We investigate the equity valuation effects of the Pension Protection Act of 2006 (hereafter PPA 2006). The PPA 2006 has two main provisions: (1) firms must fully fund their pension plans within seven years (previously allowed 30 years to fund 90 percent of the pension liability), and (2) firms receive a tax deduction for contributions up to 150 percent of the pension liability (previously 100 percent). After controlling for the effects of SFAS 158, growth opportunities, the cost of external funds and other information released during our sample period, we examine pension firms' abnormal returns surrounding key dates in the legislative process leading to the adoption of the PPA 2006. First, we find a mean negative abnormal return of -4.20 percent during the period in which the PPA 2006 was first voted on by Congress. The mean (median) firm in our sample experienced a $310 million ($60 million) decline in market capitalization. Second, we find that the valuation effect was more negative for firms with larger unfunded pension liabilities and larger capital expenditure requirements, while firms with higher marginal tax rates experienced a positive effect. Third, we find no evidence of differential valuation effects for firms in different at risk categories as defined by the PPA 2006. Finally, we find a significant number of pension freezes occurred during our sample period. Our results are stronger when excluding these firms from our sample.

Les auteurs étudient les répercussions de la Pension Protection Act de 2006 (PPA 2006) sur la valeur boursière des actions. La PPA 2006 contient deux dispositions principales : 1) les entreprises doivent assurer la capitalisation intégrale de leur régime de retraite en sept ans (alors qu’une période de trente ans leur était auparavant accordée pour capitaliser 90 pour cent de leur passif au titre du régime) et 2) elles peuvent se prévaloir d’une déduction fiscale à l’égard des cotisations à concurrence de 150 pour cent du passif au titre du régime (alors que le plafond de la déduction était antérieurement de 100 pour cent). Une fois contrôlés l’incidence de la norme SFAS 158, les possibilités de croissance, le coût du financement externe et les autres informations publiées au cours de la période d’échantillonnage, les auteurs examinent les rendements anormaux des entreprises ayant un régime de retraite, à proximité des dates marquantes du processus législatif ayant menéà l’adoption de la PPA 2006. Premièrement, ils observent un rendement anormal moyen négatif de – 4,20 pour la période au cours de laquelle la PPA 2006 a fait l’objet d’un premier vote au Congrès. La capitalisation boursière de l’entreprise moyenne (médiane) de l’échantillon a enregistré un déclin de 310 millions de dollars (60 millions de dollars). Deuxièmement, les auteurs constatent que les répercussions sur la valeur boursière sont plus négatives dans le cas des entreprises présentant des passifs non capitalisés plus importants au titre du régime et devant faire face à des dépenses en immobilisations plus substantielles, alors que les entreprises dont les taux d’imposition marginaux sont plus élevés enregistrent des répercussions positives. Troisièmement, les auteurs ne relèvent aucun élément permettant d’affirmer que les répercussions sur la valeur boursière varient selon les différentes catégories de risque définies par la PPA 2006. Enfin, ils recensent un nombre appréciable de cas de blocage du régime au cours de la période soumise à l’étude. Les résultats sont plus marqués encore lorsque ces entreprises sont retirées de l’échantillon.

In this paper we report the results of two experimental studies designed to test how demographic characteristics affect outsiders' assessments of a firm's top managers. We draw on theories of evaluation and status characteristics to examine the interactive effects of managers' racial characteristics and educational prestige on external perceptions. In the first study, we find that top executives' educational background and race affected analysts' valuation of a firm's stock. Outside analysts made the highest stock price projections for firms led by white executives who had highly prestigious educational backgrounds but made the lowest valuations for firms led by African Americans with the same prestigious education. We posit that the moderating effect of executives' racial characteristics stems from outsiders' assumptions that African American managers received preferential treatment in the admissions process for high prestige universities. In the second study, we find that when we explicitly removed the possibility of preferential selection, analysts gave the same stock valuation to firms led by white and African American executives with high educational prestige. We discuss the implications of these findings for theory and management.

Assuming that firms’ suppliers are better able to extract value from the liquidation of assets in default and have an information advantage over other creditors, the paper derives six predictions on the use of trade credit. (1) Financially unconstrained firms (with unused bank credit lines) take trade credit to exploit the supplier's liquidation advantage. (2) If inputs purchased on account are sufficiently liquid, the reliance on trade credit does not depend on credit rationing. (3) Firms buying goods make more purchases on account than those buying services, while suppliers of services offer more trade credit than those of standardized goods. (4) Suppliers lend inputs to their customers but not cash. (5) Greater reliance on trade credit is associated with more intensive use of tangible inputs. (6) Better creditor protection decreases both the use of trade credit and input tangibility.

