{"title":"Agency Conflicts and Risk Management","authors":"E. Morellec, Clifford W. Smith","doi":"10.2139/ssrn.281537","DOIUrl":"https://doi.org/10.2139/ssrn.281537","url":null,"abstract":"This paper analyzes the relation between agency conflicts and risk management in a contingent claims model of the firm. In contrast to previous contributions, our analysis incorporates not only stockholder-debtholder conflicts but also manager--stockholder conflicts. We show that the costs of both underinvestment and overinvestment are essential in determining the firm's hedging policy. In particular, firms that derive more of their value from assets in place (lower market-to-book ratios), although having lower costs of underinvestment, generally display larger costs of overinvestment. Thus, they may be more likely to hedge to control these overinvestment incentives. Our analysis demonstrates that the relation between risk management and agency conflicts is more complex than prior discussions have recognized. It also provides a rationale for the recent findings of Bartram, Brown, and Fehle (2004) and suggests reinterpretation of some of the empirical evidence on corporate risk management.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123910435","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Stock Option Exercise, Earnings Management, and Abnormal Stock Returns","authors":"Irfan Safdar","doi":"10.2139/ssrn.468561","DOIUrl":"https://doi.org/10.2139/ssrn.468561","url":null,"abstract":"This essay uses a large sample to examine whether stock option plans provide incentives to executives to manage earnings when exercising their options. The evidence presented is consistent with a hypothesis where managers use accruals to shift earnings to increase the stock price prior to and during option exercise periods. However, the results indicate that the magnitude of earnings management related to stock options may be limited. Reported income peaks at the earnings announcement immediately preceding option exercise activity and is followed by both reversals in income and discretionary accruals as well as negative abnormal stock returns during the post-exercise period for up to one year. Current discretionary accruals range from 0.3% to 0.62% of assets, depending upon the accrual model, during the quarterly earnings announcement immediately preceding option exercise activity. Over the two quarters following option exercise, sample firms experience small but statistically significant reversals in discretionary accruals and on average experience negative abnormal returns of approximately -3%. The magnitude of the return reversals is shown to be cross-sectionally positively related to the magnitude of the pre-exercise discretionary accrual proxies, even after adjusting for the Sloan anomaly. I find similar evidence for a sample of firms that experience option expiration but weaker evidence of earnings management for stock sales unrelated to stock option exercise.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126445175","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Precautionary Savings and Partially Observed Income","authors":"Neng Wang","doi":"10.2139/ssrn.429400","DOIUrl":"https://doi.org/10.2139/ssrn.429400","url":null,"abstract":"I propose an intertemporal precautionary-saving model in which the agent's labor income is subject to both permanent and transitory shocks. However, he only observes his total income, not individual components. I show that partial observability of individual components of income gives rise to additional precautionary saving because of uncertainty in estimating individual components of income. This additional precautionary saving is higher, when there is greater uncertainty associated with estimating the individual components of income. Incomplete Information, Kalman Filter","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126703112","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"A Dynamic Analysis of Takeover Deals with Competition and Imperfect Information","authors":"E. Morellec, A. Zhdanov","doi":"10.2139/ssrn.406981","DOIUrl":"https://doi.org/10.2139/ssrn.406981","url":null,"abstract":"This article develops an equilibrium framework for the joint determination of the timing and the terms of takeovers in the presence of competition and imperfect information. The model analyzes takeovers as exchange options and derives equilibrium restructuring strategies by solving option exercise games between bidding and target shareholders. In the model, outside investors have incomplete information and can update their beliefs by observing the behavior of participating firms. In equilibrium part of the uncertainty remains unresolved until the takeover anouncement, thereby inducing abnormal announcement returns. The returns resulting from the equilibrium strategies derived in the paper are consistent with the available empirical evidence. In addition, the model generates new predictions relating these returns to the drift, volatility and correlation coefficient of the bidder and the target stock returns.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126712020","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Inflation and the Constant-Growth Valuation Model: A Clarification","authors":"M. Bradley, G. Jarrell","doi":"10.2139/ssrn.356540","DOIUrl":"https://doi.org/10.2139/ssrn.356540","url":null,"abstract":"We examine the effects of inflation on the standard, Constant-Growth valuation model found throughout the finance literature. We find that the presence of inflation vitiates the generally accepted expression of this model for the value of a firm that either makes no new investments or invests only in zero net present value projects. If expected inflation is positive, the generally accepted and widely used expression for the value of the firm under either of these two conditions seriously understates the true value of the firm, even at modest levels of inflation. For example, assuming zero net new investments, a real interest rate of 6% and a rate of inflation of 2%, the commonly accepted expression understates the true value of the firm by 25%. We also examine the effects of inflation on the firm's weighted-average cost of capital (WACC), which is an important parameter in the Constant-Growth model. We find that the popular WACC equation developed by Modigliani and Miller is not inflation-neutral when stated in nominal terms. Specifically, when expected inflation and corporate tax rates are positive, the nominal M&M WACC understates the firm's true nominal WACC by a non-trivial amount. We show how to adjust the standard M&M formula to correct for this understatement. In contrast to the M&M model, we find that the WACC equation developed by Miles & Ezzel is inflation-neutral when stated in nominal terms, and thus, there is no need to adjust the equation in the presence of positive expected inflation. We conclude the paper by documenting the widespread misapplication of the Constant-Growth model under conditions of inflation found throughout the finance literature and in the practical application of corporate valuation techniques.