Showing papers on "Equity (finance) published in 2005"
TL;DR: The authors survey 384 financial executives and conduct in depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions, finding that maintaining the dividend level is on par with investment decisions while repurchases are made out of the residual cash flow after investment spending.
1,577 citations
TL;DR: This paper showed that equity market liberalization, on average, leads to a 1% increase in annual real economic growth and that the largest growth response occurs in countries with high-quality institutions.
1,460 citations
TL;DR: In this paper, the authors show that the fraction of publicly traded industrial firms that pay dividends is high when retained earnings are a large portion of total equity (and of total assets) and falls to near zero when most equity is contributed rather than earned.
Abstract: Consistent with a lifecycle theory of dividends, the fraction of publicly traded industrial firms that pays dividends is high when retained earnings are a large portion of total equity (and of total assets) and falls to near zero when most equity is contributed rather than earned. We observe a highly significant relation between the decision to pay dividends and the earned/contributed capital mix, controlling for profitability, growth, firm size, leverage, cash balances, and dividend history, a relation that also holds for dividend initiations and omissions. In our regressions, the mix of earned/contributed capital has a quantitatively greater impact than measures of profitability and growth opportunities. We document a massive increase in firms with negative retained earnings (from 11.8% of industrials in 1978 to 50.2% in 2002). Controlling for the earned/contributed capital mix, firms with negative retained earnings show virtually no change in their propensity to pay dividends from the mid-1970s to 2002, while those whose earned equity makes them reasonable candidates to pay dividends have a propensity reduction that is twice the overall reduction in Fama and French (2001). All our evidence supports the lifecycle theory of dividends, in which a firm's stage in that cycle is well-proxied by its mix of internal and external capital.
1,262 citations
TL;DR: In this paper, the authors explore a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-1996, and show that a "gravity" model explains international transactions in financial assets at least as well as goods trade transactions.
1,244 citations
TL;DR: The authors empirically examined whether firms engage in a dynamic rebalancing of their capital structures while allowing for costly adjustment and found that firms actively rebalance their leverage to stay within an optimal range.
Abstract: We empirically examine whether firms engage in a dynamic rebalancing of their capital structures while allowing for costly adjustment. We begin by showing that the presence of adjustment costs has significant implications for corporate financial policy and the interpretation of previous empirical results. After confirming that financing behavior is consistent with the presence of adjustment costs, we find that firms actively rebalance their leverage to stay within an optimal range. Our evidence suggests that the persistent effect of shocks on leverage observed in previous studies is more likely due to adjustment costs than indifference toward capital structure. A TRADITIONAL VIEW IN CORPORATE FINANCE is that firms strive to maintain an optimal capital structure that balances the costs and benefits associated with varying degrees of financial leverage. When firms are perturbed from this optimum, this view argues that companies respond by rebalancing their leverage back to the optimal level. However, recent empirical evidence has led researchers to question whether firms actually engage in such a dynamic rebalancing of their capital structures. Fama and French (2002), among others, note that firms’ debt ratios adjust slowly toward their targets. That is, firms appear to take a long time to return their leverage to its long-run mean or, loosely speaking, optimal level. Moreover, Baker and Wurgler (2002) document that historical efforts to time equity issuances with high market valuations have a persistent impact on corporate capital structures. This fact leads them to conclude that capital structures are the cumulative outcome of historical market timing efforts, rather than the result of a dynamic optimizing strategy. Finally, Welch (2004) finds that equity price shocks have a long-lasting effect on corporate capital structures as well. He concludes that stock returns are the primary determinant of capital structure changes and that corporate motives for net issuing activity are largely a
1,067 citations
TL;DR: Moeller et al. as discussed by the authors investigated the experience of acquiring-firm shareholders in the recent merger wave and compared it to their experience in the merger wave of the 1980s.
