Knowledge that Transforms

We study shareholder proposals across a period of substantial activity and find systematic differences both across sponsor identity and across time. To measure the success of shareholder activism, we examine voting outcomes and short-term market reactions conditioned on proposal type and sponsor identity. The voting analysis documents that sponsor identity, issue type, prior performance and time period are important influences on the voting outcome. Proposals sponsored by institutions or coordinated groups appear to act as substitutes gaining substantially more support than proposals sponsored by individuals. The nature of the stock market reaction, while typically small, varies according to the issue and the sponsor identity.

We examine whether a distinct equity issuer underperformance anomaly exists. In a sample of initial public offering (IPO) and seasoned equity offering (SEO) firms from 1975 to 1992, we find that underperformance is concentrated primarily in small issuing firms with low book-to-market ratios. SEO firms, that underperform these standard benchmarks have time series returns that covary with factor returns constructed from nonissuing firms. We conclude that the stock returns following equity issues reflect a more pervasive return pattern in the broader set of publicly traded companies.

This paper examines the roles of the number of trades, size of trades, and order imbalance (buyer- versus seller-initiated trades) in explaining the volatility–volume relation for a sample of NYSE and Nasdaq stocks. Our results reconfirm the significance of the size of trades, beyond that of the number of trades, in the volatility–volume relation on both markets. After controlling for the return impact of order imbalance, the volatility–volume relation becomes much weaker. For NYSE stocks, the order imbalance in large trade size categories affects the return more than in smaller size categories. For Nasdaq stocks, the largest return impact comes from the order imbalance in maximum-sized Small Order Execution System (SOES) trades.

We hypothesize that firms choose dividend increases to distribute relatively permanent cash-flow shocks and repurchases to distribute more transient shocks. As predicted, we find that post-shock cash flows of dividend increasing firms exhibit less reversion to pre-shock levels compared with repurchasing firms. We also examine whether the stock market uses the announcement of the payout method to update its beliefs about the permanence of cash-flow shocks. Controlling for payout size and the market's expectation about the permanence of the cash-flow shock, the stock price reaction to dividend increases is more positive than the reaction to repurchases.

Defenders of market efficiency argue that anomalies involving long-term abnormal returns are not robust to alternative methodologies. We argue that because various methodologies use different weighting schemes, the magnitude of abnormal returns should differ, and in a predictable manner. Three problems are identified that cause low power in value-weighted three-factor time series regressions when abnormal returns following managerial actions are being estimated. We illustrate the sensitivities in the context of the new issues puzzle as well as with simulations. More generally, multifactor models as currently used do not, and cannot, test market efficiency.

We investigate the portfolio choices of mean-variance-optimizing investors who use sample evidence to update prior beliefs centered on either risk-based or characteristic-based pricing models. With dogmatic beliefs in such models and an unconstrained ratio of position size to capital, optimal portfolios can differ across models to economically significant degrees. The differences are substantially reduced by modest uncertainty about the models’ pricing abilities. When the ratio of position size to capital is subject to realistic constraints, the differences in portfolios across models become even less important and are nonexistent in some cases.

We show that inflows of capital into venture funds increase the valuation of these funds’ new investments. This effect is robust to (i) controlling for firm characteristics and public market valuations, (ii) examining first differences, and (iii) using inflows into leveraged buyout funds as an instrumental variable. Interaction terms suggest that the impact of venture capital inflows on prices is greatest in states with the most venture capital activity. Changes in valuations do not appear related to the ultimate success of these firms. The findings are consistent with competition for a limited number of attractive investments being responsible for rising prices.

We examine the separation of ownership and control for 2,980 corporations in nine East Asian countries. In all countries, voting rights frequently exceed cash-flow rights via pyramid structures and cross-holdings. The separation of ownership and control is most pronounced among family-controlled firms and small firms. More than two-thirds of firms are controlled by a single shareholder. Managers of closely held firms tend to be relatives of the controlling shareholder's family. Older firms are generally family-controlled, dispelling the notion that ownership becomes dispersed over time. Finally, significant corporate wealth in East Asia is concentrated among a few families.

Antitrust enforcement that efficiently constrains Microsoft's behavior benefits firms supplying complements to and/or substitutes for Microsoft's operating system and applications software. However, from 1991 through 1997, 29 reports of federal antitrust enforcement action against Microsoft were accompanied by declines in the value of an index of 159 computer industry firms (excluding Microsoft). The mean loss to those firms exceeded $1 billion per event. Eight retreats or setbacks in enforcement were associated with increased computer sector value. Thus, financial markets reveal compelling evidence against the joint hypothesis that (a) Microsoft conduct is anticompetitive and (b) antitrust policy enforcement produces net efficiency gains.

This paper investigates the determinants of the market share of investment banks acting as advisors in mergers and tender offers. In both mergers and tender offers, bank market share is positively related to the contingent fee payments charged by the bank and to the percentage of deals completed in the past by the bank. It is unrelated to the performance of the acquirors advised by the bank in the past. In tender offers, the post-acquisition performance of the acquiror is negatively related to the contingent fee payments charged by the bank, suggesting that the contingent fee structure in tender offers ensures that investment banks focus on completing the deal.