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Volume 63: Issue 2 (April 2008)


Front Matter

Pages: i-iv  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01341.x  |  Cited by: 0


ANNOUNCEMENT OF 2007 SMITH BREEDEN PRIZES AND BRATTLE AWARDS

Pages: v-v  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01323.x  |  Cited by: 0


Back Matter

Pages: ix-xiv  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01340.x  |  Cited by: 0


Which Shorts Are Informed?

Pages: 491-527  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01324.x  |  Cited by: 397

EKKEHART BOEHMER, CHARLES M. JONES, XIAOYAN ZHANG

We construct a long daily panel of short sales using proprietary NYSE order data. From 2000 to 2004, shorting accounts for more than 12.9% of NYSE volume, suggesting that shorting constraints are not widespread. As a group, these short sellers are well informed. Heavily shorted stocks underperform lightly shorted stocks by a risk‐adjusted average of 1.16% over the following 20 trading days (15.6% annualized). Institutional nonprogram short sales are the most informative; stocks heavily shorted by institutions underperform by 1.43% the next month (19.6% annualized). The results indicate that, on average, short sellers are important contributors to efficient stock prices.


An Empirical Analysis of the Pricing of Collateralized Debt Obligations

Pages: 529-563  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01330.x  |  Cited by: 166

FRANCIS A. LONGSTAFF, ARVIND RAJAN

We use the information in collateralized debt obligations (CDO) prices to study market expectations about how corporate defaults cluster. A three‐factor portfolio credit model explains virtually all of the time‐series and cross‐sectional variation in an extensive data set of CDX index tranche prices. Tranches are priced as if losses of 0.4%, 6%, and 35% of the portfolio occur with expected frequencies of 1.2, 41.5, and 763 years, respectively. On average, 65% of the CDX spread is due to firm‐specific default risk, 27% to clustered industry or sector default risk, and 8% to catastrophic or systemic default risk.


Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K.

Pages: 565-608  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01325.x  |  Cited by: 207

SERGEI A. DAVYDENKO, JULIAN R. FRANKS

Using a sample of small firms that defaulted on their bank debt in France, Germany, and the United Kingdom, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate costly aspects of bankruptcy law. In particular, French banks respond to a creditor‐unfriendly code by requiring more collateral than lenders elsewhere, and by relying on collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting very different levels of creditor protection.


Empirical Evidence of Risk Shifting in Financially Distressed Firms

Pages: 609-637  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01326.x  |  Cited by: 119

ASSAF EISDORFER

This paper provides evidence of risk‐shifting behavior in the investment decisions of financially distressed firms. Using a real options framework, I show that shareholders' risk‐shifting incentives can reverse the expected negative relation between volatility and investment. I test two hypotheses that are consistent with risk‐shifting behavior: (i) volatility has a positive effect on distressed firms' investment; (ii) investments of distressed firms generate less value during times of high uncertainty. Empirical evidence using 40 years of data supports both hypotheses. I further evaluate the effect of various firm characteristics on risk shifting, and estimate the costs of the investment distortion.


Information Sales and Insider Trading with Long-Lived Information

Pages: 639-672  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01327.x  |  Cited by: 31

GIOVANNI CESPA

Fundamental information resembles in many respects a durable good. Hence, the effects of its incorporation into stock prices depend on who is the agent controlling its flow. Like a durable goods monopolist, a monopolistic analyst selling information intertemporally competes against herself. This forces her to partially relinquish control over the information flow to traders. Conversely, an insider solves the intertemporal competition problem through vertical integration, thus exerting tighter control over the information flow. Comparing market patterns I show that a dynamic market where information is provided by an analyst is thicker and more informative than one where an insider trades.


The Industry Life Cycle, Acquisitions and Investment: Does Firm Organization Matter?

Pages: 673-708  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01328.x  |  Cited by: 79

VOJISLAV MAKSIMOVIC, GORDON PHILLIPS

We examine the effect of industry life‐cycle stages on within‐industry acquisitions and capital expenditures by conglomerates and single‐segment firms controlling for endogeneity of organizational form. We find greater differences in acquisitions than in capital expenditures, which are similar across organizational types. In particular, 36% of the growth recorded by conglomerate segments in growth industries comes from acquisitions, versus 9% for single‐segment firms. In growth industries, the effect of financial dependence on acquisitions and plant openings is mitigated for conglomerate firms. Plants acquired by conglomerate firms increase in productivity. The results suggest that organizational forms' comparative advantages differ across industry conditions.


Capital Gains Taxes and Asset Prices: Capitalization or Lock-in?

