Knowledge that Transforms

A large body of the corporate finance literature is devoted to capital structure. This literature examines whether firms have a target capital structure, and whether they actively rebalance their capital structure toward a target. Since conversion of a convertible bond causes a drop in leverage, target capital structure theory suggests that the structure should be rebalanced in the future. I consistently find that following a realized conversion firms rebalance their positions in less than a year. When the stock price passes the conversion price threshold for a convertible bond, the firm expects this drop in leverage to occur in the near future. Using a regression discontinuity design around the conversion price threshold for those conversions that are decided by investors, not by the firm, my paper documents a 20% increase in leverage before an actual drop in leverage. That is to say, firms do not wait for the realization of leverage shocks but rather respond to anticipated shocks. A quantile treatment effect analysis reveals the effect to be a hump-shaped function of leverage, with a peak for firms with a conditional leverage ratio around the 70th percentile.

We show that firms led by politically partisan CEOs are associated with a higher level of corporate tax sheltering than firms led by nonpartisan CEOs. Specifically, Republican CEOs are associated with more corporate tax sheltering even when their wealth is not tied with that of shareholders and when corporate governance is weak, suggesting that their tax sheltering decisions could be driven by idiosyncratic factors such as their political ideology. We also show that Democratic CEOs are associated with more corporate tax sheltering only when their stock-based incentives are high, suggesting that their tax sheltering decisions are more likely to be driven by economic incentives. In sum, our results support the political connection hypothesis in general but highlight that the specific factors driving partisan CEOs' tax sheltering behaviors differ. Our results imply that it may cost firms more to motivate Democratic CEOs to engage in more tax sheltering activities because such decisions go against their political beliefs regarding tax policies.

This research studies the effect of family control on the debt maturity structure of private firms. It uses a sample of unlisted Spanish firms for the period 2004–2013. Our results indicate that family firms get better access to long-term debt, even when exercising control by pyramid structures. However, the presence of a second largest family shareholder has a negative effect on debt maturity. Moreover, in line with previous studies, we find that firms use more long-term debt when they have fewer growth opportunities, higher asset maturity and are more leveraged.

We find that, on average, firms close 31% of their gap between target and actual cash ratio each year. The adjustment speed is generally swifter if the actual cash ratio exceeds the target ratio, possibly because it is cheaper to disgorge cash than it is to raise it. But as firms become more insulated from the threat of takeovers, they decelerate their cash adjustment at high cash ratios. This evidence suggests that self-interested managers are reluctant to disburse excess cash, and they will allow cash levels to remain high unless the firms are subject to external pressure.

We investigate the role of venture-backing at the time of the initial public offering for the decision to subsequently be taken over and leave the exchange. We show, controlling for firm characteristics as well as the endogeneity of the involvement of VC, that VC-backed firms are significantly more likely to leave the exchange in the course of a take over. Our analysis sheds new light on decisions to go private, and even more so on the process of going public for VC-backed firms. Our findings suggest that, in a significant number of cases, VC-backed IPOs can be interpreted as delayed trade sales.

We use India's unique regulatory design to test sentiment-based models of IPO initial returns. Using a sample of 362 Indian offerings from 2003 to 2014, we find that the traditional measure of IPO underpricing averages 23%. We decompose the traditional underpricing measure into two components: one related to voluntary underpricing by the underwriter and the other component related to the IPO's first-day trading activity. We find minimal levels of voluntary underpricing. However, initial returns on the first day average 14% and are primarily driven by the unmet demand of non-institutional investor groups. Overall, our results support sentiment-based models of IPO initial returns.

We examine interactions between investment and financing decisions in a dynamic model where the firm can alter the mix of debt and equity financing and exercise a randomly arriving and potentially short lived growth option. The firm will typically finance the exercise of the growth option with equity and may wait years before recapitalizing to a higher debt level. The lack of coordination between the timing of investment and debt financing helps explain a number of findings in the empirical literature, including violation of the financing pecking order, debt conservatism, apparent market timing of security issues, and more pronounced underperformance following equity issues than debt issues.

We posit that presence of informed directors, by enhancing the board's information and ability to advise and monitor management, will affect the nature of incentive contracts offered to CEOs. In particular, we study the effect of directors from related industries (DRIs) i.e., downstream or upstream industries: our premise is that DRIs contribute information about product-market prospects. Using a simple optimal-contracting model to develop testable predictions, we hypothesize that DRIs reduce a firm's reliance on stock-based incentives. Our empirical evidence is strongly supportive: CEO pay and replacements are less sensitive to stock performance, particularly when industry-related information is crucial and when stock price is less informative.

Payout policies based on share repurchase programs provide greater flexibility than do those based on cash dividends. We develop and test an empirical model in which strongly governed companies outperform weakly governed companies after announcing share repurchase programs. Our findings include positive associations between strong governance and both post-announcement adjusted operating performance and abnormal stock returns. The results are robust to sample selection bias, different sample criteria, governance measurement, and various control variables. In addition, governance strength is associated with larger post-announcement changes in CEO incentive compensation and merger and acquisition activity, both of which we argue are consistent with strongly governed companies using the financial flexibility derived from choosing share repurchases over cash dividends to drive better performance. Consistent with current literature on attenuation of former anomalies, the associations we find between governance and post-announcement performance tend to disappear in the latter half of our sample period.

We study the strategic scheduling of annual shareholder meetings. When companies move their annual meetings a great distance from headquarters, they tend to experience pronounced stock market underperformance in the six months after the meeting and announce earnings below expectations over the subsequent year. Companies appear to schedule meetings in remote locations when the managers have private, adverse information about future performance and wish to discourage scrutiny by shareholders, analysts, and the media. However, shareholders do not decode this signal, since the disclosure of meeting locations leads to little immediate stock price reaction. We find that voter participation drops when meetings are held at unusual hours, even though most voting is done electronically during a period of weeks before the meeting convenes.