Financial market integration and the value of global diversification: evidence from US acquirers in cross-border mergers and acquisitions

Using theories of internal capital markets, this paper examines the link between financial market integration and the value of global diversification. Based on a sample of 1,491 completed cross-border mergers and acquisitions (M&As) conducted by US acquirers during the 1990–2003 period, we find that, in general, US shareholders gain significant positive abnormal returns following the announcement of the merger/acquisition. Specifically, firms that acquire/merge with targets from countries with financially segmented markets experience significantly higher positive abnormal returns than those that acquire/merge with targets from countries with financially integrated capital markets. We find that the significantly higher positive returns are driven particularly by deals between firms from unrelated industries. These firms with higher announcement returns are also characterized by positive and significant post-merger operating performance. This finding is consistent with our event study results and suggests that the overall improvement in the merged firms’ performance is likely due to the influx of internal capital from wholly integrated acquirers to segmented targets, firms that, on average are usually faced with higher capital constraints.financial market integration; global diversification; internal capital markets; mergers; acquisitions

Political connections and the process of going public: evidence from China

We examine how political connections impact the process of going public. Specifically, we test how political connections impact the pricing of newly offered shares, the magnitude of underpricing, and the fixed cost of going public. Based on experiences of the new public firms in the Chinese security markets and using multiple measures of political connections, we find robust evidence that issuing firms with political connections reap significant preferential benefits from going public. To be specific, we find that firms – irrespective of ownership arrangements – with greater political connections have higher offering prices, less underpricing, and lower fixed costs during the going-public process.political connections; IPO; emerging markets

Return-volatility linkages in the international equity and currency markets

This paper, which is motivated by the literature on international asset pricing and recent work on exchange rate determination, investigates dynamic relationshiops between major currency and equity markets. Using a multivariate GARCH framework, we examine conditional cross-autocorrelations between pairs of national equity markets and related exchange rates. This provides a parsimonious way of testing mean-volatility relationships in currency and equity markets and re-examining the robustness of relationships between equity markets, while controlling for exchange rate effects. We find that the relationship between currency and equity markets is bi-directional, significant, persistent, and independent of the relationship strictly between equity markets, and that it is better captured by the conditional second moments.international asset pricing; exchange rate determination; equity markets; relationships between currency and equity markets

Return-volatility linkages in the international equity and currency markets

This paper, which is motivated by the literature on international asset pricing and recent work on exchange rate determination, investigates dynamic relationshiops between major currency and equity markets. Using a multivariate GARCH framework, we examine conditional cross- autocorrelations between pairs of national equity markets and related exchange rates. This provides a parsimonious way of testing mean- volatility relationships in currency and equity markets and re-examining the robustness of relationships between equity markets, while controlling for exchange rate effects. We find that the relationship between currency and equity markets is bi-directional, significant, persistent, and independent of the relationship strictly between equity markets, and that it is better captured by the conditional second momentsinternational asset pricing, exchange rate determination, equity markets, relationships between currency and equity markets

Does hedging tell the full story? Reconciling differences in US aggregate and industry-level exchange rate risk premia

While the importance of currency movements to industry competitiveness is theoretically well established, there is little evidence that currency risk impacts US industries. Applying a conditional asset-pricing model to 36 US industries, we find that all industries have a significant currency premium that adds about 2.47 percentage points to the cost of equity and accounts for approximately 11.7% of the absolute value of total risk premia. Cross-industry variation in the currency premium is explained by foreign income, industry competitiveness, leverage, liquidity and other industry characteristics, while its time variation is explained by US aggregate foreign trade, monetary policy, growth opportunities and other macro variables. The results indicate that methodological weakness, not hedging, explains the insignificant industry currency risk premium found in previous work, thus resolving the conundrum that the currency risk premium is important at the aggregate stock market level, but not at industry level.exposure; currency risk premium; cost of equity; industry competition; international asset pricing