Pages: 709-742  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01329.x  |  Cited by: 64

ZHONGLAN DAI, EDWARD MAYDEW, DOUGLAS A. SHACKELFORD, HAROLD H. ZHANG

This paper demonstrates that the equilibrium impact of capital gains taxes reflects both the capitalization effect (i.e., capital gains taxes decrease demand) and the lock‐in effect (i.e., capital gains taxes decrease supply). Depending on time periods and stock characteristics, either effect may dominate. Using the Taxpayer Relief Act of 1997 as our event, we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock‐in effect in the week after the rate reduction became effective.


Identification of Maximal Affine Term Structure Models

Pages: 743-795  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01331.x  |  Cited by: 74

PIERRE COLLIN-DUFRESNE, ROBERT S. GOLDSTEIN, CHRISTOPHER S. JONES

Building on Duffie and Kan (1996), we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations. Because these variables possess unambiguous economic interpretations, they generate a representation that is globally identifiable. Further, this representation has more identifiable parameters than the “maximal” model of Dai and Singleton (2000). We implement this new representation for select three‐factor models and find that model‐independent estimates for the state vector can be estimated directly from yield curve data, which present advantages for the estimation and interpretation of multifactor models.


The Term Structure of Real Rates and Expected Inflation

Pages: 797-849  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01332.x  |  Cited by: 250

ANDREW ANG, GEERT BEKAERT, MIN WEI

Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time‐varying prices of risk, and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve in the United States is fairly flat around 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure.


Competition from Specialized Firms and the Diversification-Performance Linkage

Pages: 851-883  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01333.x  |  Cited by: 75

JUAN SANTALO, MANUEL BECERRA

In this study, we show that the effect of diversification on performance is not homogeneous across industries and explore analytically and empirically the implications of this finding for the diversification literature. Diversified firms perform better in industries with a small number of nondiversified competitors or, equivalently, when specialized firms have a small combined market share, but worse as the presence of specialized firms increases in the industries in which they compete. The results are robust to the use of methods that alleviate the self‐selection problem and call for a reassessment of the diversification–performance relationship.


Correlated Trading and Returns

Pages: 885-920  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01334.x  |  Cited by: 110

DANIEL DORN, GUR HUBERMAN, PAUL SENGMUELLER

A German broker's clients place similar speculative trades and therefore tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Aggregate liquidity effects, short sale constraints, the systematic execution of limit orders (coordinated through price movements) or the correlated trading of other investors who pick off retail limit orders do not fully explain why retail investors trade similarly. Correlated market orders lead returns, presumably due to persistent speculative price pressure. Correlated limit orders also predict subsequent returns, consistent with executed limit orders being compensated for accommodating liquidity demands.


Share Issuance and Cross-sectional Returns

Pages: 921-945  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01335.x  |  Cited by: 273

JEFFREY PONTIFF, ARTEMIZA WOODGATE

Post‐1970, share issuance exhibits a strong cross‐sectional ability to predict stock returns. This predictive ability is more statistically significant than the individual predictive ability of size, book‐to‐market, or momentum. Our finding is related to research that finds that long‐run returns are associated with share repurchase announcements, seasoned equity offerings, and stock mergers, although our results remain strong even after exclusion of the data used in these studies. We estimate the issuance relation pre‐1970 and find no statistically significant predictive ability for most holding periods.


Earnings Management and Firm Performance Following Open-Market Repurchases

Pages: 947-986  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01336.x  |  Cited by: 161

GUOJIN GONG, HENOCK LOUIS, AMY X. SUN

Both post‐repurchase abnormal returns and reported improvement in operating performance are driven, at least in part, by pre‐repurchase downward earnings management rather than genuine growth in profitability. The downward earnings management increases with both the percentage of the company that managers repurchase and CEO ownership. Pre‐repurchase abnormal accruals are also negatively associated with future performance, with the association driven mainly by those firms that report the largest income‐decreasing abnormal accruals. The study suggests that one reason firms experience post‐repurchase abnormal returns is that post‐repurchase realized earnings growth exceeds expectations formed on the basis of pre‐repurchase deflated earnings numbers.


Underreaction to Dividend Reductions and Omissions?

Pages: 987-1020  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01337.x  |  Cited by: 30

YI LIU, SAMUEL H. SZEWCZYK, ZAHER ZANTOUT

Using a sample of 2,337 cash dividend reduction or omission announcements over the 1927 to 1999 period, this study reports significant negative post‐announcement long‐term abnormal returns, which last 1 year only. However, this long‐term abnormal performance is driven by the post‐earnings‐announcement drift. After controlling for the earnings performance and the skewness of buy‐and‐hold abnormal returns, there is no compelling evidence of a post‐dividend‐reduction or post‐dividend‐omission price drift.


MISCELLANEA

Pages: 1021-1022  |  Published: 4/2008  |  DOI: 10.1111/j.1540-6261.2008.01339.x  |  Cited by: 0