32 research outputs found
Structural Models and Endogeneity in Corporate Finance: the Link Between Managerial Ownership and Corporate Performance
This paper presents a parsimonious, structural model that captures primary economic determinants of the relation between firm value and managerial ownership. Supposing that observed firm size and managerial pay-performance sensitivity (PPS) maximize value, we invert our model to panel data on size and PPS to obtain estimates of the productivity of physical assets and managerial input. Variation of these productivity parameters, optimizing firm size and compensation contract, and the way the parameters and choices interact in the model, all combine to deliver the well-known hump-shaped relation between Tobin’s Q and managerial ownership (e.g., McConnell and Servaes (1990)). Our structural approach illustrates how a quantitative model of the firm can isolate important aspects of organization structure, quantify the economic significance of incentive mechanisms, and minimize the endogeneity and causation problems that so commonly plague empirical corporate finance. Doing so appears to be essential because, by simulating panel data from the model and applying standard statistical tools, we confirm that the customary econometric remedies for endogeneity and causation can be ineffective in application.
Director networks and informed traders
We provide evidence that sophisticated investors like short sellers, option traders, and financial institutions are more informed when trading stocks of companies with more connected board members. For firms with large director networks, the annualized return difference between the highest and lowest quintile of informed trading ranges from 4% to 7.2% compared to the same return difference in firms with less connected directors. Sophisticated investors better predict outcomes of upcoming earnings surprises and firm-specific news sentiment for companies with more connected directors. Changes in board connectedness are positively associated with changes in measures of adverse selection
Corporate Political Donations: Investment or Agency?
This is the published version, also available from http://dx.doi.org/10.1515/1469-3569.1391 .We examine corporate donations to political candidates for federal offices in the United States from 1991 to 2004. Firms that donate have operating characteristics consistent with the existence of a free cash flow problem, and donations are negatively correlated with returns. A $10,000 increase in donations is associated with a reduction in annual excess returns of 7.4 basis points. Worse corporate governance is associated with larger donations. Even after controlling for corporate governance, donations are associated with lower returns. Donating firms engage in more acquisitions and their acquisitions have significantly lower cumulative abnormal announcement returns than non-donating firms. We find virtually no support for the hypothesis that donations represent an investment in political capital. Instead, political donations are symptomatic of agency problems within firms. Our results are particularly useful in light of the Citizens United ruling, which is likely to greatly increase the use of corporate funds for political donations
Sentiment and Stock Returns: The SAD Anomaly Revisited
NOTICE: This is the author’s version of a work that was accepted for publication in Journal of Banking & Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking & Finance, Vol. 34, Issue 6, June 2010. DOI:10.1016/j.jbankfin.2009.11.027Widely-cited research by Kamstra et al. (2003) argues that changes in mood resulting from Seasonal Affective Disorder (SAD) drive changes in investor risk aversion and cause seasonal patterns in aggregate stock returns around the world. In this paper we reexamine the so-called SAD effect by replicating and extending Kamstra et al. (2003). We study the psychological underpinnings of the SAD hypothesis and show that the time-series predictions of the SAD model do not correspond to the seasonal patterns in depression found in the general population. We also investigate the cross-sectional prediction that SAD has a greater effect on stock markets in countries where SAD is more prevalent and find no relation between the prevalence of SAD and stock returns. Finally, we document that the SAD effect is mechanically driven by an overlapping dummy-variable specification and higher returns around the turn of the year
Structural Models and Endogeneity in Corporate Finance: the Link Between Managerial Ownership and Corporate Performance
This paper presents a parsimonious, structural model that captures primary economic determinants of the relation between firm value and managerial ownership. Supposing that observed firm size and managerial pay-performance sensitivity (PPS) maximize value, we invert our model to panel data on size and PPS to obtain estimates of the productivity of physical assets and managerial input. Variation of these productivity parameters, optimizing firm size and compensation contract, and the way the parameters and choices interact in the model, all combine to deliver the well-known hump-shaped relation between Tobin’s Q and managerial ownership (e.g., McConnell and Servaes (1990)).
