Forthcoming Articles

Does Financial Market Structure Impact the Cost of Raising Capital?

James Brugler, Carole Comerton-Forde, and Terrence Hendershott

We provide direct evidence on financial market structure and the cost of raising capital by examining major market structure changes in US equities markets. Only the Order Handling Rules (OHR), which transformed Nasdaq from a dealer-oriented over-the-counter market to a market where investors directly interact with each other via limit orders, lowered the cost of raising capital. Using a difference-in-difference framework relative to the NYSE and exploiting the OHR’s staggered implementation, we find that the OHR reduced the implicit costs (under-pricing) of seasoned equity offerings by one to two percentage points compared to a pre-OHR average of 3.6 percent.

The Puzzle of Frequent and Large Issues of Debt and Equity

Rongbing Huang and Jay R. Ritter

More frequent, larger, and more recent debt and equity issues in the prior three fiscal years are followed by lower stock returns in the subsequent year. The intercept of a q-factor calendar-time regression for the value-weighted portfolio of firms with at least three large issues is -0.63% per month (t-statistic =-4.31). Purging the factor returns of recent issuers increases the magnitude of the estimated underperformance following frequent equity issues. A value-weighted Fama–MacBeth regression shows that firms with three equity issues underperform non-issuers by 0.65% per month (t-statistic =-2.65). Earnings announcement returns are low following frequent issues, especially equity issues.

The Impact of Stronger Shareholder Control on Bondholders

Sadra Amiri-Moghadam, Siamak Javadi, and Mahdi Rastad

We study the impact of stronger shareholder control on bondholders. We find that the passage of shareholder-sponsored governance proposals causes a decline in CDS spreads, indicating a net positive effect on bondholders. Evidence suggests that the direct benefit of stronger shareholder control, through “management disciplining” channel, is larger than the combined adverse effects of directly escalating shareholder-bondholder conflict and indirectly exacerbating exposure to shareholder opportunism. Results are stronger for firms with existing high levels of shareholder-bondholder conflict and for proposals that mitigate managerial entrenchment without exacerbating risk-shifting. Finally, stronger shareholder control improves credit ratings and operating performance in the long term.

How Does Forced CEO Turnover Experience Affect Directors?

Jesse Ellis, Lixiong Guo, and Shawn Mobbs

We study changes in independent director behavior and labor market outcomes after experiencing a forced CEO turnover. We find they are more willing to fire CEOs of underperforming firms, hire outside CEOs after a firing and encourage better board meeting attendance by fellow directors. We also find that shareholders of poorly performing firms react positively when experienced directors join the board. It does come with a small cost for directors, in terms of additional directorships, though the cost is not as great as that for directors who do not fire the CEO of a poorly performing firm.

Do Analysts and Their Employers Value Access to Management? Evidence from Earnings Conference Call Participation

Ling Cen, Jing Chen, Sudipto Dasgupta, and Vanitha Ragunathan

The literature examining analyst activity assumes that access to management is valued by analysts and their employers. We propose a readily observable measure of access: how often an analyst is invited to be among the first to ask questions in the Q&A session of an earnings conference call. These “early participants” are more successful in the labor market than peers from the same brokerage when their brokerages close. Our results show that access is valued by both sell-side and buy-side employers and reflects connectivity to management as well as dimensions of analyst skill not captured in traditional measures of performance.

Debtholder Monitoring Incentives and Bank Earnings Opacity

Piotr Danisewicz, Danny McGowan, Enrico Onali, and Klaus Schaeck

We exploit exogenous legislative changes that alter the priority structure of different classes of debt to study how debtholder monitoring incentives affect bank earnings opacity. We present novel evidence that exposing nondepositors to greater losses in bankruptcy reduces earnings opacity, especially for banks with larger shares of nondeposit funding, listed banks, and independent banks. The reduction in earnings opacity is driven by a lower propensity to overstate earnings and is more pronounced among larger banks, and in banks with larger real estate loan exposure. Our findings highlight the importance of creditors’ monitoring incentives in improving the quality of information disclosure.

Granularity of Corporate Debt

Jaewon Choi, Dirk Hackbarth, and Josef Zechner

We study the extent to which firms spread out their debt maturity dates, and refer to it as “granularity of corporate debt.” Guided by a model with rollover frictions we document based on a large sample of corporate bond issuers that maturities are more dispersed for larger and more mature firms, for firms with better investment opportunities, with higher leverage, and with lower profitability. During the recent financial crisis firms with valuable investment opportunities implemented more dispersed maturity structures. Finally, firms manage granularity actively and adjust toward target levels.

Internal Labor Markets, Wage Convergence, and Investment

Rui C. Silva

I document wage convergence in conglomerates using detailed plant-level data: workers in low-wage industries collect higher-than-industry wages when the diversified firm also operates in high-wage industries. I confirm this effect by exploiting the implementation of NAFTA and changes in minimum wages at the state-level as sources of exogenous increases in wages in some plants. I then track the evolution of wages of the remaining workers of the firm, relative to workers of unaffiliated plants. Plants where workers collect higher-than-industry wages operate with higher capital intensity, suggesting that internal labor markets may affect investment decisions in internal capital markets.