Showing papers in "The Journal of Business in 2001"
TL;DR: In this paper, the authors argue that hazard models are more appropriate than single-period models for forecasting bankruptcy and propose a model that uses both accounting ratios and market-driven variables to produce out-of-sample forecasts.
Abstract: I argue that hazard models are more appropriate than single-period models for forecasting bankruptcy. Single-period models are inconsistent, while hazard models produce consistent estimates. I describe a simple technique for estimating a discrete-time hazard model. I find that about half of the accounting ratios that have been used in previous models are not statistically significant. Moreover, market size, past stock returns, and idiosyncratic returns variability are all strongly related to bankruptcy. I propose a model that uses both accounting ratios and market-driven variables to produce out-of-sample forecasts that are more accurate than those of alternative models. Copyright 2001 by University of Chicago Press.
1,821 citations
TL;DR: In this paper, a model of dynamic capital structure is proposed, where the optimal strategy is implemented over an arbitrarily large number of restructuring periods, a scaling feature inherent in the framework permits simple closed-form expressions to be obtained for equity and debt prices.
Abstract: A model of dynamic capital structure is proposed. Even though the optimal strategy is implemented over an arbitrarily large number of restructuring‐periods, a scaling feature inherent in the framework permits simple closed‐form expressions to be obtained for equity and debt prices. When a firm has the option to increase future debt levels, tax advantages to debt increase significantly, and both the optimal leverage ratio range and predicted credit spreads are more in line with what is observed in practice.
718 citations
TL;DR: In this paper, the authors show that the interest rate paid on federal funds transactions reflects differences in credit risk across borrowers, and that the size and relative importance in the funds market of the trading institutions are shown to affect the rates charged for overnight borrowing, thereby providing insight into the nature of competition in the federal funds market.
Abstract: This study provides evidence that banks are effective monitors of their peers by showing that the interest rate paid on federal funds transactions reflects differences in credit risk across borrowers. In addition, the size and relative importance in the funds market of the trading institutions are shown to affect the rates charged for overnight borrowing, thereby providing insight into the nature of competition in the federal funds market. Transaction volume and size-of-transaction effects are uncovered, as is evidence of relationship banking between banks. These results are made possible by unique data identifying individual federal funds transactions. Copyright 2001 by University of Chicago Press.
369 citations
TL;DR: In this paper, the authors developed a dynamic model of a firm in which diversification can be a value-maximizing strategy even if specialization is generally efficient, and the central idea is that firms are composed of organizational capabilities that can be profitable in multiple businesses.
Abstract: This article develops a dynamic model of a firm in which diversification can be a value‐maximizing strategy even if specialization is generally efficient. The central idea is that firms are composed of organizational capabilities that can be profitable in multiple businesses and that diversification is a search process by which firms seek businesses that are good matches for their capabilities. The theory can account for diversified firms trading at discounts compared to single‐segment firms, as well as some empirical regularities that are challenging to the agency theory of diversification, such as positive returns to diversification announcements.
268 citations
TL;DR: For example, the authors found that the sensitivity of investment to internally generated funds increases with a firm's reliance on bank financing, and that the greater cash sensitivity for investment for bank-dependent firms arises only for the largest capital expenditures.
Abstract: Using detailed information on the debt structure of 250 publicly traded U.S. firms over the 1980–93 period, we find that the sensitivity of investment to internally generated funds increases with a firm’s reliance on bank financing. Bank‐dependent firms also hold larger stocks of liquid assets and have lower dividend payout rates. However, the greater cash sensitivity of investment for bank‐dependent firms arises only for the largest capital expenditures (relative to assets). For most levels of investment spending, bank‐dependent firms appear to be slightly less cash‐flow‐constrained than firms with access to public debt markets.
179 citations
TL;DR: In this paper, the authors examined whether insiders use private information to time the exercises of their executive stock options, and they found negative abnormal stock returns after option exercise only after exercises by top managers at small firms.
