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doi: 10.1111/j.1540-6261.2006.00883.xpmid: N/A
ABSTRACT The study of household finance is challenging because household behavior is difficult to measure, and households face constraints not captured by textbook models. Evidence on participation, diversification, and mortgage refinancing suggests that many households invest effectively, but a minority make significant mistakes. This minority appears to be poorer and less well educated than the majority of more successful investors. There is some evidence that households understand their own limitations and avoid financial strategies for which they feel unqualified. Some financial products involve a cross‐subsidy from naive to sophisticated households, and this can inhibit welfare‐improving financial innovation.
DANIEL, KENT; TITMAN, SHERIDAN
doi: 10.1111/j.1540-6261.2006.00884.xpmid: N/A
ABSTRACT The book‐to‐market effect is often interpreted as evidence of high expected returns on stocks of “distressed” firms with poor past performance. We dispute this interpretation. We find that while a stock's future return is unrelated to the firm's past accounting‐based performance, it is strongly negatively related to the “intangible” return, the component of its past return that is orthogonal to the firm's past performance. Indeed, the book‐to‐market ratio forecasts returns because it is a good proxy for the intangible return. Also, a composite equity issuance measure, which is related to intangible returns, independently forecasts returns.
BAKER, MALCOLM; WURGLER, JEFFREY
doi: 10.1111/j.1540-6261.2006.00885.xpmid: N/A
ABSTRACT We study how investor sentiment affects the cross‐section of stock returns. We predict that a wave of investor sentiment has larger effects on securities whose valuations are highly subjective and difficult to arbitrage. Consistent with this prediction, we find that when beginning‐of‐period proxies for sentiment are low, subsequent returns are relatively high for small stocks, young stocks, high volatility stocks, unprofitable stocks, non‐dividend‐paying stocks, extreme growth stocks, and distressed stocks. When sentiment is high, on the other hand, these categories of stock earn relatively low subsequent returns.
doi: 10.1111/j.1540-6261.2006.00886.xpmid: N/A
ABSTRACT This paper examines the capital structure implications of market timing. I isolate timing attempts in a single major financing event, the initial public offering, by identifying market timers as firms that go public in hot issue markets. I find that hot‐market IPO firms issue substantially more equity, and lower their leverage ratios by more, than cold‐market firms do. However, immediately after going public, hot‐market firms increase their leverage ratios by issuing more debt and less equity relative to cold‐market firms. At the end of the second year following the IPO, the impact of market timing on leverage completely vanishes.
BAKER, MALCOLM; TALIAFERRO, RYAN; WURGLER, JEFFREY
doi: 10.1111/j.1540-6261.2006.00887.xpmid: N/A
ABSTRACT Many studies find that aggregate managerial decision variables, such as aggregate equity issuance, predict stock or bond market returns. Recent research argues that these findings may be driven by an aggregate time‐series version of Schultz's (2003, Journal of Finance 58, 483–517) pseudo market‐timing bias. Using standard simulation techniques, we find that the bias is much too small to account for the observed predictive power of the equity share in new issues, corporate investment plans, insider trading, dividend initiations, or the maturity of corporate debt issues.
BUTLER, ALEXANDER W.; GRULLON, GUSTAVO; WESTON, JAMES P.
doi: 10.1111/j.1540-6261.2006.00888.xpmid: N/A
ABSTRACT This paper provides a rational explanation for the apparent ability of managers to successfully time the maturity of their debt issues. We show that a structural break in excess bond returns during the early 1980s generates a spurious correlation between the fraction of long‐term debt in total debt issues and future excess bond returns. Contrary to Baker, Taliaferro, and Wurgler (2006), we show that the presence of structural breaks can lead to nonsense regressions, whether or not there is any small sample bias. Tests using firm‐level data further confirm that managers are unable to time the debt market successfully.
LEHN, KENNETH M.; ZHAO, MENGXIN
doi: 10.1111/j.1540-6261.2006.00889.xpmid: N/A
ABSTRACT We examine the relation between bidder returns and the probability of chief executive officer (CEO) turnover in acquiring firms. Using a sample of 714 acquisitions during 1990 to 1998, we find that 47% of CEOs of acquiring firms are replaced within 5 years, including 27% by internal governance, 16% by takeovers, and 4% by bankruptcy. A significant inverse relation exists between bidder returns and the likelihood of CEO turnover. This relation is not associated with governance structure. It also is not significantly different in stock versus cash acquisitions, which appears to be inconsistent with Shleifer and Vishny's theory of “stock market driven” acquisitions.
RAJGOPAL, SHIVARAM; SHEVLIN, TERRY; ZAMORA, VALENTINA
doi: 10.1111/j.1540-6261.2006.00890.xpmid: N/A
ABSTRACT Although agency theory suggests that firms should index executive compensation to remove market‐wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004, Journal of Finance 59, 1619–1649) posits that an absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities vary with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent, as proxied by the CEO's financial press visibility and his firm's industry‐adjusted ROA. Our results are robust to alternate explanations such as managerial skimming, oligopoly, and asymmetric benchmarking.
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