PEER GROUP FORMATION IN AN ADVERSE SELECTION MODEL

Abstract

This paper develops an adverse selection model where peer group systems are shown to trigger
lower interest rates and remove credit rationing in the case where borrowers are uninformed
about their potential partners and ex post state veriÆcation (or auditing) by banks is costly. Peer
group formation reduces interest rates due to a `collateral effect', namely, cross subsidisation
amongst borrowers acts as collateral behind a loan. By uncovering such a collateral effect, this
paper shows that peer group systems can be viewed as an effective risk pooling mechanism, and
thus enhance efÆciency, not just in the full information set up.

Market Timing and Capital Structure

Abstract

It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

INTRA-INDUSTRY REACTIONS TO STOCK SPLIT ANNOUNCEMENTS

Abstract

We examine whether favorable information conveyed by stock split announcements transfers to nonsplitting firms within the same industry. On average, nonsplitting firms’ shareholders experience positive and significant abnormal returns at the stock split announcements of their industry counterparts. In addition, industrywide and firm-specific characteristics are important determinants in explaining nonsplitting firms’ stock returns. These firms’ earnings increase significantly, and the earnings changes are positively related to the stock price reactions.
Finally, we find no evidence that investors revise the value of nonsplitting firms because they anticipate a decline in earnings volatility.

The Impact of Securities Litigation Reform on the Disclosure of Forward-Looking Information
By High Technology Firms

ABSTRACT

This study evaluates corporate voluntary disclosure of forward-looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Using a sample of 523 computer hardware, computer software, and pharmaceutical firms, we find a significant increase in both the frequency of firms issuing earnings and sales forecasts and the mean number of forecasts issued following the Act’s passage. To provide more direct evidence
that our findings are attributable to the Act reducing firms’ legal exposure, we develop a proxy for litigation risk and examine whether the increase in disclosure is more pronounced for firms at greatest risk of a lawsuit. As expected, we find that the change in disclosure is increasing in firms’ ex ante risk of litigation. Finally, we report that the safe harbor had no adverse impact on the quality of forward-looking information. Forecast errors, whether directional or non-directional, were not significantly affected by the Act’s passage.

Contagion Effects from the 1994 Mexican Peso Crisis: Evidence from Chilean Stocks

Abstract

The contagion, or informational spillover, effects of the 1994 peso crisis from the Mexican
market to the Chilean market, and to the Chilean American Depository Receipts (ADRs) trading
in the U.S., are examined. Significant excess returns are observed for Chilean stocks for the
event dates of the Mexican Peso crisis, providing evidence of contagion effects. Significant
excess returns on these Chilean ADRs are also observed for each of the five event dates
associated with the Peso crisis, suggesting that the contagion effects spilled over to the ADRs.
A multiple regression model shows that the spillover contagion effects were very efficiently
transmitted from the Mexican market to the Chilean market to the Chilean ADRs. Multifactor
regressions show that the most significant influence on the pricing of Chilean ADRs is the raw
Chilean Index, rather than the Chilean Index expressed in U.S. dollars.

BANK SUPERVISION AND CORPORATE FINANCE

ABSTRACT

We examine the impact of bank supervision on the financing obstacles faced by almost 5,000
corporations across 49 countries. We find that firms in countries with strong official supervisory
agencies that directly monitor banks tend to face greater financing obstacles. Moreover, powerful official supervision tends to increase firm reliance on special connections and corruption in raising external finance, which is consistent with political/regulatory capture theories. Creating a supervisory agency that is independent of the government and banks mitigates the adverse consequences of powerful supervision. Finally, we find that bank supervisory agencies that force accurate information disclosure by banks and enhance private monitoring tend to ease the financing obstacles faced by firms.

IPO Profit Guarantees and Income Smoothing

ABSTRACT

A unique feature of the initial public offering (IPO) market in Malaysia during 1996-1999 was the imposition of IPO profit guarantees for a three-year period subsequent to listing on the major shareholders of the newly listed Second Board companies. This study investigates the income smoothing behavior on a sample of 92 IPO companies with profit guarantees, of which 54 of them reported profit guarantee surpluses. For each of the companies, Eckel’s Income Smoothing Index
(1981) is calculated based on two sub-periods i.e. (1) ten-year period comprising five years before and five years after listing and (2) profit guarantee period comprising a year before the start of the profit guarantee period and a year after the end of the profit guarantee period.
The evidence indicates that there is no significant difference in income smoothing between companies with IPO profit guarantee surplus and IPO profit guarantee shortfall for both sub-periods. We argue that the controlling shareholders need not resort to income smoothing to avoid the costly profit guarantee shortfall as they could easily seek variations in the original profit guarantee agreement. Further analyses show that income smoothing is more prevalent among smaller companies and construction companies based on a ten-year period but not the profit guarantee period.

A LAW AND FINANCE ANALYSIS OF VENTURE CAPITAL EXITS IN EMERGING MARKETS

Abstract

We analyze a sample of 336 venture capital exits from 12 Asia-Pacific countries: Australia, China, Hong Kong, India, Indonesia, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan and Thailand. Interestingly, the data also comprise these countries’ venture capitalists’ investments in U.S.-based entrepreneurial firms. We study the impact of Legality on the investing and exiting of venture investments across these countries. Counter to our expectations (based on studies of publicly traded companies), we find do not find a direct relation between Legality and the returns to venture finance. Our specifications consider Heckman controls for selection effects in venture exits, among other things. The data nevertheless indicate that Legality directly impacts the selection of different entrepreneurial firms, as well as the exit
vehicle and extent of exit. Legality therefore indirectly impacts the returns to venture finance.

Why firm access to the bond market di ers over the business cycle: A theory and some evidence

Abstract

This paper presents a theory of firm access to the bond market in which information gathering agencies provide a valuable service but alter the relative cost of this funding source across firms of dierent creditworthiness and over the business cycle. The theory builds on two assumptions. First, the “quality” of the signal produced by the information agencies that firms use to access this market varies with firms’ creditworthiness. Second, the mix of bond applicants in recessions is riskier than in expansions. According to this paper’s theory, rating agencies aect the cost to access the bond market and recessions increase the impact that these agencies have on the cost of this funding source. Importantly, the impact of recessions is not uniform across firms. It may, for instance, be largest for midcredit quality firms. The analysis of the bonds issued in the last two decades by American nonfinancial firms produces evidence in support of the model’s key assumption.

Entrepreneurial perspectives on informal venture capital

Abstract

Entrepreneurial firms, a major source of new employment in Europe, require risk capital from informal venture capitalists in order to create substantial economic growth. This study surveys the capital-acquisition process from the demand side–that is, from the entrepreneurs' perspective. Twenty semi-structured, qualitative, in-depth interviews, conducted over 2â years and focusing on the entrepreneur-informal investor relationship, yielded four case studies that are analysed here. The analysis reveals two very different approaches to acquiring informal venture capital. One approach views capital as a scarce resource, the other views it as a commodity. Entrepreneurs who view it as a commodity contend that what makes the capital-acquisition process so difficult is not securing the capital itself, but rather finding investors with the requisite expertise and contacts. This paper proposes the term relevant capital to describe the `added value' capital that these investors provide, and offers qualitative insights into the content of the informal investor/ entrepreneur relationship.