Abstract: Acquiring-firm shareholders lost 12 cents around acquisition announcements per dollar spent on acquisitions for a total loss of $240 billion from 1998 through 2001, whereas they lost $7 billion in all of the 1980s, or 1.6 cents per dollar spent. The 1998 to 2001 aggregate dollar loss of acquiring-firm shareholders is so large because of a small number of acquisitions with negative synergy gains by firms with extremely high valuations. Without these acquisitions, the wealth of acquiring-firm shareholders would have increased. Firms that make these acquisitions with large dollar losses perform poorly afterward. IN THIS PAPER, WE EXAMINE THE EXPERIENCE of acquiring-firm shareholders in the recent merger wave and compare it to their experience in the merger wave of the 1980s. Such an investigation is important because the recent merger wave is the largest by far in American history. It is associated with higher stock valuations, greater use of equity as a form of payment for transactions, and more takeover defenses in place than the merger wave of the 1980s.1 Though these differences suggest poorer returns for acquiring-firm shareholders, there are also several reasons why the acquiring-firm shareholders may have better returns. With the growth of options as a form of managerial compensation in the 1990s, managerial wealth is more closely tied to stock prices, presumably making management more conscious of the impact of acquisitions on the stock *Moeller is at the Babcock Graduate School of Management, Wake Forest University; Schlinge
1,062 citations
TL;DR: Gov-score as discussed by the authors is a summary governance measure based on 51 firm-specific provisions representing both internal and external governance, and they show that a parsimonious index based on seven provisions underlying Gov-Score fully drives the relation between Gov-score and firm value.
Abstract: Gompers et al. [Gompers, P., Ishii, J., Metrick, A., 2003. Corporate governance and equity prices. Quarterly Journal of Economics 118, 107-155] created G-Index, a summary measure of corporate governance based on 24 firm-specific provisions, and showed that more democratic firms are more valuable. Bebchuk et al. [Bebchuk, L., Cohen, A., Ferrell, A., 2005. What matters in corporate governance? Working Paper, Harvard Law School] created an entrenchment index based on six provisions underlying G-Index, and found it to fully drive the Gompers et al. (2003) valuation results. Both G-Index and the entrenchment index are based on IRRC data that is comprised of anti-takeover measures, focusing on external governance [Cremers, K.J.M., Nair, V.B., 2005. Governance mechanisms and equity prices. Journal of Finance 60, 2859-2894]. We create Gov-Score, a summary governance measure based on 51 firm-specific provisions representing both internal and external governance, and we show that a parsimonious index based on seven provisions underlying Gov-Score fully drives the relation between Gov-Score and firm value. Our results support the Bebchuk et al. (2005) findings that only a small subset of provisions marketed by corporate governance data providers are related to firm valuation, and the Cremers and Nair (2005) evidence that both internal and external governance are linked to firm value. The 51 governance provisions we consider include five that are relevant to accounting and public policy: stock option expensing, and four that are audit-related. We find none of these five measures to be related to firm valuation. We document that only one of the seven governance provisions important for firm valuation was mandated by either the Sarbanes-Oxley Act of 2002 or the three major US stock exchanges. We provide researchers with an alternative measure of governance to G-Index with three distinct advantages: (1) broader in scope of governance, (2) covers more firms, and (3) more dynamic, reflecting recent changes in the corporate governance environment.
1,024 citations
TL;DR: The authors examined the link between managers' equity incentives and earnings management and found that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold.
Abstract: This paper examines the link between managers' equity incentives—arising from stock‐based compensation and stock ownership—and earnings management. We hypothesize that managers with high equity incentives are more likely to sell shares in the future and this motivates these managers to engage in earnings management to increase the value of the shares to be sold. Using stock‐based compensation and stock ownership data over the 1993–2000 time period, we document that managers with high equity incentives sell more shares in subsequent periods. As expected, we find that managers with high equity incentives are more likely to report earnings that meet or just beat analysts' forecasts. We also find that managers with consistently high equity incentives are less likely to report large positive earnings surprises. This finding is consistent with the wealth of these managers being more sensitive to future stock performance, which leads to increased reserving of current earnings to avoid future earnings disappointm...
1,022 citations
TL;DR: The authors survey 384 financial executives and conduct in depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions, finding that maintaining the dividend level is on par with investment decisions, while repurchases are made out of the residual cash flow after investment spending.
