Debt, Investment, and Product Market Competition

Recent empirical literature on the interaction between capital structure, investment, and product market decisions suggests that debt leads to lower investment expenditures and weaker product market competition. Theoretical literature in this area has been unable to fully explain this finding (perhaps because all theoretical papers look only at two of the above decisions). This paper develops a model which examines all three decisions and shows that debt and investment can be substitutes in a model where firms rationally take on debt. Furthermore, it is demonstrated that when firms compete with prices in the product market, an increase in debt leads to lower investment and higher prices

Cross Holding and Imperfect Product Markets

We consider a setting in which two firms first choose equity positions in each others stock (cross holdings) and then compete in an imperfect product market. We demonstrate that cross holdings lead to higher firm profits and higher consumer surplus when the competitors’ products are complements. We find that cross holdings lead to lower firm profits and higher consumer surplus when the products are substitutes. This finding is in contrast to the existing literature which establishes that cross holdings leads to higher firm profits and to lower consumer surplus. The contrasting results emerge because we solve for optimal cross holdings, whereas the existing literature considers exogenous cross holdings. In addition, allowing optimal cross holdings improves economic welfare. Furthermore, we demonstrate that cross holdings deter entry when the products are substitutes and facilitate entry when the products are complements

Message Strategies of North American For-Profit Colleges and Universities: A Qualitative Analysis

A decade ago For-Profit Colleges and Universities (FPCUs) were experiencing booming enrollments and were well-positioned to take advantage of the opportunities presented through online learning platforms. Due to regulatory changes and heightened awareness of the low retention and graduation rates of these institutions, enrollment has plummeted and several major firms, including Sanford Brown and ITT have closed. Competition for students has intensified with a greater proportion of revenue being allocated toward marketing. In fact, for some FPCU marketing spending now exceeds the amount of money spent on their core service, teaching. This paper examines the message strategies of North American For-Profit Colleges and Universities for advertisements posted on YouTube from October, 2016 to October, 2018. Using a Grounded Theory Study approach to qualitative analysis, the authors evaluate 40 ads from 15 postsecondary institutions that have accredited degree granting programs of study (i.e., offering associate’s, bachelor’s, master’s and/or Ph.D. degrees). Research findings show four representative themes within the industry sector: convenience, path to a better life, we care about our students, and legitimacy. These themes vary significantly from those employed by non-profit colleges and universities in North America. These messages speak directly to the challenges faced by older, non-traditional college students, as well as the stigmas associated with for-profit colleges. Theoretical analysis and implications of these themes for the for-profit educational sector are examined and discussed

The Impact of CEO Turnover on Equity Volatility

A change in executive leadership is a significant event in the life of a firm. Our paper investigates a potentially significant consequence of a CEO turnover: a change in equity volatility. We develop several hypotheses about how CEO changes might affect stock price volatility, and test these hypotheses using a sample of 872 CEO changes over the 1979-1995 period. We find that volatility increases following a CEO turnover, even for the most frequent type, when a CEO leaves voluntarily and is replaced by someone from inside the firm. Our results indicate that forced turnovers, which are expected to result in large strategy changes, increase volatility more than voluntary turnovers. Outside successions, which are expected to result in a successor CEO with less certain skill in managing the firm's operations, increase volatility more than inside turnovers. We also document a greater stock-price response to earnings announcements around CEO turnover, consistent with more informative signals of value driving the increased volatility. Controls for firm-specific characteristics indicate that the volatility changes cannot be entirely attributed to factors such as changes in firm operations, firm size, and both volatility change and performance prior to the turnover

Debt, Investment, and Product Market Competition

Recent empirical literature on the interaction between capital structure, investment, and product market decisions suggests that debt leads to lower investment expenditures and weaker product market competition. Theoretical literature in this area has been unable to fully explain this finding (perhaps because all theoretical papers look only at two of the above decisions). This paper develops a model which examines all three decisions and shows that debt and investment can be substitutes in a model where firms rationally take on debt. Furthermore, it is demonstrated that when firms compete with prices in the product market, an increase in debt leads to lower investment and higher prices

On the Formation and Structure of International Exchanges

We investigate the formation and structure of 248 financial exchanges throughout the world. First, we empirically analyze the determinants of exchange formation as well as the impact of exchange formation on the domestic country's economy. Second, conditional on formation, we use a probit model to relate the choice of trading mechanism to the characteristics of the economic environment in which the exchange exists. We find that the main determinants of exchange formation in a country are the degree of economic freedom, the growth of the economy, the availability of technology, and the legal system. In addition, we find that the impact of exchange formation on the macro economy is limited to a reduction in the growth of the monetary aggregates with no significant impact on productivity. Lastly, our results show that the choice of trading mechanism depends on the country's economic development, the degree of competition, and the extent of economic freedom

The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions

This paper investigates how firms’ bidding behavior in various auctions is affected by capital structure. A theoretical model is developed where the first price sealed bid and the English auction are examined. We find as debt levels increase, firms tend to decrease their bids. The lower bids give the competition incentives to decrease their bid as well. These results are then investigated empirically using the recent FCC spectrum auctions. Consistent with the theoretical model, larger debt levels of the bidding firm and the competition tend to lead to lower bids. Additional determinants of bidding behavior in these auctions are also analyzed

The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions

This paper investigates how firm bidding behavior in various auctions is affected by capital structure. A theoretical model is developed where the first price sealed bid and second price sealed bid auctions are examined in situations where the firms are competing for an asset with either a common value or a private value. Findings include that in the presence of exogenous and symmetric debt, the revenue equivalence theorem no longer holds, and hence, there may be an optimal auction or set of auctions that yield the maximum expected revenue to the seller. In addition, as debt level increase, firms will tend to decrease their bids. The lower bid function gives the competition incentives to decrease their bid as well. Thus, we would expect a firm's bid to be a function of both its own debt level and the debt level of the competition, and an increase in either should result in a decrease in the firm's bid. The empirical part of the paper applies these ideas to recent FCC auctions. The evidence is consistent with the theoretical model. Debt levels of the bidding firm and the competition are found to be determinants of the highest bid a firm is willing to submit in the auction, and higher debt levels (by the firm or its competition) lead to lower bids

Anyone Can Become a Troll: Causes of Trolling Behavior in Online Discussions

In online communities, antisocial behavior such as trolling disrupts constructive discussion. While prior work suggests that trolling behavior is confined to a vocal and antisocial minority, we demonstrate that ordinary people can engage in such behavior as well. We propose two primary trigger mechanisms: the individual's mood, and the surrounding context of a discussion (e.g., exposure to prior trolling behavior). Through an experiment simulating an online discussion, we find that both negative mood and seeing troll posts by others significantly increases the probability of a user trolling, and together double this probability. To support and extend these results, we study how these same mechanisms play out in the wild via a data-driven, longitudinal analysis of a large online news discussion community. This analysis reveals temporal mood effects, and explores long range patterns of repeated exposure to trolling. A predictive model of trolling behavior shows that mood and discussion context together can explain trolling behavior better than an individual's history of trolling. These results combine to suggest that ordinary people can, under the right circumstances, behave like trolls.Comment: Best Paper Award at CSCW 201