group firms, influences an affiliated firm's dividend policy. Intuition is developed in a model in which business group insiders distribute dividends from cash-rich firms and use their share of payout to invest in other affiliated firms. Employing multi-country panel-data, we find support for this channel: Dividends by a group firm are positively related with equity-financed investments by its affiliated firms. Results are corroborated by exploiting variation in a firm's investment opportunity generated by changes in import tariff policy: a shock to investment opportunity of an affiliated firm is propagated to dividend policies of other firms in its group.

In 1936, the federal government unexpectedly imposed a tax on undistributed corporate profits. Despite the direct costs of the tax, its announcement produced a positive revaluation of corporate equity, particularly among lower-payout firms. The authors interpret this as evidence of a divergence between managerial and shareholder preferences regarding dividend payout policies, consistent with the presence of agency costs. They also find that, despite the incentives created by the tax, the actual growth in dividends during 1936 was lower among firms judged more likely to be subject to higher agency costs after controlling for liquidity, debt, and the growth in earnings.

This paper investigates the empirical significance of underwriter reputation capital by analyzing the impact of initial returns of IPOs on lead-underwriter market value. Consistent with reputation costs, overpriced offerings are associated with a decrease in lead-underwriter market value significantly in excess of estimated direct costs. For moderately underpriced offerings, however, underwriter wealth effects are positive. Consistent with higher reputation costs, these wealth effects are insignificant when the IPO underpricing is more extreme. In jointly managed offerings, it is lead-underwriters that are primarily affected by IPO initial performance.Journal of Economic LiteratureClassification Numbers: G24, G32.