Abstract: We survey 384 financial executives and conduct in depth interviews with an additional 23 to determine the factors that drive dividend and share repurchase decisions. Our findings indicate that maintaining the dividend level is on par with investment decisions, while repurchases are made out of the residual cash flow after investment spending. Perceived stability of future earnings still affects dividend policy as in Lintner (1956). However, fifty years later, we find that the link between dividends and earnings has weakened. Many managers now favor repurchases because they are viewed as being more flexible than dividends and can be used in an attempt to time the equity market or to increase EPS. Executives believe that institutions are indifferent between dividends and repurchases and that payout policies have little impact on their investor clientele. In general, management views provide little support for agency, signaling, and clientele hypotheses of payout policy. Tax considerations play a secondary role. This is the final working paper version of our 2005 publication in the Journal of Financial Economics.
1,014 citations
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TL;DR: This article proposed a theoretical model in which the supply of and demand for socially responsible investment opportunities determines whether these activities will improve, reduce, or have no impact on a firm's market value.
Abstract: Debates continue to rage between those that argue that managers should maximize the present value of their firm's cash flows in making strategic choices and those that argue that, sometimes, the wealth maximizing interests of a firm's equity holders should be abandoned for the good of a firm's other stakeholders. This debate is addressed by proposing a theoretical model in which the supply of and demand for socially responsible investment opportunities determines whether these activities will improve, reduce, or have no impact on a firm's market value. The theory shows that managers in publicly traded firms might fund socially responsible activities that do not maximize the present value of its future cash flows yet still maximize the market value of their firm.
902 citations
TL;DR: The authors examine how mutual funds allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide, and find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks.
Abstract: We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.
TL;DR: The authors argue that country attributes are still critical to financial decision-making because of "twin agency problems" that arise because rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors.
Abstract: Despite the dramatic reduction in explicit barriers to international investment activity over the last 60 years, the impact of financial globalization has been surprisingly limited. I argue that country attributes are still critical to financial decision-making because of “twin agency problems” that arise because rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors. When these twin agency problems are significant, diffuse ownership is inefficient and corporate insiders must co-invest with other investors, retaining substantial equity. The resulting ownership concentration limits economic growth, financial development, and the ability of a country to take advantage of financial globalization.
TL;DR: The authors studied the relationship between industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999 and found that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures.
Abstract: Mutual fund managers may decide to deviate from a well-diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries. ACTIVELY MANAGED MUTUAL FUNDS are an important constituent of the financial sector. Despite the well-documented evidence that, on average, actively managed funds underperform passive benchmarks, mutual fund managers might still differ substantially in their investment abilities.1 In this paper, we examine whether some fund managers create value by concentrating their portfolios in industries where they have informational advantages. Conventional wisdom suggests that investors should widely diversify their holdings across industries to reduce their portfolios' idiosyncratic risk. Fund
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TL;DR: In this paper, the authors define and analyze the agency costs of overvalued equity and propose a set of organizational forces that are extremely difficult to manage -forces that almost inevitably lead to the destruction of part or all of the core value of the firm.
Abstract: I define and analyze the agency costs of overvalued equity. They explain the dramatic increase in corporate scandals and value destruction in the last five years; costs that have totaled hundreds of billions of dollars. When a firm's equity becomes substantially overvalued it sets in motion a set of organizational forces that are extremely difficult to manage - forces that almost inevitably lead to destruction of part or all of the core value of the firm. WorldCom, Enron, Nortel, and eToys are only a few examples of what can happen when these forces go unmanaged. Because we currently have no simple solutions to the agency costs of overvalued equity this is a promising area for future research. The first step in managing these forces lies in understanding the incongruous proposition that managers should not let their stock price get too high. By too high I mean a level at which management will be unable to deliver the performance required to support the market's valuation. Once a firm's stock price becomes substantially overvalued managers who wish to eliminate it are faced with disappointing the capital markets. This value resetting (what I call the elimination of overvaluation) is not value destruction because the overvaluation would disappear anyway. The resulting stock price decline will generate substantial pain for shareholders, board members, managers and employees, and this makes it difficult for managers and boards to short circuit the forces leading to value destruction. And when boards and managers choose to defend the overvaluation they end up destroying part or all of the core value of the firm. WorldCom, Enron, Nortel, and eToys are only a few examples of what can happen if these forces go unmanaged. Control markets cannot solve the problem because you cannot buy up an overvalued firm, eliminate the overvaluation and make money. Equity-based compensation cannot solve the problem because it makes the problem worse, not better. While it is puzzling that short selling was unable to resolve the problem the evidence seems to be consistent with the Shleifer and Vishny (1997) arguments for the limits of arbitrage. It appears the solution to these problems lies in the board of directors and the governance system. But that is a problem because there is substantial evidence that weak governance systems have failed widely. It also appears that boards and audit committees would be well served by communicating with and carefully evaluating the information that could be provided by short sellers of the firm's securities.
