Distracted institutional shareholders and debt maturity
Adrian (Wai Kong) Cheung, Joye Khoo, Rui Wang

We examine whether institutional shareholders’ distraction affects corporate debt maturity decisions. We find that firms with distracted shareholders are associated with lengthened debt maturity. The effect becomes stronger for firms with high information asymmetry or those with high levels of financial constraint. When distraction is high and debt maturity is low, firms hold more cash and use that cash in value-destroying acquisitions. This supports the prevalence of agency problems when institutional shareholders are distracted. The impact of distraction is persistent and affects the debt maturity decision in the future. Our findings are robust to endogeneity and other concerns.
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Model for optimizing lender’s decision on dealing with collateral of defaulted mortgage
Shu Ling Chiang, Ming Shann Tsai

In this article, we describe a comprehensive model for obtaining a critical gross recovery rate (GRR) for the short sale of a defaulted mortgage. Our model includes the following factors: settlement period, settlement cost, discounted sale/auction price, opportunity cost, failure probability of the short sale, and lender’s willingness for the short sale. The results show that using the short sale yields a lower settlement cost, shorter settlement period, but higher loss given default (LGD). The real GRR of a short sale is about 8%–9% less than the critical GRR calculated from our model. This means the lender’s willingness for the short sale is high in reality. The sensitivity analyses show that the lender’s likelihood of approving a short sale is low if the settlement cost, contract rate, interest rate, and failure probability of the short sale are high. The greater the expected LGD of a foreclosure, the stronger the lender’s willingness to approve the short sale. Also, a higher GRR of short sale leads to a lower expected LGD of short sale. This increases the probability of approval for the short sale. Finally, the Home Affordable Foreclosure Alternatives (HAFA) program helped struggling homeowners successfully use a short sale as an alternative to foreclosure, but the HAFA program became less effective as housing prices went up. Our model and analyses should help lenders make the optimal decision about how to efficiently deal with the collateral from a defaulted mortgage to mitigate their LGD.
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The threat of voiced shareholder disapproval and the value of voting
Justin Balthrop, Jonathan Bitting

We study how granting shareholders an advisory compensation vote affects the subsequent demand for shareholder voting rights. We find that the voting premium decreases when shareholders are given the right to disapprove firm compensation plans, consistent with shareholders preemptively negotiating concessions, which results in a diminished need to use their votes. Potential concessions extend beyond compensation; firms that experience a decrease in voting premiums also experience changes to investment and dividend policy, as well as the number of independent directors. The same firms experience positive abnormal stock returns over the following year.
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Organizational capital and private placements of common equity
Oneil Harris, Thanh Ngo

We examine the impact of organizational capital (OC) on the performance of firms that engage in private equity placements. We document larger discounts in stock sales where issuers have more OC, which suggests that private equity investors demand a higher risk premium to compensate for OC risk. We also find the private placements completed by high-OC issuers elicit more favorable announcement-period returns and superior postissue performance than those completed by low-OC issuers. These findings are consistent with the certification hypothesis and support research showing that OC improves firm efficiency and productivity. Our study sheds light on the importance of OC as a determinant of issuer outcome in private stock sales. Overall, our empirical results imply that OC reflects value-relevant information that is consistent with certification benefits.
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Estimating background risk hedging demands from cross-sectional data
James Brugler, Joachim Inkmann, Adrian Rizzo

Based on a theory of portfolio choice with non-tradable assets, we estimate hedging demands due to background risks before and after the Great Recession for U.S households. Hedging demands related to human capital, residential property and business assets reduce financial risk-taking, but these effects decline over the Great Recession, as does expected risk-adjusted stock market performance. We also estimate the appropriate discount rate to compute the risk-adjusted value of human capital, which declines by around eight percent over the period. Unlike previous literature requiring panel data with large time dimensions, our approach only requires cross-sectional data to identify hedging demands.
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Time-series factor modeling and selection
Michael Michaelides

The article proposes a statistical time-series factor model that incorporates deterministic orthogonal trend polynomials. Such polynomials allow capturing variation in returns without initially identifying a set of robust time-series factors. This modeling approach can serve as a coherent basis for testing and selecting the most relevant factors among a set of possible ones. Additionally, it can help identify whether any factors are missing from a time-series asset pricing model. The use of the proposed model and empirical strategy is illustrated by two empirical applications from the literature, yielding results related to the Fama-French five-factor model and the factor zoo.
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Social connections and information leakage: Evidence from target stock price run-up in takeovers
Iftekhar Hasan, Lin Tong, An Yan

Does information leakage in a target’s social networks increase its stock price prior to a merger announcement? Evidence reveals that a target with more social connections indeed experiences a higher pre-announcement price run-up. This effect does not exist during or after the merger announcement, or in windows ending two months before the announcement. It is more pronounced among targets with severe asymmetric information, and weaker when the information about the upcoming merger is publicly available prior to the announcement. It is also weaker in expedited deals such as tender offers.
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Personal connections, financial advisors, and M&A outcomes
Dobrina Jandik, Tomas Jandik, Weineng Xu

Personal connections (based on prior employment, educational, or social club membership overlaps) between top executives and board members of the bidding firm and those of the bidder financial advisor affect Mergers and Acquisition (M&A) outcomes. M&A deals where bidder top managers share past personal work-related connections with their advisors are associated with 1.7% lower bidder announcement returns compared to the returns for deals without such connections. We also show M&A deals advised by personally connected financial advisors are more likely to be completed but take longer to get finalized. Last, when connections exist, the bidder CEO receives a higher cash bonus upon completion of the deal, and the financial advisors are rewarded by higher advisor fees. Overall, our findings suggest that personal connections between bidders and their financial advisors could be detrimental.
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Foreign corporations as large shareholders
Fuxiu Jiang, Kenneth A. Kim, John R. Nofsinger, Bing Zhu

