Market timing and cost of capital of the firm

Graham and Harvey’s (2001) survey evidence and Baker, Greenwood, and Wurgler (2003) indicate that firm managers try to time debt markets based on term spreads or excess bond returns when choosing the maturity of new debt issues. Whether debt market timing increases firm value via a reduced cost of capital is an empirical question. I examine differences in firm value across non-timers and timers, where timers are defined as firms that follow either a naïve strategy of choosing long-term debt when the term premium is low or a complex strategy from Baker et al. (2003) based on the predictability of future excess bond returns. Also, I combine a debt maturity function and a complex timing strategy to obtain a better classification of timers. Timers are assumed to choose different maturity from the predictions of the debt maturity function to follow a complex strategy. First, I investigate whether the timing strategies affect the share price response to announcements of straight debt offerings. I find no evidence that timing strategies affect share price responses to announcements of debt offering. Second, I investigate whether timers have higher firm value than non-timers, as measured by Tobin’s q. After controlling for various determinants of firm value, I find no differences in firm value between them. Third, I investigate whether firm value for timers increases more than that for non-timers after the debt issues. I find no differences in changes in value between them. In addition, I consider that firms could have private information about their future credit quality and use the information to time debt markets. Timers issue short-term (long-term) debt when they expect increases (decreases) in credit quality. I find that timers have lower firm value than non-timers. This result is consistent with previous findings that bond ratings changes follow financial and operational abnormal performance, and thus investors are able to predict bond ratings changes. Overall, although firms apparently try to time debt markets using market interest rates or future credit quality, they fail to increase firm value. The results suggest that corporate debt markets are efficient and well integrated with equity markets

Revisiting The Certifying Role Of Financial Intermediaries On IPOs

This paper re-examines the role of commercial banks, investment banks, and venture capitalists in monitoring and certifying the value of the firms that went public in the 2000s. We find that investment banks that have better reputations are associated with larger underpricing for venture-capital-backed IPOs, but not for non-venture-capital-backed IPOs. The partial adjustment phenomenon observed in Carter et al. (2001) exists only for venture-capital-backed IPOs. The presence of venture capital is inversely related to IPO underpricing only when venture capitalists certify small firms. We do not find that the presence of bank debt reduces IPO underpricing. In addition, we do not find any substitutive or complementary role between commercial banks and venture capitalists in certifying IPOs

Who Are Better Informed Before Analysts’ Forecast Changes?

Using Korean data, we investigate information asymmetry among investors before analysts change their stock recommendations. By comparing trading activities between individuals, institutions, and foreign investors, we find that there is information asymmetry before analysts change their recommendations. Institutional investors buy/sell the stock before recommendation upgrades/downgrades, but individuals and foreign investors do not anticipate the upcoming news. We also document that the trade imbalance of institutional investors are associated with stock returns upon the announcements of recommendation changes. This result indicates that institutions take advantage of their superior information around the recommendation changes.     

Investment barriers and premiums on closed-end country funds

We investigate the cross-sectional relation between investment barriers and premiums on closed-end country funds (CECFs) traded in U.S. markets over the period from 1995 to 2004. We find that funds investing in markets with higher indirect investment barriers as measured by market turnover and country risk have higher premiums. We also document that the relation between the country risk and CECF premium is much stronger after the stock market liberalization. Since investors prefer to invest in emerging markets with high indirect barriers through country funds, they increase the premiums of the funds targeting those countries. In addition, we find that direct investment barriers as measured by the investable weight factor do not explain the large variation in the CECF premiums.Closed-end country funds Investment barriers Fund premium