Two essays on market timing

In the first essay, I test the predictions of the market timing theory of capital structure on a comprehensive sample of firms that issued debt and equity during the period January 1974–December 2001. I first categorize firms as likely and unlikely market timers based on their ability to time the market. As a proxy for firms\u27 ability to time the market, I use the index of financing constraints developed in Kaplan and Zingales (KZ) (1997). Separately, I categorize firms as likely and unlikely market timers based on their opportunities to time the market. I argue that firms will have more opportunities to time the market when their stock market prices do not reflect fundamental information about them. I proxy for the firm\u27s stock price informativeness with the R-squared statistic obtained from regressing a firm\u27s stock returns prior to a debt or equity issuance against industry and market returns as in Morck et al. (2000). I classify firms with a low R-squared statistic as having informative stock prices that rarely diverge from fundamentals. Such firms are classified as unlikely market timers. Given these a priori classifications of firms, I test whether firm financing choices differ across likely and unlikely market timers as predicted by market timing theory. I find that the unlikely market timers behave either no differently than the likely market timers or opposite that predicted by the market timing theory. In short, the results do not support the market timing theory. In the second essay, I examine the role of capital market imperfections on the allocation of capital across firms. Market imperfections make external financing costly and discourage investment for financially constrained firms. Changes in the investment opportunity set may reduce the effects of market imperfections on the cost of external capital and stimulate investment for financially constrained firms. Consistent with this hypothesis, I find that the sensitivity of investment to stock prices is significantly higher for financially constrained firms. Further, I link the increased sensitivity of investment to stock prices to changes in the cost of external financing

Capital structure decisions: Evidence from deregulated industries

Deregulation significantly affects the firms' operating environment and leverage decisions. Firms experience a significant decline in profitability, asset tangibility and a significant increase in growth opportunities following deregulation. Firms respond by reducing leverage. Deregulation also significantly affects the cross-sectional relation between leverage and its determinants. Leverage is much less negatively correlated with profitability and market-to-book and much more positively (negatively) correlated with firm size (earnings volatility) following deregulation. These results are consistent with the dynamic tradeoff theory of capital structure. Also consistent with the dynamic tradeoff theory, those firms that are more likely to be above their target capital structure issue significantly more equity in the first few years following deregulation.Capital structure Financing policy Deregulation

Self-funding of Political Campaigns

Candidate self-funding, in particular self-loans, is a significant source of funding of political campaigns. Self-funding clusters among non-incumbent campaigns, Republican campaigns and more expensive campaigns. Self-funded campaigns raise less money from individuals and special interests and also spend less. Self-funders are wealthier on average and run in more competitive elections. The analysis of self-funders’ legislative decisions shows that self-funders’ votes, especially those of Republicans, are significantly more sensitive to contributions from special interests that are affected by the votes. The results highlight the importance of considering politicians’ self-funding choices in analyzing voting behavior and the value of political activism

Stock Ownership of Federal Judges and its Impact on Corporations

This paper investigates whether and how litigant peer stock ownership by federal district judges affects characteristics of case outcomes for large corporate litigants. We find that industry-peer stock ownership by district judges is associated with the following outcomes for corporate litigants named in their assigned cases: 1) an increased likelihood of judgments for the corporate litigants, 2) a decrease in the amount received by the parties suing these corporate litigants, and 3) a decrease in the length of the litigation proceedings. The random assignment of district judges to cases provides exogenous variation in the judge stock ownership. We further identify the association outlined in our base results by examining appellate court reversals of district judgments, a triple difference analysis isolating large-stake investments, and outcomes in case types that should impact industries either cooperatively or competitively. Our results survive a falsification test as well as a battery of robustness tests. Our findings underscore the importance of mandates governing judge stock ownership, and more broadly, judge conflicts of interest