• The Effect of Informative Events in a Contingent Claims Pricing Framework: Evidence from Newly Issued Securities Markets, with Paul Mason.
In this paper we use initial public offerings as a quasi-natural experiment with which to study the effect of information signals, on peer firms, within a contingent claims pricing framework. We conclude that peer investors systematically view the IPO as a signal that portends a rise in expected industry growth. We show that peer investors expect the information signaled by the IPO to mainly affect the volatility of their firm. In a contingent claims framework this results in an asymmetric price change, with equity investors experiencing a negative return and debt investors experiencing a positive return.
• Investment Income Taxes and Private Equity Acquisition Activity, with Paul Mason, and Harold Zhang.
Utilizing a novel identification strategy, we uncover evidence that investment income tax rate reductions increase acquisition activity of private equity acquirers. Applying a difference-in-difference methodology, we find that acquisitions sponsored by private equity firms nearly doubled following the Taxpayer Relief Act of 1997 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. We attribute our findings to private equity firms’ ability to capture the benefit of lower capital gains tax rates. These findings are robust to considering target shareholders’ tax incentives as well as firm, industry, and macroeconomic factors possibly influencing acquisition activity.
• Expectations of Reciprocity and Feedback when Competitors Share Information: Experimental Evidence, with Bernhard Ganglmair and Noah Myung.
Informal know-how trading and exchange of information among competitors has been well-documented for a variety of industries, including in science and R&D, and an individual’s expectations of reciprocity is understood to be a key determinant of such flow of information. We establish a feedback loop (as a representation of information trading) in the laboratory and show that an individual’s expectations of the recipient’s intentions to reciprocate matter more than a recipient’s ability to do so. This implies that reducing strategic uncertainty about competitors’ behavior has a bigger effect on the flow of information than reducing environmental uncertainty (about their ability to generate new information). We also show that the formation of beliefs about a recipient’s intentions to reciprocate are heavily influenced by past experience, where prior experience lingers and can have negative effects on the sustainability of productive and fruitful information exchange.
I study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. I argue that a merger announcement may signal the possibility of a merger wave to the industry, and in doing so, increase the conditional probability that peer firms might themselves be acquired in the future. However, while peer firm equity holders expect a direct benefit from a potential acquisition—in the form of a price premium—peer firm bond holders can only expect an indirect benefit—in the form of a risk reduction through coinsurance. Consistent with these hypotheses, I show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. In addition, I document that, cross-sectionally, the abnormal returns I observe from peer bondholders are concentrated among firms that have the highest expected coinsurance benefit from a potential acquisition. In order to distinguish the coinsurance benefit as the explicit return driver, I show that abnormal bond returns within firm (between different bond issues) are also concentrated among issues that have the highest expected coinsurance benefit.
• Damage Control: Changes in Disclosure Tone after Financial Misconduct, with Rebecca Files, Paul Mason, and Gerry Martin
This paper examines whether managers attempt to mitigate the negative outcomes of financial misconduct by altering the tone of required disclosures. Using a series of difference-in-differences analyses, we show that following fraudulent activity, managers use more negative and litigious words in disclosures, as compared to a matched sample of control firms. We find managers that have a larger set of negative outcomes, such as those with foreknowledge of the fraud committed, are more aggressive in altering disclosure when compared to peer firms. Our results also suggest that negative outcomes due to financial misconduct, such as monetary fines and reputation loss, are mitigated by altering the tone in financial disclosures. Altogether, we conclude that managers alter disclosures to reduce the set of negative outcomes they face following securities law violations.
- Market Threats and Firms’ Choice of 401K Options, with Han Xia.
- Through a Glass Darkly: Going Private Transactions as a Reflection of IPO’s, with Dupinder Kaur, and Paul Mason.
- Framing: It Really Does Matter, with Catherine Eckel.