Adam C. Kolasinski

A Multiple Lender Approach to Understanding Supply and Search in the Equity Lending Market

Using unique data from 12 lenders, we examine how equity lending fees respond to demand shocks. We find that when demand is moderate, fees are largely insensitive to demand shocks. However, at high demand levels, further increases in demand lead to significantly higher fees and the extent to which demand shocks impact fees is also related to search frictions in the loan market. Moreover, consistent with search models, we find significant dispersion in loan fees, with this dispersion increasing in loan scarcity and search frictions. Our findings imply that search frictions significantly impact short selling costs.

On the Economic Meaning of Interaction Term Coefficients in Non-Linear Binary Response Regression Models

We show that it is perfectly correct to use just the interaction term, along with its standard error, to draw inferences about interactive effects in binary response regression models. This point is currently in dispute among applied econometricians, some of whom insist that simply relying on the interaction term is incorrect, since the cross partial derivative of the probability of occurrence with respect to interacted covariates can, for some observations, have the sign opposite to that of the interaction term coefficient. We show that this sign flip results from a mechanical saturation effect that is of no importance to researchers who recognize that small changes in probability are more important near the boundaries than near the center. For such researchers, the interaction term coefficient (which is the cross partial derivative of the logit or probit function of the probability) provides a more meaningful measure of interactive effects than does the cross partial derivative of the probability itself. We introduce an alternative cross partial derivative of the probability for which these sign changes cannot occur. Finally, we demonstrate some simple and intuitive ways of interpreting the economic meaning of interaction term coefficients.

Can Strong Boards and Trading Their Own Firm’s Stock Help CEOs Make Better Decisions? Evidence from Acquisitions by Overconfident CEOs

Little evidence exists on whether boards help managers make better decisions. We provide evidence that strong and independent boards help overconfident chief executive officers (CEOs) avoid honest mistakes when they seek to acquire other companies. In addition, we find that once-overconfident CEOs make better acquisition decisions after they experience personal stock trading losses, providing evidence that a manager’s recent personal experience, and not just educational and early career experience, influences firm investment policy. Finally, we develop and validate a new CEO overconfidence measure that is easily constructed from machine-readable insider trading data, unlike previously used measures.

Can Short Restrictions Result in More Informed Short Selling? Evidence from the 2008 Regulations

We use the 2008 short selling regulations to conduct the first test of Diamond and Verrecchia’s (1987) counterintuitive prediction that short sale constraints can actually increase the information content of short sales. The emergency order made it difficult and costly for short sellers without strong broker relationships to borrow shares; borrowing fees increased by over 500%. Similarly, the short selling ban prohibited short selling in the spot market, but sophisticated traders could still short synthetically via the options market. As such, there is good reason to expect that both regulations increased the proportion of informed short sellers. Consistent with this notion, we find that the price reaction to announcements of unexpectedly high levels of short interest became more negative when the regulations were in effect. We also find that the price impact of short sales increased during the ban for affected stocks. Our results confirm the counterintuitive and previously untested prediction that short selling restrictions may actually increase the information content of short selling.

Do Strong Boards and Trading in Their Own Firm's Stock Help CEOs Make Better Decisions? Evidence from Corporate Acquisitions by Overconfident CEOs.

Little evidence exists on whether boards help managers make better decisions. We provide evidence that strong and independent boards help overconfident CEOs avoid honest mistakes when they seek to acquire other companies. In addition, we find that once-overconfident CEOs make better acquisition decisions after they experience personal stock trading losses, providing evidence that a managers recent personal experience, and not just educational and early career experience, influences firm investment policy. Finally, we develop and validate a new CEO overconfidence measure that is easily constructed from machine-readable insider trading data, unlike previously-used measures.

How Does Failure Spread Across Broker-Dealers and Dealer Banks?

We empirically test for the presence of two types of financial contagion across large broker-dealers and dealer banks during the crisis of 2007-2009: the type based on the idea that market illiquidity mediates the spread of distress from one dealer to others, or, “liquidity contagion”, and the type based on the idea that one dealer’s distress directly undermines the franchise value of others, or, “franchise value contagion”. We test for the two types of contagion against the null hypothesis that correlation in dealer-distress during the crisis was only due to an observable common shock to the real estate assets that triggered the crisis. We find evidence that prior to the Federal Reserve and Treasury market interventions in the Fall of 2008, both types of contagion were present. Franchise-value contagion, however, dominates, accounting for 95% of all contagion. Furthermore, unlike liquidity contagion which disappears after the interventions are in place, franchise-value contagion remains.

Do Private Equity Sponsor Returns Result from Wealth Transfers and Short-Termism?Evidence from a Comprehensive Sample of Large Buyouts and Exit Outcomes

We test whether the well-documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties and from a focus on short-term profits at the expense of long-term value. Debt investors who finance buyouts, as well as buyers of private equity portfolio companies, represent the two potential sources of wealth transfers. Yet, we find that on average, public companies benefit when they buy financial sponsors’ portfolio companies, experiencing positive abnormal returns upon the announcement of the acquisition and long-run post-transaction abnormal returns indistinguishable from zero. We further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress, suggesting that debt investors are not suffering systematic wealth losses, either. However, we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations. Finally, we find that portfolio companies invest no differently than a matched sample of public control firms, even when they are not profitable, an observation inconsistent with short-termism.

Why Do Firms Issue Secured Debt

We empirically examine theories of secured debt. Credit risk and asset volatility increase with secured debt issuance, and the strength of this association is unrelated to contemporaneous investment. Hand-collected data reveals most secured debt is secured on all assets of the firm and rarely originates from collateralizing unsecured debt. A difference-in-differences analysis shows that shocks to the likelihood of debt overhang have no impact on the mix of secured and unsecured debt issued. Most secured debt is issued to bond against expropriating lenders rather than as described in theories related to debt overhang, facilitation of risk-shifting, and monitoring.