TL;DR: In this article, the authors assess the impact of university resources and routines/capabilities on the creation of spin-out companies and find that both the number of spinout companies created and the number created with equity investment are significantly positively associated with expenditure on intellectual property protection, the business development capabilities of technology transfer offices and the royalty regime of the university.
TL;DR: In this article, the authors show that the year-by-year equity decisions of more than half of the sample firms violate the pecking order model and that most firms issue or retire equity each year and the issues are on average large and not typically done by firms under duress.
TL;DR: In this paper, the authors argue that when a firm's stock price becomes substantially overvalued it sets in motion a set of organizational forces that are extremely difficult to manage, forces that almost inevitably lead to the destruction of part or all of the core value of the firm.
Abstract: The recent dramatic increase in corporate scandals and value destruction is due to what I call the agency costs of overvalued equity. I believe these costs have amounted to hundreds of billions of dollars in recent years. When a firm's equity becomes substantially overvalued it sets in motion a set of organizational forces that are extremely difficult to manage, forces that almost inevitably lead to destruction of part or all of the core value of the firm. The first step in managing these forces lies in understanding the incongruous proposition that managers should not let their stock price get too high. By too high I mean a level at which management will be unable to deliver the performance required to support the market's valuation. Once a firm's stock price becomes substantially overvalued managers who wish to eliminate it are faced with disappointing the capital markets. This value resetting (what I call the elimination of overvaluation) is not value destruction because the overvaluation would disappear anyway. The resulting stock price decline will generate substantial pain for shareholders, board members, managers and employees. The prospect of this value resetting pain makes it difficult for managers and boards to short circuit the forces leading to destruction of part or all of the core value of the firm. And in many cases managers choosing to defend the overvaluation instead end up destroying part or all of the core value of the firm. WorldCom, Enron, Nortel, and eToys are only a few examples of what can happen if these forces go unmanaged. Control markets cannot solve the problem because you cannot buy up an overvalued firm, eliminate the overvaluation and make money. Equity-based compensation cannot solve the problem because it makes the problem worse, not better. While it is puzzling that short selling was unable to resolve the problem the evidence seems to be consistent with the Shleifer and Vishny (1997) arguments for the limits of arbitrage. It appears the solution to these problems lies in the board of directors and the governance system, and there is substantial evidence that weak governance systems have failed widely. It also appears that boards and audit committees would be well served by communicating with and carefully evaluating the information that could be provided by short sellers of the firm's securities.
TL;DR: In this paper, the authors catalog the complete contents of Institutional Investor All-American analyst reports and examine the market reaction to their release, including the justifications supporting an analyst's opinion reduces, and in some models eliminates, the significance of earnings forecasts and recommendation revisions.
TL;DR: In this article, the authors provide evidence that geographically proximate analysts are more accurate than other analysts, and that this advantage translates into better performance when compared to other analysts in the industry.
Abstract: I provide evidence that geographically proximate analysts are more accurate than other analysts. Stock returns immediately surrounding forecast revisions suggest that local analysts impact prices more than other analysts. These effects are strongest for firms located in small cities and remote areas. Collectively these results suggest that geographically proximate analysts possess an information advantage over other analysts, and that this advantage translates into better performance. The well-documented underwriter affiliation bias in stock recommendations is concentrated among distant affiliated analysts; recommendations by local affiliated analysts are unbiased. This finding reveals a geographic component to the agency problems in the industry.
