[This paper examines the relationship between default probability and stock returns. Using the Expected Default Frequency (EDF) of Moody' s KMV, we document that higher default probabilities are not associated with higher expected stock returns. Within a model of bargaining between equity holders and debt holders in default, we show that the relationship between default probability and equity return is (i) upward sloping for firms where shareholders can extract little benefit from renegotiation (low "shareholder advantage") and (ii) humped and downward sloping for firms with high shareholder advantage. This dichotomy implies that distressed firms with stronger shareholder advantage should exhibit lower expected returns in the cross section. Our empirical evidence, based on several proxies for shareholder advantage, is consistent with the model's predictions.]

Abstract Using stock transactions data along with detailed stockholdings for a comprehensive sample of U.S. actively managed equity mutual funds from 1993 to 2002, this paper empirically examines the effect of liquidity and investment style on the relation between fund size and fund performance. Consistent with Chen, Hong, Huang, and Kubik (2004), I find a significant inverse relation between fund size and fund performance. Further, this inverse relation is stronger among funds that hold less liquid portfolios. The inverse relation between fund size and fund performance is also more pronounced among growth and high turnover funds that tend to have high demands for immediacy. Overall, this paper's findings suggest that liquidity is an important reason why fund size erodes performance.

Abstract This paper provides the first theoretical explanation and the first empirical analysis of contingent value rights (CVRs), which have been used as a means of payment in acquisitions, exchange offers, debt restructurings, Chapter 11 reorganizations, and lawsuit settlements. A CVR is a put option committing to pay additional cash or securities to CVR holders, contingent on the issuer's share price falling below a prespecified reference level. In this paper, we develop a model to show that CVRs can help a higher-intrinsic-value firm to reveal its firm type when the firm faces an asymmetric information problem. Our model predicts that i) when CVRs are offered along with cash or stock, the announcement period abnormal stock return is greater than that in stock offers, ii) firms facing more severe asymmetric information problems are more likely to offer CVRs to signal their firm type, and iii) firms that are relatively more cash-constrained are more likely to offer CVRs rather than cash. We test all three predictions using a sample of mergers and acquisitions. Our empirical results are consistent with the predictions of the model.

A large empirical literature has documented that firm-level differences in productivity, size, ownership status, and other characteristics are crucial to understanding differences in firms’ decisions to export. The evidence strongly supports the self-selection of more productive firms into export markets, but there has been more mixed evidence on the subsequent feedback effects of exporting on the future path of firm productivity. Several recent papers have introduced a new dimension into this export-productivity relationship: firm-level investments in productivity-enhancing activities such as R&D. James A. Costantini and Marc J. Melitz (2007), Alla Lileeva and Daniel Trefler (2007), and Paula Bustos (2006) explore the linkages between investments in innovation, productivity, and the decision to export in the context of the liberalization of trade regimes. Aw, Roberts, and Tor Winston (2007) have also found a significant role for firm R&D investments in explaining Taiwanese firm export patterns, as well as interaction effects between firm R&D and export choices in explaining productivity change. In this paper we summarize some empirical results from our research project to develop an estimable structural model of the joint exportinvestment decision. In the theoretical model, firms invest in R&D and physical capital, which can affect the path of future productivity for the firm. R&D investment, through its effect on future productivity, increases the profits from exporting, and participation in the export market raises the return to R&D investments. The theoretical model yields equations for the policy functions for R&D investment, physical investment, and the exporting decision, as well as the evolution of firm-level profitability, that can be estimated with micro datasets containing R&D Investments, Exporting, and the Evolution of Firm Productivity

This paper examines the relationship between default probability and stock returns. Using the Expected Default Frequency (EDF) of Moody's KMV, we document that higher default probabilities are not associated with higher expected stock returns. Within a model of bargaining between equity holders and debt holders in default, we show that the relationship between default probability and equity return is (i) upward sloping for firms where shareholders can extract little benefit from renegotiation (low “shareholder advantage”) and (ii) humped and downward sloping for firms with high shareholder advantage. This dichotomy implies that distressed firms with stronger shareholder advantage should exhibit lower expected returns in the cross section. Our empirical evidence, based on several proxies for shareholder advantage, is consistent with the model's predictions.

This paper examines the demand for directors’ and officers’ liability insurance (D&O insurance) by Chinese listed companies where controlling-minority shareholder incentive conflicts are acute due to the concentrated and split ownership structure. We hypothesize and find evidence that the incidence of seeking D&O insurance is positively related to the extent of controlling-minority shareholder incentive conflicts – a finding not previously documented in the literature. Using an event study, we find that the announcements of D&O insurance decisions in firms that engage in earnings management, and/or are controlled by a local government (such firms tend to have stronger incentives to tunnel), seem to have a negative wealth effect. In addition, the incidence of the D&O insurance decision is positively related to the proportion of independent directors and several litigation risk proxies. Therefore, the breakthrough in corporate governance and judicial reforms has created non-negligible perceived securities litigation risks in China.