Altınkılıç and Hansen (2000) show that underwriter spreads in seasoned equity offerings (SEOs) overwhelmingly reflect variable costs. This research attempts to begin filling the gap created by this result, as to what are the important constituents of the variable costs. In particular, I investigate the hypothesis that an important part of underwriter compensation is partial payment for anticipated market making activities in the secondary market, once the offer begins. I show that lead underwriter market making activities following an SEO are partly paid through the spread. The lower bound cost estimates show that the spreads for firms likely to require the most market making services are on average 100 basis points higher than those requiring the least services. On average, the compensation for market making activities amounts to 20% of the lead underwriter's total compensation. The results are robust to several considerations. / Ph. D.

Tests of the static trade-off theory that posits that firms move towards the optimum capital structure necessitate a joint hypothesis test - whether firms adjust toward target leverage, and whether the proxy used for target leverage is the true target leverage. Prior studies use the time-series mean leverage for each firm, the industry median leverage, an estimated cross-sectional leverage, and a tobit estimated leverage using the factors suggested by the static trade-off theory as proxies for the target leverage. In this dissertation, I examine whether these proxies are equivalent and test the consistency of the proxies with the theorized behavior of the true target leverage. My results indicate that the four proxies we examine have significantly different distributions and this holds across most industries. Further, the industry median leverage is the proxy which best exhibits behavior consistent with the true target leverage. Firm value is higher for firms closer to the industry median and lower for firms away from the industry median. A robustness check using Kmeans cluster analysis confirms the superiority of the industry median leverage over the other proxies of target leverage. This study complements the previous studies on the pecking order theory and the trade-off theory. The main purpose of this study is to investigate three issues that are not considered in the previous studies. The adequacy of the specification and the assumptions of the models used in testing the trade-off and the pecking order theory. The second issue examined in this study is the validity to putting the pecking order and the trade-off theories in a horse race. The final issue examined in this study is the factors driving firms to issue (repurchase) debt or equity or combination of both and simultaneously the factors affecting the size of issue (repurchase)

I examine the effect of ownership structure on firms' propensities to save the proceeds of a share issuance as cash. Specifically, I focus on changes in cash savings at the time of a seasoned equity offering (SEO), a moment at which the firm experiences a large inflow of cash, to determine whether ownership structures such as managerial blockholdings or the presence of institutional investors materially affect firms' decisions regarding their level of cash savings. I find that firms with managerial blockholders are more inclined to save share issuance proceeds as cash, relative to firms with outside blockholders or no blockholders present. This finding could be interpreted as consistent with either managerial entrenchment or incentive alignment, so I distinguish between these competing forces by examining SEO announcement returns. The market's reaction to SEO announcements when managerial blockholders are present is significantly worse on average when the firm has excess cash, lending support to the entrenchment explanation. I also find that firms with greater total institutional ownership save more cash from equity issuance, which is consistent with the theory that greater firm monitoring allows optimal corporate cash holdings to increase because shareholders are less concerned about potential misuses of cash.

