Does Stock market harm investment incentives?

A fascinating article on Harvard's Governance Blog today. A MUST read for class.

Does the Stock Market Harm Investment Incentives? by Asker, Farre-Mensa, and Ljungqvist.

"The theory literature in economics and finance has long argued that the separation of ownership and control following a stock market listing can lead to agency problems between managers and dispersed stock market investors and hence to suboptimal investment decisions. The literature is divided on whether overinvestment (i.e., empire building) or underinvestment (due to rational short-termism) will result, or indeed whether effective corporate governance mechanisms can be devised to ensure investment does not suffer. "

and later:

"We also show that public companies tend to smooth their earnings growth and dividends and are reluctant to report negative earnings. One interpretation for these patterns is that public firms treat investment spending as the residual after having paid dividends out of their cash flows, whereas private firms treat dividends as the residual after paying for their investment out of cash flows. "

From The paper's abstract:

"Theory suggests that agency problems resulting from separation of ownership and control can cause stock market listed firms to invest suboptimally... Listed firms invest less and are less responsive to changes in investment opportunities compared to observably similar private firms, especially in industries in which stock prices are particularly sensitive to current profits. Listed firms also tend to smooth earnings growth and dividends and avoid reporting losses. These patterns are consistent with models of managerial myopia and do not appear to be due to firms endogenously choosing to be public or private: Firms that go public for reasons other than to fund investment invest like private firms pre-IPO and like public firms post-IPO. Nor do the results appear to be driven by measurement error, tax effects, or firm life-cycle effects. Our evidence suggests that the stock market distorts investment, at least for the fast-growing companies in our sample."

Cite: Asker, John William, Farre-Mensa, Joan and Ljungqvist, Alexander, Does the Stock Market Distort Investment Incentives? (March 13, 2011). ECGI - Finance Working Paper No. 282/2010. Available at SSRN: http://ssrn.com/abstract=1603484

Definitely I^3=Interesting, Informative, and Important!

Can You Beat the Market? It’s a $100 Billion Question - New York Times

Ken French has done it again! Definitely a superstar! From the NY Times:

Can You Beat the Market? It’s a $100 Billion Question - New York Times:

"INVESTORS collectively spend around $100 billion a year trying to beat the stock market. That’s the finding of a rigorous effort to measure the total costs of Americans’ efforts to surpass the returns they would have received by simply holding a stock index fund. The huge price tag helps explain why beating a buy-and-hold strategy is so difficult."

and later:

"...despite many developments that greatly reduced the cost of trading, like deeply discounted brokerage commissions, a narrowing in bid-asked spreads, and a big reduction in front-end loads, or sales charges, paid to mutual fund companies...the portion of stocks’ aggregate market capitalization spent on trying to beat the market has stayed remarkably constant, near 0.67 percent."

WOW! An instant classic! I^3!

I am still looking for a link to the actual working paper, if anyone knows where it is please let me know :)
But did find out that he also is a cyclist.

SSRN-Control Rights and Capital Structure: an Empirical Investigation by Michael Roberts, Amir Sufi

SSRN-Control Rights and Capital Structure: an Empirical Investigation by Michael Roberts, Amir Sufi:

Roberts and Sufi show that "financing decisions of solvent firms are dictated by creditors...."

More specifically they show that following a covenant violation, creditors exercise some of their power and limit further debt issuances. (Of course this is not surprising, but still always good to see what we expect to happen actually happens.)

A couple of look ins:

"... 97% of credit agreements contain at least one financial covenant and almost 80% of these agreements explicitly restrict the amount of debt that a firm may have in their capital structure....more than one quarter of all publicly listed firms in the US violate a financial covenant at some point...Among firms with an average leverage ratio of at least 5%, this fraction approaches one third. Thus, financial covenants are not only a prominent feature of debt contracts (Smith and Warner (1979) and Bradley and Roberts (2003)) but they are also frequently violated (Dichev and Skinner (2002)) and, importantly, rarely lead to default
or acceleration of the loan (Gopalakrishnan and Parkash (1995))."

Just because the paper shows that the violation does not lead to accelerationof the loan, it does not mean that violation does not bring with it penalties. From reduced credit, to increased rates, to forced equity issues, the creditors do use their power to protect their position but do fall short of demanding immediate payment.

As the authors state:

"[The paper] documents that the transfer of control accompanying covenant violations has significant consequences for corporate debt policy over and above any changes in manager’s preferences for debt. Specifically, net debt issuances decline, on average, by 70 basis points in the quarter following a covenant violation. This sharp reduction in net debt issuance is persistent for two years following the violation, and leads to a reduction in leverage ratios by 3%."

Cool paper! I^3!!!


Cite:

Roberts, Michael R. and Sufi, Amir, "Control Rights and Capital Structure: an Empirical Investigation" (January 31, 2007). Available at SSRN: http://ssrn.com/abstract=962131

Costs and Benefits of Regulation

As part of a study on the impact of regulation on market, the Committee on Capital Markets Regulation provides the SEC with several sudies today that try to guage the costs and benefits of regulation.

Particularly interesting is Zingales' look at whether regulations following the Governance Crisis of 2002 had a detrimental impact on the relative advantages of a US listing.

From the WLS (via Pittsburgh Post Gazette) Is a U.S. listing worth the effort?:

"The premium for listing on both U.S. and foreign markets averaged 51 percentage points from 1997 to 2001. It dropped to 31 percentage points between 2002 and 2005, Mr. Zingales found.

'We raised the cost of being public in the U.S.,' said Glenn Hubbard, dean of the Columbia University business school and co-chairman of the capital-markets committee. 'These things have long-term consequences."

later:

"Others aren't so sure. Andrei Shleifer, an economics professor at Harvard University, called the decline in the foreign-listing premium "fascinating" but whether it is due to "improvements in corporate governance and the quality of stock markets abroad, or from the reduced benefits of U.S. listing, is still an open question."

Another possibility is that rather than the costs rising, it could be that the percieved benefit of a US listing declined. This was not as a result of the regulations, but because the governance crisis (which brought about the regulations) demonstrated that US markets were not as minority investor friendly as might have been percieved prior to the problems. For instance, again in the WSJ/Post-Gazette piece:

"Andrew Karolyi, a finance professor at Ohio State University who has also studied the cross-listing premium said Mr. Zingales's conclusion is "reasonable," but advised caution. Mr. Karolyi said in his own research he had been unable to relate a change in the cross-listing premium to corporate governance."