TL;DR: In this paper, the optimal dynamic portfolio decisions for investors who acquire housing services from either renting or owning a house were examined and it was shown that when indifferent between owning and renting, investors who own a house hold a lower equity proportion in their net worth (bonds, stocks, and home equity), reflecting the substitution effect, yet hold a higher equity proportion of their liquid portfolios (bond and stocks) reflecting the diversification effect.
Abstract: We examine the optimal dynamic portfolio decisions for investors who acquire housing services from either renting or owning a house Our results show that when indifferent between owning and renting, investors owning a house hold a lower equity proportion in their net worth (bonds, stocks, and home equity), reflecting the substitution effect, yet hold a higher equity proportion in their liquid portfolios (bonds and stocks), reflecting the diversification effect Furthermore, following the suboptimal policy of always renting leads investors to overweigh in stocks, while following the suboptimal policy of always owning a house causes investors to underweigh in stocks For many investors, a house is the largest and most important asset in their portfolios The 2001 Survey of Consumer Finances (SCF) shows that about two-thirds of US households own their primary residences and home value accounts for 55% of a homeowner’s total assets, on average At the same time, approximately 50% of US households hold stocks and/ or stock mutual funds (including holdings in their retirement accounts), and stock investment accounts for less than 12% of household assets Even for households owning stocks, they account for less than 40% of household assets Housing differs from other financial assets in that housing serves a dual purpose It is both a durable consumption good from which the owner derives utility and also an investment vehicle that allows the investor to hold home equity Further, compared with other financial assets such as bonds and stocks, the housing investment is often highly
TL;DR: In this article, the authors argue that price formation in equity markets has a significant geographic component linked to the trading patterns of local residents, and that the local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents.
Abstract: We document strong comovement in the stock returns of firms headquartered in the same geographic area. Moreover, stocks of companies that change their headquarters location experience a decrease in their comovement with stocks from the old location and an increase in their comovement with stocks from the new location. The local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents. We argue that price formation in equity markets has a significant geographic component linked to the trading patterns of local residents.
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TL;DR: In this article, the authors characterize and measure a long-run risk return tradeoff for the valuation of financial cash flows that are exposed to fluctuations in macroeconomic growth and explore the resulting measurement challenges and the implied sensitivity to alternative specifications of stochastic growth.
Abstract: We characterize and measure a long-run risk return tradeoff for the valuation of financial cash flows that are exposed to fluctuations in macroeconomic growth This tradeoff features components of financial cash flows that are only realized far into the future but are still reflected in current asset values We use the recursive utility model with empirical inputs from vector autoregressions to quantify this relationship; and we study the long-run risk differences in aggregate securities and in portfolios constructed based on the ratio of book equity to market equity Finally, we explore the resulting measurement challenges and the implied sensitivity to alternative specifications of stochastic growth
TL;DR: In this article, the authors analyzed 210 developing country private equity investments and found that transactions vary with nations' legal enforcement, whether measured directly or through legal origin, and that investments in high enforcement and common law nations often use convertible preferred stock with covenants.
Abstract: Analyzing 210 developing country private equity investments, we find that transactions vary with nations’ legal enforcement, whether measured directly or through legal origin. Investments in high enforcement and common law nations often use convertible preferred stock with covenants. In low enforcement and civil law nations, private equity groups tend to use common stock and debt, and rely on equity and board control. Transactions in high enforcement countries have higher valuations and returns. While relying on ownership rather than contractual provisions may help to alleviate legal enforcement problems, these results suggest that private solutions are only a partial remedy.
TL;DR: In this article, the authors investigated the effect of partial privatization on the performance of state-owned enterprises in India and found that partial privatization has a positive impact on profitability, productivity, and investment.
Abstract: Most privatization programs begin with a period of partial privatization in which only non-controlling shares of firms are sold on the stock market. Since management control is not transferred to private owners it is widely contended that partial privatization has little impact. This perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner. Using data on Indian state-owned enterprises we find that partial privatization has a positive impact on profitability, productivity, and investment. WIDESPREAD PRIVATIZATION IN RECENT DECADES has generated a large empirical literature concerning the effect of ownership on firm performance. Most studies find that privatization has a positive impact on the profitability and efficiency of firms (see Megginson and Netter (2001) for a recent survey). 1 The firms in these studies have had a majority of their assets privatized and control rights have been transferred from the government to private owners. Surprisingly, little is known about the effect of partial privatization where the government remains the controlling owner. This paper seeks to address this gap in the literature by investigating whether the performance of state-owned enterprises in India is affected by the sale of non-controlling equity stakes on the stock market.