O presente estudo investiga os impactos da redução nas restrições financeiras para a captação de dívidas no mercado de capitais brasileiro sobre o financiamento e os investimentos de companhias brasileiras de capital aberto e fechado, não financeiras. Empiricamente, o estudo interpreta que a Instrução CVM nº 476, vigente a partir do ano de 2009, que trata das ofertas públicas de valores mobiliários distribuídas com esforços restritos, pode ter reduzido as restrições financeiras enfrentadas por sociedades anônimas brasileiras, dado que tal mudança regulatória, comparativamente ao mecanismo tradicional para o acesso ao mercado de capitais nacional, reduziu os custos de emissão de debêntures (valor mobiliário em foco) no mercado de capitais nacional, tornou o acesso ao capital mais rápido e reduziu uma barreira regulatória para as sociedades anônimas fechadas, impedidas de realizar emissões públicas de debêntures no mercado de capitais nacional antes da CVM 476. Sobre o financiamento, foram propostas as hipóteses de que a CVM 476, isto é, a redução nas restrições financeiras, possibilitou que as companhias aumentassem sua alavancagem total, devido ao aumento da alavancagem de longo prazo. Sobre os investimentos, foram propostas hipóteses relacionadas ao caixa e aos investimentos em ativos de longo prazo. Em relação ao caixa, a hipótese propõe que a CVM 476 possibilitou que as companhias mantivessem menores saldos em caixa, devido à redução no componente de restrição financeira da política de caixa. Sobre os investimentos em ativos de longo prazo, a hipótese propõe que a CVM 476 possibilitou que companhias aumentassem tais investimentos, pois poderiam tornar-se menos dependentes da geração interna de recursos e de outras fontes de capitais. É esperado que tais efeitos sejam maiores para as sociedades anônimas de capital fechado, pois, a priori, espera-se que tais companhias sejam mais restritas financeiramente do que as abertas, especialmente no que se refere ao acesso ao mercado de capitais nacional. Para investigar as hipóteses, foram realizadas duas abordagens empíricas. Na primeira, as emissões de debêntures pela CVM 476 foram adicionadas aos modelos como a variável explicativa de interesse, sendo representada por uma variável binária que indica a emissão das debêntures, no ano da emissão. Na segunda abordagem, a CVM 476 é tratada como um experimento natural que pode ter provocado um choque exógeno nas restrições financeiras, ou seja, uma diminuição nas restrições financeiras enfrentadas pelas sociedades anônimas brasileiras de capital aberto e fechado (as companhias tratadas), de modo que, nesta abordagem, as empresas de responsabilidade limitada são definidas como grupo de controle. Os resultados são compatíveis com as hipóteses relativas ao financiamento, isto é, a CVM 476 possibilitou o aumento da alavancagem total e de longo prazo das companhias, de modo que há evidências que tais efeitos sejam maiores para as sociedades anônimas fechadas. Por outro lado, não foram encontradas evidências robustas que indiquem que a CVM 476 possibilitou, de forma ampla, ajustes no caixa e nos investimentos em ativos de longo prazo de companhias afetadas pela Instrução / This study analyses the effects of reducing financing constraints to debt issuance in Brazilian bond market on financing and investments of Brazilian public and private non-financial companies. Empirically, this study interprets that CVM Act nº 476, in force since 2009, which deals with public issuance of securities issued with restricted efforts, may have reduced financing constraints faced by Brazilian companies, since this Act, compared to the traditional mechanism to access Brazilian bond market, reduced issuance costs of debentures in domestic bond market, made the access to capital faster and reduced a regulatory barrier for private companies, restricted from conducting public issues of debentures in domestic bond market before CVM 476. The hypotheses related to financing propose that CVM 476, that is, the reduction in financing constraints, allowed companies to increase total leverage, due to the increase in long-term leverage. Regarding investments, hypotheses related to cash holdings and investments in long-term assets were proposed. The hypothesis concerning cash proposes that CVM 476 allowed companies to maintain lower cash holdings, due to the reduction in financing constraint component of the cash policy. Regarding investments in long-term assets, the hypothesis proposes that CVM 476 allowed companies to increase their investments, since they could become less dependent on internally generated cash flow and other sources of capital. These effects are expected to be greater for private companies, since these companies are expected to be more financially constrained than public companies, especially with regard to the access to the domestic bond market. Two empirical approaches were employed to investigate the hypotheses. In the first one, debentures issues according to CVM 476 were added to the models as the explanatory variable of interest, and is represented by a dummy variable that indicates the issuance of the debentures, in the year of the issue. In the second approach, CVM 476 is analyzed as a natural experiment that may have caused an exogenous shock in financing constraints, that is, a decrease in financing constraints faced by Brazilian public and private companies (treatment group) and, in this approach, limited liability firms are defined as the control group. The results are compatible with the hypotheses regarding financing, that is, CVM 476 made possible the increase in total and long-term leverage of the companies, and there is evidence that these effects are greater for private companies. On the other hand, no robust evidence was found that indicate the CVM 476 made possible extensive adjustments in cash holdings and investments in long-term assets of the companies treated by CVM 476.