Over at IdeaBlog Larry Ribstein does a GREAT job discussing both sides and concludes that

"if you raise the price of something without also raising the value, the demand will fall, and that applies to bonding. I hypothesize that SOX, by meddling in the internal governance as well as disclosures of foreign firms, raised price more than value. The result would be declining cross-listings in the U.S., a phenomenon we have observed."

The NY Times also has an article on the findings and the committee that is speaking to the SEC today about regulation. A look-in:

"The committee...said the S.E.C. should be required to perform cost-benefit analyses on all rules before they were adopted. It said the S.E.C. should also take steps to rein in private securities litigation and adopt policies to shield corporate directors and auditors from some lawsuits....The report also calls for relatively modest changes in the enforcement of the Sarbanes-Oxley Act and supports greater shareholder democracy by limiting antitakeover defenses of companies"

Interesting and important stuff!!

Consumer Confidence and Stock Returns

Every week it seems some news agency is reporting consumer confidence numbers. For instance from ABC News:

" Consumer confidence is showing strain. Faced with the highest gas prices since Hurricane Katrina, soft job growth, and a cooling economy, it has slipped to its lowest level in seven weeks.

The ABC News/Washington Post Consumer Comfort Index stands at -12 on its scale of +100 to -100 this week, inching out of the -9 to -11 range at which it has hovered since late June."

The traditional interpretation is that consumers will not spend as much if they lack confidence. Thus the economy will slow down. But that said, there is still some debate as to whether the numbers really mean much.

Lemmon and Portniaguina (L&P) join a long list of researchers who have tried to determine exactly how this sentiment measure matters. Specifically L&P examine whether confidence numbers can be used to further explain stock returns.

Why so many looks at the same thing? One reason is because the results are often contradictory. For instance some researchers (Lee, Shleifer, and Thaler 1991) find that the closed end fund discount can be described by investor sentiment, whereas others do not (Doukas and Milonas 2002).

What sets the L&P paper apar is that the authors break down confidence into (my terms) justified confidence and unjustified confidence. The unjustified confidence is interpreted as investor sentiment. (how cool is that?!)

How is this done? In the authors' words:

"First, we regress consumer confidence on a set of macroeconomic variables. Although the regression has a high R2 (around 0.6 – 0.8 depending on the specific confidence index), a substantial portion of confidence remains unexplained. We treat the residual from this regression as our measure of excessive sentiment (optimism or pessimism) unwarranted by fundamentals."

And now a theoretical time-out:

• The majority of financial researchers and professionals hold that small traders are more prone to bouts of excessive optimism (and pessism) than are institutional traders.
• Research has shown that individual traders impact small stocks more than large stocks (in large part due to liquidity differences).
  

Putting these two things together leads to the prediction that returns on small stocks should be more susecptible to sentiment swings. Namely, that if over optimism exists, small stocks will be over priced relative to large stocks.


Empirical findings:

Lemmon and Portniaguina find that their "excessive sentiment"measure can be used to describe stock returns.

"Consistent with the view that investor sentiment affects stock prices, we find that the pricing errors of small stocks exhibit larger time variation than those of large stocks and are higher following quarters of low sentiment. Thus we report evidence that investors appear to overvalue small stocks relative to large stocks during periods when consumer confidence is high, and vice versa"

Which is a really cool finding!

Want another cool finding? Try this one on for size:

"in the post-1977 period [where individual share ownership has increased], the sentiment measure based on consumner confidence exhibits strong ability to forecast the size premium"

Want still more? OK. The paper gives us even more:

"We find that, after controlling for time variation in beta, quarters of high investor optimism are followed by lower returns on dividend non-paying stocks, stocks with low earnings growth, stocks with low sales growth, and stocks with low institutional ownership. The results based on institutional ownership provide some additional evidence that is consistent with the idea that
individual investor sentiment is an important determinant of mispricing in stocks where arbitrage may be more limited"

Which deserves a WOW. A definite I^3 paper! (Important, Interesting, and Insightful!)



BTW I am currently ristening to Confidence by Rosebeth Kanter. So I might be hyper- sensitive to the idea that confidence matters....or maybe it goes back to middle school when after a particularly bad basketball game my mom made me a wall hanging with the CW Longenecker poem "If you think you are beaten you are" on it.

More political connections = higher returns

I imagine this one will be making the rounds in the popular press relatively quickly. It is by Goldman, Rocholl, and So.

The super short version of their paper is that having a board member with ties to the political party in office is good for shareholders (which probably is more disappointing than shocking).

A slightly longer version:

The authors begin by stating that "in countries with a well functioning legal system the preferential treatment of companies due to their political ties should not be widespread."

After alluding to studies that have shown that political connections are important in "countries with high levels of corruption and weak legal systems", the paper examines whether political connections impact firm value in the US and find that political ties do matter.

How do they show this? In their own words

"the paper employs a unique definition of a companyÂ’s political connectedness based on new hand-collected data, detailing the former political positions held by each of the board members of all companies that are in the S&P500 during the year 2000. Information about the political background of board members is then used to sort companies into those that are more connected to the Democrats and those that are more connected to the Republicans."

The closeness of the 2000 presidential election provides an interesting test case since the results were unknown leading up to (and even after) the election.

Their main finding:

"The first main result is that a portfolio of S&P500 companies classified as having a
Republican board significantly outperforms in the post-election period a portfolio of S&P500 companies classified as having a Democrat board. This is true regardless of whether the portfolios are formed based on equal weighting or value weighting....Conversely, the Democrat portfolio exhibits a negative CAR following the election."

As a robustness check, the authors also examine donations to political parties. This data set yields some fascinating factoids. For instance:

"Most of the sample companies donate to both parties, but the relative shares vary substantially. Only 18 of the 315 sample companies donate to only one of the two major parties. The sample companies donate on average $779,985. The maximum donation made by one of the sample companies is $5,075,311...."

The findings using this donation data again support the view that political connections do matter:

"Companies with the highest donations to the Republicans experience on average more than a 3% increase in their stock price over the first seven days after the Election Day. In contrast, stock prices for companies with more donations to the Democrats decrease over the same period of time in the value-weighted average and tend to decrease in the equally-weighted average."

Still not convinced? The authors provide one more piece of evidence. They look at the stock response when a new board member with political connections is nominated to the board of directors. Their finding? Stock prices jump. This CAR is particularly significant for their value weighted portfolios which again suggests that political ties do matter and are especially pronounced for larger firms.

