Recent increases in stock repurchases among U.S. corporations coupled with a historically low cost of debt since the Global Financial Crisis has created media speculation that firms in recent years are paying for their expanding share buyback programs with debt. Repurchasing stock by increasing leverage, instead of using internal funds, implies that managers may speculate on current low interest rate environments at the expense of shareholders. Recent studies find that stock repurchases are associated with reductions in future firm employment and investments such as capital expenditures and research and development expenses. This study expands on prior studies by evaluating how debt-financed stock repurchases affect firm investment, investigating the likelihood of these repurchases in low interest rate environments and assessing the effects on firm value. Results confirm that, in recent years, debt-financed repurchases have increased substantially and the probability of debt-financed repurchases increases in the presence of low interest rates. This relationship is especially pronounced in the years following the Global Financial Crisis. Debt-financed repurchases are associated with small reductions in firm investment; however, these reductions are significantly less after adjusting for industry conditions. Finally, there is little evidence that the method of financing repurchases affects firm value nor does it …

My dissertation consists of two essays on CFOs' promotion-based tournament incentives and performance-based equity incentives. The first essay examines the joint implications of CFOs' tournament incentives and equity incentives for firms' risk-taking. With the pay gap between the CEO and the CFO as the proxy for the CFO's tournament incentives, I find that the relationship between a firm's risk taking and the CFO's tournament incentives is non-monotonic. In particular, I show that below a certain level, increase in pay gap is associated with increase in firm risk taking (e.g., higher leverage, lower cash holding balance and higher R&D intensity). However, after reaching a certain level, the CEO-CFO pay gap negatively impacts risk-taking, as increase in pay gap is associated with lower leverage, higher cash holding balance and lower R&D intensity. With the CFO's pay-performance sensitivity as the proxy for the CFO's equity incentives, I find that the CFO's equity incentives negatively impact firm's R&D intensity, but have no significant impact on broader financial decisions such as capital structure and cash policy. Collectively, my findings indicate that CFO incentives play an important role in firm's risk-taking behaviors, and the effect of the CFO's tournament incentives is more pronounced. The second essay …

Do firms with higher levels of innovation output, measured by patent counts and citations, enjoy lower costs of funds? The process to develop and apply for patents involves valuable resources. Thus, applying for a patent is a credible signal that the underlying invention is valuable. This value is validated to some degree when the patent is granted. In addition, patents contain detailed information about the firm's inventions and provide collateral value as they can be sold and licensed. The number of citations a firm receives act as a proxy for high-quality inventions, active networking, and pioneering. These attributes are expected to attract investors and reduce the cost of funds. Univariate and cross-sectional regression analyses of a sample consisting of 404,595 firm-years, involving firms from twenty-eight countries spanning from 1976 to 2012, demonstrate a significant negative association between innovation output and the cost of funds. The evidence suggests that the marginal benefit of innovation diminishes as innovation output increases. The results are robust to different measures of the cost of equity and the cost of debt. The negative association between the cost of equity and innovation output is economically larger for younger and smaller firms. The long-term level of innovation seems …

Informed traders trade options on underlying securities to lower transaction costs and increase financial leverage for price trend and variance strategies. Options markets play a significant role in price discovery by incorporating private information about future prices for an underlying security into option prices. I generate a new model-free volatility measure to calculate the "distance from arbitrage bounds" from minute-by-minute option series for the S&P 500 index and 30 individual underlying stocks. These iron butterfly arbitrage bounds (IBBs) use intraday call and put option prices from the Bloomberg database. Narrow and wide IBBs are expected to reveal the options market valuation of volatility by market participants. Data series is gathered by using successive one-minute intervals from the Bloomberg database. The data comprise the most recent bid and ask option prices and volumes. I collect S&P 500 index values and index options and use 30 underlying stock prices and option prices for the contracts that have the largest option trading volume during the sampling interval. These bid and ask prices reflect the information generated by intraday price pressures implied by S&P 500 index options or stock options. Consistent with the option micro-structure literature, I find that the IBB measure for actively …

Since Engle and Granger formulated the concept of cointegration in 1987, the literature has extensively examined the unbiasedness of the commodity futures prices using the cointegration-based technique. Despite intense attention, many of the previous studies suffer from the contradicting empirical results. That is, the cointegration test and the stationarity test on the differential contradict each other. In marked contrast, my dissertation develops the no-arbitrage cost-of-carry model in the NYMEX light sweet crude oil futures market and tests stationarity of the spot-futures differential. It is demonstrated that the primary cause of the "cointegration paradox" is the model misspecifications resulting in omitted variable bias.

