Knowledge that Transforms

[I show that firms may optimally sell blocks of their own equity to other firms in anticipation of future corporate control activity. In the model, a target and one potential acquirer, who may also be an alliance partner, can negotiate before synergy values are learned. I find that equity implements an optimal mechanism, allowing the partners to extract surplus from outside bidders who may arrive later. The stake is limited by the outsiders' willingness to investigate. The results imply that corporate control may motivate an equity sale even when no takeover activity is apparent at the time or occurs ex post.]

[This article uses managerial control rights data for over 5000 firms from 31 countries to examine the net costs and benefits of cash holdings. We find that when external country-level shareholder protection is weak, firm values are lower when controlling managers hold more cash. Further, when external shareholder protection is weak we find that firm values are higher when controlling managers pay dividends. Only when external shareholder protection is strong do we find that cash held by controlling managers is unrelated to firm value, consistent with generally prevailing U.S. and international evidence.]

[In certain circumstances, insider trades such as private transactions between executives and their firms could be disclosed after the end of the firm's fiscal year, on a Form-5 filing. We find that insider sales disclosed in such a delayed manner for large firms are predictive of negative future returns (-6 to -8 percent), as well as lower future annual earnings relative to analyst forecasts. These results stand in contrast to existing findings on the uninformativeness of quickly disclosed open-market insider sales. The Sarbanes-Oxley Act curtailed the use of Form 5 under the presumption that managers used this vehicle opportunistically. Our systematic evidence supports this presumption.]

[This article applies the methodology of Bai and Ng (2002, 2004) for decomposing panel data into systematic and idiosyncratic components to both stock returns and turnover panels. This approach works well for both returns and turnover, despite the presence of severe heteroscedasticity and nonstationarity of individual stocks' turnover. We test the mutual fund separation model of Lo and Wang (2000). Trading due to systematic risk in returns can account for 66% of systematic turnover. Thus, portfolio rebalancing due to systematic risk is a very important motive for stock trading. Finally, several common turnover measures may understate the impact of stock trading.]

[This article investigates the dynamic relation between market-wide trading activity and returns in 46 markets. Many stock markets exhibit a strong positive relation between turnover and past returns. These findings stand up in the face of various controls for volatility, alternative definitions of turnover, differing sample periods, and are present at both the weekly and daily frequency. The relation is more statistically and economically significant in countries with high levels of corruption, with short-sale restrictions, and in which market volatility is high.]

[This article uses a unique option data set to provide detailed descriptive statistics on the purchased and written open interest and open buy and sell volume of several classes of investors. We also show that volatility trading through straddles and strangles accounts for a small fraction of option trading volume and presents evidence that a large percentage of call writing is part of covered call positions. Finally, we find that during the stock market bubble of the late 1990s and early 2000 the least sophisticated investors in the data set substantially increased their purchases of calls on growth but not value stocks.]

[We provide evidence that commercial banks extend their reputation in underwriting syndicated loans and private placements (private debt) to their bond-underwriting activities. In the absence of bond market reputation, private-debt-market reputation enables commercial banks to win underwriting mandates from their loan clients. Furthermore, it allows them to credibly commit to investors against opportunistically using lending information and thereby deliver superior certification benefits in the form of higher issue prices relative to investment-bank underwriters. This pricing benefit is not offset by higher underwriting fees and thus results in lower total issuance costs for borrowers.]

[We show that transactions accounts, by providing ongoing data on borrowers' activities, help financial intermediaries monitor borrowers. This information is most readily available to commercial banks, which offer these accounts and lending together. We find that (1) monthly changes in accounts receivable are reflected in transactions accounts; (2) borrowings in excess of collateral predict credit downgrades and loan write-downs; and (3) the lender intensifies monitoring in response. This is evidence on a key issue in financial intermediation-there is an advantage to providing deposit-taking and lending jointly. But this advantage may have fallen as the cost of communication has declined.]