Which deserves a WOW!

As for what it says of the political and legal systems in the US, I will leave that for smarter people to interpret.

I^3 definitely worth reading!

Cite: Goldman, Eitan, Rocholl, Jorg and So, Jongil, "Does Political Connectedness Affect Firm Value?" (July 21, 2006). AFA 2007 Chicago Meetings Paper Available at SSRN: http://ssrn.com/abstract=891426

Dividends and Capital Structure

Hold on to your seats folks, this one gets exciting! Definitely I^3!

It starts off so easy: Are dividend policy and capital structure related? And if so how?

Surprisingly for two topics that have been central to corporate finance for decades, we still really do not have very good explanations to either. A new paper by Faulkender, Milbourn, and Thackor attempts to solve both problems with a new theory that suggests not only are dividends and debt related, and tied to investor uncertainty. Moreover, it appears the theory actually fits the data!

Super short version: When managers and shareholders agree on the things stock prices rise. Moreover, debt levels and dividend payout ratios drop. This key insight is shown both theoretically and empirically.

Longer version: While often studied, capital structure and dividend policy have many unanswered questions and none of our models fit the evidence very well.Hence the need to new thinking on the matter and that is what by Faulkender, Milbourn, and Thackor have brought to the table (computer screen?) in Does Corporate Performance Determine Capital Structure and Dividend Policy?

A few quick look-ins:

“..troubling is the fact that existing theories also do not explain why some firms never pay dividends whereas others consistently do, why the payment of dividends seems dependent on the firm’s stock price, and why there seem to be correlations between firms’ capital structure and dividend policy...We are thus left without a theory of dividends that squares well with these stylized facts. The evidence on capital structure is even more troubling.”

“In this paper, we address this question by developing a fresh approach with a simple model that departs from the usual agency and signaling stories. We assume that the manager wishes to maximize a weighted average of the stock prices at the initial and terminal points in time. At the initial point in time he raises the funds needed for a future project with either debt or equity, and thereby determines the firm’s capital structure. Moreover, he also decides how large a dividend to promise to pay at the next point in time. At the time that the manager makes his financial policy choices, he is aware that investors may not agree with his future project choice… project-choice disagreement arises solely from potentially different beliefs about project value rather than agency or private information problems.

* Their main point:

“higher agreement between the manager and the investors implies a higher stock price, so the model predicts leverage and dividend payout ratios to be inversely related to the firm’s stock price.

After theoretically modeling the problems, the authors empirically test their predictions and find strong support. Again in their words:

"We find that firms for which there is greater agreement (i.e., lower analyst forecast dispersion and greater performance-based compensation) have significantly less debt in their capital structure – as measured by either market or book leverage, or interest coverage – and pay out a significantly smaller fraction of the earnings in the form of dividends, measured using both the dividend payout ratio and the dividend yield.”

Good stuff!!

You probably do want to read the whole thing on this one (indeed the literature review (disguised in the introduction) is excellent and is definitely understandable for even undergraduates!)

Cite: Faulkender, Michael W., Milbourn, Todd T. and Thakor, Anjan V., "Does Corporate Performance Determine Capital Structure and Dividend Policy?" (March 9, 2006). Available at SSRN: http://ssrn.com/abstract=686865

Active Intermediation of Non-Underwritten Rights Offerings by Mark Peterson

Rights Issues are a way of issuing new equity. They involve the firm giving rights to existing shareholders. These rights entitle the holder to purchase new shares at the subscription price (which is lower than the current market price).

Much research has look at rights issues. This has largely looked at who uses them, how they work, and why we don't see more of them (this latter point is often called the rights offering paradox of Smith 1977).

Mark Peterson offers new insights into this by examining shareholder behavior around rights issues by closed end funds.

SSRN-Active Intermediation of Non-Underwritten Rights Offerings by Mark Peterson:

His findings? That shareholders behave much like the the financial intermediaries (i.e. underwrites) studied by Singh (1997). That is, the shareholders appear to subscribe to more shares when there is an overallotment option (which is rational since the over allotment option allows those who fully subscribe to buy more shares), and actively hedge their positions by shorting shares.

In his words:

"The evidence presented is consistent with shareholders and brokers actively intermediating these offerings in a way similar to that of underwriters in underwritten rights offerings (Singh 1997). That is, intermediaries hedge the shares they purchase in the offering by simultaneously short selling the underlying stock."

Moreover, Peterson suggests that the costs associated with these strategies may explain the rights paradox. Notably:

"Large negative returns during the offering period, evidence of wealth transfers from non-participating shareholders to intermediaries, and difficulties associated with shareholder intermediation make the non-underwritten rights method highly impractical for widely held firms and may partially explain the rights offering paradox."

The paper also has some other "cool things about rights offers" that you may not have known. For instance,

* "Herzfeld (1996), in a survey of closed-end funds that issued rights, reports primary subscription rates of 50-60% for non-transferable offerings and 70-95% for transferable
offerings."

*"The offering of additional shares at a discount through the oversubscription privilege and over-allotment option provides incentives for current shareholders to attempt to purchase more than their pro rata allotment of shares and, therefore, receive a wealth transfer from non-participating shareholders."

*"54% of the non-transferable offerings and 69% of the transferable offerings include fees paid to brokers to aid in the solicitation of rights. In these offerings, the fee, typically 2.5% of the subscription price, is paid to brokers when they or their clients subscribe to the offering."

* and from footnote #7: "Subject to narrow exceptions, closed-end funds are prohibited...from issuing stock to the public at a price that is less than the net asset value. Because closed-end funds typically trade at a discount, a rights offering is frequently the only viable offering method. The SEC (1977)
discouraged the use of an underwriter in rights offerings, suggesting that such offerings were effectively offerings directed to the public."

I^3! (Interesting, Informative, and Important!) It will definitely force me to change my class notes!

Cite:
Peterson, Mark A., "Active Intermediation of Non-Underwritten Rights Offerings" (March 15, 2006). Available at SSRN: http://ssrn.com/abstract=891189

Share Repurchase, Executive Options and Wealth Changes to Stockholders and Bondholders by Sang-Gyung Jun, Mookwon Jung, Ralph Walkling

Ready for another cool paper on share repurchases? Here you go!

SSRN-Share Repurchase, Executive Options and Wealth Changes to Stockholders and Bondholders by Sang-Gyung Jun, Mookwon Jung, Ralph Walkling

Short version: This paper attempts to disentangle the signaling story ("we are buying back stock because we are undervalued") and the wealth transfer ("we are buying back stock because we can screw over bondholders") stories.

