Knowledge that Transforms

We examine CEO turnover and firm financial performance. Accounting measures of performance relative to other firms deteriorate prior to CEO turnover and improve thereafter. The degree of improvement is positively related to the level of institutional shareholdings, the presence of an outsider-dominated board, and the appointment of an outsider (rather than an insider) CEO. Turnover announcements are associated with significantly positive average abnormal stock returns, which are in turn significantly positively related to subsequent changes in accounting measures of performance. This suggests that investors view turnover announcements as good news presaging performance improvements.

Bali and Hite (1998) and Dubofsky (1992) propose models in which market microstructure effects play a role in the ex-dividend day price drop anomaly. Bali and Hite suggest that the anomaly is caused solely by price discreteness, while Dubofsky suggests that NYSE Rule 118 is also involved. We test these models by examining cum- to ex-day price drops during the one-eighth, one-sixteenth, and decimal tick size regimes. While the evidence is qualitatively consistent with Dubofsky's predictions, neither model is satisfactory in a quantitative sense. One of our main empirical findings is that no significant decline was evident in the magnitude of the ex-day anomaly after the tick size reduction.

This paper evaluates the information content of analysts’ one-quarter-ahead earnings forecast revisions and recommendation revisions at various points in event time relative to earnings announcement dates. Across three sets of tests, we find that the revisions are least informative in the week after earnings announcements and that the information content of revisions generally increases over event time. We find a sharp increase in the information content of upward forecast revisions and recommendation upgrades in the week before earnings announcements, but we do not find a similar increase for downward revisions or for recommendation downgrades.

We present evidence that the adjusted returns of merging banks’ bonds are positive and significant across pre-merger and announcement months. The cross-sectional evidence indicates that the primary determinants of merger-related bondholder gains are diversification gains, gains associated with achieving too-big-to-fail status, and, to a lesser degree, synergy gains. We obtain the same finding when we examine the acquiring banks’ credit spreads on new debt issues both before and after the merger. We also provide the first study that shows acquirers benefit by the lower cost of funds on post-merger debt issues.

Finnish investors realize losses more than gains toward the end of December. Moreover, they repurchase the same stocks recently sold. The repurchase rate depends on loss magnitude, firm size, and how late in the year the sale takes place. This trading pattern generates net tax-loss buying pressure that is negative prior to the turn of the year and positive afterward. Cross-sectional regressions indicate that stock returns around the turn of the year, particularly for small firms, are related to net tax-loss buying pressure but not to firm size per se.

We show that estimating demand and supply elasticities at the opening stage of trading at the Tel Aviv Stock Exchange is highly sensitive to which of several reasonable measures is used. We find that the demand curve is more elastic than the supply curve and that both are much more elastic in their “executable” areas. The empirical evidence indicates that elasticity is increasing during the continuous stage of trading. We discuss methods of estimation of price impact and document that the actual measure of price impact in call auctions is larger and more permanent for buys than for sells.

We study the incentive effects of granting levered or unlevered stock to a risk-averse manager. The stock is granted by risk-neutral shareholders who choose leverage and compensation level. The manager applies costly effort and selects the level of volatility, both of which affect expected return. The results are driven by the attempt of the risk-neutral shareholders to maximize the value of their claims net of the compensation package. We consider a dynamic setting and find that levered stock is optimal for high-type managers, firms with high momentum, large firms, and firms for which additional volatility only implies a modest increase in expected return.

We examine the effect that an exogenously, specifically governmentally required change in compensation contract had on a managerial decision. We find that a group of mutual funds changed their portfolio risk levels after they were forced to change their performance fee schedules. Their portfolio risk choices differed predictably from a randomly selected group of nonperformance fee funds and a group of performance fee funds that were not required to change their compensation contracts. In addition, the affected mutual funds lost both shareholders and assets around the time of the imposition of the restriction while the other funds exhibited little change or gained assets and shareholders.

This article studies whether financial ratios like dividend yield can predict aggregate stock returns. Predictive regressions are subject to small-sample biases, but the correction used by prior studies can substantially understate forecasting power. I show that dividend yield predicts market returns during the period 1946–2000, as well as in various subsamples. Book-to-market and the earnings-price ratio predict returns during the shorter sample 1963–2000. The evidence remains strong despite the unusual price run-up in recent years.

This paper presents the theory that managers can use the liquidity of securities as a choice variable to screen for deep-pocket investors, those that have a low likelihood of facing a liquidity shock. We assume an information asymmetry about the quality of the manager between the existing investors and the market. The manager then faces a lemons problem when he has to raise funds for a subsequent fund from outside investors, because the outsiders cannot determine whether the manager is of poor quality or the existing investors were hit by a liquidity shock. Thus, liquid investors can reduce the manager's cost of capital in future fundraising. We test the assumptions and predictions of our model in the context of the private equity industry. Consistent with the theory, we find that transfer restrictions on investors are less common in later funds organized by the same private equity firm, where information problems are presumably less severe. Also, partnerships whose investment focus is in industries with longer investment cycles display more transfer constraints. Finally, we present evidence consistent with the assumptions of our model, including the high degree of continuity in the investors of successive funds and the ability of sophisticated investors to anticipate funds that will have poor subsequent performance.