Thesis advisor: Thomas J. Chemmanur / Thesis advisor: Arthur Lewbel / The dissertation aims to investigate the role of asymmetric information in capital structure, investment, compensation of mortgage servicers, and bond and equity returns. Specifically, I evaluate the impact of credit ratings on debt issuance and investment of private and public firms, as well as the effect of asymmetric information on compensation of loan servicers in the mortgage backed securities market. Further, I study the relationship between ratings issued by investor and issuer-paid credit rating agencies and equity analyst recommendations. Finally, I evaluate the effect of the aforementioned signals on bond and equity returns as well as firm leverage and investment decisions. Chapter one in the dissertation is the first study to empirically evaluate the effect of credit ratings on capital structure and investment for private U.S. firms, relative to equivalent public firms. I find that private firms constrain debt issuance and investment by 4.5 and 6.5 percentage points more than public firms, respectively, when their credit ratings are on upgrade or downgrade thresholds. Consistent with these results, private firms that become public through an IPO constrain debt issuance by 10 percentage points before going public, if their ratings are on an upgrade or downgrade boundary. The second chapter studies the impact of asymmetric information between mortgage sellers and servicers on mortgage servicer compensation. We proxy for asymmetric information using the decision to retain mortgage servicing rights, which creates a principal-agent problem between sellers and servicers. Using loan-level data on Fannie Mae-insured, full documentation mortgages, we first find that loans in which sellers retain servicing rights default and foreclose at a significantly lower rate, and lose less in foreclosure than those in which they are not retained. Since it is more costly to service non-performing loans, these ex-post differences in default rates should be reflected in servicer compensation. However, using Fannie Mae MBS pool-level data, we find no difference in servicing fees for pools in which servicing rights are retained relative to pools in which they are not retained. In order to identify the impact of seller/servicer affiliation on servicing fees, we exploit a post-crisis regulatory change which altered the incentive to retain servicing rights for small sellers of MBS relative to large sellers. Finally, in the third chapter, we evaluate the information flows to the stock and bond markets of issuer versus investor-paid rating agencies and equity analysts. Equity analysts' forecasts and ratings assigned by issuer-paid credit rating agencies such as Standard and Poor's (S&P) and by investor-paid rating agencies such as Egan and Jones (EJR) all involve information production about the same underlying set of firms, even though equity analysts focus on cash flows to equity and bond ratings focus on cash flows to bonds. Further, the two types of credit rating agencies differ in their incentives to produce and report accurate information signals. Given this setting, we empirically analyze the timeliness and accuracy of the information signals provided by each of the above three types of financial intermediary to their investor clienteles and the information flows between these intermediaries. We find that the information signals produced by EJR are the most timely (on average), and seem to anticipate the information signals produced by equity analysts as well as by S&P. We find that changes in leverage are associated with lower EJR ratings but higher equity analyst recommendations; further, credit rating changes by EJR have the largest impact on firms' investment levels. We also document an "investor attention" effect (in the sense of Merton, 1987) among stock and bond market investors in the sense that changes in equity analyst recommendations have a higher impact than either EJR or S&P ratings changes on the excess returns on firm equity, while EJR rating changes have a higher impact on bond yield spreads than either S&P ratings changes or changes in equity analyst recommendations. Finally, we analyze differences in bond ratings assigned to a given firm by EJR and S&P, and find that these differences are positively related to the standard proxies for disagreement among stock market investors.