Our structural approach illustrates how a quantitative model of the firm can isolate important aspects of organization structure, quantify the economic significance of incentive mechanisms, and minimize the endogeneity and causation problems that so commonly plague empirical corporate finance. Doing so appears to be essential because, by simulating panel data from the model and applying standard statistical tools, we confirm that the customary econometric remedies for endogeneity and causation can be ineffective in application
Structural Models and Endogeneity in Corporate Finance: the Link Between Managerial Ownership and Corporate Performance
This paper presents a parsimonious, structural model that captures primary economic determinants of the relation between firm value and managerial ownership. Supposing that observed firm size and managerial pay-performance sensitivity (PPS) maximize value, we invert our model to panel data on size and PPS to obtain estimates of the productivity of physical assets and managerial input. Variation of these productivity parameters, optimizing firm size and compensation contract, and the way the parameters and choices interact in the model, all combine to deliver the well-known hump-shaped relation between Tobin’s Q and managerial ownership (e.g., McConnell and Servaes (1990)).
Our structural approach illustrates how a quantitative model of the firm can isolate important aspects of organization structure, quantify the economic significance of incentive mechanisms, and minimize the endogeneity and causation problems that so commonly plague empirical corporate finance. Doing so appears to be essential because, by simulating panel data from the model and applying standard statistical tools, we confirm that the customary econometric remedies for endogeneity and causation can be ineffective in application
Structural Models and Endogeneity in Corporate Finance: The Link Between Managerial Ownership and Corporate Performance
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Financial
Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Economics, Volume 103, Issue 1, January 2012. DOI:10.1016/j.jfineco.2011.04.002.This paper presents a parsimonious, structural model that isolates primary economic determinants of
the level and dispersion of managerial ownership, firm scale, and performance and the empirical
associations among them. In particular, variation across firms and through time of estimated
productivity parameters for physical assets and managerial input and corresponding variation in optimal
compensation contract and firm size combine to deliver the well-known hump-shaped relation between
Tobin's Q and managerial ownership. To assess the effectiveness of standard econometric approaches to
the endogeneity problem, we apply those remedies to panel data generated from the model. The
unfortunate conclusion is that, at least in the ownership-performance context, proxy variables, fixed
effects, and instrumental variables do not generally provide reliable solutions to simultaneity bias.
Note: Previously titled "Structural Models and Endogeneity in Corporate FinanceStructural Models and
Endogeneity in Corporate Finance: The Link Between Managerial Ownership and Corporate
Performance
Near-infrared wavefront sensing for the VLT interferometer
The very large telescope (VLT) interferometer (VLTI) in its current operating
state is equipped with high-order adaptive optics (MACAO) working in the
visible spectrum. A low-order near-infrared wavefront sensor (IRIS) is
available to measure non-common path tilt aberrations downstream the high-order
deformable mirror. For the next generation of VLTI instrumentation, in
particular for the designated GRAVITY instrument, we have examined various
designs of a four channel high-order near-infrared wavefront sensor. Particular
objectives of our study were the specification of the near-infrared detector in
combination with a standard wavefront sensing system. In this paper we present
the preliminary design of a Shack-Hartmann wavefront sensor operating in the
near-infrared wavelength range, which is capable of measuring the wavefronts of
four telescopes simultaneously. We further present results of our design study,
which aimed at providing a first instrumental concept for GRAVITY.Comment: 10 pages, 7 figures, to appear in "Ground-based and Airborne
Instrumentation for Astronomy II" SPIE conference, Marseille, 23-28 June 200
2010. Sentiment and stock returns: The SAD anomaly revisited
a b s t r a c t Widely-cited research by Kamstra et al. (2003) argues that changes in mood resulting from Seasonal Affective Disorder (SAD) drive changes in investor risk aversion and cause seasonal patterns in aggregate stock returns around the world. In this paper we reexamine the so-called SAD effect by replicating and extending Kamstra et al. (2003). We study the psychological underpinnings of the SAD hypothesis and show that the time-series predictions of the SAD model do not correspond to the seasonal patterns in depression found in the general population. We also investigate the cross-sectional prediction that SAD has a greater effect on stock markets in countries where SAD is more prevalent and find no relation between the prevalence of SAD and stock returns. Finally, we document that the SAD effect is mechanically driven by an overlapping dummy-variable specification and higher returns around the turn of the year