Knowledge that Transforms

This article examines late trade reporting on the Nasdaq National Market System. A substantial number of trades are reported out-of-sequence on both absolute levels and relative to the combined centralized exchanges. We find minimal support for NASD permitted reasons for the late trade reporting. Evidence suggests that market makers could use late trade reporting to manage the release of information. This evidence is consistent with the hypothesis that the delayed reporting of trades is neither a random occurrence nor fully explainable by factors outside the market maker's control.

We study the shareholder wealth effects of 270 proxy contests for board seats in the 1979–1994 period. We find that proxy contests create value, with the bulk of the wealth gains stemming from firms that are acquired. Restricting analysis to firms listed on Compustat imparts a downward bias on estimated wealth effects because such a restriction excludes a sizable fraction of the firms acquired during the proxy contest. For firms that are not acquired, the occurrence of management turnover has a significant, positive effect on shareholder wealth because firms replacing management are more likely to restructure following the contest.

Going public is a complex process with distinct markets for dispersed shares and controlling blocks. It is important to design the sale of new shares with the final ownership structure in mind. An optimal strategy for going public starts with the IPO, which is particularly suited for the sale of dispersed holdings to small and passive investors. The marketing of potentially controlling blocks to active investors should occur subsequently. We develop a framework for evaluating alternative methods of sale and show that discriminating in favor of active investors can raise the market value of the firm for all shareholders.

In theory, hedging restrictions faced by managers make executive stock options more difficult to value than ordinary options, because they imply that exercise policies of managers depend on their preferences and endowments. Using data on option exercises from 40 firms, this paper shows that a simple extension of the ordinary American option model which introduces random, exogenous exercise and forfeiture predicts actual exercise times and payoffs just as well as an elaborate utility-maximizing model that explicitly accounts for the nontransferability of options. The simpler model could therefore be more useful than the preference-based model for valuing executive options in practice.

We investigate the nature of volatility linkages in the stock, bond, and money markets. We develop a simple model of speculative trading that predicts strong volatility linkages in these markets due to common information, which simultaneously affects expectations across markets, and information spillover caused by cross-market hedging. To measure these linkages, we estimate a stochastic volatility representation of our trading model using GMM. The results indicate that our specification explains many of the observed characteristics of the data, and that the volatility linkages between the three markets are indeed strong. Moreover, we find that the linkages have become stronger since the 1987 stock market crash.

From 1863–1935, regulators imposed contingent liability on bank shareholders to discourage risk taking. Using data from 1900 to 1915, I find that banks subject to stricter liability rules have lower equity and asset volatility, hold a lower proportion of risky assets, and are less likely to increase their investment in risky assets when their net worth declines, consistent with the hypothesis that stricter liability discourages commercial bank risk taking. These findings provide lessons for current bank regulatory policy and show that the shape of the residual claimant's payoff function has a significant impact on managerial incentives and firm performance.

This paper uses a methodology robust to recent criticisms of standard long-horizon event study tests to show that bidders in mergers underperform while bidders in tender offers overperform in the three years after the acquisition. However, the long-term underperformance of acquiring firms in mergers is predominantly caused by the poor post-acquisition performance of low book-to-market “glamour” firms. We interpret this finding as evidence that both the market and the management overextrapolate the bidder's past performance (as reflected in the bidder's book-to-market ratio) when they assess the desirability of an acquisition.

This paper examines the relation among ownership structure, investment, and corporate value, focusing on whether ownership structure affects investment. Ordinary least squares regression results suggest that ownership structure affects investment and, therefore, corporate value. However, simultaneous regression results indicate that the endogeneity of ownership may affect these inferences, suggesting that investment affects corporate value which, in turn, affects ownership structure. The evidence shows that corporate value affects ownership structure, but not vice versa. These findings raise questions regarding the assumption that ownership structure is exogenously determined, and bring into question the results in studies that treat ownership structure as exogenous.

Several studies hypothesize a relation between board size and financial performance. Empirical tests of the relation exist in only a few studies of large U.S. firms. We find a significant negative correlation between board size and profitability in a sample of small and midsize Finnish firms. Finding a board-size effect for a new and different class of firms affects the range of explanations for the board-size effect.

To investigate CEOs' incentives to liquidate their firms, we examine the effects of insider ownership and compensation in stock options on 30 voluntary liquidation decisions by industrial firms in the period 1975–1986. We find that liquidation decisions are influenced by CEO incentive plans and increase shareholder value. Firms with more outside board members, smaller market-to-book ratios, and attempts by outsiders to gain control are more likely to be liquidated. Although few top executives of liquidating firms subsequently take comparable jobs, at least 41% of CEOs who downsize are made better off by liquidation.