In this paper we develop an index and an indicator of productivity change that can be used with negative data. For that purpose the range directional model (RDM), a particular case of the directional distance function, is used for computing efficiency in the presence of negative data. We use RDM efficiency measures to arrive at a Malmquist-type index, which can reflect productivity change, and we use RDM inefficiency measures to arrive at a Luenberger productivity indicator, and relate the two. The productivity index and indicator are developed relative to a fixed meta-technology and so they are referred to as a meta-Malmquist index and meta-Luenberger indicator. We also address the fact that VRS technologies are used for computing the productivity index and indicator (a requirement under negative data), which raises issues relating to the interpretability of the index. We illustrate how the meta-Malmquist index can be used, not only for comparing the performance of a unit in two time periods, but also for comparing the performance of two different units at the same or different time periods. The proposed approach is then applied to a sample of bank branches where negative data were involved. The paper shows how the approach yields information from a variety of perspectives on performance which management can use.

We examine how buyout activity and deal characteristics drive bondholder returns and the wealth transfer effects between bondholders and stockholders in going private transactions from 1981 to 2006. We find that various deal characteristics are major determinants of the cross-sectional variation in bondholder returns. In particular, a single private equity acquirer mitigates bondholder losses. On the other hand, bondholders have larger losses when a reputable buyout firm is involved in the deal. Bondholders experience losses in the 1980s and 2000s, but enjoy gains in the 1990s. Our findings remain robust to consideration of deal financing, relative cost of credit, and level of market overheating. We find a negative and significant relationship between stockholder and bondholder wealth effects, which supports the wealth transfer hypothesis.

ABSTRACT: We document the first systematic evidence on the characteristics and economic consequences of firms subject to employee allegations of corporate financial misdeeds. First, compared to a control group that avoided public whistle-blowing allegations, firms subject to whistle-blowing allegations were characterized by unique firm-specific factors that led employees to expose alleged financial misdeeds. Second, on average, whistle-blowing announcements were associated with a negative 2.8 percent market-adjusted five-day stock price reaction; this reaction was especially negative for allegations involving earnings management (−7.3 percent). Third, compared to a control group that exhibits similar characteristics, firms subject to whistle-blowing allegations were associated with further negative consequences including earnings restatements, shareholder lawsuits, and negative future operating and stock return performance. Finally, whistle-blowing targets exposed by the press were more likely to make subsequent improvements in corporate governance. Our results suggest whistle-blowing is far from a trivial nuisance for targeted firms, and on average, appears to be a useful mechanism for uncovering agency issues.

We extend the benchmark nonlinear deterministic volatility regression functions of Dumas et al. (1998) to provide a semi-parametric method where an enhancement of the implied parameter values is used in the parametric option pricing models. Besides volatility, skewness and kurtosis of the asset return distribution can also be enhanced. Empirical results, using closing prices of the S&P 500 index call options (in one day ahead out-of-sample pricing tests), strongly support our method that compares favorably with a model that admits stochastic volatility and random jumps. Moreover, it is found to be superior in various robustness tests. Our semi-parametric approach is an effective remedy to the curse of dimensionality presented in nonparametric estimation and its main advantage is that it delivers theoretically consistent option prices and hedging parameters. The economic significance of the approach is tested in terms of hedging, where the evaluation and estimation loss functions are aligned.

Empirical research on strategic alliances has focused on the idea that partners are selected on the basis of social capital considerations. In this paper we emphasize instead the role of complementary knowledge stocks and knowledge dynamics, which have received surprisingly limited attention relative to social capital as forces behind the formation and dynamics of innovation networks. To marshal evidence in this regard, we design a simple model of partner selection in which firms ally for the purpose of learning and innovating, and in doing so create an industry network. We abstract completely from network-based structural and strategic motives for partner selection and focus instead on the idea that firms' knowledge bases must “fit” for joint learning and innovation to be possible, and thus for an alliance to be feasible. The striking result is that, despite containing no social capital considerations, this simple model replicates the firm conduct, network structure, and contingent effects of network position on performance observed and discussed in the empirical literature.

We conduct an experiment to evaluate why individuals invest in high-fee index funds. In our experiments, subjects allocate $10,000 across four S&P 500 index funds and are rewarded for their portfolio's subsequent return. Subjects overwhelmingly fail to minimize fees. We can reject the hypothesis that subjects buy high-fee index funds because of bundled non-portfolio services. Search costs for fees matter, but even when we eliminate these costs, fees are not minimized. Instead, subjects place high weight on annualized returns since inception. Fees paid decrease with financial literacy. Interestingly, subjects who choose high-fee funds sense they are making a mistake.