Knowledge that Transforms

Building on two sources of exogenous shocks to analyst coverage (broker closures and mergers), we explore the causal effects of analyst coverage on mitigating managerial expropriation of outside shareholders. We find that as a firm experiences an exogenous decrease in analyst coverage, shareholders value internal cash holdings less, its CEO receives higher excess compensation, its management is more likely to make value-destroying acquisitions, and its managers are more likely to engage in earnings management activities. Importantly, we find that most of these effects are mainly driven by the firms with smaller initial analyst coverage and less product market competition. We further find that after exogenous brokerage exits, a CEO׳s total and excess compensation become less sensitive to firm performance in firms with low initial analyst coverage. These findings are consistent with the monitoring hypothesis, specifically that financial analysts play an important governance role in scrutinizing management behavior, and the market is pricing an increase in expected agency problems after the loss in analyst coverage.

We use intraday data to compute weekly realized moments for equity returns and study their time-series and cross-sectional properties. Buying stocks in the lowest realized skewness decile and selling stocks in the highest realized skewness decile generates an average return of 19 basis points the following week with a t-statistic of 3.70. This result is robust across a wide variety of implementations and is not captured by the Fama-French and Carhart factors. The relation between realized kurtosis and next week׳s stock returns is positive but not always significant. We do not find a strong relation between realized volatility and next week׳s stock returns.

Some mutual funds purchase stocks before dividend payments to artificially increase their dividends, which we call “juicing.” Funds paid more than twice the dividends implied by their holdings in 7.4% of fund-years examined. Juicing is associated with larger inflows, and is more common among funds with unsophisticated investors. This behavior is consistent with an underlying investor demand for dividends, but is hard to explain by taxes or need for income, as funds can generate equivalent tax-free distributions by returning capital. Juicing is costly to investors through higher turnover and increased taxes of 0.57% to 1.52% of fund assets per year.

Using staggered corporate income tax changes across U.S. states, we show that taxes have a first-order effect on capital structure. Firms increase leverage by around 40 basis points for every percentage-point tax increase. Consistent with dynamic tradeoff theory, the effect is asymmetric: leverage does not respond to tax cuts. This is true even within-firm: tax increases that are later reversed nonetheless lead to permanent leverage increases. The treatment effects are heterogeneous and confirm the tax channel: tax sensitivity is greater among profitable and investment-grade firms which respectively have a greater marginal tax benefit and lower marginal cost of issuing debt.

We investigate whether excess control rights of ultimate owners in pyramids affect banks׳ capital ratio adjustments. When control and cash flow rights are identical, to boost capital ratios banks issue equity without cutting lending. However, when control rights exceed cash flow rights, instead of issuing equity, banks downsize by reducing lending. Such a finding is mostly prevalent in countries with weak shareholder protection or for family-controlled banks. Other factors also explain the extent to which such banks reduce lending. Our findings contribute to the capital structure adjustment literature and have critical policy implications for the implementation of Basel III and the debate on capital requirements and bank lending.

We examine the relation between high frequency quotation and the behavior of stock prices between 2009 and 2011 for the full cross section of securities in the US. On average, higher quotation activity is associated with price series that more closely resemble a random walk, and significantly lower cost of trading. We also explore market resiliency during periods of exceptionally high low-latency trading: large liquidity drawdowns in which, within the same millisecond, trading algorithms systematically sweep large volume across multiple trading venues. Although such large drawdowns incur trading costs, they do not appear to degrade the price formation process or increase the subsequent cost of trading. In an out-of-sample analysis, we investigate an exogenous technological change to the trading environment on the Tokyo Stock Exchange that dramatically reduces latency and allows co-location of servers. This shock also results in prices more closely resembling a random walk and a sharp decline in the cost of trading.

Using a unique data set, I study how stock markets react to positive and negative events concerned with a firm׳s corporate social responsibility (CSR). I show that investors respond strongly negatively to negative events and weakly negatively to positive events. I then show that investors do value “offsetting CSR,” that is positive CSR news concerning firms with a history of poor stakeholder relations. In contrast, investors respond negatively to positive CSR news which is more likely to result from agency problems. Finally, I provide evidence that CSR news with stronger legal and economic information content generates a more pronounced investor reaction.

Studies of institutional monitoring focus on the fraction of the firm held by institutions. We focus on the fraction of the institution׳s portfolio represented by the firm. In the context of acquisitions, we hypothesize that institutional monitoring will be greatest when the target firm represents a significant allocation of funds in the institution׳s portfolio. We show that this measure is important in reconciling mixed findings for total institutional ownership in the prior literature. The results indicate that our measure of institutional holdings leads to greater bid completion rates, higher premiums, and lower acquirer returns. This empirical evidence provides support for theories predicting a beneficial effect of blockholders in monitoring the firm in general and in enhancing the gains to takeover targets in particular.

This study examines the effect of technology spillovers on firms׳ cash holdings. It finds that firms facing greater technology spillovers hold higher cash balances. This effect is more pronounced among financially constrained firms and for firms that are likely to benefit more from diffused technology, e.g., those that have newer patents, are more profitable, and face better growth opportunities. The spillover impact remains strong when product market competition and own-firm innovations are accounted for. Overall, our study identifies technology spillovers as an important factor in determining corporate cash policy.

Previous research indicates that firms issue shares when their stock is overpriced and repurchase shares when their stock is underpriced. Such transactions transfer wealth from transacting stockholders to ongoing stockholders. We quantify the magnitude of these wealth transfers and analyze their implications. Strikingly, we find that for the average firm-year, these wealth transfers approximate 40% of net income. We also find that these wealth transfers can be predicted using a variety of firm characteristics and that future wealth transfers are an important determinant of current stock prices.