Research Paper Series

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Year RPS # Title Author/s
2013 2013-013 (FN) SEEING AND BELIEVING: AN ANALYSIS OF TRANSPARENT AND NONTRANSPARENT SHORT SALES Zsuzsa R. Huszár & Melissa Porras Prado

We examine the pricing implications of short sales by differentiating between regulated or ―transparent‖, and unregulated or ―nontransparent‖ shorts, with stock borrowing via centralized versus OTC lending markets. Overall we find that stocks with active shorting via multiple lending channels are more efficiently priced, as centralized shorts aid liquidity and OTC shorts provide information and prevent overvaluation. However, we find that stock with concentrated short selling exhibit higher return volatility, cross correlation, and price delay, specifically stocks with concentrated centralized shorts are associated with the lowest pricing efficiency measures. These results challenge the regulatory view that nontransparent or unregulated shorts are major concern for developed exchanges.

2013 2013-012 (FN) STOCK LENDING FROM LENDERS’ PERSPECTIVE: ARE LENDERS PRICE TAKERS? Zsuzsa R. Huszár

This study provides new insights about the source of short sale constraints, by examining lending fee dynamics in the increasingly competitive and transparent US stock lending market. Focusing on lenders’ perspective, we first show that lending fees increase in response to large new shorting demand and bad news. More importantly, lenders are proactive and raise fees by 13.6% and decrease loan inventory by 1.27% before negative announcements. Lastly, after the 2008 financial crisis, lenders become more sophisticated and active in the equity lending market.

2013 2013-011 (FN) MARKETABLE SECURITIES: STORAGE OR INVESTMENT? Craig O. Brown

Corporate liquidity demand models view investments in marketable securities as a relatively simple store of excess liquidity (the storage view). However, compared to excess cash, market investment has more in common with general investment and liability-driven investment. For firms with repatriation tax exposure, constrained to a limited payout and permanent foreign capital reinvestment, the average coefficient difference between excess cash and market investment regressions is zero. For all firms, the difference is 12%. The findings suggest that market investment is no longer a passive store of excess liquidity. Rather, market investment is associated with active general investment and liability-driven investment.
 
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2013 2013-010 (S&P) CREDITOR CONTROL RITGHTS, LOAN ENFORCEMENT AND BANKRUPTCY REGIMES Luh Luh Lan, Yew Kee Ho & Hewage Ushan Saminda Premaratne

The paper examines the actions taken by the creditor and the impact on the borrower’s firm value upon a covenant violation across jurisdictions. By analyzing 342 loan facilities concerning 259 borrowers from four jurisdictions with either a pro-creditor or pro-debtor bankruptcy regime over a period of five years (2002-2007), we find that the jurisdiction in which the borrower is incorporated plays an important factor on how its stock price will respond to a covenant violation announcement even though it may not affect the creditors’ decision to provide waivers or change covenants. In addition, contrary to prior findings, the study also shows that creditors do not always reduce allowable borrowings nor tighten existing covenants when the loan agreement is renegotiated after a covenant violation. Instead, new restrictive covenants are often imposed to control the way the borrower utilizes the funds.
 
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2013 2013-009 (FN) HOLD-UP VERSUS BENEFITS IN RELATIONSHIP BANKING: A NATURAL EXPERIMENT USING REIT ORGANIZATIONAL FORM Yongheng Deng, Maggie (Rong) Hu & Anand Srinivasan

We use different organizational forms of REITs (internally-advised versus externally-advised) as a natural experiment to devise a clean test of the impact of hold up versus benefits in relationship banking. Due to regulatory reasons, externally advised REITs have lower information opacity and consequently are less subject to hold up effect. Contrary to hold up and consistent with benefits accruing to borrowers, we find that the relatively more opaque internally advised REITs derive greater benefits from lending relationship for both price (loan rate), and non price terms of loan contracts (collateral, covenants and loan size). Further, relationship banks of internally advised REITs have a higher likelihood of securing repeat business from such REITs providing further evidence of the benefits of relationship lending.  
 
