Publications
ABSTRACT: The auction rate bond market grew from inauspicious beginnings in 1985 to representing a significant fraction of the municipal bond market in 2007, with a total of 603 issuances raising more than $35 billion in capital. Since March of 2008 not a single auction rate bond has been issued. The last issuance coincided with a wave of “failures” of auction rate bond auctions during the early winter of 2008. Pundits have attributed the auction failures to a “frozen” market and hint that irrationality on the part of investors precipitated the auction failures. Missing from the headlines is that all auction rate bonds have interest rate caps that limit their yields. The authors find that, contrary to the impression given by news headlines, not all auctions failed and that investors rationally discriminated among bonds such that it was primarily those with low caps that experienced high failure rates. They further conclude that, in the absence of such caps, few if any auctions would have failed.
ABSTRACT: Using 636 large acquisition attempts that are accompanied by a negative stock price reaction at their announcement (“value-reducing acquisition attempts”) from 1990 to 2010, we find that, in deciding whether to abandon a value-reducing acquisition attempt, managers' sensitivity to the firm's stock price reaction at the announcement is influenced by the level and the tone of media attention to the proposed transaction. We interpret the results to imply that managers have reputational capital at risk in making corporate capital allocation decisions and that the level and tone of media attention heighten the impact of a value-reducing acquisition on the managers' reputational capital. To the extent that value-reducing acquisition attempts are more likely to be abandoned, the media can play a role in aligning managers' and shareholders' interests.
ABSTRACT: Do the media play a role in corporate governance? By that we mean, do the media influence managers to act in shareholders’ interests? And, if so, how? Why do managers care about what the media says? Prior theory proposes that top managers have “reputational” capital at risk in making corporate decisions where reputational capital is the present value of their future compensation and that, to the extent that the media influence top managers’ reputational capital, the media can influence their corporate decisions. We consider the role of the media in one particular circumstance - - corporate acquisitions. Specifically, many corporate acquisition attempts are greeted with a negative stock price reaction. Prior studies report that such “value-reducing” acquisition attempts are more likely to be abandoned than are acquisition attempts that are greeted with a positive stock price reaction and, the more negative is the stock price reaction, the more likely the attempt is to be abandoned. These studies interpret this phenomenon as managers “listening to the market.” But why do managers listen to the market? After all, once the stock price has dropped, it is a sunk cost. We propose that CEOs have both financial capital (i.e., their ownership of the firm’s shares) and reputational capital at risk in making acquisition attempts. Perhaps cancellation of a value-reducing acquisition will lead to a recovery of both the CEO’s financial and reputational capital loss. We measure financial loss as the stock price decline times the number of share owned by the CEO. The novel variable is the number of news articles about the acquisition attempt and the “tone” of the media articles. We find that the greater the loss in the CEO’s share ownership and the more negative the tone of the media coverage, the more likely the attempt is to be abandoned. We interpret the evidence to imply that the media can and do play a role in corporate governance by influencing the CEO’s reputational capital - - at least in some circumstances.
ABSTRACT: This paper provides evidence on the disciplinary role of failed takeover attempts. When taking into account the target firm's stock returns during the period from the onset of the takeover attempt through its resolution, contrary to prior studies, I find that the likelihood of CEO turnover in target firms following failed takeover attempts is negatively correlated with the target firm's performance prior to the failed attempt. I also find that target firms that initiate corporate restructurings during the failed attempt have more positive stock returns in this period and are less likely to experience subsequent CEO turnover. When restructurings do not occur, an active outside blockholder is more likely to emerge and to facilitate the ouster of the target CEO. Together these findings indicate that failed takeover attempts act as “wake-up calls” either to target managers to make value-increasing improvements or to alternative control mechanisms to replace target managers who have underperformed prior to and/or during the failed attempt.
ABSTRACT: By examining the post-retirement outside board seats held by former CEOs of S&P 1500 firms, we find that CEOs’ outside post-retirement board service is influenced by the tone and level of media coverage given to the CEOs’ firms while the CEOs were “on the job.” These results provide evidence of a direct economic link between media coverage of CEOs’ performance today and CEOs’ future opportunity sets. These results buttress the proposition set forth in prior studies that the media can play a role in corporate governance by influencing the value of CEOs’ human capital.
ABSTRACT: Prior theory postulates that media coverage can increase (decrease) the value of a manager’s reputational capital and, as a consequence, enhance (diminish) his power to extract corporate resources for private consumption. An empirical implication that follows is that media events that increase (decrease) a manager’s reputational capital are good (bad) news for the CEO and bad (good) news for shareholders. We examine these predictions using increases and decreases in Fortune’s rankings of America’s Most Admired Companies as a measure of media-induced changes in CEO’s reputational capital. Consistent with the predictions, we find that increases (decreases) in ranking scores are associated with stock price decreases (increases). Further, and also consistent with the predictions, CEOs whose firms experience increases (reductions) in ranking scores experience increases (reductions) in compensation and in job tenure, and their firms undertake more (fewer) acquisitions and the acquisitions are less (more) value increasing.
