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Merger options and risk arbitrage
Van Tassel, Peter (2016-01-01)
Option prices embed predictive content for the outcomes of pending mergers and acquisitions. This is particularly important in merger arbitrage, where deal failure is a key risk. In this paper, I propose a dynamic asset pricing model that exploits the joint information in target stock and option prices to forecast deal outcomes. By analyzing how deal announcements affect the level and higher moments of target stock prices, the model yields better forecasts than existing methods. In addition, the model accurately predicts that merger arbitrage exhibits low volatility and a large Sharpe ratio ...
Staff Reports , Paper 761

Report
The impact of CEO turnover on equity volatility
Clayton, Matthew J.; Hartzell, Jay C.; Rosenberg, Joshua V. (2003-05-01)
A change in executive leadership is a significant event in the life of a firm. This study investigates an important consequence of a CEO turnover: a change in equity volatility. We develop three hypotheses about how changes in CEO might affect stock price volatility, and test these hypotheses using a sample of 872 CEO turnovers over the 1979-95 period. We find that volatility increases following a CEO turnover, even when the CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility more than voluntary turnovers - a finding consistent with the ...
Staff Reports , Paper 166

Report
Buyout activity: the impact of aggregate discount rates
Haddad, Valentin; Loualiche, Erik; Plosser, Matthew (2013)
Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit-specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the ...
Staff Reports , Paper 606

Working Paper
Interlocked Executives and Insider Board Members: An Empirical Analysis
Gayle, George-Levi; Golan, Limor; Miller, Robert A. (2015-11-27)
This paper asked the question of whether the behavior and compensation of interlocked executives and non-independent board of directors are consistent with the hypothesis of governance problem or whether this problem is mitigated by implicit and market incentives. It then analyzes the role of independent board of directors. Empirically, we cannot reject the hypothesis that executives in companies with a large number of non-independent directors on the board receive the same expected compensation as other executives. In our model, every executive has an incentive to work. Placing more of ...
Working Papers , Paper 2015-40

Working Paper
The Impact of Reserves Practices on Bank Opacity
Kwan, Simon H.; Iannotta, Giuliano (2013)
Using a banking firm?s unexpected loan loss provision to proxy for earnings management, it is found to have a significantly positive effect on bank opacity. The explanatory power of earnings management on bank opacity is stronger during the pre-crisis period than during the 2007-2009 financial crisis. When we examine the effects of delays in loan loss recognition on bank opacity, we found strong statistical relations during the financial crisis period, while the results for the pre-crisis period are mixed. We conclude that bank opacity is related to unexpected loan loss provision as well as ...
Working Paper Series , Paper 2013-35

Working Paper
Cash Windfalls and Acquisitions
von Beschwitz, Bastian (2016-03-02)
This article studies the effect of cash windfalls on the acquisition policy of companies. As identification I use a German tax reform that permitted firms to sell their equity stakes tax-free. Companies that could realize a cash windfall by selling equity stakes see an increase in the probability of acquiring another company by 19 percent. I find that these additional acquisitions destroy firm value. Following the tax reform, affected firms experience a decrease of 1.2 percentage points in acquisition announcement returns. These effects are stronger for larger cash windfalls. My findings are ...
International Finance Discussion Papers , Paper 1159

Working Paper
Do Small Businesses Still Prefer Community Banks?
Goulding, William; Berger, Allen N.; Rice, Tara (2013-12-01)
We formulate and test hypotheses about the role of bank type ? small versus large, single-market versus multimarket, and local versus nonlocal banks ? in banking relationships. The conventional paradigm suggests that "community banks" ? small, single market, local institutions ? are better able to form strong relationships with informationally opaque small businesses, while "megabanks" ? large, multimarket, nonlocal institutions ? tend to serve more transparent firms. Using the 2003 Survey of Small Business Finance (SSBF), we conduct two sets of tests. First, we test for the type of ...
International Finance Discussion Papers , Paper 1096

Working Paper
Risk Choices and Compensation Design
Sun, Bo; Carey, Mark S. (2015-01-26)
We analyze the impact of bad-tail risks on managerial pay functions, especially the decision to pay managers in stock or in options. In contrast to conventional wisdom, we find that options are often a superior vehicle for limiting managerial incentives to take bad-tail risks while providing incentives to exert effort. Arrangements similar to collar options are able to incent the desired project choice in wider range of circumstances than call options or stock. However, information requirements appear high. We briefly explore alternatives with features similar to maluses and clawbacks, which ...
International Finance Discussion Papers , Paper 1130

Working Paper
Estimating the Competitive Effects of Common Ownership
Gramlich, Jacob P.; Grundl, Serafin J. (2017-02-19)
If managers maximize the payoffs of their shareholders rather than firm profits, then it may be anticompetitive for a shareholder to own competing firms. This is because a manager?s objective function may place weight on profits of competitors who are held by the same shareholder. Recent research found evidence that common ownership by diversified institutional investors is anticompetitive by showing that prices in the airline and banking industries are related to generalized versions of the Herfindahl-Hirschman Index (HHI) that account for common ownership. In this paper we propose an ...
Finance and Economics Discussion Series , Paper 2017-029

Working Paper
Evidence for the Effects of Mergers on Market Power and Efficiency
Blonigen, Bruce A.; Pierce, Justin R. (2016-10)
Study of the impact of mergers and acquisitions (M&As) on productivity and market power has been complicated by the difficulty of separating these two effects. We use newly-developed techniques to separately estimate productivity and markups across a wide range of industries using detailed plant-level data. Employing a difference-in-differences framework, we find that M&As are associated with increases in average markups, but find little evidence for effects on plant-level productivity. We also examine whether M&As increase efficiency through reallocation of production to more efficient ...
Finance and Economics Discussion Series , Paper 2016-082

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