Finance Faculty Research and Publications Copyright (c) 2013 Marquette University All rights reserved. http://epublications.marquette.edu/fin_fac Recent documents in Finance Faculty Research and Publications en-us Fri, 10 May 2013 07:46:02 PDT 3600 Catering Driven Substitution in Corporate Payouts http://epublications.marquette.edu/fin_fac/74 http://epublications.marquette.edu/fin_fac/74 Fri, 22 Mar 2013 07:01:04 PDT This paper investigates catering as a motivation for substitution between share repurchases and dividend payments. I hypothesize that firms cater to investor demand by repurchasing shares when investors place a premium on the stock price of firms that repurchase shares, and by paying dividends when investors place a higher value on dividend-paying firms. I propose a proxy to measure the relative preference for repurchases over dividends — the difference premium. Results show that the decision to repurchase shares or to pay dividends depends on this premium. Firms channel higher fractions of the additional payout dollars toward share repurchases when this premium is high. The market reaction to dividend changes is more favorable when firms act in accordance with the catering hypothesis. Overall, I find that catering plays a role in the substitution between repurchases and dividends.

]]> Manoj Kulchania Market Microstructure Changes Around Accelerated Share Repurchase Announcements http://epublications.marquette.edu/fin_fac/73 http://epublications.marquette.edu/fin_fac/73 Fri, 22 Mar 2013 07:01:03 PDT I investigate the impact on trading characteristics of firms announcing share repurchases using a relatively new buyback method—accelerated share repurchases (ASRs). I find that trading costs decrease and market quality improves following an ASR announcement. The improvement in liquidity is not accompanied by significant changes in information asymmetry or price volatility. Multivariate tests show that the change in volatility and the presence of price constraints in the ASR agreement are significant in explaining the changes in spreads, but the reasons given by firms for conducting the ASRs are not. Thus, in the case of ASRs, the announced involvement of an investment bank buying shares on behalf of the firm improves liquidity without significantly affecting the level of information asymmetry.

]]> Manoj Kulchania Short Sale Constraints and Short Selling Strategies http://epublications.marquette.edu/fin_fac/72 http://epublications.marquette.edu/fin_fac/72 Thu, 17 Jan 2013 07:46:33 PST Marcus Braga-Alves et al. Predicting Corporate Governance in Emerging Markets http://epublications.marquette.edu/fin_fac/71 http://epublications.marquette.edu/fin_fac/71 Thu, 17 Jan 2013 07:42:26 PST Marcus Braga-Alves et al. Naked Short Selling and Market Returns http://epublications.marquette.edu/fin_fac/70 http://epublications.marquette.edu/fin_fac/70 Thu, 03 May 2012 10:26:20 PDT Boulton and Braga-Alves study persistent failures to deliver (fails) to better understand naked short sellers’ trading strategies, their ability to profit from their trades, and the market’s reaction to information about their activities. Contrary to recent claims that naked short sellers are momentum traders who drive down stock prices, they find that returns are typically positive just prior to periods of increased naked short selling that result in persistent fails and that returns generally remain positive for several weeks afterward. Their results also suggest that stocks that experience persistent fails are susceptible to short squeezes as shares move from a normal state in which short exposure is established by borrowing and selling to a hard-to-borrow state in which fails become a more attractive option for establishing short exposure.

]]> Thomas J. Boulton et al. Firm Location and Corporate Debt http://epublications.marquette.edu/fin_fac/69 http://epublications.marquette.edu/fin_fac/69 Fri, 09 Mar 2012 08:31:28 PST This study examines the influence of a firm’s geographical location on corporate debt and provides evidence that the higher cost of collecting information on firms distant from urban areas has significant implications on a wide array of corporate debt characteristics. We find that rural firms face higher debt yield spreads and attract smaller and less prestigious bank syndicates than urban firms. Rural firms attempt to reduce their informational disadvantage by relying more on relationship banking. Our results on the effect of location on corporate debt are robust to the inclusion of an extensive set of firm and issue characteristics.

]]> Matteo Arena et al. Mortgage Product Substitution and State Anti-Predatory Lending Laws: Better Loans and Better Borrowers? http://epublications.marquette.edu/fin_fac/68 http://epublications.marquette.edu/fin_fac/68 Wed, 15 Feb 2012 14:56:36 PST Mounting foreclosures and recent disclosures of abusive lending practices have led many states to adopt new anti-predatory lending laws. Researchers have examined the impact of such laws on credit flows and the cost of credit. This research extends the literature by examining if the market responded to these laws by substituting different mortgage products for those restricted by antipredatory lending provisions. The evidence indicates that the new laws were effective in restricting loans with targeted characteristics and that the market substituted other product types to maintain affordability in the face of these restrictions.