TL;DR: In this article, the authors investigated the extent globalization and regional integration lead to increasing equity market interdependence and found evidence for contagion from the U.S. market to a number of local European equity markets during periods of high world market volatility.
Abstract: This paper investigates to what extent globalization and regional integration lead to increasing equity market interdependence. I focus on Western Europe, as this region has gone through a unique period of economic, financial, and monetary integration. More specifically, I quantify the magnitude and time-varying nature of volatility spillovers from the aggregate European (EU) and U.S. market to 13 local European equity markets. To account for time-varying integration, I use a regime-switching model to allow the shock sensitivities to change over time. I find regime switches to be both statistically and economically important. Both the EU and U.S. shock spillover intensity increased substantially over the 1980s and 1990s, though the rise is more pronounced for EU spillovers. Shock spillover intensities increased most strongly in the second half of the 1980s and the first half of the 1990s. I show that increased trade integration, equity market development, and low inflation contribute to the increase in EU shock spillover intensity. I also find evidence for contagion from the U.S. market to a number of local European equity markets during periods of high world market volatility.
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TL;DR: In this paper, the authors examined the sizes of the penalties, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations and found that firms violating environmental laws suffer statistically significant losses in the market value of firm equity.
Abstract: This paper examines the sizes of the fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations. Firms violating environmental laws suffer statistically significant losses in the market value of firm equity. The losses, however, are of similar magnitudes to the legal penalties imposed; and in the cross section, the market value loss is related to the size of the legal penalty. Thus, environmental violations are disciplined largely through legal and regulatory penalties, not through reputational penalties.
TL;DR: In this paper, the authors examined the sizes of the penalties, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations and found that the losses are of similar magnitudes to the legal penalties imposed, and in the cross section, the market value loss is related to the size of the legal penalty.
Abstract: This paper examines the sizes of the fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations. Firms that violate environmental laws suffer statistically significant losses in the market value of firm equity. The losses, however, are of similar magnitudes to the legal penalties imposed, and in the cross section, the market value loss is related to the size of the legal penalty. Thus, environmental violations are disciplined largely through legal and regulatory penalties, not through reputational penalties.
TL;DR: The authors found that the difference in the investment banking fee for firms in the most liquid vs. the least liquid quintile is about 101 basis points or 21% of the average investment banking fees in their sample.
Abstract: We show that stock market liquidity is an important determinant of the cost of raising external capital. Using a large sample of seasoned equity offerings, we find that, ceteris paribus, investment banks' fees are significantly lower for firms with more liquid stock. We estimate that the difference in the investment banking fee for firms in the most liquid vs. the least liquid quintile is about 101 basis points or 21% of the average investment banking fee in our sample. Our findings suggest that firms can reduce the cost of raising capital by improving the market liquidity of their stock.
TL;DR: In this paper, the conditions under which firms are likely to pursue equity investment in new ventures as a way to source innovative ideas are explored, and the results suggest that in Schumpeterian environments incumbents may supplement their innovative efforts by tapping into the knowledge generated by new ventures.
Abstract: We explore the conditionsunder which firms are likely to pursue equity investment in new ventures as a way to source innovative ideas. We find that firms invest more in new ventures—commonly referred to as ‘corporate venture capital’—in industries with weak intellectual property protection and, to some extent, in industries with high technological ferment and where complementary distribution capability is important. Furthermore, we find that the greater a firm’s cash flow and absorptive capacity, the more likely it is to invest. Our results suggest that in Schumpeterian environments incumbents may supplement their innovative efforts by tapping into the knowledge generated by new ventures. Copyright 2005 John Wiley & Sons, Ltd.
TL;DR: In this article, the authors examined the effect of credit rating changes on stock prices and found that the informational effect of downgrades and upgrades is much greater in the post-FD period.