This dissertation comprises of three related essays in regard of puzzling negative book equity phenomenon among U.S. public firms. In essay 1, I present the evidence that there is an increasing trend of negative book equity firms over the past 50 years, from 0.3% up to over 5% among publicly traded firms in US. In contrast to previous research which generally classify these firms as distressed firms with highly likelihood of bankruptcy, I propose a new method to separate Healthy Negative Book Equity Firms (HNBEF) from relatively more distressed negative book equity firms. The results show that HNBEF have much higher net income and interest coverage ratio, they survive longer, and pay more dividends. More interestingly, these firms are often actively increase share repurchases and debt issuance. These facts, combined with their strong profitability, indicate that managers of these firms are actively increasing their leverage and choose to be negative book equity firms. To explain the existence of HNBEF, in essay 2, I investigate several possible reasons that may contribute to the extreme leverage of these firms. I find that HNBEF are substantially undervalued by their book assets as stated on the balance sheet. In addition, the value of intangible …

The purpose of this paper is to investigate the effect of the "limits of arbitrage" on securities mispricing. Specifically, I investigate the effect of the availability of substitutes and financial constraints on stock mispricing. In addition, this study investigates the difference in the limits of arbitrage, in the sense that it will lead to lower mispricing for these stocks, relative to non-S&P 500 stocks. I also examine if the lower mispricing can be attributed to their lower limits of arbitrage. Modern finance theory and efficient market hypothesis suggest that security prices, at equilibrium, should reflect their fundamental value. If the market price deviates from the intrinsic value, then a risk-free profit opportunity has emerged and arbitrageurs will eliminate mispricing and equilibrium is restored. This arbitrage process is characterized by large number of arbitrageurs which have infinite access to capital. However, a better description of reality is that there are few numbers of arbitrageurs to the extent that they are highly specialized; and they have limited access to capital. Under these condition arbitrage is no more a risk-free activity and can be limited by several factors such as arbitrage risk and transaction costs. Other factors that are discussed in the literature …

Issuers’ credit ratings change by one or more notches when credit rating agencies provide new ratings. Unique to the literature, I study the influences affecting multi notch versus single notch rating upgrades and downgrades. For Standard & Poors data, I show that rating changes with multiple notches provide more information to the market than single notch rating changes. Consistent with prior literature on the business cycle, I show that investors value good news rating changes (upgrades) more in bad times (recession) and that investors value bad news rating changes (downgrades) more in good times (expansion). I model and test probit models using variables capturing the characteristics of the previous issuer’s credit rating, liquidity, solvency, profitability, and growth opportunity to determine the classification of single notch versus multi notch rating changes. The determinants of multi notch versus single notch rating changes for upgrades and downgrades differ. Business cycle influences are evident. Firms that have multi notch rating upgrades and downgrades have significantly different probit variables vis-à-vis firms that have single notch rating upgrades and downgrades. The important characteristics for determining multiple notch upgrades are a firm’s prior rating change, prior rating, cash flow, total assets and market value. The important characteristics …

This study examines the comparative magnitude of disturbances in intraday data for exchange traded foreign exchange (FX) options. An in-depth time series analysis on the frequency and extent of discrepancies in the disturbances is conducted. The purpose of this study is twofold. First, using intraday data and trading volume, this study attempts to determine whether both put-call parity and lower boundary conditions consistently hold for exchange traded options written on U.S. dollar denominated options on the Euro trading on the Philadelphia Stock Exchange (PHLX). Second, this study attempts to investigate the magnitude of any discrepancies that may exist due to a temporary cessation of either put-call parity or lower boundary conditions. Intraday (tick-by-tick) bid prices, ask prices, and trading volume on U.S. dollar denominated European style call options and put options on the Euro are obtained. Option data is collected through a Structured Query Language (SQL) request from the Bloomberg database. Corresponding tick-by-tick spot rates for the underlying exchange rate are obtained for the same time period. Tick-by-tick 3-month Treasury bill rates are obtained to for use as the relevant risk-free interest rate. The primary data set spans an approximate one month period from 11/1/2011 to 12/6/2011. Call and option …