Abstract: This article examines whether insiders use private information to time the exercises of their executive stock options. Before May 1991, insiders had to hold the stock acquired through option exercise for 6 months. Exercises from that regime precede significantly positive abnormal stock performance, suggesting the use of inside information to time exercises. By contrast, we find little evidence of such timing since insiders have been able to sell acquired shares immediately. Now, such timing should show up as negative abnormal stock returns after option exercise. However, we find negative stock performance only after exercises by top managers at small firms.
157 citations
TL;DR: The authors examined the effect of corporate diversification on the equity issue process in a sample of 641 equity issues from 1983 to 1994 and found that issues by diversified firms are viewed less negatively by the market than are issues by focused firms.
Abstract: We examine the effect of corporate diversification on the equity‐issue process in a sample of 641 equity issues from 1983 to 1994. We find that issues by diversified firms are viewed less negatively by the market than are issues by focused firms. This finding supports the hypothesis that diversification helps alleviate asymmetric information problems. Our results appear inconsistent with the hypothesis that reduced transparency exacerbates asymmetric information problems for diversified firms. The results also appear inconsistent with the hypothesis that the market anticipates that the funds raised from equity issues by diversified firms will be invested in particularly poor projects.
148 citations
TL;DR: In this paper, the authors explore a product market motive for going public and develop a model where consumers discern product quality from the stock price, predicting that only better quality firms will go public.
Abstract: Given recent public attention paid to high‐flying Internet IPOs such as Yahoo and Amazon.com, we explore a product market motive for going public. We develop a model where consumers discern product quality from the stock price. The model predicts that only better‐quality firms will go public. Effects of IPO announcements on rival firms’ stock prices are related to inferences about market size and market share. The model also predicts that the likelihood of “hot issue” markets depends on the distribution of market size uncertainty and the degree of network externalities present in consumer preferences.
143 citations
TL;DR: In this paper, the authors model a family business as a household operating a production technology in which the household's human capital is a specific business skill and each generation can either bequeath the business and the business skill to the next generation or sell the business through a financial intermediary.
Abstract: We model a family business as a household operating a production technology in which the household's human capital is a specific business skill. Each generation can either bequeath the business and the business skill to the next generation or sell the business through a financial intermediary and bequeath the revenue. Using a dynamic model, we analyze how the imperfections in primary capital markets affect the evolution of family businesses. Whether recourse to external financing exists or not, our model predicts that family businesses are bigger, last longer, and have lower investment rates in economies with less developed primary capital markets. Copyright 2001 by University of Chicago Press.
100 citations
TL;DR: In this paper, the authors present and analyze new monthly index series for U.K. financial assets, covering equities, bonds, bills, and inflation, and use their indices to estimate equity and bond premia and to make international comparisons, especially with the United States, Germany, and Japan.
Abstract: We present and analyze new monthly index series for U.K. financial assets, covering equities, bonds, bills, and inflation. The data are consistent with the CRSP/Ibbotson series for the United States. We use our indices to estimate equity and bond premia and to make international comparisons, especially with the United States, Germany, and Japan. We illustrate potential uses of the new series by investigating stock market seasonality, inflation-linked bonds, real dividend growth rates, and the small-firm effect. While some of our findings resemble U.S. results, we also report differences between U.K. and U.S. stock market behavior. Copyright 2001 by University of Chicago Press.
84 citations
TL;DR: In this article, the authors examine the potential for external conflicts in large, diversified business groups and evaluate the trade-off between visibility and complexity, finding that complexity dominates visibility, providing scope for opportunistic behavior against outside investors.
Abstract: In this article, we examine the potential for external conflicts in large, diversified business groups On the one hand, these highly visible groups facilitate the detection of opportunistic actions Accordingly, reputational concerns should effectively constrain group behavior On the other hand, these groups' complexities hinder outsiders from unveiling group strategies from among a myriad of transactions This complexity limits the power of reputational concerns to constrain actions Using data on initial public offer initial returns, we evaluate the trade-off between visibility and complexity The evidence suggests that complexity dominates visibility, providing scope for opportunistic behavior against outside investors Copyright 2001 by University of Chicago Press
TL;DR: This article examined the predictive ability of informed trading with respect to post-spin-off stock performance and corporate control transactions and found that subsequent to spin-offs, insiders are substantial purchasers of stock in public subsidiaries and sellers in parent firms.
