Slow Moving Capital

We study three cases in which specialized arbitrageurs lost significant amounts of capital and, as a result, became liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to fundamentals and the rebound took months. While multi-strategy hedge funds who were not capital constrained increased their positions, a large fraction of these funds actually acted as net sellers consistent with the view that information barriers within a firm (not just relative to outside investors) can lead to capital constraints for trading desks with mark-to-market losses. Our findings suggest that real world frictions impede arbitrage capital.

Sold below value? Why takeover offers can have negative premiums

Although many studies have acknowledged the existence of negative offer premiums, where the initial bid undercuts the target's pre-announcement market price, this phenomenon has remained unexplained. Negative premiums occur frequently and are no measurement error. We show theoretically and empirically that negative premiums can be rationally explained with ‘hidden earnouts,’ where target shareholders participate in the bidder's share of joint synergies, and with corrections of target overvaluation. We find that target shareholders profit from the consummation of a takeover even if the announced offer has a negative premium

The Interdependent And Intertemporal Nature Of Financial Decisions: An Application To Cash Flow Sensitivities

We develop a dynamic multiequation model where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash. We argue that static models of financial decisions produce inconsistent coefficient estimates, and that models that do not acknowledge the interdependence among decision variables produce inefficient estimates and provide an incomplete and potentially misleading view of financial behavior. We use our model to examine whether firms are constrained from accessing capital markets. Unlike static single-equation studies that find firms underinvest given cash flow shortfalls, we conclude that firms maintain investment by borrowing. © 2010 the American Finance Association

The Interdependent and Intertemporal Nature of Financial Decisions: An Application to Cash Flow Sensitivities

We develop a dynamic multiequation model where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash. We argue that static models of financial decisions produce inconsistent coefficient estimates, and that models that do not acknowledge the interdependence among decision variables produce inefficient estimates and provide an incomplete and potentially misleading view of financial behavior. We use our model to examine whether firms are constrained from accessing capital markets. Unlike static single-equation studies that find firms underinvest given cash flow shortfalls, we conclude that firms maintain investment by borrowing. Copyright (c) 2010 the American Finance Association.

Slow Moving Capital

We study three cases in which specialized arbitrageurs lost significant amounts of capital and, as a result, became liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to fundamentals and the rebound took months. While multi-strategy hedge funds who were not capital constrained increased their positions, a large fraction of these funds actually acted as net sellers consistent with the view that information barriers within a firm (not just relative to outside investors) can lead to capital constraints for trading desks with mark-to-market losses. Our findings suggest that real world frictions impede arbitrage capital.capital constraint; convertible bond; frictions; hedge funds; limits of arbitrage; liquidity; merger arbitrage; risk management; valuation