The Journal of Finance

Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00463

Hendrik Bessembinder, Michael L. Lemmon

Spot power prices are volatile and since electricity cannot be economically stored, familiar arbitrage‐based methods are not applicable for pricing power derivative contracts. This paper presents an equilibrium model implying that the forward power price is a downward biased predictor of the future spot price if expected power demand is low and demand risk is moderate. However, the equilibrium forward premium increases when either expected demand or demand variance is high, because of positive skewness in the spot power price distribution. Preliminary empirical evidence indicates that the premium in forward power prices is greatest during the summer months.

Employee Stock Options and Investment

Published: 05/23/2011   |   DOI: 10.1111/j.1540-6261.2011.01657.x

ILONA BABENKO, MICHAEL LEMMON, YURI TSERLUKEVICH

Exercises of employee stock options generate substantial cash inflows to the firm. These cash inflows substitute for costly external finance in those states of the world in which the demand for investment is high. Using the fact that the proceeds from option exercises exhibit a distinct nonlinearity around the point where options fall out of the money, we estimate that firms increase investment by $0.34 for each dollar received from the exercise of stock options. Firms that face higher external financing costs allocate more of the proceeds from option exercises to investment.

Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis

Published: 07/15/2003   |   DOI: 10.1111/1540-6261.00573

Michael L. Lemmon, Karl V. Lins

We use a sample of 800 firms in eight East Asian countries to study the effect of ownership structure on value during the region's financial crisis. The crisis negatively impacted firms' investment opportunities, raising the incentives of controlling shareholders to expropriate minority investors. Crisis period stock returns of firms in which managers have high levels of control rights, but have separated their control and cash flow ownership, are 10–20 percentage points lower than those of other firms. The evidence is consistent with the view that ownership structure plays an important role in determining whether insiders expropriate minority shareholders.

Book‐to‐Market Equity, Distress Risk, and Stock Returns

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00497

John M. Griffin, Michael L. Lemmon

This paper examines the relationship between book‐to‐market equity, distress risk, and stock returns. Among firms with the highest distress risk as proxied by Ohlson's (1980) O‐score, the difference in returns between high and low book‐to market securities is more than twice as large as that in other firms. This large return differential cannot be explained by the three‐factor model or by differences in economic fundamentals. Consistent with mispricing arguments, firms with high distress risk exhibit the largest return reversals around earnings announcements, and the book‐to‐market effect is largest in small firms with low analyst coverage.

Multimarket Trading and Liquidity: Theory and Evidence

Published: 09/04/2007   |   DOI: 10.1111/j.1540-6261.2007.01272.x

SHMUEL BARUCH, G. ANDREW KAROLYI, MICHAEL L. LEMMON

We develop a new model of multimarket trading to explain the differences in the foreign share of trading volume of internationally cross‐listed stocks. The model predicts that the trading volume of a cross‐listed stock is proportionally higher on the exchange in which the cross‐listed asset returns have greater correlation with returns of other assets traded on that market. We find robust empirical support for this prediction using stock return and volume data on 251 non‐U.S. stocks cross‐listed on major U.S. exchanges.

Does Corporate Diversification Destroy Value?

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00439

John R. Graham, Michael L. Lemmon, Jack G. Wolf

We analyze several hundred firms that expand via acquisition and/or increase their number of business segments. The combined market reaction to acquisition announcements is positive but acquiring firm excess values decline after the diversifying event. Much of the excess value reduction occurs because our sample firms acquire already discounted business units, and not because diversifying destroys value. This implies that the standard assumption that conglomerate divisions can be benchmarked to typical stand‐alone firms should be carefully reconsidered. We also show that excess value does not decline when firms increase their number of business segments because of pure reporting changes.

Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure

Published: 07/19/2008   |   DOI: 10.1111/j.1540-6261.2008.01369.x

MICHAEL L. LEMMON, MICHAEL R. ROBERTS, JAIME F. ZENDER

We find that the majority of variation in leverage ratios is driven by an unobserved time‐invariant effect that generates surprisingly stable capital structures: High (low) levered firms tend to remain as such for over two decades. This feature of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods of time. We then show that these results have important implications for empirical analysis attempting to understand capital structure heterogeneity.

Long‐Run Performance following Private Placements of Equity

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00507

Michael Hertzel, Michael Lemmon, James S. Linck, Lynn Rees

Public firms that place equity privately experience positive announcements effects, with negative post‐announcement stock‐price performance. This finding is inconsistent with the underreaction hypothesis. Instead, it suggests that investors are overoptimistic about the prospects of firms issuing equity, regardless of the method of issuance. Further, in contrast to public offerings, private issues follow periods of relatively poor operating performance. Thus, investor overoptimism at the time of private issues is not due to the behavioral tendency to overweight recent experience at the expense of long‐term averages.

Securitization and Capital Structure in Nonfinancial Firms: An Empirical Investigation

Published: 11/18/2013   |   DOI: 10.1111/jofi.12128

MICHAEL LEMMON, LAURA XIAOLEI LIU, MIKE QINGHAO MAO, GREG NINI

Contrary to recent accounts of off‐balance‐sheet securitization by financial firms, we show that asset securitization by nonfinancial firms provides a valuable form of financing for shareholders without harming debtholders. Using data from firms’ SEC filings, we find that securitization is attractive to firms in the middle of the credit quality distribution, which are the firms with the most to gain. Upon initiation, firms experience positive abnormal stock returns and zero abnormal bond returns, and largely use the securitization proceeds to repay existing debt. Securitization minimizes financing costs by reducing expected bankruptcy costs and providing access to segmented credit markets.

Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.55404

John R. Graham, Michael L. Lemmon, James S. Schallheim

We provide evidence that corporate tax status is endogenous to financing decisions, which induces a spurious relation between measures of financial policy and many commonly used tax proxies. Using a forward‐looking estimate of before‐financing corporate marginal tax rates, we document a negative relation between operating leases and tax rates, and a positive relation between debt levels and tax rates. This is the first unambiguous evidence supporting the hypothesis that low tax rate firms lease more, and have lower debt levels, than high tax rate firms.