Underpricing of Venture and Non Venture Capital IPOs: An Empirical Investigation

In this paper we examine the premarket underpricing phenomenon within a group of venture-backed and a group of non venture-backed initial public offerings (IPOs) using a stochastic frontier approach. Consistent with previous research, we find that venture-backed IPOs are managed by more reputable underwriters and are generally associated with less underwriter compensation. However, unlike other papers in the literature, we find that the initial day returns of venture-backed IPOs are, on average, higher than the non venture-backed group. We also observe a significantly higher degree of pre-market pricing inefficiency in the initial offer price of venture-backed IPOs. Further, our results show that a significant portion of the initial day returns is due to deliberate underpricing in the premarket. We also observe that for both venture and non-venture issuers, there is a positive relationship between deliberate underpricing and the probability that underwriters provide support for the issue. This evidence is consistent with the notion that underwriters deliberately underprice the offering to reduce costs of price stabilization in the after-market

The signalling hypothesis revisited: Evidence from foreign IPOs

While the signalling hypothesis has played a prominent role as the economic rationale associated with the initial public offering (IPO) underpricing puzzle (Welch, 1989), the empirical evidence on it has been mixed at best (Jegadeesh, Weinstein and Welch, 1993; Michaely and Shaw, 1994). This paper revisits the issue from the vantage point of close to two decades of additional experience by examining a sample of foreign IPOs – firms from both financially integrated and segmented markets – in US markets. The evidence indicates that signalling does matter in determining IPO underpricing, especially for firms domiciled in countries with segmented markets, which as a result face higher information asymmetry and lack access to external capital markets. We find a significant positive and robust relationship between the degree of IPO underpricing and segmented-market firms’ seasoned equity offering activities. For firms from integrated markets, in contrast, the analyst-coverage-purchase hypothesis appears to matter more in explaining IPO underpricing and the aftermarket price appreciation explains these firms’ seasoned equity offering activities. The evidence, therefore, clearly supports the notion that some firms are willing to leave money on the table voluntarily to get a more favorable price at seasoned offerings when they are substantially wealth constrained, a prediction embedded in the signalling hypothesis.IPO underpricing; seasoned equity offering; cross-listing; signalling hypothesis; financial market integration; market-feedback hypothesis

Precision Nitrogen Fertilization Technology with Micro Grids

Sensor-based precision fertilizer technologies are being developed and researched by production scientists. One such technology uses normalized difference vegetation index (NDVI) reflectance measurements of growing winter wheat plants and a nitrogen fertilizer optimization algorithm (NFOA) to determine nitrogen requirement necessary for plants to reach their yield plateau. A number of precision fertilizer application systems that use this technology are considered in this paper. A linear response stochastic plateau wheat yield function conditional on NDVI reflectance measurements is estimated and used within an expected profit-maximization framework to estimate upper bounds on the returns from the precision nitrogen application systems. The on-the-go precision system that assumes perfect information was approximately $7 per acre more profitable than the convention of applying 80 pounds of nitrogen prior to planting in the fall. The whole-field precision system was break-even with conventional methods.Research and Development/Tech Change/Emerging Technologies,

Labor Law and Innovation Revisited

This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels and find that employee-friendly labor reforms induce inventor shirking and a distortion in labor flow. Further investigation reveals that the negative relation is more pronounced in (1) firms that heavily rely on external financing, (2) firms that have high R&D intensity, (3) manufacturing industries, and (4) civil-law countries. Our micro-level evidence indicates that enhanced employment protection impedes corporate innovation

Underpricing of Venture and Non Venture Capital IPOs: An Empirical Investigation

In this paper we examine the premarket underpricing phenomenon within a group of venture-backed and a group of non venture-backed initial public offerings (IPOs) using a stochastic frontier approach. Consistent with previous research, we find that venture-backed IPOs are managed by more reputable underwriters and are generally associated with less underwriter compensation. However, unlike other papers in the literature, we find that the initial day returns of venture-backed IPOs are, on average, higher than the non venture-backed group. We also observe a significantly higher degree of pre-market pricing inefficiency in the initial offer price of venture-backed IPOs. Further, our results show that a significant portion of the initial day returns is due to deliberate underpricing in the premarket. We also observe that for both venture and non-venture issuers, there is a positive relationship between deliberate underpricing and the probability that underwriters provide support for the issue. This evidence is consistent with the notion that underwriters deliberately underprice the offering to reduce costs of price stabilization in the after-market