[7] Active Investors and Open Market Share Repurchases (with Don Autore and Nick Clarke, 2019, Journal of Banking and Finance 107, 105614)
ABSTRACT: This study examines open market share repurchases of firms targeted by activist campaigns. Compared with firms making ordinary share repurchases, firms making activist-involved repurchases have more cash holdings, are more undervalued, experience better subsequent stock performance and similar or better changes in operating performance, and eventually repurchase more shares. Moreover, repurchasing firms in which the activist investor claims to take a passive role exhibit no undervaluation. For repurchasing firms that make multiple repurchases, their stocks exhibit undervaluation only in repurchases where activists are involved. Lastly, an activist campaign that targets shareholder payout is more likely to be successful when the targeted firm holds more cash and is more undervalued. In all, our findings suggest that activist-involvement improves corporate repurchase decisions.
ABSTRACT: The ability to short allows investors to protect their long positions against industry and market fluctuations. In theory, this should enable investors to buy underpriced securities more aggressively. Utilizing the institutional feature in Hong Kong that only stocks on a special list can be shorted, we provide evidence that the emergence of shortable securities causes investors to pursue under-priced securities more aggressively and helps eliminate mispricing on the long side. Relatedly, positive earnings surprises are followed by more immediate price reactions and smaller post-earnings-announcement drift when it becomes easier for investors to hedge their long positions.
[9] Ease-of-Processing Heuristics and Asset Prices: Evidence from Exchange Repo Market in China (with Xuyun Fang, Zhiqian Jiang, John J. McConnell, and Mingshan Zhou, 2022, Journal of Financial Markets 59(B), 100656)
ABSTRACT: We provide empirical evidence of a strong causal relation between investors’ cognitive biases and asset prices using an exogenous regulatory shock to the exchange repurchase agreements (repo) market in China. We find that average annualized daily repo returns are negatively correlated with the actual days of the outstanding funds. The negative correlation disappears immediately after the exchanges implementing new repo price quotation rules on May 22, 2017, which simplify but do not materially alter, the calculation of repo rates offered. We attribute this phenomenon to investors’ cognitive biases that hinder them from fully adjusting for the deviation of the actual days of the outstanding funds from the nominal days of the repo term when they offer repo rates in their trading.
ABSTRACT: We examine the relation between media attention and regulatory efficiency of corporate violations. Using a hand-collected sample of corporate violations in China during 1998-2018, we find that fraudulent firms accompanied by more negative media attention are associated with a shorter duration of the violation being investigated and enforced. We employ negative media attention given to industry peers as an instrument to establish the causal link. We interpret our findings to suggest that the media play both an informational intermediary role and a pressure-exerting role in influencing regulatory efficiency, a channel through which the media serve as an effective governance mechanism
ABSTRACT: Using the introduction of Fox News as a natural experiment, we investigate whether partisanship in television coverage influences fundamental corporate decisions. We find that, during the George W. Bush presidency, firms led by Republican-leaning managers headquartered in regions into which Fox was introduced shift upward their total investment expenditures, investment expenditures devoted to R&D, and leverage. Our findings imply that in making fundamental corporate decisions, Republican-leaning managers are swayed by the Republican slant of Fox that presents an optimistic macroeconomic outlook. The results highlight the importance of heterogeneity in media slant in understanding the role of the media in corporate decision-making.
ABSTRACT: This paper studies the effect of short selling on corporate managers from 2002 through 2010. We examine how the exemption of short-sale uptick tests due to the Regulation SHO pilot program affects managers’ decisions to abandon value-reducing acquisition attempts. We find that when deciding whether to abandon value-reducing acquisition attempts during the program, managers of pilot firms, whose stocks are less subject to short-selling impediments, are more sensitive to stock price changes than managers of nonpilot firms. We find no difference in managers’ sensitivity prior to nor post SHO. These results indicate that, despite their dislike of short sellers, managers believe that the level of informativeness from capital markets is superior when short sellers are less im-peded.
ABSTRACT: We investigate the prevalence and persistence of short squeezes and the corresponding economic consequences on the stocks being squeezed. Using daily short sale data, we provide evidence that a short squeeze on average subsides within seven trading days and can be driven by both the capital constraint of the short sellers and the short sale constraint of the underlying stocks. The risk of being squeezed is higher during major macroeconomic events. Further analyses reveal that squeezed stocks experience an increase in the demand for and the cost of borrowing the shares and in trading volume, idiosyncratic volatility, and abnormal returns.
ABSTRACT: Using the positive shift in tone of Fox News coverage of macroeconomic news after the Republican Bush election in 2000, we investigate whether media slant influences the investment decisions of short sellers. We find that firms headquartered in Republican-leaning townships with Fox News availability experienced a relative decrease in short interest post the 2000 election. We further find that the relative decrease is more pronounced for firms that are more subject to investors’ home bias. We interpret our findings to mean that short sellers, as sophisticated as they may be, are not immune to the slant in media coverage.
ABSTRACT: Using scandals involving US congresspersons over the period of 1992-2018, we investigate the economic impact of scandal-tainted congresspersons on politically-connected firms. Following the first media report of a scandal, firms connected to the scandal-tainted congressperson experience a relative loss in market value. The loss manifests through both a reputational spillover and a reduced connection effectiveness mechanism. Our findings indicate an undocumented cost of corporate political connections - the loss that occurs when a connected politician is caught up in a scandal.