This thesis makes two main contributions to the literature. The first is to establish the existence of a capital supply channel, in particular a bank lending channel of monetary policy transmission in the UK using a clean measure of bank loan supply. In this study we exploit the revealed debt preferences of debt issuing firms by using the Becker and Ivashina (2014) fixed effects framework to isolate the impact of credit supply. By conditioning the sample on non-financial firms whose debt issuance is observed, we are able to eliminate the effects of credit demand and to isolate a clean measure for bank loan supply. In this thesis, we find that the tendency by unconstrained, non-financial firms to substitute corporate bonds for bank loans at different points of the financial cycle reflects changes in bank loan supply. We also find that the patterns of substitutability are consistent among more granular classifications of heterogeneous debt. Our results reveal that among unconstrained firms, the proportion of new bank loan issuance declines, while the proportions of corporate bonds and program debt issuance tend to increase, when faced with unfavourable credit market conditions. We then create a loan to bond substitution measure based on observed substitution behaviour of unconstrained firms. We find that this measure explains the out of sample bank loan issuance behaviour of constrained firms. As a result we conclude that the measure is able to cleanly capture changes in bank loan supply. We extend the study to examine the impact of bank loan supply on the financing, hiring and investment decisions of UK non-financial corporations. We find that bank loan supply disruptions significantly and disproportionately affect the hiring and inventory investment decisions of bank dependent firms relative to those of non-bank dependent firms. The propensity to invest or hire among bank dependent UK non-financial firms declines relative to non-bank dependent firms when bank loan supply deteriorates. Moreover, the fixed investment decisions of non-bank dependent firms tend to decline following adverse bank loan supply shocks. These results confirm the existence of a bank lending channel among UK non-financial firms, and the findings are in line with the narrow credit view of monetary policy transmission. Our second central contribution is to analyse the impact of orthogonal QE shocks, credit supply shocks, credit demand shocks, and monetary policy shocks on the aggregate debt issuance behaviour of UK non-financial firms. Using structural vector error correction models (SVECM), we show that QE shocks increase corporate bond issuance and compress term spreads, but have no effect on the policy rate. Moreover, we observe that unexpected increases in the monetary policy rate lead to a decline in corporate bonds in the short term. While credit supply shocks move aggregate bank lending and aggregate corporate bond issuance in the same direction, corporate bond issuance responds with a lag to fluctuation in credit supply. This implies that adverse credit supply shocks may produce amplified negative effects on capital supply as both corporate bonds and bank loan decline. We also establish a counterfactual for corporate bonds and bank loan issues based on our structural model. We find that the QE policies result in the Bank of England averting a decline in corporate bond issuance of between 3% and 10% during the QE period. Our findings in this thesis point towards the existence of a portfolio balance channel of QE that operates in the UK corporate bond markets during the QE period.

This dissertation consists of three essays in international corporate finance. It studies the impact of aggregate conditions and the institutional environment on the behavior of publicly traded firms from a broad sample of countries. In the first essay I argue that when credit constraints are widespread, as may be the case in countries with poor investor protection, we should not necessarily expect small firms´ investment to be more sensitive to monetary contractions or negative aggregate shocks. A simple model of investment with credit constraints shows that for this pattern to occur we need a high enough level of investor protection. The empirical evidence is broadly consistent with the hypothesis. In periods of tight credit conditions, small firms from countries with high creditor protection contract their investment rate more than large firms, while there is no significant difference in the investment contraction of small and large firms in from low creditor protection countries. In the second essay I explore to what extent the effect of legal origin on payout policy, ownership concentration, and valuation has been stable through time. The results suggest that previously established results should be taken with caution, and cast doubts on their strength. In particular, it appears that corporate characteristics are converging across countries, and legal origin is not longer an important determinant of them. In the final essay I study to what extent capital raising in international markets is related to firms´ ability to react to financial shocks. I provide a complete descriptive picture of the main patterns in the use of international financing between 1990 and 2009,study how issuers and non-issuers grow during financial crises, and how their growth is related to the aggregate conditions in the economy and their past financing behavior. Firms that raise capital internationally have a lower correlation with the local GDP growth, and grow more during local financial crises; however this relationship depends on the overall degree of development of the country and is highly dependent on the determinants of the issuance decision. The descriptive analysis show that international capital raising is pervasive in most countries, but the firms doing so differ depending on the development of their country of origin. / text