The findings are

"generally consistent with the positive signaling effect of stock repurchases, but also provide some support for wealth transfer. In the subset...where signaling effects are less likely, the positive correlation of wealth changes between stockholders and bondholders is completely eliminated. Finally, bond ratings are much more likely to be upgraded in samples without executive options which is precisely where the signaling effects are expected to be concentrated."

Besides updating previous literature (and looking at data in the post 1997 Lehman Brother Bond Database world), the authors find that the reason for the buyback is important. Not surprisingly (and confirming Kahle's 2002 findings), if the repurchase is being done to fund option plans, then there is less of a stock price reaction.

Again in the authors' own words:

"In general, our results on equity alone or bonds alone indicate positive wealth changes to equity holders and negative wealth changes to bondholders surrounding repurchase announcements. For bondholders, however, the wealth losses are only significant in the subset of firms associated with options. These are precisely the cases where any off-setting effects of positive signaling are less likely to occur....."

additionally:

"...results show that bond ratings for [repurchasing] firms with options are less likely to be upgraded after stock repurchases." [Thus, the] ...results are generally consistent with positive signaling but also provide some support for wealth transfer."

VERY COOL! An I^3 paper! (Interesting, Important, and Informative!)

Cite:
Jun, Sang-Gyung, Jung, Mookwon and Walkling, Ralph A., "Share Repurchase, Executive Options and Wealth Changes to Stockholders and Bondholders" (March 14, 2006). Available at SSRN: http://ssrn.com/abstract=891664

Is Stock Picking Declining Around the World? by Utpal Bhattacharya, Neal Galpin

SSRN-Is Stock Picking Declining Around the World? by Utpal Bhattacharya, Neal Galpin:

Short version: Bhattacharya and Galpin examine the relative use of indexing vs. stock picking in various equity markets around the world. They find that indexing is increasing pretty much everywhere but especially in more developed markets. They also estimate that the "long run steady state" fraction of stock picking in US markets is 11% (it is now 24% down from 60% in the 1960s."

Longer version:
Bhattacharya and Galpin use an innovative method to measure the degree to which stock picking is used in an equity market. Based on this model, they then compare the relative percentage of stock picking (vs. Indexing) both using a cross sectional analysis as well as time series analysis.

The key idea behind the paper model is that if everyone indexes, then volume should be proportional to size of firm. In their words:

"The idea behind this measure is inspired by a theoretical insight in Lo and Wang (2000). They proved that, if the two-fund separation theorem holds, dollar turnover of a stock, which is defined as the dollar volume of shares traded divided by the dollar market capitalization of the stock, should be identical for all stocks.

An empirical implication of the above theoretical insight is that if every person in the world indexes between a risk-free portfolio and the market portfolio (or a value-weighted portfolio that is a proxy for the market portfolio), trading volume in stock i should be explained completely by the market capitalization of stock i."

Given this, the authors the essentially regress actual volume on capitalization (more technically they run the

"regression of log monthly stock volume (measured by number of shares traded in that month for stock i in a country) against the log of monthly shares outstanding (measured by number of shares outstanding in the beginning of the month for stock i). We run this regression for 43 countries, of which 21 are classified as developed markets and 22 are classified as emerging markets."

Most of the analysis begins in 1995, but for US stocks they go back into the early 1960s to yield valuable insights as to how markets have changed.

Findings:

* "The first big result.... is that there is more stock picking in emerging markets than in developed markets." This is shown in figure 1 and table 1.

* "The second big result that Figure 1(a) illustrates is that, on an average, stock picking is declining around the world. The declines in stock picking are quite dramatic, especially in the emerging markets."

In their examination of US stocks, they find that there has been a dramatic decrease in stock picking:

"In the United States, the maximum fraction of volume explained by stock picking has secularly declined from a high of 60% in the 1960s to a low of 24% in the 2000s"

Additionally, stock picking is relatively more popular where theory would predict--
namely where information asymmetries are highest. Thus stock picking is more common in young firms, in industries where there is lower asymmetries, and (only somewhat surprisingly) where there are fewer analysts.


VERY cool!! I^3. Indeed their finding that stock picking is negatively related to analyst coverage is worth the price of admission!


Cite:

Bhattacharya , Utpal and Galpin, Neal E., "Is Stock Picking Declining Around the World?" (November 2005). http://ssrn.com/abstract=849627

By the way, Neal is a SBU grad, so I could be a tad biased ;) I tried not to be, but you can be the judge.

Class Classification: Investments

SSRN-Corporate Governance and Acquirer Returns by Ronald Masulis, Cong Wang, Fei Xie

SSRN-Corporate Governance and Acquirer Returns by Ronald Masulis, Cong Wang, Fei Xie:

Some takeovers are good (value enhancing), others are bad (value destroying). Why the difference? One easy explanation is that managers often have incentives (such as empire building, hubris, pay tied to size, ego, diversification) to do a merger that is not in shareholders’ best interests. Masulis, Wang, and Xie examine this by looking at the returns to acquiring firms and relating these returns to the corporate governance in place at the firm.

To some degree the market for corporate control and corporate governance at the firm itself can force managers to look out for shareholders. Thus firms with anti-takeover provisions (ATP) in place make good candidates for areas where managers might be more tempted to do acquisitions that increase managerial well-being at the expense of shareholders.

Examining over 3000 acquisitions from 1990 to 2003, Masulis, Wang, and Xie find strong support for this hypothesis. In their words:

“More specifically, acquisition announcements made by firms with more ATPs in place generate lower abnormal bidder returns than those made by firms with fewer ATPs, and the difference is significant both statistically and economically. This result holds for all the corporate governance indices or subsets of ATPs we consider and it is robust to controlling for an array of other key corporate governance mechanisms, including product market competition, CEO equity incentives, institutional ownership, and board characteristics."

Simply put, this is more evidence that not only are antitakeover provisions bad for shareholders, but it shows a specific path by which these diminish shareholder wealth.

Not centent with just one important finding, the authors also look at other control or governance mechanisms on the premise that if ATPs lower returns, good governance measures will increase acquiring firms' returns. They also find support for this hypothesis:

"acquiring firms operating in more competitive industries experience higher abnormal announcement returns, as do acquirers that separate the positions of CEO and chairman of the board."

An I^3 paper! It definitely deserves a WOW!

