Knowledge that Transforms

Our simulation results show that tests for long-horizon (i.e.. multi-year) abnormal security returns around firm-specific events are severely misspecified. The rejection frequencies using parametric tests sometimes exceed 30% when the significance level of the test is 5%. Our results are robust to many different abnormal-return models. Conclusions from long-horizon studies require extreme caution. Nonparametric and bootstrap tests are likely to reduce misspecification.

Management compensation is often categorized as either sensitive or insensitive to firm performance. This one-dimensional treatment ignores the variation in the types and terms of compensation contracts. Through a cross-sectional examination of share-holder-authorized compensation arrangements, this paper demonstrates that the terms of stock option and restricted stock plans, and the flexibility afforded the board of directions in negotiating with managers, vary systematically with the characteristics of the assets being managed. This variation in compensation contracting challenges theorists to incorporate the richness of management contracts into models of incentive pay.

This study examines chief executive officer (CEO) turnover. It reports new evidence on factors that affect the likelihoods of voluntary and forced turnover, and for both of these turnover types, whether the new CEO is from inside the firm, from another firm in the industry, or from outside the industry. The evidence is consistent with arguments that poor CEOs are easier to identify and less costly to replace in industries that consist of similar firms than in heterogeneous industries. The likelihoods of forced turnover and of an intra-industry appointment increase with industry homogeneity.

We propose and test the hypothesis that trading by institutional investors contributes to serial correlation in daily returns. Our results demonstrate that NYSE particles and individual security daily return autocorrelationsare an increasing function of the level of institutional ownership. Moreover, the results are consistent with the hypothesis that institutional trading reflects information and increases the speed of price adjustment. The relation between autocorrelation and institutional holdings does not, however, apparent to be driven by market frictions or rational time-varying required rates of return. We conclude that institutional investors correlated trading patterns contribute to axial correlation in daily returns.

We analyze the effect of privatization on the performance of British Airways by examining the privatization's impact on airfares and competitors' stock prices. We find that stock prices of U.S. competitors fell a significant 7% upon British Airways' privatization, implying expectation of a more competitive British Airways. Closer rivals of British Airways experienced a greater drop in stock price than more distant rivals. Further, airfares in markets served by British Airways fell significantly upon privatization. The results suggest that a change from government to private ownership improves economic efficiency.

This paper uses a unique financial instrument in the U.S. Treasury market to study the price behavior of the put option embedded in the November 2009 14 callable U.S. Treasury bond. We find that, beginning in August 1993, the estimated option value was persistently negative on nearly every day for the ensuing eight months. We show that the anomalous pricing behavior arose because the underlying callable bond became the cheapest to deliver issue against U.S. Treasury bond futures contracts. Hence, this paper provides direct evidence that derivative assets can significantly distort pricing in the primary asset market.

This paper studies stock ownership in Japanese firms by non-Japanese investors from 1975 to 1991. Existing models predicting that foreign investors hold national market portfolios or portfolios tilted towards stocks with high expected returns are inconsistent with our evidence. We document that foreign investors hold disproportionately more shares of firms in manufacturing industries, large firms, and firms with good accounting performance, low unsystematic risk, and low leverage. Controlling for size, there is evidence that small firms that export more firms with greater share turnover, and firms that have ADRs have greater foreign ownership.

This paper examines 472 securities that were listed on Nasdaq and moved to the NYSE or Amex. When Nasdaq market makers avoid odd-eighth quotes, bid-ask spreads are large and decline dramatically with exchange listing. When market makers use both odd and even eighths, spreads are smaller and decline only slightly with exchange listing. The large spreads observed when Nasdaq market makers avoid odd-eighths cannot be explained by security-specific characteristics. Instead, the results support the conclusion that the avoidance of odd-eighth quotes is used as a coordination device among Nasdaq market makers to maintain supra-competitive bid-ask spreads.

We test a prediction from the corporate focus literature that cross-industry spinoff distributions, where the continuing and spunoff units belong to different two-digit Standard Industry Classification codes, create more value than own-industry spinoffs. Our results indicate significant value creation around the announcement of cross-industry spinoffs only. We then provide evidence on whether the value creation comes from operating performance improvements, or bonding benefits, or both, where bonding refers to a pre-commitment by managers to avoid cross-subsidizing relatively poor performing units within the firm. We find a significant improvement in operating performance for cross-industry spinoffs, and none for own-industry cases. We do not find strong evidence of bonding to explain spinoff-related value creation. Further, the operating performance improvement is associated with the continuing rather than the spunoff entity, consistent with the hypothesis that spinoffs create value by removing unrelated businesses and allowing managers to focus attention on the core operations they are best suited to manage.

This paper investigates the role of vulture investors in the governance and reorganization of a sample of 288 firms that default on their public debt. The improvement in post-restructuring operating performance relative to the pre-default level is greater when the vulture investor becomes CEO or chairman or gains control of the target firm. We also find positive abnormal returns for the target's common stock and bonds in the two days surrounding the announcement of a vulture purchase of public debt or equity. Our evidence suggests that vulture investors add value by disciplining managers of distressed firms.