The selling of put derivatives by firms for shareholder wealth and information signaling enhancement

Working paper; version dated November 5, 200

Essays on Investment and Financing Decisions

This dissertation contains three essays in the area of Business Finance which are related to the literature of asymmetric information and agency. Our purpose is to demonstrate that the presence of asymmetric information creates possible costly effects that adversely influence the performance and profitability of the firm. The first essay deals with the value of slack (excess liquidity) and the investment decision under asymmetric information. It is shown that when managers and shareholders hold different information sets with respect to the quality of an investment opportunity, an optimum amount of slack can partially resolve an underinvestment problem. The employed framework emphasizes the existence of a penalty function which is assigned by capital market participants due to the uncertainty associated with the announcement of external financing. In the second essay, we address issues of risk sharing between an agent and a principal. We examine the principal-agent relationship under the plausible condition of a multidivisional managerial effort. It is suggested that under realistic assumptions, information about the divisional performance produces sharing rules which are different from those derived under the condition of aggregated information. The third essay deals with issues of agency costs and financial decisions at the divisional level of a multidivisional firm. It is argued that the internal organizational structure places some constraints on the nature of the financial decisions made by the division manager. The internal regulatory environment forces the divisional manager to be risk averse and to avoid the adoption of risky projects. The costs associated with this managerial behavior, called managerial regulatory costs, represent a different dimension of agency costs

Foreign and Domestic Divestments: Evidence on Valuation Effects of Plant Closings

This study examines the valuation consequences of domestic and foreign divestments by comparing the stock price reaction to announcements of domestic plant closings and foreign plant closings. A domestic plant closing could indicate firm-wide problems and impending firm deterioration. A foreign plant may serve to exploit arbitrage opportunities specific to that plant location. Closing a foreign plant need not signify firm-wide problems. Our comparison of stated reasons for closings supports these propositions. Therefore, foreign plant closing announcements should produce a smaller stock price decline that domestic plant closing announcements. Empirical results indicate a significant negative stock price reaction for domestic plant closings and an insignificant negative stock price reaction for foreign plant closings. Differences in stock price reaction remain after controlling for firm-specific factors.© 1992 JIBS. Journal of International Business Studies (1992) 23, 203–223

The differentiation of 'emerging' equity markets

We argue that 'emerging' security markets, as defined by IFC, have characteristics differentiated from their counterparts in industrialized nations not only due to differential levels of economic development, but also because their origins are more recent. Consequently, the institutional infrastructure comprising a broad legal framework recognizing property rights, disclosure requirements, accounting practices conforming to international standards, supervision and regulation of these markets, may be inadequate or even absent in 'emerging' markets. Our study develops a positive (descriptive) framework of the qualitative (institutional infrastructure) and quantitative features that classifies and predicts the relative development of securities markets across countries. Discriminant and logit analyses using IFC data indicate that the 'emerging' equity markets as a class are dissimilar from 'developed' markets. These findings lend support to the premise that the two sets of markets are segmented. There is weak evidence of convergence in the characteristics of the two sets of markets. However, it is expected that as the institutional infrastructures in 'emerging' markets improve, there will be stronger evidence of the trend towards convergence in these markets.