More than Meets the Eye: Convertible Bond Issuers’ Concurrent Transactions

More than Meets the Eye: Convertible Bond Issuers’ Concurrent Transactions

Brian J. Henderson George Washington University – Department of Finance

Bo Zhao George Washington University

June 4, 2013

Abstract: 
In recent years, over 60% of convertible bond issuers conduct concurrent transactions; including share repurchases, call option purchases, warrant sales, seasoned equity offerings, and stock lending program initiations. We show that the determinants of issuers’ choice of concurrent transactions vary; and include controlling earnings dilution, the supply of capital available from convertible arbitrageurs, and investment opportunities. Our results suggest that in the convertible bond market, the influence of capital supply, as measured by flows to convertible arbitrage hedge funds, extends beyond the issuance decision and influences the security design and use of concurrent transactions. Additionally, the announcement effects suggest that concurrent transactions signal managers’ information regarding future earnings.

News-Driven Return Reversals Liquidity Provision Ahead of Earnings News; six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods

News-Driven Return Reversals: Liquidity Provision Ahead of Earnings News

Eric C. So Massachusetts Institute of Technology (MIT) – Sloan School of Management

Sean Wang University of North Carolina – Kenan-Flagler Business School

June 7, 2013

Abstract: 
This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. These findings indicate that increases in market makers’ inventory risks result in reduced liquidity through a channel distinct from adverse selection risks and that pre-announcement demand for liquidity provision results in predictable variation in earnings announcement returns. We also use pre-announcement option prices to show that return reversals increase when there is greater expected volatility during earnings announcements. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in expected returns to liquidity provision and that these increases significantly affect the dynamics and information content of market prices.

Do Sovereign Wealth Funds Make Informed Investment Decisions? Target firm returns are reduced following SWF investment

Do Sovereign Wealth Funds Make Informed Investment Decisions?

Bong Soo Lee Florida State University

Francis Haeuck In Monash University – Department of Accounting and Finance; Financial Research Network (FIRN)

June 9, 2013

Abstract: 
Recent studies find that target firm returns are reduced following sovereign wealth fund (SWF) investment. Although risk is also reduced following SWF investment, they find that SWF investment is associated with a reduction in the compensation of risk.In this paper, weexamine the hypothesis that sovereign weal funds’ poor performance is partly due to their poor information about the target firms and find some support for the hypothesis.

A Review and Synthesis of ‘Cost Stickiness’ Literature

A Review and Synthesis of ‘Cost Stickiness’ Literature

Mahfuja Malik Boston University

November 9, 2012

Abstract: 
Traditional cost accounting holds the assumption that cost changes proportionately with activity. Anderson et al. (2003) show that cost increases more when activity rises than decreases less when activity falls by an equivalent amount, a behavior that they refer to as “cost stickiness”. By following Anderson et al. (2003) researchers investigate the determinants, consequences and different aspects of cost stickiness. However, some studies raise questions about the validity of the inference made by Anderson et al. (2003). Over the last few years many authors highlight some new aspects such as earnings forecasts error, agency problem and earnings management that relate to cost stickiness. The objective of this paper is to review and synthesize the growing body of research on cost stickiness. Lack of theoretical support, merely insights provided by the literature and some inconclusive findings suggest that there are ample research opportunities to improve the understanding in this area.

Are Aggressive Reporting Practices Indicative of Risk-Taking Corporate Environments?

Are Aggressive Reporting Practices Indicative of Risk-Taking Corporate Environments?

Mary Margaret Frank University of Virginia – Darden School of Business

Luann J. Lynch University of Virginia – Darden School of Business

Sonja O. Rego Indiana University – Kelley School of Business

Rong Zhao University of Calgary

March 31, 2012
Darden Business School Working Paper No. 1066846

Abstract: 
We examine whether firms with aggressive financial and tax reporting also have greater risk-taking corporate environments. We use investing, financing and operating policies and measures of firm risk to assess a firm’s risk-taking environment. We separate our analyses into the periods before and after the Sarbanes-Oxley Act (SOX) because prior evidence suggests SOX affected reporting and risk-taking practices. Our results provide strong evidence that before SOX, firms with greater risk-taking environments also engaged in more aggressive reporting. Our results also suggest that SOX eliminated the positive association between corporate risk-taking environments and aggressive reporting. Results from shareholder valuation tests indicate that in the pre-SOX time period, shareholders valued aggressive reporting – but not corporate risk-taking – at a premium. However, the passage of SOX substantially altered how shareholders assess aggressive reporting and corporate risk-taking.

China’s State-Owned Enterprises: How Much Do We Know? From CNOOC to Its Siblings

China’s State-Owned Enterprises: How Much Do We Know? From CNOOC to Its Siblings

Duanjie Chen University of Calgary – The School of Public Policy

June 6, 2013
SPP Research Paper No. 6-19

Abstract: 
China’s state-owned enterprises (SOEs) are sometimes compared to Canadian Crown corporations, such as VIA Rail or the CBC. But that comparison is not only profoundly inaccurate, it can also be a dangerous assumption to make when crafting Canadian economic policy. China’s SOEs have been actively buying up interests in major Canadian resource firms. But that phenomenon has much more serious implications for Canada than if these were, say, state-owned European firms, such as Norway’s Statoil. China’s SOEs do not operate by the normal rules of commerce. They are, in fact, a very powerful tool of the Chinese government’s industrial policy, which is aimed at a ruthless expansion of its global economic empire. The spectacular growth of China’s SOEs over the last two decades, at a rate unrivalled by virtually any other sector on earth, has been driven by the will of the Chinese government, which provides cheap or free inputs — such as access to capital and real estate — in order to create globally dominant corporate powers. There is also the Chinese competitive advantage that comes with not just lower wages for workers but also behaviour that would be considered irresponsible in a Western context. Placing a lower priority on human rights, the environment, social justice and corporate rectitude give China and its SOEs an edge that have helped them in their goal of leapfrogging competing world economic powers, including Canada. Without these explicit and implicit subsidies, China’s SOEs have actually proven to be far less economically competitive than their private-sector rivals. Chinese SOEs are not publicly accountable the way that Crown corporations in Canada are. Chinese SOEs are run by appointees of the Communist party, whose first duty is to the state, the majority or even sole shareholder of SOEs. Unlike Canada’s Crown corporations, which are designed to fill in market-failure gaps or provide public service, China’s SOEs are permitted to chase profits in sectors that do not even fall within their primary mandate. And unlike Canada, China jealously guards the sectors in which its SOEs exert absolute or strong control, disallowing any private-sector competitors — domestic or foreign — free entry. When Canada’s federal government last December granted approval to the takeover of Nexen Inc. it made it clear that this would be the “end of a trend” of Chinese SOEs controlling acquisition of major Canadian energy firms. Such takeovers would be allowed only in exceptional circumstances from now on. That is how it should be. Canada’s business sector should contribute to market-driven economic growth, through efficient management and upright corporate behavior. It should not be allowed to become an instrument in China’s distorted and often disreputable drive toward global hegemony.