]]> Raphael W. Bostic et al. The Effect of Taxes on Multinational Debt Location http://epublications.marquette.edu/fin_fac/67 http://epublications.marquette.edu/fin_fac/67 Wed, 02 Nov 2011 13:33:39 PDT We provide new evidence that differences in international tax rates and tax regimes affect multinational firms' debt location decisions. Our sample contains 8287 debt issues from 2437 firms headquartered in 23 different countries with debt-issuing subsidiaries in 59 countries. We analyze firms' marginal decisions of where to issue debt to investigate the influence of a comprehensive set of tax-related effects, including differences in personal and corporate tax rates, tax credit and exemption systems, and bi-lateral cross-country withholding taxes on interest and dividend payments. Our results show that differences in personal and corporate tax rates, the presence of dividend imputation or relief tax systems, the tax treatment of repatriated profits, and inter-country withholding taxes on dividends and interest significantly influence the decision of where to locate debt and the proportion of debt located abroad. Our results are robust to firm and issue specific factors and to the effect of legal regimes, debt market development, and exchange rate risk.

]]> Matteo Arena et al. It Takes Two: The Incidence and Effectiveness of Co-CEOs http://epublications.marquette.edu/fin_fac/66 http://epublications.marquette.edu/fin_fac/66 Tue, 01 Nov 2011 12:18:15 PDT This study examines the phenomenon of co-CEOs within publicly traded firms. Although shared executive leadership is not widespread, it occurs within some very prominent firms. We find that co-CEOs generally complement each other in terms of educational background or executive responsibilities. Our results show that firms most likely to appoint co-CEOs have lower leverage, a more limited firm focus, less independent board structure, fewer advising directors, lower institutional ownership and greater levels of merger activity. The governance structure of co-CEO firms suggest that co-CEOships can serve as an alternative governance mechanism, with co-CEO mutual monitoring substituting for board or external monitoring and co-CEO complementary skills substituting for board advising. An event study indicates that the market reacts positively to appointments of co-CEOs while a propensity score analysis shows that the presence of co-CEOs increases firm valuation.

]]> Matteo Arena et al. The Impact of State Anti-Predatory Lending Laws: Policy Implications and Insights http://epublications.marquette.edu/fin_fac/65 http://epublications.marquette.edu/fin_fac/65 Fri, 30 Sep 2011 09:06:21 PDT The subprime mortgage market, which consists of high-cost loans designed for borrowers with weak credit, has grown tremendously over the past ten years. Between 1993 and 2005, the subprime market experienced an average annual growth rate of 26 percent. As this market emerged, so did allegations that subprime loans contained predatory features or were the result of predatory sales practices.3 In the worst cases, brokers deceived borrowers about the meaning of loan terms or falsely promised to assist them in obtaining future refinance loans with better terms. In other situations, borrowers entered into loans with low teaser rates, not aware how high their monthly payments could go when their interest rates reset. Many policy-makers across the country agree that subprime loans provide an important vehicle for making credit available to consumers; however, concerns about abuses in the subprime market have led the federal government and most states to enact laws that place limits on subprime lending. The federal government led the way with the Home Ownership Equity Protection Act (HOEPA), which was enacted in 1994. A growing number of states followed suit, passing laws modeled on HOEPA (known as “mini-HOEPA laws”). Today, well over half the states have anti-predatory lending statutes of one kind or another. These laws vary in terms of the loans they cover, the practices they prohibit, and the methods of enforcement they permit. In addition to the mini-HOEPA laws, numerous states have laws that pre-date HOEPA and prohibit specific loan terms such as prepayment penalties or balloon payments. These laws function alone or alongside more comprehensive mini-HOEPA laws. As home mortgage default and foreclosures rates have escalated in recent years, antipredatory lending measures have moved into the policy limelight. Lenders and others in the mortgage industry claim that the laws drive up the cost and reduce the availability of credit, especially to low-income borrowers. In contrast, those who endorse the laws argue that they are needed to protect vulnerable consumers and the communities in which they live. They further argue that any costs are de minimis relative to the protection the laws provide. Any laws that place restrictions on loan terms and lending practices invariably have some effect on credit flows in the home mortgage market. Until recently, the nature and extent of those effects have only been speculative. The availability of loan pricing and other data now makes it possible to evaluate the impact of laws on the flow and cost of credit. In this chapter, we review past studies on the impact of anti-predatory lending laws and describe the results of our own research, which expands on prior studies by: (1) using a more nuanced legal index; (2) examining anti-predatory lending laws that pre-date HOEPA as well as the HOEPA analogues; (3) looking at the role of enforcement mechanisms, including assignee liability laws, on loan volumes; and (4) disaggregating anti-predatory lending laws along three dimensions—coverage, restrictions, and enforcement.