This study examines the association between changes in accounting performance resulting from mandated adoption of International Financial Reporting Standards (IFRS) and managerial incentives to engage in opportunistic equity issuance. Based on 2,719 Australian and the European Union firms that are required to adopt IFRS starting in 2005, I find that firms disclosing a material decline in reported net income under IFRS relative to reported net income under local standards are revalued downwards, while firms disclosing a material improvement in reported net income under IFRS relative to reported net income under local standards are revalued upwards. This indicates that relative to financial statements prepared according to local accounting standards, financial statements under IFRS convey new information that impacts market value. Building on the market timing hypothesis, I find that managers exploit their private information about the effects of changes in accounting standards on accounting performance and that managers strategically time equity issuance before their firms disclose those effects. In particular, during the three-year window prior to a firm disclosing the financial statement effects of IFRS adoption, the firm’s likelihood and size of equity issuance are negatively associated with the change in reported net income resulting from IFRS adoption. This is consistent with the prediction that firms whose reported performance is negatively affected by mandated changes in accounting standards are more likely to issue equity and issue a larger volume of equity in advance of the disclosure of those negative effects. The association between equity issuance and the relative decline in accounting performance resulting from IFRS adoption is robust to alternative definitions of equity issuers, specifications and measures of accounting performance, and changes in sample composition. I find some evidence that equity issuance is positively associated with earnings forecast optimism, where earnings forecast optimism is another proxy for information asymmetry arising from mandatory adoption of IFRS. / Thesis (Ph.D, Management) -- Queen's University, 2008-07-10 17:39:27.512

The first empirical chapter examines the existence of a 'net equity issuance' (NEI) effect in the UK stock market. Net Equity Issuance (NEI) refers to the change in a firm's shares outstanding due to events such as SEOs, acquisitions financed by share issues, issues to staff and share repurchases. The NEI effect is the ability of share issuance by firms to predict their subsequent stock returns. My results mainly suggest that there is an NEI effect in the UK. However, a discrepancy exists between the UK results and those found in the US. In the UK market, negative-NEI stocks tend to show negative subsequent returns while zero-NEI stocks have the highest subsequent returns. I also find that the abnormal returns from the NEI effect disappear when transaction costs are taken into account. Furthermore, the asset pricing test results suggest that the new factor models partially explain the NEI effect in the UK. The second empirical chapter evaluates the information content of new asset pricing factors in the UK. I find that two new risk factors, the investment factor and the profitability factor, improve the factor model's performance in the UK while both the size factor 'small minus big' (SMB) and the value factor 'high minus low' (HML) are redundant. There is also evidence that factor construction methods matter to the information content of the profitability factor. The most informative profitability factor in the UK among the possible candidates is constructed using income before extraordinary items scaled by book equity. The third empirical chapter explores the information content of the two new factors by linking them to the state variables which predict future investment opportunities. By doing this, I find confirmative evidence that the two new risk factors may proxy for state variables that capture time variations in the investment opportunity set. I find empirical evidence which confirms that the investment factor predicts future economic growth, proxied by GDP growth, investment growth and consumption growth. In addition, the investment factor is found to be related to dividend yield shocks, whereas the profitability factor is related to inflation shocks. In addition, the pricing significance of macroeconomic variable shocks disappears when loadings on the two new factors are presented in the model. The evidence therefore provides economic interpretation to the information content of the new asset pricing factors in the UK market.

This dissertation consists of two essays. In the first essay, I examine the source of momentum in stock returns. The reversal of momentum returns has been interpreted as evidence that momentum results from delayed overreaction to information. I examine momentum and reversals conditional on firms’ share issuance (net of repurchases) during the momentum holding period and show that (1) among losers, the momentum returns are statistically significant, but the reversals are non-existent, for both issuers and non-issuers; (2) among winners, momentum and reversals are restricted to issuers, but are non-existent among non-issuers. After further conditioning on firm size, I find that winner reversals are restricted to small, equity issuing firms. After excluding these small issuers from the sample, the remaining firms have strong momentum profits with no accompanying reversals. The evidence suggests that the return reversals are a manifestation of the poor performance of equity issuing firms. Further, while investor overreaction potentially contributes to the momentum among winners, a large fraction of firms do not earn any significant abnormal returns following initial price continuation, suggesting that underreaction, and not delayed overreaction to information, is the dominant source of momentum in stock returns. In the second essay, I examine alternative explanations of reversals in stock returns. George and Hwang (2007) find that long-term reversals in stock returns are driven by investors’ incentive to defer payment of taxes on locked-in capital gains rather than by overreaction to information. I show that return reversals are instead attributable to the negative relationship between firms’ composite share issuance and future stock returns documented in Daniel and Titman (2006). The ability of locked-in capital gains measures to forecast stock returns is largely subsumed by the composite share issuance measure. My results do not support the hypothesis that capital gains taxes drive long-term return reversals. / Ph. D.