This dissertation consists of three essays: essay 1, Underwriting Use of Credit Information and Firm Performance ‐ An Empirical Study of Texas Property‐Liability Insurers, essay 2, Prediction of Ratings in Property‐Liability Industry when The Organizational Form Is Endogenous, and essay 3, A Discussion of Parsimonious Methods Predicting Insurance Companies Ratings. The purpose of the first essay is to investigate the influence of underwriting use of credit information on variation in insurers’ underwriting performance. Specifically, this study addresses the following two research questions: first, what firm‐level characteristics are associated with the insurers’ decision to use credit information in underwriting? second, is there a relationship between the use of credit information and variation in insurers’ underwriting performance? The empirical results indicate that larger insurance companies, companies having more business in personal auto insurance, and those with greater use of reinsurance are more likely to use credit information in underwriting. More importantly, the results indicate that use of credit information is associated with lower variation in underwriting performance, consistent with the hypothesis that use of credit information enables insurers to better predict their losses. The purpose of the second essay is to resolve the inconsistent relationship between the organizational forms (i.e., stock versus …

This study provide empirical evidence whether bias in the standard errors of Jensen’s alpha explains conflicting results in the extant literature in real estate funds. Significant alphas in real estate mutual funds and REITs are compared with heteroskedasticity consistent covariance matrix estimators (HC1, HC2 and HC3), Newey-West standard errors, a robust regression tempering the effect of high leverage points, a GARCH model, and a HC3 adjusted wild bootstrap. In the analysis of real estate mutual funds and a separate sample set of REITs, the HCCME had a minimal impact attenuating the number of firms with excess returns. Contrary to expectations the differences from HC1 to HC2 to HC3 were also negligible. The Newey-West standard error provided highly variable results when compared with the OLS results particularly in the REIT sample. Of the techniques to adjust for bias in the standard error, the wild bootstrap with HC3 adjustment to the standard error provided the most conservative result to the number of real estate mutual funds and REITs with significant alphas. The co-movement of real estate funds suggests common exogenous influences. Including state variables such as the changes in unexpected inflation, term spread, default spread, market skewness and industrial production growth in …

This dissertation identifies key determinants of outbound cross-border mergers and acquisitions (M&As) by emerging Asian acquirers during 2001-2012. Using a zero-inflated model that takes into account different mechanisms governing country pairs that never engage in cross-border M&As and country pairs that actively participate in cross-border M&As, I uncover unique patterns for emerging Asian acquirers. Emerging Asian acquirers originate from countries with lower corporate tax rates than those countries where their targets are located. Furthermore, the negative impact of an international double tax burden is significantly larger than that found in previous studies. While country governance differences and geographical and cultural differences are important determinants of international M&As, relative valuation effects are muted. Coefficients of these determinants vary substantially, depending on whether targets are located in developing or advanced nations. Also, determinants differ considerably between active and non-active players in cross-border M&As. Moreover, comparisons of empirical models illustrate that estimating a non-linear model and taking into account both the bounded nature and non-normal distributions of fractional response variables lead to different inferences from those drawn from a linear model estimated by the ordinary least squares method. Overall, emerging Asian acquirers approach the deals differently from patterns documented in developed markets. So, …

The initial matching relationships between underwriters and bonds/issuing firms and the certification quality of underwriters, as determined by changes in the issuing firm’s financial strength post issue, are the two primary research topics in this dissertation. Based on total underwriter syndicate market share, two distinct categories, low market power (LMP) syndicates and high market power (HMP) syndicates were defined. Firm financial strength is examined based on a new factor developed in this research. A comparison of the two underwriting categories, or pools, indicates that the HMP underwriters take on firms of lower initial financial strength and additionally, the issuing firms decline more in financial strength two years following bond issuance than do firms using LMP underwriters. Notwithstanding these results, the more interesting findings are the relationships within each of these pools. In the LMP pool of underwriters, financially stronger firms used the larger LMPs to underwrite their bonds, while the weaker firms used smaller LMPs. In contrast, among HMP underwriters, the largest HMPs aligned with the firms of relatively lower financial strength. The relationships in both pools reverse when changes in financial strength are examined. Larger LMPs are associated with greater issuing firm financial decline while larger HMPs correlate with …

