This paper tests the relation between capital structure and a firm's response to short-term financial distress. In a sample of 358 firms that perform poorly for a year, higher predistress leverage increases the probability of operational actions, particularly asset restructuring and employee layoffs. Higher predistress leverage also increases the probability of financial actions such as dividend cuts. These results are consistent with Jensen's (1989) argument that higher predistress leverage increases the speed with which a firm reacts to poor performance. Interestingly, higher managerial holdings reduce the probability of operational actions, especially those that do not generate cash

Several recent papers present signaling models in which firms underprice their initial public offerings of equity (IPOs) so that they can subsequently issue seasoned equity at more favorable prices. We test the implications of these models. We find a positive relation between IPO underpricing and the probability and size of subsequent seasoned offerings. Although these results are consistent with the implications of the signaling hypotheses, the economic significance appears weak. We conduct additional tests to evaluate other explanations for these findings and find the alternatives more compelling

This paper empirically investigates the seasonal behavior of the liquidity premium in asset pricing. The evidence suggests a strong seasonal component. In the 1961–1990 period, the liquidity premium is reliably positive only during the month of January. For the non-January months, one cannot detect a positive liquidity premium. The impact of the relative bid-ask spreads on asset pricing in non-January months cannot be reliably distinguished from zero. In contrast to Amihud and Mendelson (1986), however, our evidence suggests that the size effect is significant, even after controlling for spreads

We investigate the value created through spinoffs over the 1965–1988 period by measuring the stock returns of spinoffs, their parent firms, and parent-spinoff combinations for periods of up to three years following the spinoffs. We find significantly positive abnormal returns for spinoffs, their parents, and the spinoff-parent combinations. Both the spinoffs and parents experience an unusually high incidence of takeovers and the abnormal performance is limited to firms involved in takeover activity. These findings suggest that spinoffs provide a low-cost method of transferring control of corporate assets to bidders who will create greater value.

This paper studies the effects of transaction taxes on the behavior of Swedish equity returns during the 1980–1987 period. Sweden provides an excellent laboratory-style setting for such a study, as taxes were imposed for political purposes rather than to alter the behavior of the stock market. Volatility did not decline in response to the introduction of taxes although stock price levels and turnover did. Large proportions of trading activity migrated overseas to London when the tax rate was increased to 2% in 1986

Rationing data for initial public offerings (IPOs) in the Finnish market make possible a test of Rock's (1986) winner's curse hypothesis. The evidence from 80 IPOs issued between 1984 and 1989 confirms the presence of the winner's curse: average returns adjusted for the bias in allocation are lower than average unadjusted returns. But the initial returns of these IPOs appear unrelated to lawsuit avoidance, as the sample firms seem unlikely to incur legal liabilities. In the long run, consistent with the evidence in the United States, the IPO firms substantially underperform the Helsinki Stock Exchange value-weighted index.

This paper reassesses the apparent systematic underpricing of initial public offerings (IPOs). Investigation of the distribution of initial returns following IPOs shows that positive mean initial returns may reflect the existence of a partially unobserved left (negative) tail. Moreover, most IPOs with zero one-day returns subsequently fall in price, suggesting that underwriter price support may account for the skewed distribution and hence the phenomenon of positive average initial IPO returns, even if offering prices are set at expected market value. This paper thus challenges the presumption underlying previous research that positive average initial IPO returns result primarily from deliberate underpricing

We evaluate the performance of alternative test statistics in event studies which include NASDAQ daily security returns. We document varying degrees of test statistic misspecification in NASDAQ samples. In particular, we find that the commonly used standardized test statistic is misspecified in most settings. Although less pervasive, misspecification is also evident in the portfolio test statistic estimated using the time series of portfolio mean abnormal returns. The nonparametric rank statistic [introduced in Corrado (1989)] performs the best overall in NASDAQ samples; we recommend its use with market model abnormal returns based on an equal-weighted NASDAQ market index.

This study examines price stabilization in new equity issues. Stabilizationtruncates the distribution of post-issue prices at a floor price, lowering the risk of adverse price moves and hence, in a competitive dealer market, reducing the bid-ask spread. Using 1.523 NASDAO-traded firm- commitment initial public offerings issued between 1982 and 1987, we find that spreads narrow when the market price is close to the offer price and stabilization is most likely. Moreover, significant negative returns are documented after the hypothesized termination of stabilizing activities, suggesting that stabilization, and its cessation, affect market prices.

The seemingly unrelated problems of stock market liquidity and manager-stockholder contracting are closely intertwined. Active stockholders who reduce agency costs by providing internal monitoring also reduce stock liquidity by creating information asymmetry problems. Conversely, stock liquidity discourages internal monitoring by reducing the costs of ‘exit’ of unhappy stockholders. The U.S. has exceptionally many actively-traded firms with widely-diffused stockholding because public policy has favored stock market liquidity over active investing. And, the benefits of stock market liquidity must be weighed against the costs of impaired corporate governance.