Cite:

Masulis, Ronald W., Wang, Cong and Xie, Fei, "Corporate Governance and Acquirer Returns" (August 22, 2005). AFA 2006 Boston Meetings Paper http://ssrn.com/abstract=697501

Executive Stock Options and Earnings Management - A Theoretical and Empirical Analysis by Ohad Kadan, Jun Yang

Executive compensation has changed in the aftermath of the corporate governance "crisis" (where we saw Enron, Tyco, Adelphia, WorldCom and others fall precitously due to accounting scandals). One such change is a shift away from stock options. Microsoft is the classic example but many other firms have also scaled back option progams for restricted shares (share that can not be sold for some period).

The restricted shares are better than options view is summed up by the AFL-CIO in a WSJ piece from 2003:

The AFL-CIO has submitted shareholder resolutions at American Express Co. and five other businesses urging a ban on stock options for senior executives and greater use of restricted stock. Labor officials call performance-linked restricted stock "a better motivator of performance," says the AFL-CIO's Brandon Rees.

However, that is not the final word. Kadan and Yang suggest that restricted shares may actaully worsen the earnings management problem and be more costly than traditional option grants.

Executive Stock Options and Earnings Management - A Theoretical and Empirical Analysis

How? They begin by showing that restricted shares are really little more than option grants with a strike price of zero. They then

"...show that lowering the exercise price (increasing the moneyness) of options intensifies earnings management. Therefore, for the same number of grants, restricted stock induces more earnings management than stock options. Additionally, using numerical examples, we show that to induce the same level of effort, optimally-designed stock options induce less earnings management and cost less to the firm than restricted stock. "

Very interesting.

Here are some more "visual bites":

• "Stock-based compensation, on one hand, motivates executives to take real actions to increase firm value. On the other hand, it induces executives to engage in earnings management, which is essentially the difference between the firm’s reported earnings and the economic earnings"
• "lowering the exercise price makes the options more in-the-money, and hence the marginal benefit from an increased stock price is higher. For this reason, it is more likely that the cost of earnings management will be outweighed by the benefit from the boost in stock price. As an extreme case of stock options, restricted stock is always in-the-money regardless of the stock price.Consequently, restricted stock induces more earnings management than do stock options." --This is presented more rigorously as their second propostion (page 13): Both the expected earnings management and the expected cost of earnings management strictly decrease in the exercise price K, strictly increase in the number of ESO grants, and strictly decrease in the stringency of the accounting standards....Proposition 2 is the main theoretical result used in our empirical analysis. It implies that the more in-the-money the option is, the higher the extent of induced earnings management. Everything else being equal, stocks induce more earnings management than options."

So it is very possible that the change to restricted shares (ie. in the money options) may lead to further accounting problems. Kadan and Yang investigate this empirically using cross sectional regressions where they measure the effect of restricted share usage on distretionary accruals. Their findings fit existing theories very well!

" a larger amount of stock-based compensation in year t induces managers to lower the earnings in this year. Perhaps, during the grant year, managers manipulate earnings downwards in order to better the conditions of the grants (to lower the exercise price) or to save accruals for future vesting years....bonus payments induce more earnings management, which is consistent with prior research; see, for instance, Healy (1985).... In contrast, salary payments appear to mitigate earnings management, perhaps, due to the wealth effect. Interestingly, the CEOs with longer tenures tend to manipulate earnings more. Moreover, large firms tend to have more discretionary accruals consistent with the observation in Coffee (2003). Firms with more growth opportunities and lower current operating performance are engaged in more earnings management, in line with Larcker and Richardson (2004). Not surprisingly, firms with a higher stock return have less incentives to manipulate earnings"

Which deserves a WOW!

I^3! (a rarity for a paper that still has some parts undone!)

Cite:

Kadan, Ohad and Yang, Jun, "Executive Stock Options and Earnings Management - A Theoretical and Empirical Analysis" (March 15, 2005). AFA 2006 Boston Meetings Paper http://ssrn.com/abstract=615881

Corporate Governance in the US and Europe: Where Are We Now? by Tom Kirchmaier, Geoffrey Owen, Jeremy Grant

SSRN-Corporate Governance in the US and Europe: Where Are We Now? by Tom Kirchmaier, Geoffrey Owen, Jeremy Grant:

This one is long but very interesting! It is really a book more than a paper.

It is "based on a conference organised by the London School of Economics and New York University, held in London on November 4th and 5th, 2004.

The conference brought together academics and practitioners from both sides of the Atlantic to review recent developments in corporate governance, focusing in particular on the lessons to be learnt from the stock market boom-and-bust and from the corporate scandals that came to light in 2001 and 2002."

It contains many interesting insights!

A very quick "look about":

* "Why is corporate governance important? Corporate governance can be defined as
the set of control mechanisms and institutions which protect the suppliers of capital to a company, particularly suppliers of equity capital, the shareholders, who have only residual protection after all other claimants have been satisfied. Product market competition provides an incentive for managers to deploy capital efficiently, but only effective corporate governance can ensure that interests of shareholders are protected."

* "In Europe, and to a lesser extent in Japan, additional pressure to make these changes came from the growing influence of American institutional investors as shareholders in European companies. Then came the stock market crash, followed by Enron, WorldCom and other corporate scandals. The US model of corporate governance lost much of its appeal, especially in those Continental countries where the concept of shareholder value maximisation did not fit easily with long-established habits and attitudes."

* "Comparisons are often made between Anglo-American capitalism and the rest,
and it is true that the US and the UK do share some common features which distinguish them from most Continental European countries and Japan. But such generalisations obscure important differences on both sides of the divide. For example, British institutional investors tend to be more interventionist than their American counterparts."

Fascinating material done well! Definitely I^3!

Cite:
Kirchmaier, Tom, Owen, Geoffrey and Grant, Jeremy, "Corporate Governance in the US and Europe: Where Are We Now?" (April 2005). http://ssrn.com/abstract=708461

SSRN-Who Monitors the Mutual Fund Manager, New or Old Shareholders? by Woodrow Johnson

Who Monitors the Mutual Fund Manager, New or Old Shareholders? by Woodrow Johnson:

Johnson looks at the behavior of mutual fund investors to determine whether shareholders who have held the shares for longer behave differently than new shareholders. He finds that there are differences in behavior. Specifically he finds little relation between fund performace and selling behavior of existing shareholders.

From the paper:

"The main premise of the paper is that transactions from shareholders who monitor the fund's manager are correlated with returns. The first stage of the analysis compares buys with sells to see whether shareholders sell poor returns with the same vigilance they buy good returns."