This study examines the impact of reducing tick size and, in particular decimalization on stock splits. Based on previous studies, this study examines hypotheses in the following three areas: first, market reaction around stock split announcement and ex-dates, second, the effect of tick size on liquidity after stock split ex-dates, and third, the effect of tick size on return volatility after stock split ex-dates. The impact of tick size on market reaction around split announcement and ex-dates is measured by abnormal returns and buy and hold abnormal returns (BHARs). Also, this study investigates the long term impact of decimalization on market reaction for small, medium, and large firms for the three different tick size periods. The effect of tick size on liquidity after stock split ex-dates is measured by turnover, relative bid ask spread, and market maker count. The effect of tick size on return volatility around stock split announcement and ex-dates is measured by return standard deviation. Also, this study investigates the long term impact of decimalization on volatility after split ex-dates for small, medium, and large firms for three different tick size periods.

The purpose of the study is to empirically determine the relevance of PPP theory under the traditional arbitrage and the efficient markets (EPPP) frameworks during the recent floating period of the 1980s. Monthly data was collected for fifteen industrial nations from January 1980 to December 1986. The models tested included the short-run PPP, the long-run PPP, the EPPP, the EPPP with deviations from expectations, the forward rates as unbiased estimators of future spot rates, the EPPP and the forward rates, and the EPPP with forward rates and lagged values. A generalized regression method called Seemingly Unrelated Regression (SUR) was employed to test the models. The results support the efficient markets approach to PPP but fail to support the traditional PPP in both the short term and the long term. Moreover, the forward rates are poor and biased predictors of the future spot rates. The random walk hypothesis is generally supported.

The effect of a change in capital structure on the risk and return of common stockholders is investigated. Also, the information content of dividends when a firm goes for new outside financing is examined. Data used in the study are collected from the Moody's Bond Survey, the Prentice Hall's Capital Adjustments, the Wall Street Journal Index, and the Center for Research in Security Prices Tape. The study uses an event study methodology. The risk (beta) of common stock before an issuance of debt securities is compared with the risk after the issue. The stock market reaction to the issuance of new debt securities is measured using after-the-event risk. The information content of dividend announcement before a new debt issue is compared to that of after the issue. The findings show that debt issue reduces stock holders' risk if the issuer is a dividend paying company. Also, debt securities issued through an exchange offer increase stockholders' wealth. Finally, issuance of new debt does not affect the information content of dividends.

The observed use (and indeed tremendous growth in volume) of forward contracts, futures, options, and swaps as hedges against interest rate risk, foreign exchange risk, and commodity price risk indicates that hedging does add value to the firm. The purpose this research was to empirically examine the value of off-balance-sheet hedging. The benefits of off-balance-sheet hedging were found to accrue from reducing (1) taxes, (2) expected financial distress costs, and (3) agency costs. Taxes. Hedging reduces the firm's tax liability by reducing the variability in taxable income. The value of hedging to the firm is a positive function of the convexity of the tax function and the variability of taxable income. Expected Financial Distress Costs. The value of hedging is a positive function of the degree to which hedging reduces the probability of financial distress and the costs of financial distress. Agency Cost. Due to the fact that bondholders and some managers hold fixed claims while shareholders hold variable claims, shareholders desire more risky projects than do bondholders or managers. Hedging reduces this conflict by allowing shareholders to undertake higher risk projects while protecting the holders of fixed claims. Firms can achieve the same benefits of hedging by using alternative …

Monthly returns on twenty-seven Eurobonds from July 1982 to June 1986 were examined. There were no consistent differences in returns based on the country in which a firm is located. There were consistent differences due to industry classification, with energy-related firms exhibiting higher average returns and variances. Excess returns were calculated using the capital asset pricing model and arbitrage pricing theory. The results from calculation of mean average deviation, root mean square, and R2 all indicate that the arbitrage pricing theory was a better descriptor of the Eurobond market. The excess returns were also examined using stochastic dominance. Arbitrage pricing theory never dominated the capital asset pricing model using first-order criteria, but consistently dominated using second-order criteria. The results were discussed in terms of the implications for investors and portfolio managers.

