Alberto Manconi

Are Buybacks Good for Long-Term Shareholder Value? Evidence from Buybacks around the World

This paper documents that short-term returns around share repurchase announcements and long-run abnormal returns afterwards are following the same pattern in non-US firms as document by prior literature for U.S. firms. We test whether cross-country differences in corporate governance quality and regulatory differences can explain variation in the short- and long-run abnormal returns. We find positive announcement returns around the world, higher in better governed countries and firms, and where regulation allows the board rather than the shareholders to approve a buyback announcement. Long-run abnormal returns are also observed globally and they are related to an undervaluation index (Peyer and Vermaelen, 2009, RFS) consistent with the interpretation that managers are able to time the market by buying back their own shares at low prices. Governance quality is also related to returns. Firms with lower governance ratings outperform those with higher ratings in the long run consistent with the buyback signalling lower agency problems than expected by the market. Furthermore, long run abnormal returns are higher in board approval countries suggesting that board approval regimes make managers act more in the interest of long-term shareholders rather than using buybacks to manipulate share prices.

A Servant to Many Masters: Competing Shareholder Preferences and Limits to Catering

We study what determines catering through payout policy, and how the ability to cater affects firm policies. We create a catering index, measuring the extent to which the firm caters to its investors’ payout preferences. Catering is constrained by market segmentation and dispersion in investor payout preferences. The ability to cater grants the firm better equity financing conditions: catering firms experience a smaller stock price drop when issuing equity, and a positive market reaction to dividend announcements. Investors react to an increase in catering by raising their investment in the firm. Firms that cater have lower leverage, and invest more through capital expenditures and acquisitions.

The Informational Role of Corporate Hedging

We study the informational role of corporate hedging, comparing two hypotheses. Under the “opacity” hypothesis, corporate hedging makes earnings less informative, renders the firm opaque, and increases informed traders’ profitability. Under the “transparency” hypothesis, hedging reduces uncertainty and erodes the informed traders’ information advantage and profitability. Our tests support the transparency hypothesis. Hedging is associated with lower uncertainty (lower implied volatility and analyst forecast dispersion, and greater breadth of ownership). It is also associated with a lower informed trading intensity, in particular for short selling. Short selling profits are more than twice lower on the stocks of firms engaging in corporate hedging. The online appendix is available at https://doi.org/10.1287/mnsc.2016.2717. This paper was accepted by Neng Wang, finance.

Can Technology Undermine Macroprudential Regulation? Evidence from Peer-to-Peer Credit in China

We study whether and to what extent peer-to-peer (P2P) credit helps circumvent loan-to-value (LTV) caps, a key macroprudential tool to contain household leverage. We exploit the tightening of mortgage LTV caps in a number of cities in China in 2013 as our testing ground, in a difference-in-differences setting, and we base our tests on a novel, hand-collected database covering all lending transactions at RenrenDai, a leading Chinese P2P credit platform. P2P loans increase at the cities affected by the LTV cap tightening relative to the control cities, consistent with borrowers tapping P2P credit to circumvent the regulation. The granularity of our data allows us to separate credit demand from credit supply effects, with a fixed effects strategy. Our results also indicate that P2P lenders do not adjust their pricing and screening to the influx of new borrowers after 2013, despite the fact that their loans ex post have higher delinquency and default rates. Symmetric effects are associated with a loosening of mortgage LTV caps in 2015. Our test provides empirical evidence on the capacity of P2P credit to undermine LTV caps. More broadly, our analysis informs the debate on the challenges posed by the interaction between FinTech and credit regulation.We study whether, and to what extent, peer-to-peer (P2P) lending creates a channel to elude regulation preventing asset price run-ups and limiting household leverage. We rely on a novel, hand-collected database, including detailed information on all lending transactions at Renrendai, a leading Chinese P2P lending company. We exploit a policy intervention in the market for real estate mortgages in a number of major Chinese cities, which increases the demand for P2P lending. We analyze P2P lending outcomes around the policy intervention, comparing affected and un-affected cities in a difference-in-differences setting. Our test provides clean empirical evidence on the capacity of P2P lending to undermine regulation in the credit market, and to potentially lead to excessive household debt. More broadly, our analysis informs the ongoing debate on FinTech and the regulatory challenges posed by the disintermediation of financial services. JEL codes: G23; G01; G18.

The Value of Human Capital Synergies in M&A: Evidence from Global Asset Management

We study consolidation via mergers and acquisitions in the global asset management industry, using a world-wide sample of asset managers over the period 2000-2013. The merging fund management companies benefit from the merger via two channels: access to new markets and to new investment expertise. While the performance of acquiror-affiliated funds deteriorates during the merger process (mainly driven by declining returns in the main areas of expertise of the acquiror), the target company’s funds’ performance improves. Following the deal, acquiror and target companies shift the relative intensity of new fund launches towards new distribution markets (countries in which they did not have a strong presence prior to the merger), generating higher flows in new funds launched there. In addition, both acquiror- and target-affiliated funds converge in their portfolio compositions after gaining a common affiliation, consistent with the merging companies exchanging information that is valuable for investment decisions. This interpretation is supported by the way portfolio convergence takes place. In particular, acquiror funds begin investing in areas where the target used to invest prior to the merger; the reverse holds for the target funds. Furthermore, both acquiror and target funds generate their best performance in sub-portfolios associated with those newly-entered investments. Taken together, our results indicate that mergers allow acquirors to address their deteriorating performance because they allow acquirors to capture new investment flows both directly (via target distribution channels) and indirectly (via learning about new investment areas). In addition, they point to the management company’s organizational structure, and changes therein, as an important driver of learning and information acquisition for fund managers.

How Much Labor Do You Need to Manage Capital

Asset management companies in the United States employ several hundred thousand people in advisory, portfolio management, and research roles, yet academic research suggests their investments, on average, underperform passive benchmarks net of fees. Using a new dataset on over 10,000 registered investment advisors (RIAs), we analyze which clienteles, asset classes, and strategies require more human capital, as well as the value that human capital adds to investment management. We find that while more human capital is not associated with better performance (controlling for assets under management), having more advisory personnel helps attract more assets, justifying their salaries from the point of view of the firm. Furthermore, larger teams actually behave more like closet-indexers, holding more diversified portfolios with lower tracking error. Our findings suggest that some active management companies realize their ability, or lack thereof, to generate alpha, and use their employees in order to keep and attract clients.

Much Ado About Nothing: Is the Market Affected by Political Bias?

We use the 2007 acquisition of Dow Jones & Co. by News Corporation to study whether the perception of a news source’s political affiliation affects its credibility and financial market impact. Following 2007, the price of Republican- (Democrat-) aligned stocks becomes less sensitive to positive (negative) Dow Jones Newswires (DJNW) sentiment, consistent with the market perceiving a pro-Republican bias. There is, however, no evidence of an actual bias in DJNW, suggesting a loss of price informativeness. Consistent with this view, a trading strategy exploiting the attenuated reaction to DJNW news earns abnormal returns following 2007.

Corporate Bond Guarantees and The Value of Financial Flexibility

Parent guarantees to subsidiary bond issues can circumvent restrictive covenants on parent debt, and transfer wealth from bond- to equity-holders or maximize parent managers’ private benefits. We find that parent firms expecting stringent covenants on their own debt more likely guarantee subsidiary bonds, and less likely when the pressure from covenants attenuates. Parent bond and stock prices drop after guaranteed subsidiary bond issues. Following such issues parents do not increase payout or risk, but more likely undertake acquisitions. These results suggest that the benefits of limited liability are balanced by the potential agency costs that it creates.