This paper analyzes informed trading in acquiring firms through (stock) merger announcements. We show that pre-announcement abnormal option volumes in acquiring firms strongly increase ahead of a stock merger (by approximately 300%). Furthermore, we show that the direction of option trades (puts or calls) prior to an announcement can predict post-announcement stock returns. Our results also indicate that higher wealth-to-performance sensitivities of top executives are related to higher abnormal put than call option trading before stock merger announcements. Overall, our results support the view that top executives have a hedging motive. They tend to purchase protection against, e.g., confounding (negative) information policies and/or empire-building mergers with negative NPVs, in order to avoid short-term salary losses (lower bonuses, lower stock options, etc.).

We analyze the impact of expected (targeted) capital structure decisions on information asymmetries. We measure information asymmetry from equity liquidity through the use of an information asymmetry index that is based on six measures that capture trading activity, trading costs, and the price impact of order flow. Modeling the joint determination of leverage and liquidity, the data indicate that expected increases in leverage (target leverage changes) decrease the information asymmetry index. This is consistent with the signaling hypothesis of Ross (1977), and is equivalent to increases in equity liquidity.

This paper investigates the performance of venture capital-backed (VC-backed) firms upon their exits through mergers with special purpose acquisition companies (SPACs) or “more traditional” initial public offerings (IPOs) during the recent SPAC wave. Compared to their IPO peers, VCbacked ventures merging with SPACs tend to exhibit smaller size, less current and analystprojected future profitability, and additional characteristics that indicate lower venture quality. Notably, SPACs merging with VC-backed ventures demonstrate significant underperformance relative to both SPACs merging with non-VC-backed companies and “standard” IPOs. This suggests that VCs may have exploited a relative lack of regulation and investor naivety. They may have presented their lower-quality ventures as appealing opportunities for mergers with SPACs, which resulted in their substantial underperformance.

This paper tests the idea that financial regulation can impact performance persistence in the context of the hedge fund industry in 48 countries over the years 1994–2008. The data show evidence of three types of regulation influencing performance persistence: (1) minimum capital restrictions, which restrict lower quality funds and hence increase the likelihood of performance persistence, (2) restrictions on location of key service providers, which restrict human capital choices and hence tend to mitigate performance persistence, and (3) distribution channels, which make fund performance more opaque, decrease the likelihood of performance persistence. We do not find evidence that distribution channels, that promote fund presence to institutional investors, enhance performance persistence. Finally, we show differences in the effect of regulation on persistence by fund quartile ranking.

Special Purpose Acquisition Companies (SPACs) are shells initiated with the sole intent of acquiring a single privately held company. SPAC shareholders vote on this acquisition, and in this paper we identify the factors that affect approval probability. Surprisingly, the data indicate more experienced managers and boards do not enhance the probability of deal approval. Similarly, glamor underwriters and larger underwriter syndicates are less likely to be associated with successful SPACs. Further, we find a negative relation between the presence of active investor (hedge funds and private equity funds) shareholdings in a SPAC and approval probability.

Portfolio optimization using private equity is typically based on one of three indices: listed private equity, transaction-based private equity, or appraisal value-based private equity indices. However, we show that none of these indices is fully suitable for portfolio optimization. We introduce here a new benchmark index for venture capital and buyouts, which is updated monthly, adjusted for autocorrelation (de-smoothing), and available contemporaneously. We illustrate how our benchmark enables superior quantitative portfolio optimization.

Numerous collapses and corporate scandals of large corporations have underscored the impact of corporate conduct on capital markets and society as a whole. These failures have highlighted the need for regulators to rethink regulatory frameworks and enforcement, and for corporations to rework their organizational structures and focus on business ethics. Establishing a clear understanding of the drivers of corporate failure is therefore key. In this paper, we review recent research that extends the debate on the causes and consequence of corporate failures.

Governments worldwide spend trillions of dollars on business support programs. This article examines the implications to investors of phasing out one of these subsidy programs. Our setting takes advantage of a unique quasi-natural experiment, where tax subsidies for Canadian Labour-Sponsored Venture Capital Corporations (LSVCCs) were phased out in one province but not in others. Using a difference-in-differences setting, we show that fund performance—unrelated to the tax credit—decreased substantially following the enactment of the phase-out. We further show empirically that LSVCC managers continued to charge venture capital-like management fees, despite the fact that their investment strategies become more similar to mutual funds. Our data strongly support the idea that investors in companies and/or funds that unexpectedly lose government support face significant financial costs.