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2013 2013-008 (DS) HARMONY IN COMPETITION: ON PREFERENCES FOR CONTRACTUAL FORMS IN SUPPLY CHAINS Lijian Lu & Yaozhong Wu

The supply chain contracting literature has focused on incentive contracts designed to align supply chain members' individual interests. A key finding of this literature is that members' preferences for contractual forms are at odds: the upstream supplier prefers more complex contracts that can coordinate the supply chain, with the simple “wholesale price-only" contracts eliminated by market force; however, the downstream retailer prefers the wholesale price-only contract because it leaves more surplus (than a coordinating contract) that the retailer can get. This paper addresses the following question: under what circumstances do suppliers and retailers prefer the same contractual form? Our analysis suggests that both sides of the supply chain may prefer the same “quantity discount" contract, thereby eliminating the conflicts of interest that otherwise typify contracting situations. More interesting still is that both sides may also prefer the wholesale price-only contract, a result that is new to the literature.

2013 2013-007 (AC) DISCLOSURE OF CASH FLOW INFORMATION IN EARNINGS ANNOUNCEMENTS Bin Miao & Zinan Zhu

This paper examines the capital market consequences of voluntary disclosures of statement of cash flow (SCF) information in quarterly earnings announcements. We find strong evidence that SCF disclosure enables the market to more efficiently price reported earnings. More importantly, we find this effect is only present for firms widely held by individual investors and institutions holding small stakes. Further investigation of the intraday trading activities surrounding earnings announcements suggests only small traders respond to disclosure of SCF information. The results are robust to standard procedures for correcting self-selection bias. These findings are consistent with the notion that voluntary disclosure of statement cash flow information at earnings announcements benefits retail investors more than sophisticated institutions, and have direct implications for the existing disclosure rules, which do not mandate disclosure of detailed financial statements at earnings announcements.

2013 2013-006 (FN) COORDINATION COSTS, INSTITUTIONAL INVESTORS, AND FIRM VALUE Jiekun Huang

Coordination costs among institutional investors have an important impact on corporate governance and firm value. We propose two measures to proxy for coordination costs, one based on the geographic distance among institutional shareholders and the other based on the correlation in their portfolio allocation decisions. We find that, after controlling for other factors, coordination costs are negatively associated with firm value as proxied by industry-adjusted Tobin’s q. We exploit three exogenous shocks, namely, mergers of asset management firms, the 1992 proxy reform, and decimalization in 2001, and find evidence consistent with a causal effect of co-ordination costs on firm value. Furthermore, we show that the ease of coordination among institutions is associated with fewer anti-takeover provisions adopted by the firm, higher equity-based pay for CEOs, and improved CEO turnover-performance sensitivities. Overall, these findings suggest that the ease of coordination improves firm value by enhancing the governance role of institutional investors.

2013 2013-005 (FN) SHAREHOLDER COORDINATION AND THE MARKET FOR CORPORATE CONTROL Jiekun Huang

The ease of coordination among a firm’s institutional shareholders has an important impact on the market for corporate control. I construct two measures to capture the ease of shareholder coordination, one based on the geographic proximity among institutional shareholders and the other based on the correlation in their portfolio allocation decisions. I find that target firms with greater ease of shareholder coordination experience significantly higher abnormal returns around the takeover announcement. In a similar vein, acquirer firms with greater ease of shareholder co- ordination are associated with higher acquisition announcement returns. Using the SEC’s 1992 proxy reform as an exogenous shock that reduces barriers to shareholder coordination, I find that these effects are absent in the pre-reform period and become particularly pronounced in the post-reform period. These findings suggest that the ease of coordination among institutional shareholders plays an important role in the market for corporate control by raising the bargaining power of target shareholders and enhancing the monitoring role of both target and acquirer shareholders.

2013 2013-004 (S&P) WHEN DOES NON-LOCAL SEARCH LEAD TO BREAKTHROUGH INVENTIONS? Sai Yayavaram & Yuan Shi

Does non-local search lead to breakthrough inventions? And under what conditions is non-local search more likely to lead to breakthrough inventions? Using U.S. patent data from 1975 to 2010, we address these two questions by examining whether the effect of non-local search on the likelihood of generating a breakthrough invention is moderated by the characteristics of the technological domain to which the focal patent belongs, the technological domains to which the backward citations belong and the connections between these two sets of domains. The results show that non-local search is more likely to lead to breakthrough inventions when the originating patent belongs to a domain with low search diversity, when the domains of the backward citations have high generality and when few previous connections exist between the two sets of domains.

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