Corporate governance issues have become increasingly important to financial managers and shareholders. Firms that are plagued by poor performance, incompetent managers, or excess agency costs have become the subject of a dramatic increase in shareholder activism. Dissident shareholders, who are unable to launch costly takeover bids or proxy contests, have initiated a process of governance reform through the use of shareholder sponsored proposals. Shareholder proposals are a direct attempt to reverse operating or voting policies, such as a proposal to repeal a classified board. Managers announce shareholder proposals in a proxy statement and typically include a vote recommendation against the proposal. In the first essay, I find an unfavorable stock price reaction to the announcement of a shareholder proposal. In some cases, however, management supports the proposal and negotiates an agreement with the proposing shareholder. Stock prices react favorably to a settlement announcement. If managers are willing to negotiate with shareholders, they are perceived to be acting in the best interest of shareholders. If managers are unwilling, shareholders believe a severe agency problem exists. In the second essay, the effect that ownership structure has on voting outcomes of shareholder proposals is examined. I find a direct relationship between the percentage …

This study examines the effects of delisting on firm value, risk and market liquidity. In a world where markets are becoming increasingly integrated, delistings may prove counter productive. We use the unique event, free from company specifics, that occurred on January 2, 1990 in the stock exchanges of Singapore and Malaysia to test for the above effects. On that day, dual listed companies were required to delist from the foreign stock exchange. We also use this event to test if the Singapore and Malaysia markets are globally integrated. Since financial data is found to show persistence in volatility, we model the return generating process in a generalized autoregressive conditionally heteroskedastic (GARCH) framework that takes into consideration changing volatility. For comparison purposes, OLS and Time-Deformation models are included. The study found delistings to decrease firm value, the size of which is related to how actively the stocks were previously traded on the foreign stock exchange. Risk levels increased following delistings. Nevertheless, thinly traded stocks showed significant changes in neither firm value nor riskiness. Further evidence of new listings to increase firm value was noted. Consistent with the political motive hypothesis, delisted stocks showed an increase in post-event volume, but however, lost …

This research describes an analysis, using event-study methodology, of the reaction of the stock returns of a sample, drawn from the one-hundred largest bank holding companies, to certain actions of regulatory agencies. The first part of the analysis examines the reaction of the bank stocks to the closure of the Bank of New England, using cross-sectional variables not previously examined by other investigators. The second event considers the invalidation of interest-rate swap contracts by the British Law Lords, the highest court in Britain. The third case is an examination of the effects of actions taken to enforce the Community Reinvestment Act. All three events have significant abnormal returns in at least one sub-sample and event window. The results of the cross-sectional analysis and the lack of response to later events are consistent with market efficiency in the semi-strong form. The results are also consistent with the hypothesis that regulatory policies that emphasize consistency and banking system safety are desirable.

There is a limited amount of research dealing with the wealth effects of sale-and-leaseback transactions, but previous research has focused predominantly on the tax effects of these transactions. The results of these studies have often been in conflict with one another. This dissertation shows that tax effects do play a role in determining the wealth effect of sale-and-leasebacks on stockholders, but there exists a framework of finance research that suggests several other factors could play a determining role as well.

Prior studies on the impact of the termination of overfunded defined benefit pension plans on shareholders' wealth have produced conflicting findings. The first study on the stock market reaction to pension plan termination was conducted by Alderson and Chen (1986); this study claimed that shareholders realize significant positive abnormal returns around the termination announcement date. A more recent study, by Moore and Pruitt (1990), disclaimed the findings of Alderson and Chen. Reexamination of these two studies with additional evidence and the use of the appropriate announcement date suggests that termination of pension plans is associated with significant wealth gain to shareholders. This study also analyzes samples from periods prior to and after the imposition in 1986 of a 10 percent excise tax on recaptured excess pension assets. The empirical results suggest that shareholders experience significant positive wealth effects for the pre-tax (1980-85) period and no wealth effects for the post-tax (1986-88) period. The primary purpose of this study is to determine the impact of stock market reaction upon shareholders' wealth under the partial anticipation hypothesis. The pre-tax sample is analyzed by isolating the expected terminators using the multiple discriminant analysis model. This study finds significant positive abnormal returns only for …

This dissertation consists of three essays exploring market reactions to business failure. In the first essay, the filing strategies are divided into three basic types, voluntary, involuntary and prepackaged. The second essay provides insight into industry wide factors impacting assimilation of information by the market. The third essay provides a view of the GARCH-M model in measuring a risk premium as a firm approaches bankruptcy.