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"67 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134073905","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Michael J. Barclay, E. Morellec, Clifford W. Smith
{"title":"On the Debt Capacity of Growth Options","authors":"Michael J. Barclay, E. Morellec, Clifford W. Smith","doi":"10.2139/ssrn.271949","DOIUrl":"https://doi.org/10.2139/ssrn.271949","url":null,"abstract":"If debt capacity is defined as the incremental debt optimally associated with an additional asset, then the debt capacity of growth options is negative. The underinvestment costs of debt increase and free cash flow benefits of debt fall with additional growth options. Thus, if firm value increases with additional growth options, then not only does leverage decline but the firm's optimal total debt level declines as well. This result implies a negative relation between book leverage and growth options and provides a new economic interpretation of book leverage regressions.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2001-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127850062","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Consumer Welfare Consequences of Exchanges of Cost Information","authors":"O. Richard, Olivier Armantier","doi":"10.2139/ssrn.262026","DOIUrl":"https://doi.org/10.2139/ssrn.262026","url":null,"abstract":"We show that exchanges of cost information in models with entry may benefit consumers in a wide range of market structures, including multimarket models with independently distributed costs and duopolies. These results contrast with previous findings in models without entry.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"238 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2001-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116109748","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"IPO Market Cycles: An Exploratory Investigation","authors":"M. Lowry, G. Schwert","doi":"10.2139/ssrn.209008","DOIUrl":"https://doi.org/10.2139/ssrn.209008","url":null,"abstract":"This paper examines cycles in the frequency of initial public offerings (IPOs) and their relation to the average initial returns realized by investors who participated in the IPOs. There are strong cycles in the IPO market. We find that initial returns are predictably related to past initial returns and to future IPO volume. This predictability occurs because of the time it takes to complete an IPO. Using data on individual issues, we model the price updates that occur between initial filing and the IPO, as well as the IPO return. We use aggregate U.S. data from 1960-98, and firm-level data from 1985-97.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2000-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130043535","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Incentives in Nonprofit Organizations: Evidence from Hospitals","authors":"James A. Brickley, R. V. Van Horn","doi":"10.2139/ssrn.209178","DOIUrl":"https://doi.org/10.2139/ssrn.209178","url":null,"abstract":"This paper examines the incentives of CEOs in a large sample of nonprofit hospitals. The evidence suggests that the relations between financial performance (return on assets) and CEO turnover and compensation are as strong in nonprofit hospitals as in for-profit hospitals and other for-profit corporations. We find little evidence that nonprofit hospitals provide explicit incentives for their CEOs to focus on altruistic activities. The results add to the collective evidence that there is little distinction between the behaviors of nonprofit and for-profit hospitals. We provide some evidence that these similarities are due to competition in the marketplace, not identical objective functions.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"143 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2000-02-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114373772","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Beta and Book-to-Market: Is the Glass Half Full or Half Empty?","authors":"S. Kothari, Jay Shanken","doi":"10.2139/ssrn.126212","DOIUrl":"https://doi.org/10.2139/ssrn.126212","url":null,"abstract":"We review recent empirical work on the determinants of the cross-section of expected returns. This literature, which includes the influential work by Fama and French (1992, 1993), tends to ignore the positive evidence on beta and to overemphasize the importance of book-to-market. Kothari, Shanken, and Sloan (1995) show that beta significantly explains the cross-sectional variation in average returns, but that size also has incremental explanatory power. We find that, while statistically significant, the incremental benefit of size given beta is surprisingly small economically. Book-to-market is a weak determinant of the cross-sectional variation in average returns among large firms and it fails to account for returns from momentum strategies. This raises doubts about the forecasting power of book-to-market.","PeriodicalId":222025,"journal":{"name":"Simon Business School Working Papers","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1998-09-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114522841","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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