Abstract: Following pro rata spin-offs, shareholders, including insiders, trade their stock holdings in public subsidiaries independently of trades in parent firms. This article examines the predictive ability of informed trading with respect to post-spin-off stock performance and corporate control transactions. I find that subsequent to spin-offs, insiders are substantial purchasers of stock in public subsidiaries and sellers in parent firms. The trades of insiders are significantly related to post-spin-off stock returns, takeovers, and delistings of spun-off firms. The results are highly significant for senior managers of public subsidiaries, but they do not generally hold for outside directors or large blockholders. Copyright 2001 by University of Chicago Press.
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TL;DR: In this paper, the authors investigate whether a trading strategy based on ex post analysis would have earned excess returns on an ex ante basis over the period 1989-95, when compared with the matched firm benchmark used by Cusatis et al. and the Fama and French (1993) 3-factor model.
Abstract: Cusatis, Miles, and Woolridge (1993) report large positive excess returns following spin-offs over the period 1965-88. We investigate whether a trading strategy based on this ex post analysis would have earned excess returns on an ex ante basis over the period 1989-95. When compared with the matched firm benchmark used by Cusatis et al. and the Fama and French (1993) 3-factor model, the strategy does not beat the benchmark. When compared with size- and book-to-market-matched portfolios, the strategy typically beats the benchmark. On an ex ante basis, post-spin-off returns provide a shaky basis for rejecting the efficient market hypothesis. Copyright 2001 by University of Chicago Press.
TL;DR: In this article, the authors investigate why firms include warrants in their initial public offerings (IPOs) and examine two hypotheses about the inclusion of warrants in an IPO, the agency-cost hypothesis emphasizes the need for sequential financing for relatively young firms, because sequential financing reduces the opportunities for managers to squander money on unprofitable projects.
Abstract: We investigate why firms include warrants in their initial public offerings (IPOs). We use a data set of Australian IPOs to examine two hypotheses about the inclusion of warrants in an IPO. The agency-cost hypothesis emphasizes the need for sequential financing for relatively young firms, because sequential financing reduces the opportunities for managers to squander money on unprofitable projects. The signaling hypothesis focuses on the choice of securities as a signaling mechanism in a market characterized by information asymmetry. The evidence favors the signaling hypothesis, thus contributing to our understanding of the types of securities issued by firms.
TL;DR: In this paper, the authors provided a model in which a supplier's use of short and long-term debt depends on the demand for its product, and the model predicts that suppliers use short-term Debt to match their assets' and liabilities' maturities and their incentive to do so is stronger, the larger the term premium.
Abstract: This study provides a model in which a supplier’s use of short‐ and long‐term debt depends on the demand for its product. The model predicts that suppliers use short‐term debt to match their assets' and liabilities' maturities and that their incentive to do so is stronger, the larger the term premium. The model also predicts that the use of short‐term debt increases the amplitudes of the supplier’s investment, production, and sales cycles. These changes occur because the use of short‐term debt permits suppliers to match production and sales more closely to the pattern of demand for the final good.
TL;DR: In this article, the role of risk overhang in non-life insurance market disruptions is investigated, and it is shown that exposure from past business transactions can reduce activity in related business lines, sometimes to the point where no new trade occurs.
Abstract: We show that exposure from past business transactions – risk overhang – can reduce activity in related business lines, sometimes to the point where no new trade occurs. We focus primarily on the role of overhang in nonlife insurance market disruptions. Our model predicts that the relative impact, duration, and character of supply disruptions are related to the extent of overhang. These predictions are consistent with differences between the mid-1980s liability insurance crisis and the early-1990s catastrophe reinsurance crisis. The overhang model predicts attributes of these crises that prior explanations relying on adverse selection do not. We also discuss applications of the overhang model to disruptions in lending and securities markets.
TL;DR: The authors found that trading stops are not a necessary condition for the reverse-J variance pattern and suggested that private information is not a sufficient condition for reverse-j variance patterns in the stock market.
