Chris Veld

Hedging Pressure Effects in Futures Markets

We present a simple model implying that futures risk premia depend on both own-market and cross-market hedging pressures. Empirical evidence from 20 futures markets, divided into four groups (financial, agricultural, mineral, and currency) indicates that, after controlling for systematic risk, both the futures own hedging pressure and cross-hedging pressures from within the group significantly affect futures returns. These effects remain significant after controlling for a measure of price pressure. Finally, we show that hedging pressure also contains explanatory power for returns on the underlying asset, as predicted by the model. Copyright The American Finance Association 2000.

An empirical analysis of incremental capital structure decisions under managerial entrenchment

Abstract We study incremental capital structure decisions of Dutch companies. From 1977 to 1996 these companies have made 110 issues of public and private seasoned equity and 137 public issues of straight debt. Managers of Dutch companies are entrenched. For this reason a discrepancy exists between managerial decisions and shareholder reactions. Confirming Zwiebel [American Economic Review (1996) 1197–1215] we find that Dutch managers avoid the disciplining role of debt allowing them to overinvest. However, the market reactions show that this overinvestment behavior is recognized. We do not find a confirmation of the adverse selection model of Myers and Majluf [Journal of Financial Economics (1984) 187–221]. This is probably due to the entrenchment of managers and the prevalence of rights issues.

Do Spin-offs Really Create Value? The European Case

We study wealth effects for a sample of 161 spin-offs from 15 different European countries that were announced between January 1987 and September 2000. The cumulative average abnormal return over the three-day event window is 2.35%. The mean abnormal return is 2.89% for companies that increase their industrial focus and only 1.20% for non-focus increasing companies.These results are in line with previous studies for the United States.The long-run returns in excess of the market return are significantly negative for both parent and pro-forma combined firms.However, if we control for the size and book-to-market effects by creating a matching portfolio, we find mostly insignificant long-run excess returns both for focus-increasing and non-focus increasing parents, subsidiaries and pro-forma combined firms.This result suggests that, unlike U.S. spin-offs, European spin-offs are not associated with long-run outperformance.

Announcement effects of convertible bond loans versus warrant-bond loans : An empirical analysis for the Dutch market

This study investigates the announcement effects of offerings of convertible bond loans and warrant-bond loans using data for the Dutch market. Using standard event study methodology it is found that on average stock prices show a positive but insignificant abnormal return for the announcement of a convertible bond loan and a significant positive abnormal return for the announcement of a warrant-bond loan. These findings contrast with studies for the United States which generally find significant negative abnormal returns for convertible bond loans and negative but no significant abnormal returns for warrant-bond loans. This can be explained by the fact that Dutch companies generally package these announcements with other (good) firm specific news. Using regression analysis, in which the amount of new equity and new debt involved in the issue are taken into account, it is found that shareholders react more positively to the announcement of warrant-bond loans than to the announcement of convertible bond loans.

The dividend and share repurchase policies of Canadian firms: Empirical evidence based on an alternative research design

We empirically investigate dividend and share repurchase policies of Canadian firms. Our analysis contains two features that are uncommon in finance, while they are encountered in other fields of science. First, we use standard, simultaneous, and nested logit models. By examining different model specifications, we test alternative descriptions of the behavior of decision makers. Second, we use questionnaire data on firm characteristics. We have sent a questionnaire to the 500 largest nonfinancial Canadian companies listed on the Toronto Stock Exchange, of which 191 usable responses were returned. Our results are consistent with a structure in which the company first decides whether it wants to pay out cash to its shareholders or not. In the second stage, the firm decides on the form of the payout: dividends, share repurchases, or both. Payout is determined by free cash flow. The choice for dividends and repurchases depends on behavioral and tax preferences. Furthermore, the payout is less likely to be dividends if the company has executive stock option plans. Finally, we find evidence for the Brennan and Thakor [J. Finance (1990)] model. According to this model, the existence of asymmetric information amongst outsiders is associated with a preference for dividend payments over share repurchases.

Do Happy People Make Optimistic Investors

Do happy people predict future risk and return differently from unhappy people, or do individuals rely only on economic facts? We survey investors on their subjective sentiment-creating factors, return and risk expectations, and investment plans. We find that noneconomic factors systematically affect return and risk expectations, where the return effect is more profound. Investment plans are also affected by noneconomic factors. Sports results and general feelings significantly affect predictions. Sufferers from seasonal affective disorder have lower return expectations in the autumn than in other seasons, supporting the winter blues hypothesis.

Pricing Term Structure Risk in Futures Markets

One-period expected returns on futures contracts with different maturities differ because of risk premia in the spreads between futures and spot prices. We analyze the expected returns for futures contracts with different maturities using the information that is present in the current term structure of futures prices. A simple affine one-factor model that implies a constant covariance between the pricing kernel and the cost-of-carry cannot be rejected for heating oil and German Mark futures contracts. For gold and soybean futures, the risk premia depend on the slope of the current term structure of futures prices, while for live cattle futures, the evidence is mixed.

An Empirical Analysis of Incremental Capital Structure Decisions Under Managerial Entrenchment

We study incremental capital structure decisions of Dutch companies. From 1977 to 1996 these companies have made 110 issues of public and private seasoned equity and 137 public issues of straight debt. Managers of Dutch companies are entrenched. For this reason a discrepancy exists between managerial decisions and shareholder reactions. Confirming Zwiebel (1996) we find that Dutch managers avoid the disciplining role of debt allowing them to overinvest. However, the market reactions show that this overinvestment behavior is recognized. Our findings also confirm the signalling model of Ross (1977) and the static trade-off model. We do not find a confirmation of the adverse selection model of Myers and Majluf (1984). This is probably due to the entrenchment of managers and the prevalence of rights issues.

Wealth Effects of Convertible Bond and Warrant-Bond Offerings: A Meta Analysis

The literature on wealth effects associated with the announcements of convertible-bond and warrant-bond offerings is reviewed. The findings of 35 event studies, which include 84 sub-samples and 6310 announcements, are analysed using meta-analysis. We find a mean cumulative abnormal return of−1.14% for convertibles compared with−0.02% for warrant bonds, the significant difference confirming a relative advantage for warrant bonds. Abnormal returns for hybrid securities issued in the USA are significantly more negative than those issued in other countries. In addition, issuing hybrid securities to refund debt does not seem to be favoured by investors. Finally, several factors identified as important by theory or in prior research are not significant within our cross-study models, suggesting that more evidence is needed to confirm whether they are robust.

Analysis of a practical formula for the valuation of employee stock options

In The Netherlands employee stock options are taxed when they are rewarded. The Dutch tax authorities have developed a formula for the valuation of these options. This formula is analysed and it is shown how it can be used for tax and accounting purposes in The Netherlands and in other countries.