Like virtually everyone who has looked at it, the author finds that net inflows increase after periods (even very short periods) of good returns. What sets this paper apart is that the data set allows Johnson to decompose these cash flows into buys and sells.

He finds that "buys" come from both new and existing shareholders with new shareholders investing more in dollar terms but existing shareholders involved in more transactions (and yes he does control for automatic investments). This difference is consistent with diversification theory.

"Sells," however, do not appear to be as closely tied to performance. Thus positive net inflows following good performance appear to be driven by increased inflows and not decreased outflows.

Again in the author's words:

"In a manner consistent with positive-feedback trading, they buy more after periods of high fund returns but less after periods the fund underperforms its benchmark index. Old shareholders generate the majority of the buy transactions|even after excluding automatic transactions and fund distributions, but new shareholders are responsible for the majority of the fund's inflow."

"Outflow is remarkably constant across all levels of fund returns: shareholders neither increase their sells during periods of poor returns nor decrease their sells during periods of good returns. These results suggest that the risk of losing assets from old shareholders does not incentivize the fund manager to work hard."

That deserves a WOW! Great paper! A definite I^3 paper!

Cite:
Johnson, Woodrow T., "Who Monitors the Mutual Fund Manager, New or Old Shareholders?" (April 28, 2005). http://ssrn.com/abstract=712825

One comment: While I loved the paper as it now is, there may be much more to it than appears at face value.

If we are to simplify the conclusion down to its bare essence we get that existing (old) shareholders are not as good of monitors as new shareholders. The application of this idea to corporate finance could be HUGE.

For instance, do longer tenured shareholders lead to different forms (or levels) of executive pay? Different capital structure? Other agency costs problems? And if so, do corporate governance infrastructures vary with the tenure of shareholders?

So many questions, so little time.

Again be sure to read the Johnson paper!

Corruption, Firm Governance, and the Cost of Capital

Garmaise and Liu present a model that has several important implications in their paper
Corruption, Firm Governance, and the Cost of Capital.

In the paper they

"develop a model of a firm owned by shareholders and administered by managers who may be either honest or dishonest. When managers have an informational advantage but shareholders retain control, dishonest managers can make false reports that distort investment and thereby reduce firm cash flows. When dishonest managers have privileged access to both information and control, firm value is further reduced and profits are diminished especially in the worst states of the world."

Put another way, Garmaise and Liu separate managerial advantages into informational and control measures. Where managers have information (but not control) advantages, managers' ability to take advantage of the informational advantages are limited. However, where the manager has both informational and control advantages, investors have little ability to limit managerial actions.

The authors take this idea and model the relationships in several steps. They begin off with the assumptions that

"Managers have a preference for large projects and empire-building. They therefore have an incentive to misreport the private signal they alone receive, neglecting to inform the shareholders of bad news. "

However, in the

"information model, shareholders retain control of the firm, and they design an optimal investment policy that reflects the potential for false reporting on the part of management....[the result is that] managerial deception leads to investment distortions, but they are not correlated with market outcomes."

So if investors still have control, systematic risk will not increase.

The authors then look at what happens if managers have both informational and control advantages.

"...managers set the investment level, basing it on the report they make to shareholders. Dishonest managers hide bad outcomes and therefore set the investment level consistently too high. Since shareholders do not have control, they cannot adjust the firm'’s investment downward to reflect the possibility of signal falsification."

So far nothing really new. However, the authors then go on to investigate the implications of the informational and control advantages.

"In the control model, however, the overinvestment selected by dishonest managers essentially gives the shareholders a more levered claim on the market; ex ante overinvestment is ex post beneficial when the market outcome is good and ex post destructive when the market outcome is poor. Since the extent of overinvestment increases with the proportion of dishonest managers, we show that the firmÂ’s beta is increasing in this proportion."

Which deserves a wow. But the paper is not done yet. The authors next look at this empirically across countries and find that the empirical evidence fits the model.

"We find that corruption increases firm betas substantially, controlling for industry, leverage and per capita GDP. For example, increasing the degree of a countryÂ’s corruption from the level of Canada to that of South Korea would increase the industry-adjusted beta of firms by 0.35."

Predictably, in countries where stong "anti-director" rights, dishonesty has less of an impact on the systematic risk.

"dishonesty has a stronger effect on firm betas in countries with weak antidirector rights, and this is what we find empirically. In countries with very strong antidirector rights corruption has no effect on beta, but when rights are moderate or weak, corruption substantially increases beta."

A definite I^3 paper! (interesting, informative, and important)

Cite:
Mark J. Garmaise and Jun Liu, "Corruption, Firm Governance, and the Cost of Capital" (February 28, 2005). Finance. Paper 1-05. http://repositories.cdlib.org/anderson/fin/1-05

I was just told that the paper is also available through SSRN.

SSRN-Firm Size, Debt Capacity, and Corporate Financing Choices by Senay Agca, Abon Mozumdar

Firm Size, Debt Capacity, and Corporate Financing Choices by Senay Agca, Abon Mozumdar:

Yet another paper on the pecking order! This one is by Agca and Mozumdar. You will definitely want to read it!

There is a large debate in the financial world as to whether Myers' and Majluf's pecking order holds. Their famous hypothesis states that firms want to use internally generated funds first, and then if they still have to issue new securities, they will issue safer (debt) first and only use equity as a last resort. However, the evidence on this has been mixed to say the least with some saying the Pecking order is alive and well, while others suggesting it is dead. In this paper Agca and Mozumdar report in on the "it's ALIVE!" side.

From their abstract:

"conflicting nature of the existing evidence on the pecking order theory is due to the difference between financing practices of large and small firms, and the skewness of the firm size distribution. The theory performs poorly for small firms because they have low debt capacities that are quickly exhausted, forcing them to issue equity. The pecking order theory performs satisfactorily for large firms, firms with rated debt, and when the impact of debt capacity is accounted for"

The authors explain that some of the difficulty in previous studies has been brought about by the treatment of firm size.

For instance, in possibly the most well known of the pecking order studies "Frank and Goyal (2003) normalize all variables by firm size and then use equally weighted averages. This increases the importance of small firms whose financing mix conforms poorly with the pecking order...." (here is a 2001 version of the Frank and Goyal paper)

In their current paper Agca and Mozumdar break the firms into deciles based on size and then examine firm financing behavior. The conclusion?