Abstract: The intraday literature suggests that returns, variances, and volume form an intraday reverse‐J pattern. Two competing theories explain the observed patterns: private information about future security prices and trading stoppages. The Federal funds market allows a unique opportunity to study the causes of intraday patterns because private information common to most markets does not play a role in setting prices. We find reverse‐J variance patterns while accounting for generalized autoregressive conditional heteroskedasticity (GARCH) model effects. Our results support trading stops as an explanation for the reverse‐J pattern and suggest that private information is not a necessary condition for the observed pattern.
TL;DR: In this paper, the authors test and reject the hypothesis that managers call in-the-money convertibles when they view a decline in the value of the firm as likely, and find that insiders generally buy equity before conversion-forcing calls.
Abstract: We test and reject the hypothesis that managers call in‐the‐money convertibles when they view a decline in the value of the firm as likely. Inconsistent with this view, we find that insiders generally buy equity before conversion‐forcing calls. Also, analysts tend to raise their earnings forecasts following a call. Thus, our evidence supports the alternative hypothesis that the price decline immediately following conversion‐forcing calls is a purely transitory decline caused by the anticipated increase in the supply of equity. Indeed, our evidence confirms that the initial price decline is reversed in the weeks following the announcement.
TL;DR: In this article, the authors show that it is always possible to design a delivery-settled futures contract that is less susceptible to cornering by a large long than any given cash settled contract.
Abstract: Replacement of delivery settlement of futures contracts with cash settlement is frequently proposed to reduce the frequency of market manipulation. This article shows that it is always possible to design a delivery-settled futures contract that is less susceptible to cornering by a large long than any given cash-settled contract. Such a contract is more susceptible to manipulation by large shorts, however. Therefore, cash settlement does not uniformly dominate delivery settlement as a means of reducing the frequency of market power manipulations in derivatives markets. The efficient choice of settlement mechanism depends on whether supply and demand conditions favor short or long manipulations. Copyright 2001 by University of Chicago Press.
TL;DR: The authors examined manager style, tax dilution, and manager inefficiency as three potential explanations for Japanese mutual fund underperformance over the past two decades, finding that Japanese mutual funds consistently and dramatically underperformed risk-adjusted benchmarks.
Abstract: Over the past 2 decades, Japanese mutual funds have consistently and dramatically underperformed risk-adjusted benchmarks. In this article, we examine manager style, tax dilution, and manager inefficiency as three potential explanations for this puzzle. Grouping funds by style of asset management, we find evidence that confirms Cai, Chan, and Yamada's (1997) conjecture that tax dilution contributes significantly to underperformance. We propose a simple instrument to control for this dilution effect. Using this instrument, we find that alphas of Japanese funds are statistically indistinguishable from zero for most types of funds over the period 1982-95. Copyright 2001 by University of Chicago Press.
TL;DR: In this article, the authors consider trading costs in the transparent, competitive open outcry markets of the Chicago Mercantile Exchange (CME), in which market makers have no affirmative obligation to trade.
Abstract: We consider trading costs in the transparent, competitive open outcry markets of the Chicago Mercantile Exchange (CME), in which market makers have no affirmative obligation to trade. We document that while CME spreads are similar in magnitude to those in other markets, realized spreads are often negative. A plausible explanation is that CME market makers are able to employ more complex trading strategies than their equity market counterparts because they are not bound by affirmative obligation. The evidence suggests that market transparency and market maker obligations are important determinants of intraday variation in trading costs. Copyright 2001 by University of Chicago Press.
TL;DR: In this article, the authors examine in a Cournot duopoly model the well-known view that short-term capital market debt can control managerial moral hazard and show that shortterm debt does not provide this discipline because of management's manipulation of the information flow to the market.
Abstract: We examine in a Cournot duopoly model the well-known view that short-term capital market debt can control managerial moral hazard. We show that short-term debt does not provide this discipline because of management's manipulation of the information flow to the market. Shareholders may nevertheless prefer short-term debt because it motivates management to be more aggressive in the product market. We contrast short-term and long-term capital market financing with bank credit that includes monitoring. The empirical implications link managerial agency, predation, and the choice of debt maturity and funding source. Copyright 2001 by University of Chicago Press.