Brandon N. Cline

Private Information and the Exercise of Executive Stock Options

We find evidence that executives use private information in exercising stock options. The most informed executives tend to exercise early, exercise after the vest date rather than at the vest date, do not exercise in anticipation of dividends, exercise a high percentage of their options, sell a large proportion of acquired stock, and exercise and leave the firm. The most costly options to exercise are associated with the most private information, and the least costly are associated with the least private information. We also find that higher ranked executives show greater exploitation of private information than do lower ranked executives.

Exploitation of the Internal Capital Market and the Avoidance of Outside Monitoring

Internal capital markets (ICMs) provide firms an alternative to costly external financing; however, they also provide an avenue to avoid the monitoring associated with issuing external capital. We argue that firms operating inefficient internal capital markets will avoid outside financing. Consistent with this view, conglomerates that cross-subsidize divisions or engage in value-destroying investment avoid external capital market oversight by refraining from issuing both debt and equity. We further show that firms issuing bonds while engaging in value-destroying investment experience yield spreads that are, on average, 46 basis points higher than those of other diversified firms. They similarly experience yield spreads that are 18 basis points higher when they issue syndicated loans. Value-destroying conglomerates also witness SEO announcement returns that are, on average, 1% more negative than firms operating more efficient internal capital markets.

Information in the U.S. Treasury Term Structure of Interest Rates

We provide evidence of a significant change in the information content of the U.S. Treasury term structure of interest rates over the last 20 years. We apply a regression approach to measure the information in forward interest rates and introduce both a curve fitting method and an alternative data source. We find more information in the recent U.S. Treasury term structure about future interest rates than about expected holding period returns. These results document a significant departure from prior empirical findings.

Corporate Governance and the Diversification Discount: The Implications of the Sarbanes-Oxley Act

We examine whether the Sarbanes-Oxley Act has a major role in reducing the diversification discount and enhancing internal capital markets efficiency. The act proposes new rules and regulations on financial practice and reshapes corporate governance to insure alignment of incentives between corporate insiders and investors. We check the relationship between corporate governance variables and the diversification discount. Finally, we conclude the indirect effects of the act in enhancing efficiency and reducing the diversification discount. We find that the level of corporate governance, especially CEO power, affects the efficient allocation of resources and the diversification discount correspondingly. However, we find that the sensitivity of the diversification discount to CEO power decreases significantly after the implementation of the Sarbanes-Oxley Act, which implies that the restrictions and regulations passed by the act enhance corporate governance and limit the misallocation of resources and the diversification discount respectively.

A Comparison of the Information in the LIBOR and CMT Term Structures of Interest Rates

We investigate the information contained in the London Interbank Offered Rate (LIBOR) and the U.S. Constant Maturity Treasury (CMT) term structure of interest rates and report three novel findings. First, we document that the information contained in term structures are significantly different from one another. Second, we provide evidence of a significant change in the nature of this difference as the financial crisis began. Third, we find that the significant changes in the information content of CMT and LIBOR are consistent with significant shocks to credit default swap rates and tenor swap rates.

Stock Buyback Programs and Stock Option Plans: A Framework

Firms often use stock buyback programs as a tool to manage the enterprise risk of corporate stock option plans. We introduce a framework for assessing the merit of this strategy. Using a simple model of the asset portfolio, we examine a leveraged corporation that subsequently adds a stock option plan and then adopts a stock buyback program. We illustrate the interaction between the corporate assets and the managerial influence of the stock option plan, as well as the interaction between corporate debt and the stock buyback program. We show that if the stock option plan results in growth of future cash flows, then the value of limited liability falls, the value of debt rises, and the stock option plan asset is greater than the stock option plan liability. However, if the stock option plan results in increased volatility of future cash flows, then the value of limited liability rises, the value of debt falls, and the worth of the stock option plan asset is zero. Hence, the stock option plan asset is worth less than the stock option plan liability. The framework introduced here features simplicity, scalability, and flexibility regarding risk measures.