]]> Raphael W. Bostic et al. Measuring External Shocks to the City Economy: An Index of Export Prices and Terms of Trade http://epublications.marquette.edu/fin_fac/64 http://epublications.marquette.edu/fin_fac/64 Fri, 30 Sep 2011 09:00:08 PDT This paper details the construction of an index of export goods prices (the Export Price Index or EPI) for a panel of 196 metropolitan areas from 1977 to 1992. The EPI is an indicator of external demand shocks to the city economy which does not suffer from the causal ambiguity of the endogenous indicators such as income, employment or output. The creation of an index of aggregate export prices, the EPI, for the panel of areas provides both academicians and policy analysts with a new exogenous indicator that identifies demand price innovations and the terms of trade shocks to cities.

]]> Anthony Pennington-Cross Credit History and the FHA-Conventional Choice http://epublications.marquette.edu/fin_fac/63 http://epublications.marquette.edu/fin_fac/63 Fri, 30 Sep 2011 08:48:39 PDT Models explaining whether households choose conventional or FHA mortgage financing typically use differential insurance premiums, loan-to-value (LTV) and payment-to-income underwriting standards, and local economic conditions to explain household behavior. Using a large and geographically diverse sample, we expand the standard choice model by including measures of borrower credit history. We find that the ability of a homebuyer to avoid credit problems is an important part of the FHA–conventional choice. In addition, credit scores of FHA borrowers are worse on average than those of conventional borrowers, but as LTV increases credit scores of conventional borrowers deteriorate.

]]> Anthony Pennington-Cross et al. Local Economic Risk Factors on the Primary and Secondary Mortgage Markets http://epublications.marquette.edu/fin_fac/62 http://epublications.marquette.edu/fin_fac/62 Fri, 30 Sep 2011 08:43:08 PDT This paper presents a cross-sectional analysis of the spatial distribution of loans in the primary and secondary mortgage markets. Aggregating loan originations to the MSA level, we examine the proportion of the market served by FHA and conventional lenders. We model the geographic differences in market shares as a function of supply, demand, and economic risk factors. Results indicate that FHA market shares are higher in cities with higher economic risk characteristics. To examine the role of GSE activity, we model the spatial distribution of the disposition of conventional loans. Again, we focus on the impact of local economic risk factors on the proportion of loans purchased by the GSEs, purchased by other financial institutions, or retained by the originating lender. Our results indicate that GSEs purchase rates are fairly insensitive to local economic conditions indicating that they serve the primary market with little spatial variation.

]]> Brent W. Ambrose et al. The Federal Housing Administration in the New Millenium http://epublications.marquette.edu/fin_fac/61 http://epublications.marquette.edu/fin_fac/61 Fri, 30 Sep 2011 08:39:16 PDT The first challenge in attempting to predict the future of the Federal Housing Administration (FHA) is to understand why it is still here. No other depression-era mortgage-market institution has survived without substantial modification. We conclude that its survival has depended on its ability to invent new purposes for itself. For example, it changed from a replacement for failed private mortgage insurance using economic soundness as an insurance criterion to an innovator in high-risk lending based on an acceptable risk criterion. FHA has developed special programs to serve the needs of specific groups. We believe this pattern of change in purposes also is the key to FHA survival in the new millennium., We review potential future purposes for FHA and find that severalparticularly, maintaining mortgage credit flows in declining regional housing marketswill require a substantial FHA presence in mortgage markets. This is important because it implies that a marginalized FHA cannot serve several of the important purposes that it is likely to be asked to serve in the new millennium. Accordingly, we believe that FHA market share will be maintained and perhaps expanded in the new millennium, even with increasing competition from conventional lending.

