We examine the risk-return characteristics of a rolling portfolio investment strategy where more than 6000 Nasdaq initial public offering (IPO) stocks are bought and held for up to 5 years. The average long-run portfolio return is low, but IPO stocks appear as “longshots”, as 5-year buy-and-hold returns of 1000% or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed “low-minus-high” (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristic-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.

To protect inframarginal rents, rivals react to competition shocks by increasing product differentiation or lowering costs by standardizing products and production processes. We test these two mutually exclusive reactions by exploiting changes in rivals’ idiosyncratic stock return comovement following significant tariff cuts. While increased product differentiation implies a reduction in return comovement, greater standardization implies the opposite (a comovement increase). Difference-in-differences (DID) tests indicate that tariff cuts cause a significant increase in return comovement—in particular among within-industry “followers.” Treatment effects on cash flows, product counts, similarity scores, and business segment counts further support cost-cutting strategies.

While there is growing evidence that stock prices do not follow pure random walks, the degree of existence of temporary components in stock prices is not well known. Modeling stock prices as the sum of a random walk and a general stationary (predictable) component, the paper proposes an estimable lower bound on the proportion of total stock return variance caused by the predictable component. Contrary to the absolute value of the first-order autocorrelation coefficient estimates of Fama and French (1988a), this lower bound reasonably estimates the true variance proportion in finite samples also when the temporary compo? nent does not follow a first-order autoregressive process. The estimated mean values of the lower bound reach a maximum of 10 percent for the equal-weighted market portfolio of NYSE stocks over the post-war period 1947-1986, while the maximum is 25 percent for the pre-war period 1926-1946. The value-weighted market portfolio exhibits generally smaller variance proportion estimates. The pure random walk hypothesis is also reexamined using a standard variance ratio statistic extended to multiple return horizons.

In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model restrictions using data from Canada, where mixed offers are both relatively frequent and free of the confounding tax-related options characterizing mixed offers in the United States. We find that the average announcement-month bidder abnormal return in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and nonlinear cross-sectional regressions fail to support the model predictions.

The market reaction to nonroutine trades by executives and directors is conventionally viewed as increasing in the market’s assessment of insider informativeness about firm value. Using the market reaction as our instrument, we test the proposition that female directors appointed after Norway’s pioneering board gender-balancing quota law exhibit a degree of informativeness similar to that of male directors. Consistent with this proposition, we first show that the average market reaction to female director purchases jumps from a prequota value of zero to a level similar to that of male directors. Second, the market reaction is increasing in the board’s director network connectivity (but not in director busyness). Third, regardless of gender, the positive post-quota market reaction to insider purchases does not translate into holding-period adjusted abnormal performance. Fourth, insider purchase activity by both male and female directors increases significantly during the year following the 2008 financial crisis (when boards were already gender-balanced). This gender-neutral increase in insider purchases caused by the exogenous market-wide stock price drop further suggests that female directors are as informed as their male counterparts about firm value.

We present unique empirical tests for auction overbidding using data from Sweden's auction bankruptcy system. The main creditor (a bank) can neither bid in the auction nor refuse to sell in order to support a minimum price. However, we argue that the bank may increase its expected revenue by financing a bidder in return for a joint bid strategy, and we show that the optimal coalition bid exceeds the bidder's private valuation (overbidding) by an amount that is increasing in the bank's ex ante debt impairment. We find that bank–bidder financing arrangements are common, and our cross-sectional regressions show that winning bids are increasing in the bank-debt impairment as predicted. While, in theory, overbidding may result in the coalition winning against a more efficient rival bidder, our evidence on post-bankruptcy operating performance fails to support such allocative inefficiency effects. We also find that restructurings by bank-financed bidders are relatively risky as they have greater bankruptcy refiling rates, irrespective of the coalition's overbidding incentive.

We present large sample evidence on the performance of domestic and U.S. (foreign) bid? der firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announce? ment returns are, on average, greatest for offers involving stock payment and for the bid? ders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.

We develop an analytical framework to explain firm's choice of equity flotation method and the near disappearance of rights offers by U.S. exchange-listed firms. The choice between uninsured rights, rights with standby underwriting, and firm-commitment underwriting depends on information asymmetries, shareholder characteristics, and direct flotation costs. Underwriter certification and current-shareholder takeup are viewed as substitute mechanisms for minimizing wealth transfers between shareholders and outside investors. Uninsured rights create adverse-selection effects when shareholder takeup is low. Implications for stock-price behavior around issue announcements, shareholder subscription precommitments, and relative issue frequencies are supported by large-sample evidence.

Event studies often include cross-sectional regressions of announcement effects on exogenous variables. If the event is voluntary and investors are rational, then standard OLS and GLS estimators are inconsistent. Consistent ML estimators are constructed for a cross-sectional model of horizontal mergers relating announcement effects to exogenous characteristics of firms and industries. The OLS and ML estimates differ dramatically for bidders but not for targets. The evidence suggests that managers of bidders, but not targets, have valuable private information about the potential synergies from proposed mergers.

The more the target knows about the bidder, the more difficult is paying the target with overpriced bidder shares. Thus, when bidders are opportunistic, the fraction of stock in the deal payment will be lower for better informed targets. We test this intuitive prediction against the alternative that stock payments primarily reflect bidder concerns with target adverse selection, which implies a greater fraction of stock in the deal payment for better informed targets. Discriminating between these two mutually exclusive and nested predictions requires measures of target information about the bidder but not of market mispricing. We find that public bidders systematically use more stock in the payment when the target knows more about the bidder. Tests exploiting exogenous variation in bidder market-to-book ratios also fail to support bidder opportunism. Finally, greater potential competition from private bidders is associated with greater propensity for public bidders to pay in cash.