"We find that working with nonnormalized numbers yields results that are in line with the conventional notions about corporate financing practices. Furthermore, sorting firms into size deciles, we find that the debt-deficit sensitivity coefficients and R2 values are low for small firms, as in Frank and Goyal (2003), while they are high for large firms, as in Shyam-Sunder and Myers(1999)."

So size does matters. Or as the authors state:

"Why does the pecking order theory perform so differently for large and small firms? Our analysis shows that this is due to different factors assuming primacy in the two cases. How much a firm borrows depends on how much it can borrow (its debt capacity), as well as how much it wants to borrow. The observed debt level is the lower of the two. The pecking order theory focuses on the latter, and largely ignores the former."

Or in the vernacular: the pecking order works when there are not other constraints (such as debt capacity) in the way.

An I^3 paper for sure!

Cite:

Agca, Senay and Mozumdar, Abon, "Firm Size, Debt Capacity, and Corporate Financing Choices" (December 2004). http://ssrn.com/abstract=687369

SSRN-Sources of Hedge Fund Returns: Alphas, Betas, and Costs by Roger Ibbotson, Peng Chen

SSRN-Sources of Hedge Fund Returns: Alphas, Betas, and Costs by Roger Ibbotson, Peng Chen

With the growth of hedge funds in recent years, it is good that Ibbotson and Chen investigate whether these funds actually do as well as they often claim. And the answer? They do well, but not as well as claimed.

Some of the more serious problems in studying hedge funds are data related. Specifically, survivorship bias and the related backfilling of data lead to a bias in reported returns. Ibbotson and Chen investigate these problems using their data from 1995 to 2004 and as expected find that the problem is quite severe especially in smaller funds.

"The equally weighted performance of the funds that existed at the end of the sample period had a compound annual return of 16.64% net fees. Including dead funds reduced this return to 13.90%. Excluding backfill further reduced the return to 9.06%, net of fees."

So the returns are lower than many believed. That does not mean that the returns are not good relative to other investments. The authors therefore try to break this return down to determine "the average amount of hedge fund returns that come from long-term beta exposures versus the hedge fund value-added alpha."

They find that alphas are positive and significant:

"Note that the index of all the funds has an annual compound return of 9.1% over the period. This return was not as high as the S&P 500 return of 12.2%, but given the low betas on stocks (0.33) and bonds (–0.30), with a beta on cash of almost one (0.97), the alpha was a high 3.7% and statistically significant at the 5% level. Most catergories have low RSQs as well."

Interestingly, this alpha (which can be seen as abnormal return), is split almost evenly between fees to the fund and returns to the investors:

Conclusion:

While the returns may not be as high as reported, they are still better than would be expected in a perfectly efficient market and the returns are not highly correlated with broader marketindicess.

In the author's words:

"Thus, our results confirm that hedge funds added alpha over the period, and also provided excellent diversification benefits to stock, bond, and cash portfolios."

Which might just explain some of their popularity ;)

Definitely another of those I^3 papers!

Cite:

Ibbotson, Roger G. and Chen, Peng, "Sources of Hedge Fund Returns: Alphas, Betas, and Costs" (June 2005). Yale ICF Working Paper No. 05-17. http://ssrn.com/abstract=733264

Is growth good for shareholders?

I love articles that turn the conventional wisdom on its head (and I held this view long prior to ristening to Freakonomics), but that said, this one surprised me. What is more, in doing looking at growth and returns, Ritter offers valuable insights into what matters in forecasting expected returns.

Jay Ritter finds that shareholder returns are negatively correlated with economic growth.
In his words:

"... does economic growth benefit stockholders? This article argues on both theoretical and empirical grounds that the answer is no. Empirically, there is a cross-sectional correlation of –0.37 for the compounded real return on equities and the compounded growth rate of real per capita GDP for 16 countries over the 1900-2002 period."

"I am not arguing that economic growth is bad. There is ample evidence that people who live in countries with higher incomes have longer life spans, lower infant mortality, etc. Real wages are higher. But although consumers and workers may benefit from economic growth, the owners of capital do not necessarily benefit."

Later:

"This article argues that limited historical data on stock returns are not a constraint, since these data are irrelevant for estimating future returns, whether in emerging markets or developed countries. This point has been made before, although possibly not as explicitly, in Fama and French (2002) and Siegel (2002), among other places. Of greater originality, this article argues that not only is the past irrelevant, but to a large extent knowledge of the future real growth rate for an economy is also irrelevant."

"I argue that only three pieces of information are needed for estimating future equity returns. The first is the current P/E ratio, although earnings must be smoothed to adjust for business cycle fluctuations. The second is the fraction of corporate profits that will be paid out to shareholders via share repurchases and dividends, rather than accruing to managers or blockholders when corporate governance problems exist. The third is the probability of catastrophic loss, i.e., the chance that “normal” profits are a biased measure of expected profits because of “default” due to hyperinflation, revolution, nuclear war, etc. This third point is the
survivorship bias issue, applied to the future."

A few other highlights:

*"I believe that the large stock price effects associated with recessions are partly due to higher risk aversion at the bottom of a recession, but also due partly to an irrational overreaction."

He argues that while some claim the high returns experienced in the US are the result of a survivorship bias, this claim is probably overstated. For this argument he points out that 1. in 1900 most people were positive on the devolped world, 2. most of the developed world economies today are the same as they were in 1900 (with a few exceptions), and 3. no convincing evidence exists to suggest that the market's risk premium (i.e. the return above the so-called risk free rate) can be expalined through a survivorship bias hypothesis. Why? because the so-called "risk free rate" may increase in response to systematic risk factors.

It is for this third point that Ritter offers one of my favorite lines from any finance paper:

* "Third, even if survivorship bias is important in explaining realized stock returns, it is not clear that survivorship bias should affect the equity risk premium, since bond and T-bill investors suffer just as much from devastation as equity holders do. In the 1950s and 1960s, when it might plausibly be argued that a nuclear war involving the U.S. and the Soviet Union had a significant probability of occurring in future decades, real rates of interest on U.S. government bonds were very low, suggesting that investors had no significant desire for immediate consumption before they were incinerated." (italics are mine)

So why are returns negatively correlated with economic performance?

* "Why is there a negative correlation between real returns and real per capita income growth? ....Siegel (1998) hypothesizes, that part of the negative correlation between real stock returns and per capita GDP growth is because high growth was impounded into prices at the start of the period."
*"optimistic investors will bid up stock prices, lowering the dividend yield."
*"One reason that GDP growth does not necessarily translate into high returns for minority stockholders is that managers may expropriate profits via sweetheart deals, tunneling, etc."