]]> Anthony Pennington-Cross et al. The Evolution of Real Estate in the Economy http://epublications.marquette.edu/fin_fac/60 http://epublications.marquette.edu/fin_fac/60 Fri, 30 Sep 2011 08:29:59 PDT This paper examines economic indicators to show how the role of the real estate industry in the economy has evolved over time. This examination spans the early 1980s through 1999. Our key conclusion includes the followings. In terms of economic flows real estate is as important a part of the economy as ever. About 11% of GDP each year is attributable to the real estate industry. Some parts of the industry, especially those finance and capital market related, have increased share in GDP, while others (services) have remained constant or even shrunk.

In a stock measure, household and corporation asset allocations have shown significantly lower shares for real estate. The strong performance of the stock market, growth in household wealth combined with a relatively low income elasticity of demand for housing, and changed corporate behavior appear to have contributed to this decline.

The values of real estate in debt and equity markets have increased substantially. Securitizations of mortgage and commercial mortgage have made real estate an increasingly important component in debt market. The prominence of real estate investment trusts (REITs) in the stock market has increased since 1985. However it remains a very small fraction of the overall equity market.

]]> Dapeng Hu et al. Managers’ incentives to manipulate earnings in management buyout contests: An examination of how corporate governance and market mechanisms mitigate earnings management http://epublications.marquette.edu/fin_fac/59 http://epublications.marquette.edu/fin_fac/59 Fri, 30 Sep 2011 08:20:34 PDT In an MBO contest, managers offer to buy the firm from public shareholders at a premium to the current market price and thus have incentives to buy the firm “cheap.” Prior studies have found evidence that managers, on average, manipulate earnings downward prior to an MBO offer in an attempt to convince shareholders that their offer is fair. We extend this finding by attempting to explain the substantial cross sectional variation in the degree of manipulation across firms reported in these earlier studies. We find that boards with more independent directors and higher levels of incentive based compensation for the CEO act to discourage such manipulation. Additionally, our results show that some shareholders, minority and preexisting large outside blockholders, appear to be misled by the manipulation. However, new blockholders that acquire large shareholdings in the year before the offer are not. We also discover that managers are more likely to revise their bid upwards when the manipulation is most severe and that these new blockholders put pressure on managers to make these revisions. Finally, we investigate whether the manipulation has an impact on the final buyout contest outcome. We find that downward manipulation does not prevent managers from retaining control of the firm; however, they pay a higher premium.

]]> Joy Begley et al. Do Outside Blockholders Influence Corporate Governance Practices? http://epublications.marquette.edu/fin_fac/58 http://epublications.marquette.edu/fin_fac/58 Fri, 30 Sep 2011 08:16:28 PDT This study investigates whether block acquisitions lead to changes in board and CEO compensation characteristics and finds that block purchasers do not play a significant role in improving the firm’s governance practices. However, the majority of professional investors have sold their block within a year, suggesting that they do not own their stock long enough to alter governance policies nor to benefit from such changes. For the smaller number of firms where a new blockholder maintains their investment for more than a year, the use of equity based CEO compensation increases while the use of cash based compensation decreases.

]]> Sarah Peck Large Scale Shopping Center Development Opportunities http://epublications.marquette.edu/fin_fac/57 http://epublications.marquette.edu/fin_fac/57 Thu, 29 Sep 2011 12:57:19 PDT This paper develops a model with cross-patronage effects between anchor tenant department stores and smaller non-anchor tenants to examine the development opportunities for large-scale shopping centers in the U.S. A major theme of the analysis is that large-scale shopping center development opportunities in the U.S. have been affected by demand changes brought about by rising income levels and the way individuals value and use time. Our analysis shows that these trends lead directly to increased development opportunities for large-scale shopping centers.

]]> James D. Shilling et al. Changing Economic Perspectives on the Theory of Retail Location, Chapter 5 http://epublications.marquette.edu/fin_fac/56 http://epublications.marquette.edu/fin_fac/56 Thu, 29 Sep 2011 12:52:58 PDT James D. Shilling et al. Valuing the New Urbanism: The Case of Kentlands http://epublications.marquette.edu/fin_fac/55 http://epublications.marquette.edu/fin_fac/55 Thu, 29 Sep 2011 12:42:47 PDT This study assesses the impact of new urbanism on single-family home prices. Specifically, we use Duany and Plater-Zyberk's traditional neighborhood development (TND) of Kentlands and surrounding conventional subdivisions to estimate the premium, if any, that single-family homeowners are willing to pay to reside in a community with new urbanist features. Using data on 2,061 single-family home transactions and several hedonic price models, the empirical evidence reveals that consumers are willing to pay a premium to locate in Kentlands.

]]> Charles C. Tu et al.