In this article, we examine foreign corporate shareholders in China. We find that they play an active and effective corporate governance role that improves firm performance. The results are robust to tests that address endogeneity, selection bias, and direction-of-causality concerns. The methods for which foreign corporations exert effective oversight are identified: (1) they actively and effectively monitor firms (i.e., they are more likely to fire [reward] managers for poor [good] firm performance), (2) they invest more in innovation, (3) they are better at selecting investment projects, and (4) they help generate more foreign sales.
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The taxonomy of tail risk
Evarist Stoja, Arnold Polanski, Linh H. Nguyen

We use tail events at different levels of severity to define an asset’s tail risk and to decompose the latter into a systematic and an idiosyncratic component. The systematic component captures an asset’s tendency to experience joint tail losses with the market and generalizes a classic tail dependence coefficient. However, the idiosyncratic component consists of two parts: idiosyncratic tail risk that leads to asset-specific tail losses and tail risk cushioning that dampens the tail losses emanating from the market. Tail risk cushioning is a novel concept that arises naturally in our framework, is consistent with the previous two and completes the taxonomy of tail risk. We examine the performance of our tail risk decomposition on a large dataset, confirming some previous results on tail risk and uncovering new theoretical and empirical findings.
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Artificial intelligence innovation and stock price crash risk
Junru Zhang, Chen Cui, Chen Zheng, Grantley Taylor

This study examines the association between artificial intelligence innovation (AII) and stock price crash risk (SPCR). AII serves as a governance mechanism that can bolster strength in internal controls, leading to increased financial transparency and thereby reducing the likelihood of future SPCR. The results hold after accounting for possible endogeneity issues Further, we find that monitoring through corporate governance mechanisms, level of following by equity analysts, and the reduced information asymmetry constitute important channels that mediate the association between AII and SPCR. Additionally, the relationship between AII and SPCR varies across corporate life cycle stages and workplace culture.
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Mutual fund partial liquidation and future performance
George Jiang, Ping McLemore, Ao Wang

We examine the determinants of mutual fund partial liquidation and the effect of a negative shock to fund size on performance. We find that older funds from a smaller family with a large number of share classes are more likely to conduct partial liquidation. As fund size decreases after partial liquidation, its performance improves. This effect is more pronounced for funds with stronger pre-event liquidity constraint and funds that subsequently experience a larger decrease in liquidity, suggesting that liquidity constraint is a contributing factor of fund performance. These findings are consistent with mutual funds having decreasing returns to scale.
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Insider trading restriction enforcement, investor protection, and innovation
D. Brian Blank, Jiawei Chen, Valeriya Posylnaya

US Securities and Exchange Commission (SEC) enforcement actions are intended to protect investors and limit expropriation by firm insiders, but these SEC actions could affect insiders’ incentives to contribute to value-enhancing activities. Therefore, we explore how corporate innovation and performance respond to insider trading restrictions imposed by regulators and firms. Using manually collected data on SEC indictments against corporate insiders, we document more innovative activity following external insider trading restrictions. External restrictions are also followed by higher corporate investment, capital access, and operating performance. Similarly, internal blackout restrictions to insider trading are linked to more innovation as well. We use SEC and congressional rule changes as quasi-natural experiments resulting in shocks in enforcement and indictments for identification and inference. Our results suggest insider trading restrictions and enforcement actions affect subsequent firm activities and managerial decisions by protecting outside investment, resulting in more investment in innovation.
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Do traders overweight experience from first movers?
Naomi Boyd, Shenru Li

We examine empirically how trading by peers on a new platform influences others’ adoption decisions. We model the adoption process and find the relation to be U-shaped, with first movers greatly discouraging their peers from adoption and late movers slightly discouraging or encouraging their peers. Further analysis shows that the U-shape is explained by social transmission bias rather than profitability.
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Treasury auction method and underpricing: Evidence from Iceland
Antoine Noel, Mark Wu

The Central Bank of Iceland replaced the discriminatory method used for auctioning treasury securities with the uniform-price method in 2009. We analyze underpricing before and after this institutional reform with a sample of 516 auctions organized from 2000 to 2018. After controlling for auction characteristics and financial market conditions, we find that underpricing is lower under the uniform-price method. However, this underpricing decline does not translate into a reduction in sovereign issuance cost. The emergence of overpricing, observed in the late part of our sample, coincides with the growing importance of commissions paid to primary dealers. Our results provide practical implications for governments, regulators, and market participants.
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The impact of changing disclosure requirements, competition, and private capital on firm exit methods and premiums
James C. Brau, Ninon K. Sutton, Qiancheng Zheng

Changing disclosure requirements and the evolution of US markets in the 21st century have created historic shifts in the exit strategies and payoffs for private firms. The propensity to sell to an acquirer has dominated firm exits in recent decades, especially for smaller private firms in highly concentrated industries. Exceptions to the merger exit preference are venture capital-backed firms, which exhibit an enduring preference for IPOs, likely due to the reputation effects associated with this strategy. While the premium for IPO exits has exceeded that for M&A exits in the past, we document a reversal in this pricing trend: in more recent years firms that sell out earn higher risk-adjusted premiums than firms that conduct IPOs. Our empirical tests examine potential drivers of this effect. We believe we are the first to document this reversal in the economics of the exit decision.
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