So what does matter? Ritter concludes with what many may deem the most important part of the paper:

"What...does predict future equity returns? The answer is simple: the current
earnings yield. The major adjustment that needs to be made is to smooth earnings for the effects of business cycles. Economic growth doesn’t matter. As a first approximation, the return on existing shares will equal the earnings yield on these shares, subject to the caveats that expropriation by insiders or catastrophic market meltdowns will prevent minority shareholders from receiving future earnings."

If the earnings yield is the real cost of equity capital, does this mean that the textbooks are wrong to say that the E/P ratio of a company is not its cost of equity capital? The answer is yes and no. A company can rationally be expected to earn above- or below-normal ROE for a period of time (economic profits), so in general it is incorrect to state that a firm’s cost of equity capital is its earnings yield. But for the market as a whole, above- and below-normal rates of profit growth largely cancel out, so in fact the market’s smoothed earnings yield is the expected real return on the market."

An definite I^3 paper. Well worth your time!

(for the uninitiated: I^3 = Interesting, Informative, Important)

Cite:
Ritter, Jay R., "Economic Growth and Equity Returns" (November 1, 2004). http://ssrn.com/abstract=667507
Although I question the date, as it says it was last edited on June 24, 2005.

Improved Forecasting of Mutual Fund Alphas and Betas by Matthew Spiegel, Harry Mamaysky, Hong Zhang

Maybe mutual funds do beat the market more than previously reported?


SSRN-Improved Forecasting of Mutual Fund Alphas and Betas by Matthew Spiegel, Harry Mamaysky, Hong Zhang


Spiegel, Mamaysky, and Zhang look at measurement errors in measuring mutual fund performance and find that past researchers have not always gotten it right. In fact, when correct betas are used, it seems that find managers do better than we had thought.

A few quick quotes:

"...(betas) are poorly estimated. This in turn results in a systematic bias in the estimated alphas. Sorting on the estimated alphas populates the top and bottom deciles not with the best and worst funds, but with those having the greatest estimation error"

"Since mutual funds often, but not always, employ dynamic trading strategies their betas move over time in a ways that differ from fund to fund. Since no one statistical model is likely to fit every fund, the result is a great deal of misspecification error. This paper shows that the combined use of an OLS and Kalman filter model increases the number of funds with predictable out of sample alphas by about 60%"

"Overall, this paper’s findings offers support for at least part of their thesis;
managerial skill exists but its benefit to mutual fund investors is short lived."

Defnitely an I^3 designation! (Insightful, Interesting, and Important)


Cite:

Spiegel, Matthew I., Mamaysky, Harry and Zhang, Hong , "Improved Forecasting of Mutual Fund Alphas and Betas" (January 4, 2005). Yale ICF Working Paper No. 04-23. http://ssrn.com/abstract=567284

SSRN-Taxes and Financing Decisions by Jonathan Lewellen, Katharina Lewellen

SSRN-Taxes and Financing Decisions by Jonathan Lewellen, Katharina Lewellen

Next week in class we begin capital structure, so I simply could not pass up this article by Lewellen and Lewellen on capital structure and taxes.

Short Version: The authors show that internal equity has tax advantages. Moreover, "The trade-off between debt, retained earnings, and external equity depends critically on the tax basis of investors' shares relative to current price." Their paper suggest that much of what we thought we knew about capital structure, may not be quite right! "These predictions would all be contrary to the way trade-off theory is often interpreted"

Longer Version: The paper develops the consequences of Miller's 1977 paper that showed the tax benefits of debt are overstated when personal taxes are ignored. In their current paper, Lewellen and Lewellen (LL) build on this insight.

LL summarize the reson for their paper in a nice succient parapgraph:

"Our results follow from a simple observation whose importance for capital structure seems largelyunappreciated: when a firm distributes cash to shareholders, using either dividends or repurchases, thepayout triggers personal taxes that could otherwise be delayed. Thus, using internal cash for investment, rather than paying it out to equityholders, has a tax advantage – the deferral of personal taxes – thatpartially offsets the double-taxation costs of equity. An immediate implication is that internal equity is less costly than external equity for tax reasons."

Of course this is not new. Other have looked at this and have shown that external equity has some tax disadvantages, what is different in this paper is that looks not only at differing capital gains rates, but also is based in part on what the tax basis of the shares are to investors.

"Most clearly, our results show that the traditional view of debt and taxes, as exemplified by Miller (1977), is valid only when capital gains are taxed on accrual.... The main features of the
traditional view are (i) internal and external equity are assumed to be equivalent, and (ii) the tax cost of equity depends on the total taxation of equity relative to debt, (1 – τc)(1 – τe) – (1 – τi). The first statement is generally false and the second is, at best, incomplete (it misses the distinction between internal and external equity and it is unclear about τe)."

A consequence of this is that the tax advantages often get swept under the rug and we look elsewhere for explanations. As teh authors state:

"Thus, capital structure dynamics in these models are driven by agency problems and adjustment costs – the focus of the studies –not by a tax advantage of internal over external equity. The literature sometimes acknowledges that, because capital gains are not taxed until they are realized, the effective tax rate on capital gains is less than the statutory rate. But simply allowing for a low effective tax rate isn’t sufficient because it misses
the differential tax costs of internal and external equity."

So what does this all mean? Firms may have less of a reason to increase debt and a firm's capital structure is a function of not only firm characteristics, but also investor characteristics (such as effective tax rate).

And then the kicker! The model helps to explain the currrent problems we see with the trade-off theories:

"Indeed, our model suggests a kind of tax-induced pecking order, with debt and internal equity both preferred to external equity (the ordering of debt and internal equity is ambiguous and could change over time, for example, as a function of current leverage). Thus, our model might help explain two findings that have been described as ‘major failures’ of trade-off theory: (i) profitable firms seem to have too little leverage, and (ii) changes in debt largely absorb short-run variation in internal cash surpluses and deficits (e.g.,Shyam-Sunder and Myers, 1999; Fama and French, 2002)." (pp. 17-18)

Wow. I^3 (Informative, Important, and Interesting!)

Suggested Citation
Lewellen, Jonathan W. and Lewellen, Katharina, "Taxes and Financing Decisions" (October 2004). AFA 2005 Philadelphia Meetings Paper. http://ssrn.com/abstract=647847